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Exhibit 13
ALLEN TELECOM INC.
Annual Report 1996
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BOARD OF DIRECTORS
Philip Wm. Colburn
Chairman of the Board,
Allen Telecom Inc.
J. Chisholm Lyons
Vice Chairman of the Board,
Allen Telecom Inc.,
Counsel to Smith Lyons,
Toronto, Ontario, Canada
George A. Chandler
Business Consultant,
Princeton, New Jersey
Jill K. Conway
Visiting Scholar,
Program in Science,
Technology and Society,
Massachusetts Institute
of Technology,
Cambridge, Massachusetts
Albert H. Gordon
Advisor and Director,
Deltec, Inc.,
New York, New York
William O. Hunt
Chairman of the Board,
Chief Executive Officer,
President and Director,
Intellicall Inc.
Dallas, Texas
John F. McNiff
Vice President - Finance and Director,
Dover Corporation,
New York, New York
Robert G. Paul
President and
Chief Executive Officer,
Allen Telecom Inc.
Charles W. Robinson
Chairman,
Robinson & Associates Inc.,
Santa Fe, New Mexico
William M. Weaver, Jr.
Limited Partner Emeritus,
Alex, Brown & Sons
Incorporated,
New York, New York
MANAGEMENT
Philip Wm. Colburn
Chairman of the Board
Robert G. Paul
President and
Chief Executive Officer
Erik H. van der Kaay
Executive Vice President
Robert A. Youdelman
Executive Vice President,
Chief Financial Officer
McDara P. Folan, III
Vice President, Secretary
and General Counsel
James L. LePorte, III
Vice President,
Treasurer and Controller
Peter de Villiers
Vice President,
Strategic Development
Andrea Casini
Managing Director,
Tekmar Sistemi S.r.l.
Kenton S. Day
President,
Signal Science, Incorporated
Terry N. Garner
President,
Grayson Electronics Company
F. Kim Goryance
President,
Antenna Specialists Division
John P. Kepple
President,
Allen Telecom Site Products
Peter Mailandt
President,
Decibel Products Division
Goffredo Modena
Managing Director,
FOR.E.M. S.p.A.
Michael K. Morin
President,
Comsearch
Christopher H. Morton
President,
Allen Telecom Systems Division
Karl-Heinz Schmidt
Managing Director,
Mikom G.m.b.H.
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Safe Harbor Cautionary Statement
Statements made in this Annual Report which are not historical in nature are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
regarding the Companys future performance and financial results are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements due to a
variety of factors, including, among others, the uncertain level of purchases by
current and prospective customers of the Companys products and the impact of
competitive products and pricing. Further, the amount of charges to discontinued
operations with respect to the centralized automotive emissions testing business
will depend on a number of factors, including, among others, the outcome of
negotiations with the purchaser of one test program and various state
representatives, as well as the valuation of assets to be sold, transferred or
otherwise realized.
THE YEAR AT A GLANCE
1996 1995
---- ----
FINANCIAL HIGHLIGHTS:
Sales $ 369,498,000 $ 306,556,000
Income Before Income Taxes
and Minority Interests $ 46,526,000 $ 50,441,000
Income From Continuing
Operations $ 20,556,000 $ 27,276,000
Net Income $ 13,066,000 $ 32,639,000
Return On Equity 6.0% 14.7%
FINANCIAL POSITION, YEAR-END:
Stockholders Equity $225,951,000 $210,377,000
Working Capital $ 94,378,000 $ 93,371,000
Shares Outstanding 26,763,000 26,560,000
PER COMMON SHARE:
Income From Continuing Operations $ .76 $1.02
Net Income $ .48 $1.22
Book Value $8.44 $7.92
TABLE OF CONTENTS
The Year at a Glance 1
Letter to Shareholders 2
Financial Review 4
Business Review 6
Consolidated Financial Statements 12
Notes to Consolidated Financial Statements 16
Managements Discussion and Analysis of
Financial Condition and Results of Operations 28
Five-year Summary of Operations 32
Directors and Management Inside front cover
Shareholder Information Inside back cover
_______________________________________________________________________
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[Photo] Letter to Shareholders
Robert G. Paul (left), and Philip Wm. Colburn
The cover of this years annual report features the new name of your
corporation, Allen Telecom Inc. The Company was known as The Allen Electric and
Equipment Company for 44 years before it adopted The Allen Group Inc. name in
1972. Our new name clearly reflects the focus and future of the Company. The
decision to exit the centralized emissions testing business was the final step
in the Companys multi-year transition from a conglomerate of businesses
primarily in the automotive industry, to a company solely focused on the
wireless communications industry. We believe it is important to add the word
Telecom to our name to identify our business. Our focus will be to operate our
business in a more cohesive and integrated manner in order to maximize our
presence in this expanding marketplace. The degree of success that we achieve in
the future will be governed by how well we, as a corporation, can marshal
resources to capitalize on new product opportunities and new markets, rather
than simply the sum of the successes of a "Group" of individual businesses.
Our recent marketing thrust throughout the world has been as Allen Telecom,
and this name will provide an umbrella of recognition for the strong brand names
which our products now carry, such as FOREM, Decibel, Mikom, Allen Systems,
Grayson Electronics, Comsearch, Tekmar, Allen Site Products, Signal Science and,
the origin of our wireless communications involvement, Antenna Specialists. The
ability to enter into new countries as they begin to develop their wireless
telecommunications infrastructure, under the Allen Telecom mantle, allows us to
present a broad range of products and brand names under one unifying entity.
This marketing and product offering strength allows us to participate
aggressively in many international markets where our competitors, many of whom
are smaller than Allen Telecom, might find it economically disadvantageous.
Our performance from continuing operations in 1996 was highlighted by
record sales levels and a disappointing earnings performance. Sales were $369
million, a 21% increase from $307 million in 1995. Income from continuing
operations in 1996 was $23,218,000 ($.86 per share), before the one-time charge
of $.10 per share for the write-off of incomplete research and development in
connection with the Signal Science acquisition. This is a reduction from the
$27,276,000 ($1.02 per share) earned in 1995.
The biggest contributions to the sales and earnings growth during 1996 were
from our European operations. The FOREM and Mikom acquisitions of late 1994 have
contributed very strongly to Allens worldwide presence. Their performance has
been enhanced by the continued growth in the use of the GSM technology around
the world, by the continued increase in the use of repeater products throughout
the GSM networks (a particular product strength of our Mikom subsidiary) and by
their strong market share with the European Original Equipment Manufacturers
(OEMs) for the supply of site management products.
We continue to see significant growth in the international markets as
existing cellular systems are expanded, as new cellular licenses are granted in
many countries, and as other parts of the world begin to install advanced
wireless systems. During 1996, more than 56% of our revenue came from outside
the U.S. To maximize our benefit from that continued international growth, we
have continued to develop and enhance our
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relationships with the major OEM communication manufacturers that will be
shipping cell site equipment to those countries. In addition, we have added and
expanded our own international sales, service and engineering offices to work
more closely with the wireless operators in various parts of the world.
The new personal communications systems (PCS) in North America have
developed slower than originally anticipated. Approximately 10% of our revenues
in 1996 can be traced to the U.S. PCS industry. Most of the small number of
cities that did commence operations in 1996 did not begin until the end of the
year. One of the operators that began service in late 1996 quoted statistics
that would indicate that only 40% of their expected cell sites for those areas
were built out at the time they started service. This is confirmation of our
expectation to participate in the PCS rollout for a significant number of years.
Our best judgment is that, overall, perhaps only 20% to 30% of the ultimate cell
sites of the A and B block PCS licensees were installed during 1996. We have not
seen any significant activity yet by the C block auction winners, whose auction
ended in March 1996. We should begin to benefit from that construction sometime
during 1997. The D, E and F block auctions for PCS licenses were not completed
until January 1997, and their construction is likely to lag behind the C block
winners.
Allen Telecom benefits in its base station antenna business and its site
management product business from the construction and startup of new cell sites,
as these products are necessary for the operation and performance of those
cells. As additional cells are added, additional antennas and site management
products are required. Only after enough cells have been constructed for the
system to be turned on does Allen Telecom begin to benefit from the sale of its
systems products (although often with a six to 12 month lag). These products
include repeaters, tower mount amplifiers and inbuilding coverage products as
the carriers begin to solve operating problems and enhance both the coverage and
performance of their systems.
The Company made two acquisitions during the year that complement the
implementation of our strategic vision. It is our desire to continue to add
additional technologies to those we already possess either through internal
research and development or by acquisition. By utilizing and integrating these
varied technologies, the Company can better support the wireless
telecommunications operators and OEMs in implementing, enhancing and improving
their wireless systems. The acquisitions of Tekmar Sistemi S.r.l. and Signal
Science, Incorporated have added significant technology in the area of fiber
optic distribution systems and digital signal processing, respectively. Although
these two companies only total approximately $10 million in combined annual
sales, the technologies of these two companies are applicable to products that
could represent significant sales in future periods.
We continue our efforts to insure that most of Allen Telecoms products are
either totally suitable for, or adaptable to, both analog and digital wireless
communications systems, and the different standards within each of those
categories. This breadth of our technological compatibility gives the Company
confidence that it will participate in the continued growth of wireless
communications no matter which standards are adopted in the various countries
around the world.
During the summer of 1996, the Company made the decision to exit the
emissions testing business, and accordingly, we have classified results of that
business segment as discontinued operations. This business has fallen short of
our expectations and has proven to be dilutive to our primary focus on
telecommunications. We presently have a contract for the sale of the Ohio
emissions testing program. If a sale of the Maryland and Florida programs cannot
be negotiated on reasonable terms, the Company will operate these programs under
existing contracts which only have a few years remaining.
The decision to focus Allen Telecom on the wireless communications industry
has been validated by the strong operating results of the Company and the
five-fold increase in our shareholder value since 1989. In 1996, approximately
50 million new wireless subscribers were added worldwide, achieving a total
user population of approximately 137 million, and industry analysts estimate
300 to 400 million subscribers by the year 2000. We believe that most of our
growth in this dynamic industry is still ahead of us. Allen Telecom, while
having a new name, has the same desire to maintain an industry leadership role
and to continue to enhance shareholder value.
/s/ Philip Wm. Colburn
Philip Wm. Colburn
Chairman of the Board
/s/ Robert G. Paul
Robert G. Paul
President and Chief Executive Officer
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1996 was a year of many dynamics for Allen Telecom. Sales from continuing
operations increased a strong 21% on an overall basis to reach record levels,
reflecting sales increases in most of our individual product lines. Backlog at
the end of 1996 also increased to a record level and exceeded $100 million.
At the same time, the cost of sales in our expanding and competitive
market-places increased at a somewhat faster pace this year, restraining growth
in our earnings. These cost increases were compounded by a lower portion of the
Companys total sales being derived from the generally higher-margin systems
products, most particularly the decline in sales of Extend-a-Cells(R). In
addition, a portion of the increased costs resulted from the slower than
expected ramp up in domestic PCS sales. We had added additional capacity and
personnel early in 1996 in order to be prepared for increased production
requirements which materialized later in the year than expected.
With the decision to focus the Companys operations and future growth on the
wireless communications industry, the financial results of the centralized
emission testing business have been reported as discontinued operations. The
$7.5 million after-tax loss from the discontinued operations includes both 1996
operating results and anticipated reserves which were established to sell the
Ohio program and either to sell or continue to operate the other two programs
for their remaining contract lives of approximately three years.
The $6.7 million decline in income from continuing operations in 1996, as
compared to 1995, was principally driven by three factors: a one-time write-off
of $2.7 million (or $.10 per share) for in-process research and development
expenses related to an acquisition during 1996, an increase in the Companys
effective tax rate and a significant increase in the deduction for minority
interests from $3.0 million in 1995 to $6.3 million in 1996. Both the larger
minority interest deduction and the higher tax rate are the result of the very
strong performance of our European operations, where there are high tax rates
and in which there are minority ownership interests.
Sales in our wireless equipment business, including antennas, site
management and systems products, increased 18% on a year to year basis. Revenues
generated by the frequency planning and system design business grew at more than
double that rate (43%) principally
FINANCIAL REVIEW
1996
SALES FROM
CONTINUING OPERATIONS
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$126.4 $183.6 $213.5 $306.6 $369.5
INCOME BEFORE TAXES
AND MINORITY INTERESTS
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$25.2 $24.5 $31.5 $50.4 $46.5
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related to the ongoing design and development work related to the large new PCS
systems being deployed in the United States. In total, sales of equipment and
services for these new domestic PCS networks amounted to over 10% of Allen
Telecoms revenues in 1996 and, as the deployment of these PCS networks
continues, should account for an increasing share of our sales in future years.
International sales, including both export sales from the U.S. and sales from
our international operations, reflected another strong increase and now comprise
56% of total sales as compared to 50% in 1995. The increasing amounts of
international sales are driven by the continuing strong growth in the
international marketplace for wireless communications systems.
The Company continues to invest in the future with total expenditures for
research and development and other new product engineering growing from $17
million in 1995 to $21 million in 1996 representing 5.5% and 5.7% of sales,
respectively. These expenditures, coupled with strategic acquisitions and
capacity related capital expenditures for facilities and equipment, provide for
the updating, modification and evolution of the Companys products to keep pace
with the rapidly evolving technological and cost improvements demanded in the
marketplace.
Selling, general and administrative expenses continued to run at the same
percentage of sales, even as the Company continued to expand its sales,
marketing and engineering support services around the globe. We have added
qualified technical personnel to existing locations as well as in new markets,
such as Peru, Hong Kong, Austria and India, to support the developing markets
throughout the world.
With the strongest growth in sales and income coming from our highly taxed
overseas operations in Italy and Germany, the Companys effective tax rates
increased from 39.9% in 1995 to 42.3% in 1996. Tax rates can be expected to
remain at these relatively high levels in future periods as a result of
continued strong international growth.
The cash portion of acquisition expenditures during 1996, together with
capital expenditures and research costs, were all financed from the Companys
internally generated funds and available cash. Notwithstanding these sizable
investments, our debt to equity ratio remains very comfortable at .25 to 1. The
Company continues to have strong backing from our banks with whom we have a
revolving credit agreement in the amount of $100 million, which continues
through December 1999.
Research &
Development and
New Product
Engineering Costs
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$4.5 $7.9 $8.9 $17.0 $21.0
as a percent of sales
92 93 94 95 96
-- -- -- -- --
3.6% 4.3% 4.2% 5.5% 5.7%
This credit facility and the Companys own resources provide significant
flexibility for the Company to make substantial investments to stimulate
internal development and to pursue external growth through acquisitions. Allen
Telecom has all of the required financial resources to support its future growth
and to pursue its long-term strategic objectives.
/s/ Robert A. Youdelman
Robert A. Youdelman
Executive Vice President
Chief Financial Officer
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THE AMERICAS
Overview Americas
The market for wireless telephony systems has grown at a 52% annual rate
over the last six years, and is expected to grow at a 26% annual growth rate
through the year 2000. The number of wireless subscribers worldwide is expected
to grow from approximately 137 million currently to approximately 300-400
million by the year 2000. The demand for wireless infrastructure equipment is
being driven by the need for basic telephone service in lesser developed
countries, the proliferation of new carriers as a result of privatization and
liberalization of licensing, and new digital technology which enables carriers
to increase their subscriber capacity, improve call quality and offer low cost
enhanced services.
Allen Telecom supplies a variety of equipment, engineering services and
software to support the wireless telephone infrastructure development. We have
developed a global network of sales, engineering and service offices in sixteen
countries and full scale manufacturing operations in four of these countries to
better serve our customers. The following sections describe the wireless
telephone markets in the Americas, Europe, Africa, and Asia Pacific, and how
Allen Telecom is postured to participate in these markets.
Wireless telecommunications growth over the last several years in the
Americas has been fueled by a number of macro forces, including the demand for
ubiquitous telephone coverage (at home, in the car, or at the office), increased
emphasis on security, and strong increase in consumer demand due to the
significant elasticity of this market as costs to own and operate cellular/PCS
phones decline. In Central and South America, demand has been enhanced further
by a need in many regions to supply basic telephone service quickly and
relatively inexpensively.
The number of subscribers in the Americas is presently estimated at 52
million, with approximately 43 million in the United States. The current
penetration of cellular/PCS subscribers is estimated to be approximately 16% in
the United States and 2% for the balance of the Americas. Notwithstanding the
relatively high penetration level for cellular/PCS in the United States,
cellular/ PCS subscriber growth has grown at a 39% annual rate from 1993 to
1996. The 16% penetration rate for cellular and PCS in the U.S. is still small
compared to Sweden where it is in excess of 25%. Some industry experts predict
cellular penetration to exceed 50% in the United States in less than a decade.
In Central and South America, most countries have cellular penetration
rates of less than 1%. If cellular subscriber growth increased to 5% in Brazil
and Mexico alone, there would be over 11 million new subscribers.
In North America, wireless telephony infrastructure growth is expected to
continue at double digit rates. With the completion of PCS auctions in both the
United States and Canada (which netted over $20 billion in license fees), the
PCS carriers are expected to spend many billions of dollars for equipment for
their wireless systems. In addition, cellular carriers plan to convert their
subscriber base from analog to digital systems (approximately 75% of current
subscribers worldwide use analog systems), as a means to increase overall system
capacity and improve call quality and security.
In Central and South America, cellular telephone growth is expected to
exceed average world-wide growth because of the need for basic telephone
services and because of privatization efforts in several major Central and South
American countries. For example, Brazil is in the process of awarding cellular
licenses to ten new operators in the first half of 1997 in order to foster
competition in the telecommunications market. Allen Telecom serves the carriers
in Central and South America
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through our sales, engineering and service operations in Brazil, Mexico and
Peru. Most of our product sales to carriers in this region include repeaters,
boosters and base station antennas.
It is not surprising that the Americas accounted for the majority of Allen
Telecom's sales (56% in 1996), with approximately 44% of Allen's sales in the
United States. Emerging markets in Central and South America (notably Brazil)
accounted for a significant portion (approximately $32 million) of Allen's 1996
sales.
Large systems providers, such as Motorola and Lucent, manufacture a number
of base station and switch products for these cellular and PCS systems, but the
large systems and switch providers rely on companies such as Allen Telecom to
provide subsystems and components, such as repeaters, boosters, base station
antennas, filters, combiners, tower mounted amplifiers, mobile antennas and
cable. These products are designed for both cellular (800-900MHz) and PCS (1.8
GHz) applications and may be deployed in systems using CDMA, TDMA, GSM and
analog technologies. Through the recent purchase of Signal Science,
Incorporated, Allen Telecom has acquired several new technologies, including
digital signal processing, which are instrumental in the development of new
products for cellular fraud detection and emergency 911 geolocation systems,
which presently are more applicable to the Americas.
In addition to Allen Telecom's wide range of equipment capabilities, our
Comsearch division is a leading supplier of frequency planning and coordinating
services as well as systems design, field engineering and software products for
the wireless cellular and PCS markets. Comsearch's services are utilized by
carriers and Original Equipment Manufacturers (OEMs) to perform a number of
critical functions during the early stages of a cellular/PCS system design and
deployment. Comsearch's engineering expertise in spectrum sharing, microwave
interconnection, microwave migration and cellular/PCS systems design enabled
them to provide services for almost all of the major PCS carriers in the United
States. Comsearch was the first to develop engineering and software expertise
relating to microwave interconnection and sharing, which are critical to the
deployment of PCS systems in the United States, through its groundbreaking
development efforts for DCS-1900 carriers in Germany and the United Kingdom.
Our Grayson division has developed test and measurement equipment that is
linked to Comsearch's capabilities. This equipment provides real time
statistical signal quality and systems coverage data and may be used on all
transmission standards for PCS and cellular, as well as paging and trunking.
Wireless Subscribers Worldwide
millions of subscribers
95 96 2000
87 137 400
300
Wireless Subscriber Penetration - 1996
percentage of penetration
USA CANADA ARGENTINA MEXICO BRAZIL
16.5% 13.2% .9% .7% .6%
<FN>
________________________________________________________________________________
PCS: Personal Communication Systems (PCS) telephone systems typically operate at
a frequency of 1.8 - 2.0 GHz. PCS systems exist in a few countries,
including Germany, United Kingdom, France and now the United States and
Canada.
CDMA: Code Division Multiple Access (CDMA) is a spread spectrum cellular
standard which describes a method in which radio signals are sent over a
number of different frequencies via a coding and decoding process that goes
through the switch. CDMA is a digital technology used principally in North
America and Asia.
TDMA: Time Division Multiple Access (TDMA) is a digital cellular standard where
callers share a single frequency and radio signals are sent in bursts with
a barely perceptible pause (hence, the time division). TDMA is primarily
used in North American cellular and PCS wireless systems.
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EUROPE, AFRICA
Wireless telecommunications in certain regions of Europe are perhaps
further developed than in any other region of the world. Overall, the
penetration of wireless telephones in Europe is approximately 4%, ranging from a
high of nearly 30% penetration in Sweden to less than 1% in many Eastern
European countries.
The model for wireless telephone growth in Europe for the last decade and
prospects for the future are similar, in many respects, to that of the Americas.
First, additional carriers have been licensed in most European countries, and
these carriers will build out their systems over the next several years. Second,
basic and reliable telephone service is needed in Eastern Europe, and wireless
telephony systems offer the quickest and, in some cases, the most cost efficient
solutions. Third, analog systems in Europe are in the process of being converted
to digital (primarily GSM technology) in order to increase capacity and improve
call quality.
Allen Telecom has a significant market presence in Europe through its
Italian and German based companies, FOR.E.M. S.p.A., Mikom G.m.b.H. and Tekmar
Sistemi, S.r.l. In addition to these companies which have full scale local
manufacturing, sales and marketing, and R&D capabilities, Allen also has sales,
engineering and service support operations in France, Austria and the United
Kingdom. Allen's European operations serve both OEMs and the carriers.
Allen's significant growth in Europe is a function of both the overall
growth of the European systems themselves, as well as the world-wide acceptance
(and related sales growth) of GSM as the de facto wireless standard outside of
the Americas. Over the last two years, a large portion of our growth in Europe
has been attributable to our tower mounted amplifier and
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& MIDDLE EAST
repeater products, where we are the world leader in terms of sales and overall
product capabilities. These products offer cost-effective solutions to enhance
overall system coverage and performance and typically are installed after the
basic wireless infrastructure is in place and gaps in coverage need to be
filled. Some unique applications for these products include wireless coverage of
the Berlin subway system and tunnels in the Alpine region. In 1996, Allen had
sales of approximately $133 million to European customers.
OEMs, such as Ericsson, Nokia, Siemens, Alcatel, Motorola, Lucent and Northern
Telecom supply the global market for GSM base station and switching equipment.
Allen's European operations supply products, such as filters, combiners,
duplexers and cell site subsystems, to nearly all these OEMs, and thus have
participated in the rapid proliferation of GSM systems in Europe and throughout
the world. In 1996, there were approximately 150 GSM service providers operating
in over 80 countries with an estimated subscriber base in excess of 33 million.
Some industry experts estimate the number of GSM subscribers to grow to 100 -
150 million by the year 2000. This rapid growth bodes well for Allen's European
businesses which supply systems and components to these European OEMs.
The development of wireless telephony systems in several Middle Eastern
countries have resulted in sales for Allen. On the other hand, opportunities
have been limited to date in Africa. Eventually, most telephony systems in this
region will likely be provided by OEMs on a turnkey basis. Infrastructure needs
in this region will eventually offer interesting prospects for growth for Allen
Telecom over the long term.
Wireless Subscriber Penetration - 1996
percentage of penetration
SWEDEN ISRAEL UK ITALY GERMANY RUSSIA
29.5% 14.0% 11.6% 10.4% 6.3% .1%
<FN>
______________________________________________________________________________
Tower Mounted Amplifiers (TMAs): TMAs strengthen the signal power of cell sites,
thereby allowing users to complete calls more
often and save battery power on their phones.
Allen Telecom has been very successful in
marketing TMAs, particularly in Europe.
GSM: Global System for Mobile communications (GSM)
is a digital cellular standard which was
initially developed in Europe, and has become
the dominant standard in Europe and Asia.
IQ.Link, IQ.Clear: Software tools developed by Allen Telecom's
Comsearch division, which optimize microwave
links between PCS cells and the central
switch, and determine the extent to which
radio frequency spectrum may be shared
between PCS systems and other microwave users
in the same radio spectrum.
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ASIA & THE PACIFIC
China - Australia - Pacific Rim
The wireless telecommunications market in the Asia Pacific region of the
world offers perhaps the greatest opportunities for growth for the next decade,
and likely will become the largest overall market in terms of equipment
infrastructure purchases. Cellular/PCS subscriber growth in Asia Pacific
increased approximately 100% in 1996 compared with the prior year to over 40
million subscribers. Penetration is high in Australia, Singapore, Hong Kong and
growing rapidly in Japan, but is still less than 1% in China and India. If
subscriber penetration reaches only 5% in China and India, over 100 million
subscribers will be added. Korea has recently deployed two new CDMA systems, and
by late 1996 had approximately 700 thousand subscribers, making these the
largest CDMA systems in the world.
Wireless telephony services in developed countries in the Asia Pacific
region are market driven in much the same way as in Europe and North America.
Customers in all three regions are demanding ubiquitous telephone coverage.
However, a major portion of wireless telephone growth in other areas of the Asia
Pacific region is expected to be driven by the development of basic telephone
infrastructure in China and India, as well as dozens of other lesser developed
countries. The overall number of subscribers in the Asia Pacific region is
estimated to grow from slightly more than 40 million at year end 1996 to more
than 120 million by the year 2000. In addition to the rapid development of high
profile markets in China, Japan, India and Korea, Allen Telecom expects markets
in Malaysia, Thailand, Philippines, Singapore and Indonesia to be quite
promising.
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Excluding Japan which has developed its own digital standards (PDC and
PHS), most carriers in the Asia Pacific region plan to use GSM or CDMA as their
digital standard. In addition to the deployment of traditional base station
equipment to supply the backbone of the wireless systems, wireless local loop
systems (WLL) are expected to be utilized with increasing frequency. In WLL
systems, basic telephone service is provided over a wireless network rather than
using a traditional hard-wired system. WLL is increasingly utilized to help
bring down the overall cost of a telephone system and increase the speed of
deployment, and is particularly effective where there is little or no existing
wired infrastructure. Recent technological advances have made WLLs more cost
efficient, and WLL equipment sales growth is expected to exceed the industry
average. Allen Telecom's SmartCell(TM) products may be used in WLL applications,
and are expected to be in strong demand over the next several years.
Allen Telecom sold approximately $27 million of product directly to the
Asia Pacific market (excluding shipments to OEMs that ultimately went to Asian
markets). Allen Telecom markets to local carriers through its sales, engineering
and service support offices in China, Hong Kong, Singapore, and India, and
participates in a joint venture in Australia that has local manufacturing and
engineering capabilities. Allen Telecom has been an important provider of
equipment to several cellular telephony systems in China, and has received
orders to provide in-building wireless coverage in Singapore, where such
in-building coverage is mandatory. Allen Telecom also supplies sub-systems and
components directly to base station OEMs throughout the world which are
ultimately shipped to carriers in the Asia Pacific region. Allen Telecoms
Comsearch division also participates in Asia through various engineering and
measurement studies, as well as software sales relating to overall system
design, microwave applications and spectrum sharing.
Wireless Subscriber Penetration - 1996
percentage of penetration
AUSTRALIA HONG KONG SINGAPORE JAPAN CHINA INDIA
21.4% 17.3% 15.0% 10.6% .5% .1%
<FN>
_______________________________________________________________________________
WLL: Wireless Local Loop (WLL) systems provide basic telephone
services over a wireless network rather than using a traditional
hard-wired system. WLL is well suited for introducing new
telephone coverage in both rural and urban environments because
of their speed to deploy and relatively low cost.
SmartCell(TM): A microcell designed by Allen Telecom which has several
applications including WLL, wireless PBX and rural service area
mobile cellular.
PDC: Personal Digital Cellular (PDC) is a digital cellular standard
which was developed in Japan and is deployed primarily in that
country.
11
14
CONSOLIDATED STATEMENTS OF INCOME
Allen Telecom Inc. - (amounts in thousands, except per share data)
- -------------------------------------------------------------------------------------------------------
For the years ended December 31, 1996, 1995 & 1994 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
SALES $ 369,498 $ 306,556 $ 213,517
Cost and Expenses:
Cost of sales 238,401 189,103 127,160
Selling, general and administrative expenses 58,101 47,908 44,252
Research and development and new product engineering costs 21,023 17,006 8,865
Write-off of acquired in-process research and development 2,662 -- --
Interest and Financing Expenses:
Interest expense (3,773) (3,505) (2,948)
Interest income 988 1,407 1,163
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Minority Interests 46,526 50,441 31,455
Provision for Income Taxes (19,665) (20,138) (11,191)
- -------------------------------------------------------------------------------------------------------
Income Before Minority Interests 26,861 30,303 20,264
Minority Interests (6,305) (3,027) (523)
- -------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 20,556 27,276 19,741
========================================================================================================
Discontinued Operations
Income (loss) from discontinued operations:
Automotive and truck products business -- 7,119 9,983
Emissions testing business (3,766) (1,756) (530)
Loss on disposal of emissions testing business (3,724) -- --
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 13,066 $ 32,639 $ 29,194
========================================================================================================
EARNINGS PER COMMON SHARE
(Primary and fully diluted):
Income from continuing operations $ .76 $ 1.02 $ .76
Discontinued operations:
Income (loss) from discontinued operations:
Automotive and truck products business -- .27 .38
Emissions testing business (.14) (.07) (.02)
Loss on disposal of emissions testing business (.14) -- --
- -------------------------------------------------------------------------------------------------------
Net Income $ .48 $ 1.22 $ 1.12
- -------------------------------------------------------------------------------------------------------
Average common and common equivalent shares outstanding 27,060 26,920 26,100
========================================================================================================
<FN>
The Notes are an integral part of these statements.
12
15
CONSOLIDATED BALANCE SHEETS
Allen Telecom Inc. - (amounts in thousands)
- ------------------------------------------------------------------------------------------------------------
December 31, 1996 & 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
ASSETS:
Current Assets:
Cash and equivalents $ 23,879 $ 15,706
Accounts receivable, less allowance for doubtful accounts
1996, $1,610,000; 1995, $1,232,000 93,409 82,015
Inventories 71,304 70,152
Current assets of discontinued emissions testing business 3,332 --
Other current assets 7,256 9,941
- ------------------------------------------------------------------------------------------------------------
Total Current Assets 199,180 177,814
============================================================================================================
Property, Plant and Equipment, at cost,
less accumulated depreciation and amortization 51,942 77,124
Other Assets:
Excess of cost over net assets of businesses acquired 75,502 68,310
Assets of discontinued emissions testing business 42,031 --
Other assets 41,857 40,317
- ------------------------------------------------------------------------------------------------------------
Total Assets $ 410,512 $ 363,565
============================================================================================================
LIABILITIES AND STOCKHOLDERS EQUITY:
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 5,998 $ 8,741
Accounts payable 36,639 34,299
Accrued expenses (including accrued wages and commissions -
1996, $14,663,000; 1995, $9,323,000) 37,991 25,444
Income taxes payable 19,830 10,163
Deferred income taxes 4,344 5,796
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 104,802 84,443
============================================================================================================
Long-Term Debt 49,957 47,058
Other Liabilities and Deferred Credits 29,802 21,687
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 184,561 153,188
============================================================================================================
Commitments and Contingencies (Note 5) -- --
============================================================================================================
Stockholders Equity:
Common stock, par value $1.00; authorized - 50,000,000 shares; issued -
1996, 29,614,000; 1995, 29,595,000; outstanding - 1996, 26,763,000;
1995, 26,560,000 29,614 29,595
Paid-in capital 170,945 168,632
Retained earnings 46,742 34,948
Translation adjustments (304) 102
Less: Treasury stock common shares, at cost, 1996, 2,851,000; 1995,
3,035,000 shares (17,932) (18,746)
Unearned compensation (2,908) (3,794)
Minimum pension liability (206) (360)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders Equity 225,951 210,377
============================================================================================================
Total Liabilities and Stockholders Equity $ 410,512 $ 363,565
============================================================================================================
The Notes are an integral part of these statements.
13
16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Allen Telecom Inc. - (amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 & 1994 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 20,556 $ 27,276 $ 19,741
Adjustments to reconcile income to net cash flow:
Depreciation 11,666 8,280 3,683
Amortization of goodwill 2,432 2,088 1,636
Amortization of capitalized software 2,383 2,659 1,524
Other amortization 2,006 1,015 3,471
Deferred income taxes (2,849) 6,338 (1,852)
Non-cash charge for acquired in-process research and development 2,662 -- --
Changes in operating assets and liabilities:
Receivables (13,362) (21,996) (3,362)
Inventories (85) (13,653) (1,393)
Accounts payable and accrued expenses 7,879 1,016 1,523
Income taxes payable 17,095 (2,812) 16,401
Other, net 3,229 (3,341) 2,886
- --------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 53,612 6,870 44,258
==========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,457) (16,829) (6,410)
Capitalized software product costs (4,745) (4,386) (1,971)
Sales and retirements of fixed assets 62 170 24
Investments in telecommunications companies (5,002) (1,077) (259)
Acquisition of businesses, net of cash acquired (11,907) (671) (8,458)
Proceeds from sale of automotive diagnostics and lease financing businesses -- -- 19,737
- --------------------------------------------------------------------------------------------------------------------------
Cash (used) provided by investing activities (39,049) (22,793) 2,663
==========================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of notes payable and long-term debt (2,129) (4,882) (5,282)
Dividends paid -- (3,942) (4,431)
Exercise of stock options 239 566 80
Treasury stock sold to employee benefit plans 1,572 1,435 854
Cash reclassified to assets held for spin-off distribution -- (4,002) --
- --------------------------------------------------------------------------------------------------------------------------
Cash used by financing activities (318) (10,825) (8,779)
- --------------------------------------------------------------------------------------------------------------------------
Cash (used) provided by discontinued operations (6,072) (12,786) 5,925
==========================================================================================================================
NET CASH PROVIDED (USED) 8,173 (39,534) 44,067
==========================================================================================================================
Cash at beginning of year 15,706 55,240 11,173
- --------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 23,879 $ 15,706 $ 55,240
==========================================================================================================================
The Notes are an integral part of these statements.
14
17
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Allen Telecom Inc. - (amounts in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996, 1995 and 1994
Minimum
Pension
Common Paid-In Retained Translation Treasury Unearned Liability
Stock Capital Earnings Adjustment Stock Compensation Adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993 $29,058 $159,989 $32,671 ($90) ($17,916) ($6,192) ($2,359)
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 -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- -- 614
Adjustment from translating foreign
financial statements into U.S. dollars -- -- -- 113 -- -- --
Other -- -- (532) -- -- -- --
====================================================================================================================================
BALANCE DECEMBER 31, 1994 29,146 161,644 56,902 23 (17,479) (4,310) (1,745)
Net income -- -- 32,639 -- -- -- --
Cash dividends -- -- (3,942) -- -- -- --
Net assets distributed in TransPro spin-off -- -- (50,651) -- -- -- 822
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 compensation -- -- -- -- -- 880 --
Stock option tax benefits -- 562 -- -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- -- 563
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) (360)
Net income -- -- 13,066 -- -- -- --
Exercise of stock options 36 293 -- -- (90) -- --
Treasury stock reissued, 94,839
common shares, at cost -- 883 -- -- 689 --
Restricted shares cancelled (17) (270) -- -- -- 271 --
Amortization of unearned compensation -- -- -- -- -- 615 --
Stock option tax benefits -- 82 -- -- -- -- --
Stock issued in acquisitions -- 1,325 -- -- 265 -- --
TransPro dividend adjustment -- -- (1,272) -- -- -- --
Minimum pension liability adjustment -- -- -- -- -- -- 154
Adjustment from translating foreign
financial statements into U.S. dollars -- -- -- (406) -- -- --
Other -- -- -- -- (50) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $29,614 $170,945 $46,742 ($304) ($17,932) ($2,908) ($206)
====================================================================================================================================
The Notes are an integral part of these statements.
15
18
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.
Other investments (all of which are less than 20% owned) are accounted for
using the cost method. Intercompany accounts and transactions have been
eliminated. To facilitate preparation of financial statements, the Companys
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
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.
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, 1996 and 1995
(amounts in thousands):
1996 1995
---- ----
Raw material $ 36,869 $ 36,809
Work-in-process 19,256 21,310
Finished goods 15,179 12,033
- -----------------------------------------
$ 71,304 $ 70,152
=========================================
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 and 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, 1996 and 1995
(amounts in thousands):
1996 1995
---- ----
Land and improvements $ 2,315 $ 4,241
Buildings 22,843 22,370
Machinery and equipment 52,039 51,984
Leasehold improvements 4,465 3,066
Land and buildings under capital lease -- 16,375
- -----------------------------------------------------------------
81,662 98,036
Less accumulated depreciation and amortization (29,720) (20,912)
- -----------------------------------------------------------------
$ 51,942 $ 77,124
=================================================================
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 1996, 1995 and 1994, approximately $4,745,000, $4,386,000 and $1,971,000,
respectively, of these costs were capitalized and approximately $2,383,000,
$2,659,000 and $1,524,000, respectively, were amortized.
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.
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
$18,059,000, $13,453,000 and $7,700,000 in 1996, 1995 and 1994, respectively. In
addition, the Company incurred other engineering expenses relating to new prod-
16
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
uct development (that do not meet the accounting definition of "Research and
Development") in the amount of $2,964,000, $3,553,000 and $1,165,000 in 1996,
1995 and 1994, 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," and its related interpretations which prescribe the
use of the intrinsic value based method. Accordingly, no compensation cost has
been recognized for its fixed stock option plans. However, the Company has
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation."
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." 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 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 convertible debentures (redeemed in 1995) 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 1996, 1995 and
1994.
Other: The 1995 and 1994 statements of income and cash flows have been
reclassified to conform to the 1996 presentation.
NOTE 2: FINANCING
Long-term obligations consisted of the following (amounts in thousands):
1996 1995
---- ----
Foreign credit agreement borrowings $ 7,120 $ 6,687
Floating rate industrial revenue
bonds due 2012 - 2025 15,500 12,000
8.13% fixed rate note payable to
insurance company due 2001 - 2003 15,000 15,000
Capital lease obligation 15,502 16,375
Other 223 115
Unamortized debt expense (645) (701)
- -----------------------------------------------------------------
52,700 49,476
Less current maturities (2,743) (2,418)
- -----------------------------------------------------------------
$49,957 $47,058
=================================================================
The Company maintains a domestic revolving credit agreement in the
aggregate amount of $100,000,000 expiring December 18, 1999. Of this total,
$15,900,000 has been designated for the issuance of letters of credit relating
to the Companys industrial revenue bonds. The balance of funds available under
the revolving credit agreement may be utilized for borrowings or other letters
of credit; however a maximum of $20,000,000 may be allocated to such letters of
credit. Interest may be determined on a LIBOR or prime rate basis at the
Companys 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,
1996, $82,200,000 was available under this agreement.
The Company also has short-term credit lines utilized by its European
subsidiaries. At year-end, direct borrowings under these agreements totaled
$3,255,000; an additional $15,650,000 remained unused. These credit lines bear
interest based on LIBOR. Foreign long-term debt includes long-term arrangements
at fixed and variable rates with the Industry Ministry of Italy totaling
$1,889,000 (due 1997 - 2008), and variable rate borrowings with various
international banks of $5,231,000 (due 1997 - 2004). Further, two of the
aforementioned arrangements are mortgage notes, under which the Company has
pledged the respective land and buildings as collateral. These facilities had
an aggregate net book value of $6,000,000 at year-end 1996. During 1996, the
average interest rate for all foreign credit arrangements approximated 6.95%.
The floating rate industrial revenue bonds bear interest at rates based
upon a short-term tax exempt bond index, as defined in the bonds, which
approximated 4.19% at December 31, 1996. The average interest rate for all
industrial revenue borrowings approximated 3.43% during 1996.
In connection with its discontinued emissions inspection business programs
(see Note 9), the Company has a lease agreement under which it leases
the land and inspection facilities for an initial lease term equal to the
program life of ten years expiring on December 31, 2005. 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 $15,283,000
is recorded at December 31, 1996.
The aggregate maturities of long-term obligations for the years 1997
through 2001 are as follows (amounts in thousands):
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
$2,743 $2,663 $2,702 $2,523 $6,973
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 Companys shares and the
disposition of assets of the Company not in the ordinary course of business.
17
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allen Telecom Inc.
Note 3: Other Assets and Liabilities
Other assets consisted of the following (amounts in thousands):
1996 1995
---- ----
Capitalized computer software
and database files $14,550 $12,645
Investment in telecommunication
companies, at cost 7,827 2,778
Deferred start-up and pre-operating costs -- 6,100
Investment in specialty rubber
products business 4,344 4,344
Unliquidated assets of
discontinued operations 3,217 3,282
Prepaid pension costs 3,070 2,244
Other 8,849 8,924
- ------------------------------------------------------------
$41,857 $40,317
============================================================
Other liabilities and deferred credits consisted of the following
(amounts in thousands):
1996 1995
---- ----
Minority interests $10,633 $ 7,376
Deferred income taxes 8,872 5,549
Long-term pension liabilities 4,382 3,637
Accrued post-retirement benefits 1,609 1,599
Other 4,306 3,526
- ----------------------------------------------------------
$29,802 $21,687
==========================================================
Note 4: Capital Stock and Stock Compensation Plans
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.
The Company has adopted the "disclosure-only" provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," ("SFAS No. 123") but applies Accounting Principles Board
Opinion No. 25 ("APB 25") and related interpretations for its Plans. The
Company has two active stock plans, the 1992 Stock Plan and the 1994
Non-Employee Directors Stock Option Plan. The 1982 Stock Plan, under which
options remain outstanding, was terminated in 1992.
The Company's 1992 Stock Plan provides for the granting of options (and
restricted shares as discussed below) to key employees as determined by the
Management Compensation Committee of the Board of Directors. The total number of
options for which the Company may grant options and award restricted shares of
common stock under the 1992 Stock Plan 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, have a ten-year term whereby 50%
of the option shares vest after two years and an additional 25% in each of years
three and four. 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 the shares covered
by such portion of the option in lieu of issuing shares upon exercise. There
were no exercise of stock appreciation rights in 1996, 1995 and 1994.
Pursuant to the 1994 Non-Employee Directors Stock Option Plan, the total
number of shares to be issued may not exceed 278,528 shares. Each year, each
Non-Employee Director who previously has not been employed by the Company will
automatically 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.
Shares granted under the 1994 Plan have a ten year term and vest in the same
manner as the 1992 Stock Plan, subject to certain accelerated vesting upon the
cessation of service.
Stock option activity for the three years ended December 31, 1996 is
summarized as follows:
Weighted Average
Shares Exercise Price
--------- --------------
Balance, December 31, 1993 785,595 $ 6.72
Granted 462,867 $15.22
Exercised (21,501) $ 5.33
Terminated and canceled (4,456) $10.77
- -------------------------------------------------------------------------------
Balance, December 31, 1994 1,222,505 $ 9.95
Granted (weighted average
fair value, $11.10) 331,762 $21.58
Exercised (85,766) $ 6.66
Terminated and canceled (80,575) $18.36
- -------------------------------------------------------------------------------
Balance, December 31, 1995 1,387,926 $12.44
Granted (weighted average
fair value, $10.15) 391,400 $20.39
Exercised (37,545) $ 8.84
Terminated and canceled (32,317) $20.21
- -------------------------------------------------------------------------------
Balance, December 31, 1996 1,709,464 $14.19
===============================================================================
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for stock option grants: expected volatility of 40% and 42%,
risk free interest rates of 6.42% and 6.93%, and expected lives of 6.1 years and
6.0 years for 1996 and 1995, respectively. The calculations assume no future
dividend payments for grants in both 1996 and 1995.
18
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the status of outstanding stock options as of
December 31, 1996:
Stock Options Oustanding
-------------------------------------
Weighted Average Stock Options Exercisable
------------------------- -------------------------
Range of Contractual Exercise Weighted Average
Exercise Prices Shares Life Price Shares Exercise Price
- --------------- ------ ---- ----- ------ --------------
$ 4.18 to $10.77 586,604 3.2 years $ 5.70 586,604 $ 5.70
$11.28 to $19.97 487,373 7.5 years $15.39 364,321 $15.27
$20.50 to $28.00 635,487 8.9 years $21.10 15,635 $22.73
- --------------------------------------------------------------------------------------
$ 4.18 to $28.00 1,709,464 6.5 years $14.19 966,560 $ 9.58
======================================================================================
Restricted stock awards made to date under the 1992 Stock Plan were issued
at no cash cost to the recipients; however, such employees agreed to forego
salary increases and new stock option grants for a period of two years, other
than for exceptional promotions. 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.
Restricted shares are subject to forfeiture in certain circumstances as defined
in the 1992 Stock Plan.
Restricted stock activity for the three years ended December 31, 1996 is
summarized as follows:
Shares
---------
Balance, December 31, 1993 546,429
Granted 59,219
Vested (47,779)
Terminated and canceled --
- --------------------------------------------------------------------------------
Balance, December 31, 1994 557,869
Granted (weighted average fair value, $25.00) 35,783
Vested (211,794)
Terminated and canceled (61,253)
- -------------------------------------------------------------------------------
Balance, December 31, 1995 320,605
Granted --
Vested (28,347)
Terminated and canceled (17,328)
- --------------------------------------------------------------------------------
Balance, December 31, 1996 274,930
===============================================================================
Unearned compensation with respect to restricted shares, 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 is shorter.
Compensation expense with respect to restricted shares amounted to $382,000 in
1996, $391,000 in 1995 and $2,794,000 in 1994.
At December 31, 1996 and 1995, 2,996,262 and 2,847,859 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. If the Company had elected to recognize
compensation cost for its stock based compensation plans based on the fair value
at the grant dates for awards under those plans in accordance with SFAS 123, net
income and earnings per common share would have been reduced to the pro forma
amounts below (amounts in thousands, except per share data):
1996 1995
- -----------------------------------------------------------------------
Net Income: As reported $13,066 $32,639
Pro forma $11,794 $31,726
Earnings per common share: As reported $.48 $1.22
Pro forma $.44 $1.19
=======================================================================
Note 5: Commitments and Contingencies
The Company's leases consist primarily of facilities and equipment and
expire principally between 1997 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 $3,900,000 in 1996,
$4,200,000 in 1995 and $2,700,000 in 1994. Future minimum payments under
noncancelable leases as of December 31, 1996 were as follows (amounts in
thousands):
Operating Capitalized
Leases Lease
--------- -----------
1997 $ 4,020 $ 2,450
1998 3,690 2,450
1999 3,090 2,450
2000 2,920 2,450
2001 2,810 2,450
Thereafter 5,660 9,800
- ---------------------------------------------------------
Total minimum lease payments $22,190 $22,050
- ---------------------------------------------------------
Less: amount representing interest (6,548)
- ---------------------------------------------------------
Present value of future minimum
lease payments including
current maturities of $1,160 $15,502
=========================================================
19
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allen Telecom Inc.
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 workers compensation and liability policies and has provided
a letter of credit in favor of these carriers in the amount of $1,881,000.
During 1996, the Company entered into an agreement and made an equity
investment in a wireless telecommunications company in the amount of $5,000,000.
This company has agreed to purchase from the Company $50,000,000 of equipment
and services through December 31, 2001. In connection with this purchase
commitment, the Company will make available up to $50,000,000 of product
financing in the form of secured, interest bearing loans to be used solely to
finance the purchase price of the equipment and services supplied by the
Company.
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.
In connection with the pending sale of the centralized emissions testing
programs, the Company remains liable under certain leases and other obligations.
See Note 9 for additional information.
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. 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, 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 consolidated 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 domestic 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 the plan covering hourly employees
typically provides 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.
Net periodic pension cost of continuing operations for the Company's plans
included the following components (amounts in thousands):
1996 1995 1994
---- ---- ----
Service cost benefits
earned during the year $1,165 $ 926 $1,311
Interest cost on the projected
benefit obligation 2,143 2,487 3,282
Actual income on plan assets (3,474) (5,781) (1,469)
Settlement (gains) costs -- (2,135) 35
Net amortization and deferral 1,509 3,193 (2,050)
- ---------------------------------------------------------------
Net periodic pension
cost (benefit) 1,343 (1,310) 1,109
Less allocated to discontinued
operations -- -- (414)
- --------------------------------------------------------------
$1,343 ($1,310) $ 695
==============================================================
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).
20
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan assets consist principally of equity securities (including 92,000
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, at December 31, 1996 and 1995 (amounts in thousands):
Assets Benefits
Exceed Exceed
Benefits Assets
1996:
Actuarial present value of benefit obligations:
Vested benefits $17,972 $7,301
Nonvested benefits 894 408
- ----------------------------------------------------------------------------
Accumulated benefit obligation 18,866 7,709
Effect of projected future compensation levels 1,590 1,047
- ----------------------------------------------------------------------------
Projected benefit obligations 20,456 8,756
Plan assets at fair market value 20,948 3,022
- ----------------------------------------------------------------------------
Projected benefit obligation less than
(in excess of) plan assets 492 (5,734)
Loss due to actual experience
varying from actuarial assumptions 1,595 252
Prior service cost not yet
recognized in pension cost (133) 2,140
Transition liability (asset)
on adoption of new accounting
standard to be recognized in the future (252) 10
Adjustment required to recognize
minimum liability -- (1,355)
- ----------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 1,702 ($4,687)
============================================================================
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)
============================================================================
Assumptions used in determining pension cost for the plans are:
1996 1995
---- ----
Discount rate 7 1/2% 7 1/4% - 8%
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 were 7 1/4% for all U.S.
pension plans and 7 1/2% and 8% (the termination rates) for its Canadian plans,
which were 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 insurance
benefits from continuing operations are as follows (amounts in thousands):
1996 1995 1994
---- ---- ----
Net periodic cost:
Service cost benefits
attributed to service
during period $ 15 $ 12 $182
Interest cost on accumulated
postretirement benefit obligation 110 108 348
Amortization of (gain)/loss (2) (7) 51
- --------------------------------------------------------------------
Net postretirement health care cost 123 113 581
Less allocated to
discontinued operations -- -- (451)
- --------------------------------------------------------------------
$123 $113 $130
====================================================================
The components of the accumulated postretirement benefit obligation (all of
which are unfunded) are as follows (in thousands):
1996 1995 1994
---- ---- ----
Retirees $1,103 $1,173 $1,742
Fully eligible active plan participants 102 78 123
Other active plan participants 141 302 1,346
Unrecognized net gain/(loss) 263 46 (99)
- ---------------------------------------------------------------------------
Accumulated postretirement
benefit obligations $1,609 $1,599 $3,112
===========================================================================
The actuarial calculation assumed a 13.2% increase in the health care cost
trend rate for 1996 (13.7% in 1995 and 14.1% in 1994). Based upon more recent
data, the assumed trend rate to be used for 1997 was reduced to 9.6%. The
assumed rate decreases approximately .4% per year through the year 2010 to 5.0%
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 $56,000 and increase net periodic cost by
$8,700. The weighted average discount used in determining the accumulated
postretire-
-21-
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allen Telecom Inc.
ment benefit obligation was 7.50% in 1996, 7.25% in 1995 and 8.25% in 1994,
respectively. In addition, the Company negotiated and modified certain
postretirement pension obligations which resulted in actuarially based net
gains. Accordingly, the Company reported a gain of $1,855,000 (of which,
$1,365,000 was included in income from discontinued operations) in 1994.
Note 7: Income Taxes
Information with respect to income taxes in continuing operations is as follows
(amounts in thousands):
1996 1995 1994
---- ---- ----
Income before taxes and
minority interests:
Domestic $ 9,472 $35,636 $34,846
Foreign 37,054 14,805 (3,391)
- ---------------------------------------------------------------------
$46,526 $50,441 $31,455
- ---------------------------------------------------------------------
Provision (Benefit) for income taxes:
Current:
Federal $ 2,764 $ 5,550 $11,620
Foreign 19,170 7,323 --
State and local 580 927 1,423
- ---------------------------------------------------------------------
22,514 13,800 13,043
- ---------------------------------------------------------------------
Deferred:
Federal (2,054) 5,173 (1,852)
Foreign 108 868 --
State and local (903) 297 --
- ----------------------------------------------------------------------
(2,849) 6,338 (1,852)
- ----------------------------------------------------------------------
$19,665 $20,138 $11,191
======================================================================
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):
1996 1995 1994
Provision computed at the
Federal statutory rate $16,284 $17,654 $11,009
State and local income
taxes, net of Federal
income tax benefit (210) 796 925
Net higher (lower) tax rates
on foreign income 6,082 3,304 (471)
Benefit of foreign sales corporation
and other tax credits (2,055) (1,881) (734)
Tax effect of write-off of non-deductible
acquired in-process research
and development costs 932 -- --
Other (1,368) 265 462
- ------------------------------------------------------------------------
$19,665 $20,138 $11,191
========================================================================
The following table summarizes the Companys total provision (benefit) for
income taxes (amounts in thousands):
1996 1995 1994
---- ---- ----
Continuing operations $19,665 $20,138 $11,191
Discontinued operations (3,780) 3,672 6,524
Tax benefit of carryforward
allocated to goodwill -- -- (1,330)
Allocated to equity:
Stock options (82) (509) (42)
Pension gain (loss) from
business disposition and other
pension items 112 1,164 (940)
- --------------------------------------------------------------------
$15,915 $24,465 $15,403
====================================================================
The components of deferred tax assets (liabilities) are comprised of the
following as of December 31, 1996 and 1995 (amounts in thousands):
1996 1995
---- ----
Gross deferred tax assets:
Inventory $ 3,599 $ 3,732
Pensions and deferred compensation 2,000 1,838
Tax credit carryforwards 1,480 2,986
Product warranty claims 1,108 861
Other 2,005 2,067
- ------------------------------------------------------------------------------
10,192 11,484
- ------------------------------------------------------------------------------
Gross deferred tax liabilities:
Intangible assets (8,497) (6,820)
Depreciation (1,205) (1,082)
Unremitted foreign earnings (1,500) (2,154)
Plant closings and costs of
discontinued operations (203) (1,719)
Deferred start-up costs (2,924) (1,811)
Other (8,147) (8,355)
- ------------------------------------------------------------------------------
(22,476) (21,941)
- ------------------------------------------------------------------------------
Net deferred tax liabilities ($12,284) ($10,457)
==============================================================================
Deferred tax assets (liabilities) are recorded in the consolidated balance
sheet as follows (amounts in thousands):
1996 1995
---- ----
Other current assets $932 $888
Current liabilities - deferred income taxes (4,344) (5,796)
Other liabilities and deferred credits (8,872) (5,549)
- -----------------------------------------------------------------------
($ 12,284) ($10,457)
=======================================================================
-22-
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, 1995 and 1994, general business tax credits of approximately
$500,000, $359,000 and $300,000 generated in the respective year were used to
reduce the provision for income taxes. At December 31, 1996, the Company has
available alternative minimum tax credits in the amount of $1,480,000 available
to reduce future federal income tax liabilities.
United States income taxes are not provided on undistributed earnings of
the Companys foreign subsidiaries because of the intent to reinvest these
earnings. The amount of undistributed earnings which are considered to be
indefinitely reinvested is approximately $18,000,000 at December 31, 1996. 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.
Note 8: Geographic Data
The distribution of the Companys geographic operations is as follows (amounts in
thousands):
1996 1995 1994
---- ---- ----
Sales:
United States $ 241,657 $ 245,210 $ 208,441
Canada 7,427 6,112 2,068
Europe 120,414 55,234 3,008
- -----------------------------------------------------------------------------
$ 369,498 $ 306,556 $ 213,517
=============================================================================
Operating Income:
United States $ 17,454 $ 40,665 $ 40,135
Canada 345 (56) 33
Europe 37,116 15,304 (256)
- -----------------------------------------------------------------------------
54,915 55,913 39,912
Financing costs (2,785) (2,098) (1,785)
General corporate expenses (5,604) (3,374) (6,672
- ------------------------------------------------------------------------------
$ 46,526 $ 50,441 $ 31,455
- ------------------------------------------------------------------------------
Assets:
United States, including
Mexican Maquiladora $ 293,191 $ 282,439 $ 339,135
Canada 3,707 6,700 8,835
Europe 113,614 74,426 9,746
- -----------------------------------------------------------------------------
$ 410,512 $ 363,565 $ 357,716
==============================================================================
Export sales of continuing operations were $86,542,000, $98,205,000 and
$62,175,000 in 1996, 1995 and 1994, respectively.
The aggregate net currency transaction and translation amounts in income
from continuing operations included gains of $126,000 and $34,000 in 1996 and
1995, respectively, and a loss of $32,000 in 1994.
Note 9: Acquisitions and Dispositions
On August 26, 1996, as amended on January 15, 1997, the Company's
subsidiary, MARTA Technologies, Inc. ("MARTA"), which operates centralized
automotive emissions testing programs, entered into a contract to transfer its
Cincinnati, Ohio testing program to Envirotest Systems Corp. ("Envirotest"). The
Jacksonville, Florida program is also subject to ongoing contract provisions
between MARTA and Envirotest under which that program may also be sold, under
certain circumstances, to Envirotest at some future date. The transaction has
not, as yet, been consummated. The contract is subject to a number of
pre-closing conditions including state government approval.
Pursuant to the terms of the agreement, the Company will receive a
stipulated amount, in cash, in exchange for MARTA's contractual rights to
operate the Cincinnati, Ohio program, and Envirotest will sub-lease from MARTA
the land and buildings as well as lease from MARTA the testing equipment and
other assets utilized in the program. The leases would run through the
remaining initial term of the program, which terminates December 31, 2005. The
Company will account for such leases as operating leases and will remain as
primary obligor under the existing land and buildings capitalized lease
obligation.
The Company has decided that it will exit the centralized automotive
emissions testing business. In the event the aforementioned agreement for sale
is not consummated, the Company will continue to endeavor to sell MARTA's
operating programs, or operate them until the termination of the respective
contracts, and will not bid upon or seek new emissions testing programs. The
State of Maryland program currently runs through April 30, 1998, and the State
has options for two one-year extensions. The contract for the Jacksonville,
Florida program initially ran through March 31, 1998; however, the State
recently has decided to extend the program for two years as provided in the
contract. The Company will continue to operate these programs pursuant to its
contractual commitments pending any disposal.
MARTA's El Paso, Texas program was officially terminated in January 1996.
MARTA has filed a claim with the State and is proceeding with the settlement
provisions set forth in the contract with the State. The Company believes that
its contract provides for appropriate compensation and will pursue all remedies
to protect its interests. The recorded carrying amount of its investment in the
El Paso program is $7,892,000. MARTA is incurring certain additional costs (in
particular, interest on the carrying value of its investment) which, for
financial reporting purposes, are being expensed as incurred and have been
included in the claim. At this time, it is not possible to predict the ultimate
outcome of the settlement process, or the timing of receipt of funds related
thereto, which is subject to appropriation by the State of Texas.
-23-
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allen Telecom Inc.
MARTA is also currently in discussions with the State of Kentucky in
connection with its contract to operate the centralized automotive emissions
testing program in Northern Kentucky. This program was previously suspended by
the State prior to implementation of an emissions testing program. MARTA has
filed a lawsuit in connection with its claim for compensation from the State.
The Company's contract provides for the payment of reasonable compensation on
early termination of the contract, which the Company contends has effectively
occurred. The recorded carrying amount of the investment in the Kentucky
program is approximately $900,000. Similar to the aforementioned Texas
program, MARTA is incurring certain costs which have been expensed for
financial reporting purposes and which were included in the claim filed with
the State.
The Company has presented the centralized automotive emissions testing
business as a discontinued operation in the Consolidated Statements of Income. A
summary of the non-current assets of the business is as follows (amounts in
thousands):
Cincinnati, Ohio program:
Land and buildings under capital lease $15,283
Testing equipment and other costs 14,100
Carrying value of El Paso, Texas assets 7,892
Other 4,756
- --------------------------------------------------------------
$42,031
==============================================================
Discontinued operations include managements best estimate, based on the
aforementioned proposed sale transaction, of the loss from the disposal of the
emissions testing business in the amount of $5,643,000, or $3,724,000 after
related tax benefit ($.14 per common share). Actual results could differ from
these estimates and are dependent upon final determination of the contract terms
of the sale of the Cincinnati, Ohio program to Envirotest, the continuing
efforts to sell or operate existing programs, and resolution of claims against
a number of States. In addition, the proposed claims and settlements with the
States of Texas and Kentucky could differ in the near term from the recorded
net asset values. In this regard, MARTA's claims are for amounts in excess of
the carrying value of the assets (representing costs incurred and expensed both
prior to and subsequent to termination of the programs) but remain subject to
continuing negotiations and the appropriation of funds by the States.
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 Companys partnership joint venture interest in
GO/DAN Industries ("GDI"). These entities comprised the Company's Truck
Products Business. Following the distribution, TransPro became an independent,
publicly traded corporation.
In connection with the Spin-off, the Company has presented the Truck
Products Business as a discontinued operation in the Consolidated Statements of
Income. The Company charged the net assets transferred to TransPro against its
retained earnings.
Summarized income statement information relating to the results of
discontinued operations is as follows (amounts in thousands, except per share
data):
Years Ended December 31
1996 1995 1994
Marta Marta TransPro Marta TransPro
- ----------------------------------------------------------------------------
Sales $14,914 $8,821 $92,933 $2,796 $115,039
Operating income
(loss) (5,627) (2,624) 9,726 (748) 16,113
Equity in earnings
of joint venture -- -- 2,219 -- 1,368
Net income (loss) (3,766) (1,756) 7,852 (530) 9,983
Earnings (loss) per
common share (.14) (.07) .30 (.02) .38
<FN>
The fiscal year 1995 results of operations for TransPro are 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 Truck Products Business. Further, results of operations
for TransPro are net of allocated interest of $205,000 and $402,000 in 1996
and 1995, respectively. Results of operations for MARTA are net of
allocated interest (income) of $1,243,000, $(277,000) and $(491,000) in
1996, 1995 and 1994, respectively.
In September 1996, the Company acquired, in exchange for 83,964 shares of
its common stock, 100% of Signal Science, Incorporated ("SSI"). In addition, the
selling shareholders may receive future contingent cash consideration based on
sales over an eight-year period. The Company accounted for the acquisition under
the purchase method; accordingly, the consolidated financial statements reflect
the inclusion of SSI as of the acquisition date. In addition, the Company
incurred a one-time non-cash charge relating to the write-off of purchased
in-process research and development costs of $2,662,000. SSI's primary business
is research and development projects involving special purpose radio signal
equipment for telecommunications applications. In May 1996, the Company acquired
a 64.3% interest in Tekmar Sistemi S.r.l. ("Tekmar"), an Italian company that
produces fiber optic modules used predominately in the wireless
telecommunications and cable television markets for cash and 9,783 shares of
common stock. Senior management of Tekmar owns the remaining 35.7% ownership
interest. The Company has the right, pursuant to
24
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain put and call options, to acquire the remaining minority interest of
Tekmar over a five-year period. This acquisition resulted in $3,000,000 of
excess of cost over net assets acquired (goodwill). Further, in May 1996, the
Company acquired the remaining 20% minority interest of its Grayson Electronics
Company subsidiary for cash. Proforma results of operations for these
acquisitions have not been presented because the impact is not significant to
results of operations.
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 Italy. FOREM owns 62% of Mikom G.m.b.H., located in Germany.
The Company had previously acquired an initial 40% of FOREM in December 1994.
The total consideration paid for the Companys 80% ownership interest in FOREM
has aggregated approximately $25,352,000 which includes certain costs of
acquisition. The remaining 20% of FOREM's outstanding stock is subject to
certain put and 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.
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 ($1.04 per share) and $18,900,000 ($.74 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.
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: One of the Company's investments in
telecommunication companies has a fair market value, based on a definitive
purchase agreement with a third party, in excess of the Company's cost basis.
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 other investments in telecommunications companies 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, 1996 were not impaired and reflect the corresponding
fair values. Dividends aggregating $215,000 were paid on one investment in
1996.
Long-Term Debt: The fair values of the Companys 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. The Company entered into a
foreign currency contract in November 1996 to offset the impact of currency rate
changes against certain assets and liabilities of a German subsidiary. In
addition, the Company's Italian subsidiary enters into foreign currency
contracts to offset the impact of currency rate changes against certain assets
related to accounts receivable. The fair value of such contracts are based on
quoted market prices of comparable contracts. The carrying amounts and fair
values of the Company's financial instruments at December 31, 1996 and 1995 are
as follows (amounts in thousands):
Carrying Amount Fair Value
--------------- ----------
1996
Cash and cash equivalents $23,879 $23,879
Non-current investments 12,171 14,054
Long-term debt 53,345 54,294
Off balance sheet financial instruments:
Letters of credit 1,881 1,881
Foreign currency net sales contracts 15,682 15,798
- ----------------------------------------------------------------------
1995
Cash and cash equivalents $15,706 $15,706
Non-current investments 7,122 7,122
Long-term debt 50,177 51,733
Off balance sheet financial instruments:
Letters of credit 1,982 1,982
Foreign currency net sales contracts 4,469 4,472
======================================================================
25
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allen Telecom Inc.
Note 11: Unaudited Quarterly Financial Data
Quarterly financial data are summarized as follows (amounts in thousands, except
per share amounts):
March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------
1996
Sales $84,469 $88,459 $95,010 $101,560
Gross profit 28,928 31,559 32,206 38,404
Income from continuing
operations 4,682 5,702 3,497 6,675
Income (loss) from
discontinued operations (437) (565) (6,488) --
Net income 4,245 5,137 (2,991) 6,675
Earnings per common share:
Primary and Fully Diluted:
Continuing operations .18 .21 .13 .25
Discontinued operations (.02) (.02) (.24) --
Net Income .16 .19 (.11) .25
1995
- -------------------------------------------------------------------------------
Sales $58,592 $81,538 $85,369 $81,057
Gross profit 22,585 32,469 32,770 29,629
Income from continuing
operations 5,728 7,085 7,631 6,832
Income (loss) from
discontinued operations 1,328 2,305 1,841 (111)
Net income 7,056 9,390 9,472 6,721
Earnings per common share:
Primary and Fully Diluted:
Continuing operations .22 .26 .28 .25
Discontinued operations .05 .09 .07 --
Net Income .27 .35 .35 .25
Note 12: Supplemental Cash Flow Disclosure
During 1996, the following non-cash transaction was effected and is not
reflected in the Consolidated Statement of Cash Flows:
As described in Note 9, in 1996 the Company acquired, in exchange for, in
part, 93,747 shares of its common stock, 100% of Signal Science, Incorporated
and 64.3% of Tekmar Sistemi S.r.l.
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 discontinued emissions inspection programs.
On September 29, 1995, the Company completed the largely non-cash spin-off
distribution of 100% of the common shares of TransPro.
In May, 1995, the Company called for redemption the outstanding $4,917,000
of its Convertible Subordinated Debentures issued in 1992 in connection with the
acquisition of Alliance Telecommunications Corporation. Subsequent thereto,
holders of these debentures converted such debentures into 351,834 shares of the
Companys common stock.
The Company had no significant non-cash transactions in 1994.
Information with respect to cash paid during the year for interest and
taxes is as follows:
1996 1995 1994
Interest paid $ 4,907,000 $ 3,840,000 $3,600,000
Interest capitalized -- 440,000 970,000
Income taxes paid, net 1,778,000 18,890,000 240,000
26
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Allen Telecom Inc.
We have audited the accompanying consolidated balance sheets of Allen Telecom
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of income, stockholders equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Companys 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 Allen Telecom
Inc. as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cleveland, Ohio
February 17, 1997
REPORT OF MANAGEMENT
To the Board of Directors and Stockholders of Allen Telecom 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
non-employee 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 Officer
/s/ Robert A. Youdelman
Robert A. Youdelman
Executive Vice President, Chief Financial Officer
/s/ James L. LePorte, III
James L. LePorte, III
Vice President, Treasurer & Controller, Chief Accounting Officer
27
30
MANAGEMENTS DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Results of Operations
Overview
($ millions) 1996 1995 1994
- ------------ ---- ---- ----
Sales $369.5 $306.6 $213.5
Operating income 57.6 55.9 39.9
Income before taxes and
minority interests 46.5 50.4 31.5
Income from continuing operations 20.6 27.3 19.7
Net income 13.1 32.6 29.2
Total assets 410.5 363.6 357.7
Capital expenditures 17.5 16.8 6.4
Depreciation 11.7 8.3 3.7
The increase in sales in 1996 of $62.9 million, or 21% over 1995, was due to the
significant growth of international sales, which increased $54 million, or 35%,
compared to prior year levels. European sourced sales increased to $120 million
this year from $55 million in 1995. The increase in sales in 1995 of $93.1
million, or 44%, was due in large measure to the 80% acquisition of FOR.E.M.
S.p.A. and its majority owned subsidiary Mikom G.m.b.H. (collectively referred
to herein as "FOREM") which contributed $55 million in sales for the nine-month
period they were included in the Companys consolidated financial statements in
1995. The balance of the growth was due to sales growth within existing product
lines.
Operating income (representing income before financing costs, general
corporate expenses and the one time non-cash write-off of acquired in-process
research and development) increased $1.7 million, or 3%, in 1996, as the
significantly increased earnings relating to sales of the Companys international
systems and site management products were largely offset by earnings declines in
the domestic Systems and Site Management product lines. Lower profitability in
these product lines was attributable to lower product margins, lower
requirements for domestic cellular applications and increased spending on
research and development costs by the Company to accommodate sales to Personal
Communications Systems ("PCS") markets which were slow to materialize in 1996.
Income from continuing operations declined $6.7 million in 1996, as
compared with 1995, due to the write-off of acquired in-process research and
development costs incurred in connection with an acquisition in the amount of
$2.7 million or $.10 per common share (see Note 9 of Notes to Consolidated
Financial Statements), a $3.3 million increase in minority interest expense
relating to the outstanding 20% minority interest in FOREM and its 38% minority
interest in Mikom G.m.b.H., as well as higher financing and general corporate
expenses. Income from continuing operations was also adversely affected by a
higher effective tax rate due to the proportion of European earnings taxed at
rates substantially higher than in the U.S.
The decline in net income from $32.6 million in 1995 to $13.1 million in
1996 reflects both the $7.5 million of losses for the discontinued centralized
automotive emissions test business (as discussed below) and the impact of the
elimination of the spun-off automotive and truck products business, which earned
$7.1 million in profits in 1995 through the September 30, 1995 spin-off date.
Operating income increased by $16.0 million, or 40%, in 1995 over 1994.
This increase was due primarily to the acquisition of FOREM and increased sales
from existing product lines. Operating income and income from continuing
operations increased due to such higher sales levels; however, net income was
adversely impacted by the higher tax rates in Europe and the minority interest
expense attributable to FOREM.
Sales
Sales of the Companys Systems products (which generally are comprised of booster
and repeater products for cellular and PCS systems, as well as the Companys
SmartCell(TM), Extend-A-Cell(R) and system test and measurement products) were
down slightly at $94.1 million in 1996 compared with $95.1 million in the
preceding year. Sales in this product line have been impacted primarily by
significantly lower shipments of the Company's Extend-A-Cell(R) frequency
translating repeater, principally in domestic cellular markets. Offsetting this
decline, in part, has been the Company's success with non-frequency translating
repeaters particularly in European and other export markets. The most successful
of these repeater products utilize GSM technology, which has gained worldwide
acceptance as a cellular standard. Repeaters have also been developed for CDMA
systems deployed in Asia and North America. Sales of system test and measurement
products increased significantly in 1996 over 1995 as they have obtained higher
market share with domestic PCS carriers. Sales growth expectations of the
Systems products for the Company in 1997 are dependent on the development of new
Systems products, maintaining market share and competitive pricing pressures.
Sales of Systems products increased $19 million in 1995, or 25% from 1994.
This increase in sales was largely attributable to the addition of GSM repeater
products (due to the acquisition of
Sales of Systems Products
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$51.3 $62.4 $76.1 $95.1 $94.1
Sales of Site Management and Other Non-antenna Products
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$29.3 $49.1 $53.0 $112.9 $159.3
28
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
FOREM), which added $16 million of sales in 1995. Demand for the Companys
Extend-A-Cell(R) and microcell products was strong; however, the emphasis in
sales shifted from domestic to international markets. Increased sales in the
international markets in 1995 more than offset a decline in domestic sales.
Sales of Site Management and Other Non-antenna products (which include
tower mounted amplifiers, filters, combiners and duplexers) increased to $159.3
million, or 41%, over 1995. This large increase in sales reflects the Companys
strong market presence in Europe and the worldwide acceptance of GSM, where we
have strong market share with GSM original equipment manufacturers ("OEMs") for
our Site Management products.
Site Management and Other Non-antenna products sales increased $59.9
million in 1995 over the 1994 level of $53.0 million. The FOREM acquisition in
1995 accounted for $39 million of this sales increase. In December 1994, the
Company acquired a 40% interest in FOREM and subsequently increased its
ownership to 80% in early 1995. Beginning on February 1, 1995, the Company
consolidated the results of operations of FOREM; accordingly, results of
operations included those of FOREM for the nine months ended October 31, 1995.
(FOREMs results of operations are included on a two-month lag basis in order to
facilitate the timely preparation of financial statements.) The acquisition of
FOREM has expanded the overall international market share of the Companys
products.
Sales of Mobile and Base Antennas increased to $80.6 million in 1996, or
9.2%, over 1995. The increase in sales of this product line primarily resulted
from sales of base station antennas in new PCS markets. The Company has sold PCS
base station antennas to nearly all PCS carriers. However, this sales increase
was partially offset by a decline in mobile antenna sales, as consumers shift
from "mobile" cellular telephones, where the Company has significant market
share, to portable cellular phones. The Company does not manufacture portable
antennas.
Sales in the Mobile and Base Antennas product line increased $5.1 million,
or 7%, to $73.8 million in 1995 over the 1994 period. 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. Sales of
the Companys Frequency Planning, Systems Design and Related Services product
line increased in 1996 to $35.5 million, or 43%, over 1995, while in 1995 sales
increased to $24.8 million, or 58%, over 1994. This product line continued to
see strong demand for engineering services to domestic PCS carriers in 1996,
paralleling the growth in sales in 1995. This business, operated by the Companys
Comsearch division, does consulting work with nearly all major PCS operators.
The Company anticipates that sales in this business will continue to grow as PCS
systems are rolled out and optimized.
In 1996, international sales constituted more than 56% of total sales,
while in 1995, they comprised approximately 50% of sales. The Companys export
sales from the U.S. are primarily to major wireless telephony companies, and are
typically payable in U.S. dollars. European sales are primarily to major OEMs
and cellular or PCS operators in local currencies. The Company sees no
significantly greater risk in the operation of its business as a result of this
proportion of international business. In late 1996, the Company entered into an
agreement with a wireless telecommunications company whereby such company agreed
to purchase $50 million of the Companys equipment and services through December
31, 2001. (See also Liquidity and Capital Resources below.) This arrangement
should benefit all of the Companys product lines and, in the near term,
particularly its base station antenna business. At December 31, 1996, the
Company had its largest order backlog ever at nearly $100 million, excluding the
aforementioned $50 million purchase commitment.
Sales of
Mobile and Base Antennas
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$42.4 $57.2 $68.7 $73.8 $80.6
Sales of Frequency
Planning, Systems Design
and Related Services
amounts in millions of dollars
92 93 94 95 96
-- -- -- -- --
$5.7 $14.9 $15.7 $24.8 $35.5
Operations
($ millions) 1996 1995 1994
- ------------ ---- ---- ----
Gross profit margin, as a percent of sales 35.5% 38.3% 40.4%
Operating expenses, as a percent of sales 13.5% 13.8% 16.8%
Research and development and
new product engineering costs:
Amount $21.0 $17.0 $8.9
As a percent of sales 5.7% 5.5% 4.2%
Gross profit margins have declined in each of the years 1996 and 1995 as
compared with the immediately preceding year. The decline in gross profit margin
in 1996 was due primarily to changes in product mix, as well as continuing
competitive pricing pressures, particularly in the Companys domestic Systems and
Site Management product lines. The pattern of decline in gross margin
experienced in 1995 was similar to that of 1996. The Company has embarked on a
program to emphasize cost containment and improve margins, particularly in the
Systems and Site Management product lines, and has seen improved margins during
the latter half of 1996.
29
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Operating expenses (which consist of selling, general and administrative
expenses, but exclude general corporate expenses and amortization of goodwill)
are within normal operating ranges for the Company for both 1996 and 1995. The
decline in percentage of such expenses in 1995 from 1994 represents the
spreading of fixed costs on the significantly higher sales in 1995 relative to
1994 and the consolidation of FOREM which operates at a lower cost level.
In the past few years, the Company has significantly increased its research
and development and new product engineering costs in order to keep pace with the
technological advances in the industry. The Company anticipates that this trend
will continue as PCS and cellular systems are implemented and expanded and the
Company strives to develop ancillary products, including software products, for
the wireless telephony industry.
General Corporate
($ millions) 1996 1995 1994
- ------------ ---- ---- ----
General corporate expenses, net $ 5.6 $ 3.4 $ 6.7
Corporate assets 44.4 38.4 73.5
The increase in general corporate expenses in 1996, as compared with 1995, is
due in large part to the cessation of royalty payments made under a
noncompetition agreement. The agreement pursuant to which these payments were
made expired in June 1996, and royalty income amounted to $.7, $1.6 and $1.8
million in 1996, 1995 and 1994, respectively. Lower general corporate expenses
in 1995, compared with 1994, reflect significantly lower amortization of
unearned compensation relating to restricted stock plans which amounted to $.4
million in 1995 (and a similar amount in 1996) as compared with $3.1 million in
1994, as well as lower general corporate insurance costs.
Corporate assets consist of cash and other general corporate assets. The
net change in such assets primarily reflects the net change in the Companys cash
balances for each year presented.
Financing Costs
($ millions) 1996 1995 1994
- ------------ ---- ---- ----
Interest and financing expense:
Interest expense $(3.8) $(3.5) $(2.9)
Interest income 1.0 1.4 1.2
The increase in interest expense in both 1996 and 1995, both as compared with
the immediately preceding year, was due primarily to the acquisition and
inclusion of FOREM. Lower interest income in 1996 when compared with 1995
reflects lower domestic investment income as a result of lower average cash
levels. Higher investment income in 1995 as compared with 1994 related to the
investment of funds generated late in 1994, and invested throughout 1995, and
interest income of FOREM offset, in part, by the elimination of interest income
on a note received from the sale of the Companys automotive diagnostic business
in 1993.
During the years presented, a majority of the Companys domestic cash was
invested in tax exempt securities, which has the impact of lowering the net
interest yield as compared with pre-tax instruments.
Income Taxes
($ millions) 1996 1995 1994
- ------------ ---- ---- ----
Provision for income taxes $19.7 $20.1 $11.2
Effective tax rate 42.3% 39.9% 35.6%
The higher effective tax rate in 1996, as compared with 1995 and 1994, is due to
the higher proportion of European earnings, which carry a tax burden of
approximately 55%, as compared with the U.S. statutory rate of 35%. These higher
tax rates have been offset, in part, by the tax benefits attributable to the
Companys foreign sales corporation, which has reduced U.S. income taxes payable
through favorable tax treatment accorded certain export sales.
With the continued success of the Companys European operations, which carry
the significantly higher tax burden, it is possible that the effective tax rate
in 1997 could exceed that of 1996. (See Note 7 of Notes to Consolidated
Financial Statements for additional information.)
Discontinued Operations
As more fully discussed in Note 9 of the Notes to Consolidated Financial
Statements, the Company has decided to exit the Centralized Automotive
Emissions Inspection business operated by its MARTA Technologies Inc. ("MARTA")
subsidiary. The Company has determined that its decision to discontinue future
efforts with respect to this business will allow it to fully devote management
and financial resources to its expanding wireless telecommunications product
lines. In this connection, the Company has entered into an agreement to sell
the Cincinnati, Ohio program, which is currently not operating pending the
sale. The Jacksonville, Florida program is also subject to ongoing contract
provisions pursuant to which it may be sold at some future date. In the event
the agreement for sale is not consummated, the Company will endeavor to sell
MARTAs operating programs and will not bid upon or seek new emissions testing
programs. The Company will continue to operate its programs pursuant to its
contractual commitments pending any disposition.
The Company has proposed to finance the disposition of the Cincinnati, Ohio
program by entering into long-term leases whereby the purchaser will sub-lease
from MARTA the land and buildings as well as lease from MARTA the test equipment
and other assets used in the program. The term of these leases will run through
the remaining initial term of the program, ending December 31, 2005. The Company
will account for these leases as operating leases, resulting in rental income in
future years, offset by depreciation expense on the leased assets.
30
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Discontinued operations include managements best estimate, based, in part,
on the aforementioned proposed sale transaction, of the loss from the disposal
of the MARTA business in the amount of $5,643,000, or $3,724,000 ($.14 per
common share) after related tax benefit. Actual results could differ from these
estimates and are dependent on, among other things, the final determination and
consummation of the contract for sale. In addition, it is not possible to
predict the outcome of the settlement processes with respect to the claims with
the States of Texas and Kentucky, which could differ in the near term from the
recorded net asset values of these programs. In this regard, MARTA's claims are
for amounts in excess of the carrying value of the assets but remain subject to
continuing negotiations and the appropriation of funds by the States.
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) 1996 1995 1994
- ------------ ---- ---- ----
Total debt $ 56.0 $ 55.8 $ 45.1
Stockholders equity 226.0 210.4 224.2
Debt to equity ratio .2:1 .3:1 .2:1
In 1996, the Company generated cash of $53.6 million from continuing operations
as compared with $6.9 million in 1995. The significant increase in cash
generation in 1996 as compared with 1995, despite lower income from continuing
operations, was due in large measure to a lower level of investment in working
capital in 1996 (despite significantly higher sales) than experienced in 1995,
resulting in a cash generation of $29.0 million. In addition, the Company
received in 1996 a refund of income taxes previously paid in 1995 in the amount
of $8.0 million. In 1996, the Company also invested approximately $22.2 million
in capital expenditures and software development products and $16.9 million in
wireless telecommunications company investments.
In 1995, the Company had a net cash generation from continuing operations
of $6.9 million as compared with cash generation of $44.3 million in 1994. This
decline in cash generation, despite an increase in income from continuing
operations to $27.3 million in 1995 from $19.7 million in 1994, reflects a $34.6
million investment in working capital to support sales growth, particularly in
Europe and international markets, as well as $18.9 million in income tax
payments. In 1995, the Company also invested $21.2 million in capital
expenditures and software development costs for new products, particularly for
PCS markets. All of these investments were financed through the use of
internally generated funds and available cash investments.
The discontinued Centralized Automotive Emissions Testing business
typically used cash due to the large, initial capital expenditure requirements
as well as the need to fund current operating losses. The sale and disposal of
this product line will not initially have a significant impact on the financial
position or liquidity of the Company, although the sale will generate cash over
the nine-year period of the operating leases. As a result of the decision to
discontinue this business, the Company has terminated the $60 million of credit
lines which were available for MARTA under the Companys revolving credit
agreement, thereby reducing the Companys overall credit line under this
agreement to $100 million. At December 31, 1996, no amounts were borrowed under
this agreement and, after exclusion for amounts designated for letters of
credit, approximately $82 million of credit was available for use. The revolving
credit agreement expires in December 1999 and provides for financial flexibility
to fund growth and expansion.
During 1996, the Company entered into an agreement and made an equity
investment in a wireless telecommunications company in the amount of $5.0
million. This company has agreed to purchase from the Company $50 million of
equipment and services through December 31, 2001. In connection with this
purchase commitment, the Company will make available up to $50 million of
product financing in the form of secured, interest bearing loans to be used
solely to finance the purchase price of the equipment and services supplied by
the Company. The Company believes that existing credit lines and continued cash
flow from operations provide sufficient flexibility for this arrangement.
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 1997 are estimated to approximate $24 million, of which $4.3
million was committed at December 31, 1996. These proposed capital expenditures
reflect the increase in productive capacity necessitated by the increase in the
Companys sales volume, both domestically and in Europe.
The Company believes that continued profitability and available unused
credit lines provide sufficient liquidity to fund future growth, expansion and
acquisitions.
31
34
FIVE-YEAR SUMMARY OF OPERATIONS
(amounts in thousands, except per share data)
Five Years Ended December 31, 1996 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Sales $ 369,498 $ 306,556 $ 213,517 $ 183,638 $ 126,405
Cost of sales 238,401 189,103 127,160 109,040 64,788
Selling, general and administrative expenses 58,101 47,908 44,252 40,452 30,871
Research & development and new product engineering 21,023 17,006 8,865 7,886 4,487
Writeoff of inprocess research and development 2,662 -- -- -- --
Interest and financing expense 2,785 2,098 1,785 1,805 1,092
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 46,526 50,441 31,455 24,455 25,167
Provision for income taxes 19,665 20,138 11,191 671 1,279
- ---------------------------------------------------------------------------------------------------------------------------
Income before minority interests 26,861 30,303 20,264 23,784 23,888
Minority interests (6,305) (3,027) (523) (518) (608)
- ---------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 20,556 27,276 19,741 23,266 23,280
Discontinued operations:
Income (loss) from discontinued operations (3,766) 5,363 9,453 1,695 (5,173)
Gain (loss) on sale of discontinued businesses (3,724) -- -- (2,936) --
Cumulative effect of accounting changes -- -- -- 2,102 (2,767)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 13,066 $ 32,639 $ 29,194 $ 24,127 $ 15,340
===========================================================================================================================
Net income applicable to common stock $ 13,066 $ 32,639 $ 29,194 $ 21,947 $ 11,315
===========================================================================================================================
Earnings (loss) per common share
(Primary and fully diluted):
Income from continuing operations $ .76 $ 1.02 $ .76 $ .92 $ .98
Discontinued operations:
Income (loss) from discontinued operations (.14) .20 .36 .07 (.27)
Loss on sale of discontinued businesses (.14) -- -- (.13) --
Cumulative effect of accounting changes -- -- -- .10 (.14)
- ---------------------------------------------------------------------------------------------------------------------------
Net income per common share $ .48 $ 1.22 $ 1.12 $ .96 $ .57
===========================================================================================================================
FINANCIAL CONDITION
Total assets: Manufacturing $ 410,512 $ 363,565 $ 357,716 $ 324,638 $ 304,111
Lease financing -- -- -- -- 83,811
- ---------------------------------------------------------------------------------------------------------------------------
Total company 410,512 363,565 357,716 324,638 387,922
Working capital 94,378 93,371 107,940 71,808 67,013
Current ratio 1.90 2.11 2.54 2.22 1.96
Total debt: Manufacturing 55,955 55,799 45,064 52,597 68,083
Lease financing -- -- -- -- 63,151
- ---------------------------------------------------------------------------------------------------------------------------
Total company 55,955 55,799 45,064 52,597 128,177
Stockholder equity 225,951 210,377 224,181 195,161 159,339
Debt to equity ratio: Manufacturing .25 .27 .20 .27 .47
Lease financing -- -- -- -- 4.90
- ---------------------------------------------------------------------------------------------------------------------------
Total company .25 .27 .20 .27 .81
Book value per common share 8.44 7.92 8.59 7.52 5.08
Shares outstanding at year end 26,763 26,570 26,107 25,964 20,058
Return on stockholders equity 6.0% 14.7% 14.1% 12.6% 13.5%
Capital expenditures 20,992 24,498 14,833 11,360 6,653
Depreciation 12,231 8,896 7,477 6,611 6,701
Number of employees 2,900 2,800 2,700 2,500 3,000
===========================================================================================================================
All per share data have been restated to reflect stock dividends and stock
splits.
32
35
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
92 93 94 95 96
$15.00 $29.19 $25.63 $39.38 $28.75
$ 9.44 $12.94 $13.50 $21.25 $14.00
Market Price Range of Common Stock
1996 1995 1994
High Low High Low High Low
- --------------------------------------------------------------------------------
1st Quarter 23 1/4 16 7/8 25 1/2 21 1/4 18 3/4 13 1/2
2nd Quarter 28 3/4 18 7/8 29 5/8 22 18 3/8 14
3rd Quarter 22 1/2 14 39 3/8 29 1/8 22 1/4 15 3/4
4th Quarter 23 3/4 14 3/4 35 21 7/8 25 5/8 19 3/8
Dividends Declared On Common Stock
1996 1995 1994 1993 1992
1st Quarter -- $.05 $.04 $.03 $.025
2nd Quarter -- $.05 $.04 $.03 $.025
3rd Quarter -- $.05 $.04 $.03 $.023
4th Quarter -- -- $.05 $.04 $ .03
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 Allen Telecom 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.allentelecom.com.
Affirmative Action Policy
It is the policy of Allen Telecom 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 regard to any position for which the employee or applicant for
employment is qualified.
Stockholders
As of March 3, 1997, Allen Telecom Inc. had outstanding 26,832,305 shares of
Common Stock owned by 1,926 holders of record.
Annual Stockholders Meeting
The Annual Meeting of Stockholders will be held at the Cleveland Marriott at Key
Center, 127 Public Square, Cleveland, Ohio on Friday, April 25, 1997 at 9:30
a.m.
Mountain High Maps(R) Copyright(C) 1993 Digital Wisdom, Inc.
36
Allen Telecom [Logo]
Allen Telecom Inc.
25101 Chagrin Boulevard
Beachwood, Ohio 44122-5619
www.allentelecom.com