EX-13 3 l87036aex13.txt EXHIBIT 13 ANNUAL REPORT 1 [GRAPHIC] Allen Telecom annual report 2000 2 the year at a glance
2000 1999 ---- ---- FINANCIAL HIGHLIGHTS Sales $392,608,000 $336,213,000 Operating Income $27,407,000 $(636,000) Income (Loss) Before Taxes and Minority Interests $18,374,000 $(5,412,000) Income (Loss) From Continuing Operations $10,753,000 $(5,218,000) Net Income (Loss) $12,053,000 $(2,855,000) Return On Equity 5.1% -1.2% PER COMMON SHARE: Basic and Diluted: Income (Loss) From Continuing Operations $0.38 $(0.19) Net Income (Loss) $0.43 $(0.10) Book Value Per Share $8.39 $8.64 FINANCIAL POSITION, year-end: Stockholders' Equity $234,981,000 $240,912,000 Working Capital $132,631,000 $128,062,000 Shares Outstanding 28,022,000 27,882,000
FRONT ROW (left to right) James L. LePorte, III - Vice President - Finance Peter G. de Villiers - Vice President Laura C. Meagher - Secretary and General Counsel Robert A. Youdelman - Executive Vice President and Chief Financial Officer BACK ROW (left to right) Robert G. Paul - President and Chief Executive Officer David W. Holvey - Director of Taxes Roger L. Schroeder - Treasurer Philip Wm. Colburn - Chairman of the Board [PHOTO of PERSONS LISTED ABOVE] SAFE HARBOR CAUTIONARY STATEMENT Statements included 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 Company's future performance and financial results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Factors that could cause the Company's actual results to materially differ from forward-looking statements made by the Company, include, among others, the success of new product development, the health of the world and national markets, the availability of capital to the wireless carriers, the level of purchases of the Company's products and services, the impact of competitive products and pricing, the utilization of the Company's tax loss carry forwards, the impact of U.S. and foreign government actions and whether and when backlog will be converted to customer sales. Allen Telecom Inc.'s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q contain additional details concerning these factors. 3 letter to shareholders In the year 2000, operating performance substantially improved over the previous two years, resulting in a solid return to profitability. In the year 2000 we also positioned Allen Telecom for future growth and significantly enhanced bottom-line performance. Sales of $393 million for the year resulted in a 17% increase over the previous year. This growth was all internal, with no impact from acquisitions. Net income of $12 million, or $0.43 per common share, compares very favorably to the loss of $3 million (or $0.10 per common share) in 1999. These results were accomplished despite a significant weakening of the Euro. As a result of the lower valued Euro compared to the U.S. dollar, our reported sales and income, when translated into U.S. dollars, were $27 million and $.10 per share lower, respectively, in 2000 than they would have been had the average exchange rate remained constant from 1999 to 2000. More important for the long-term future of the Company and the value of its common stock, we enhanced our position with our customers during the year, a change which is sure to benefit the Company's future. Our backlog of business at December 31, 2000, was $111 million and has increased to $139 million at January 31, 2001, up from $85 million at the beginning of year 2000, increases of 31% and 64%, respectively. This backlog does not include any orders for third generation wireless products (3G), E 911 geolocation business, or power amplifiers for wireless networks. We believe that these new opportunities will significantly enhance Allen Telecom's future growth. Our gross profit margins increased from 26.5% in 1999 to 29.3% in 2000. We also improved our operating leverage by strategically focusing our research and development and limiting the growth of our selling, general and administrative expenses. These expenses, as a percent of sales, decreased from 8.3% and 16.3% in 1999 to 6.5% and 13.8%, respectively, in 2000. [PHOTO OF PHILIP WM. COLBURN AND ROBERT G. PAUL] Philip Wm. Colburn (left) and Robert G. Paul (right) 4 2 [DESIGN GRAPHIC] Most of our growth in 2000 was generated by two of our product lines. Sales of base station subsystems and components grew $48 million or 33% year-to-year. This growth was fueled by the continued build out of the existing worldwide GSM markets and impacted our Italian operations most directly. Sales of base station and mobile antennas grew $21 million or 27% year to year. Our growth in antenna sales was most evident in the U.S. where revenues grew 41% year-to-year, far above the 17% growth for the entire company. U.S. wireless carriers added more cell sites than in any year since the cellular telephone industry began in 1983, and our base station antenna division increased market share. Allen Telecom's sales were strong in Europe during the year, although this growth was partially masked by the weaker Euro, which minimized the growth when translated into U.S. dollars. South American and Southeast Asian markets, which had been very weak in prior years, showed signs of recovery, but did not approach the vitality of the North American and the European markets for Allen Telecom products. One of our major objectives for 2000 was to develop the products that would assure our participation in the third generation wireless networks as they are installed around the world. We had earlier believed that the 3G business for Allen Telecom would commence late in 2001 or early in 2002. We have been pleasantly surprised by rapid developments in the 3G environment, most particularly in Europe. Licensing in a large number of the European countries was completed during 2000, and the winning carriers may start to install their 3G infrastructure in 2001, for an expected initiation of service to their customers in 2002. This accelerated schedule has resulted in Allen Telecom shipping small quantities of 3G OEM base station subsystems and components in November and December 2000. 5 3 [EQUIPMENT PHOTO] mikom The EDGE compatible micro BTS booster (left) and the UMTS (3G) repeater (right) are representative of the new repeater and booster products that MIKOM has introduced for the next generation of wireless communications. As wireless communications moves from the current low-featured voice networks to the higher data capability and feature rich wireless networks, these types of products will be required for better system performance. There are many different approaches a carrier may take on the path to full bandwidth 3G networks, which can include GPRS or EDGE (both can be called 2.5G). MIKOM develops products that may be specifically designed for one customer's unique application, such as the EDGE booster, or products like the UMTS repeater which are standard off the shelf products capable of improving the performance of any wireless network. grayson wireless [TESTING EQUIPMENT PHOTO] The successful deployment of 2.5G and 3G wireless networks will require test and measurement equipment with capabilities significantly more advanced than previous technologies. The Invex3G product recently introduced by Grayson Wireless provides carriers with the ability to make extremely accurate measurements of hundreds of parameters concurrently from every channel in the system. Grayson Wireless continuously invests in product development to insure that its products lead the industry in capability and ease of use. 6 4 [PHOTO OF EQUIPMENT] decibel products This base station antenna is custom designed for broadband wireless systems in the United States. It utilizes three independent arrays operating in two separate frequency bands. Mounted on a rooftop or tower, this antenna provides both direct connections, and indirect connections through repeaters, to laptop and desktop computers in the area of service. The users can be mobile or located in households or businesses. This antenna is being deployed nationwide to provide an alternative high-speed Internet access service. [PHOTO OF EQUIPMENT] The Geometrix(R) Wireless Location Sensor (WLS) is a key component at the heart of our network-based Geometrix E 911 wireless location system. Integrating this hardware with sophisticated signal processing software, the system can precisely locate wireless callers in order to facilitate emergency assistance and other location-based services. After four years of product and market development, Geometrix is poised to contribute to Allen Telecom's performance in 2001. geometrix E 911 7 5 [GRAPHIC] In the fourth quarter of 2000, we also introduced some of our other 3G products, including repeaters, in-building coverage products, base station antennas, and test and measurement products. The development of these new 3G products, coupled with the expected infrastructure rollout, increases our optimism about the size of 3G product shipments we expect to see in 2001. Our divisions have designed and developed 3G compatible products, which should position us well to actively participate in the 3G rollout beginning in 2001, and increasing in the years thereafter. We are also happy to report Allen Telecom's strengthened position in the E 911 geolocation marketplace. Entering 2000, we had finished much of the development effort for this product line. Our two major objectives in the year 2000 were to participate in field trials with major carriers to prove the effectiveness of our network-based solution and to position ourselves as a key supplier to the wireless carriers. We concluded two successful field trials with Verizon Wireless, and to date are the only supplier chosen by AT&T Wireless to move to a phase two trial. All carriers were required by the FCC to submit their plans for meeting the FCC's E 911 initiative by November 9, 2000. While carrier responses were mixed in terms of their levels of sophistication and the approaches they propose to take, the results were very supportive of our two objectives going into the year. A large number of carriers, including most of the largest carriers, declared their preference for a network solution, which is Allen Telecom's methodology, as opposed to another group of carriers who opted for an assisted handset solution. It was also gratifying to learn that when carriers mentioned network suppliers by name, they named Allen Telecom more often than all the other competitors combined. While these carrier declarations have no binding effect, they represent an indication of the carriers' thinking at that time. This has led to significantly more detailed discussions and negotiations with the carriers about supplying our product to meet the October 2001 deadline. 8 6 [PHOTO OF EQUIPMENT] forem FOREM, which continues as the largest business within Allen Telecom, is positioned for enhanced growth as new networks are rolled out. The filter combiner for 3G applications (above) and 2G (below left), represent both the present and the future for Allen Telecom. In 2000, the growth in 2G products continued to be very robust with no appreciable amount of 3G product being shipped. The phase in of 3G over the next few years will cause a shift from 2G to 3G products, but not a slowdown in the growth of our FOREM business. In 2000, FOREM launched the first shipments of its OEM, private label, microwave radio product (below right) which continued to ramp up throughout the year and will provide a growth platform for the future. 9 7 [GRAPHIC] During the last 18 months, Allen Telecom made a long term strategic decision to focus on microwave radios and power amplifiers for sale to our traditional OEM marketplace. While revenues for these new products in 2000 were small, the position we achieved during the year should lead to increases in sales during 2001 and beyond. In the microwave radio market, we signed our first OEM contract at the end of 1999, and began shipping product in the first quarter of 2000. Sales were restricted by component shortages for much of 2000; however, the situation improved as we got closer to the end of the year. With production now at much higher levels for the first OEM customer, we have initiated discussions with other potential customers. These microwave radios are private labeled and sold by the OEMs as the backbone in their wireless networks connecting cell sites to base station controllers. In addition, we believe the power amplifier market represents a very large OEM opportunity for Allen Telecom over the next few years, and our team had its first success in the year 2000. After submitting designs and prototypes to our first OEM customer, we were selected as one of the design partners for new power amplifiers as they move to their next family of base stations. These single-channel and multi-channel linear power amplifiers are going through qualification and testing during the first half of 2001, and we expect revenue from the product line beginning in the second half of 2001. 10 8 [GRAPHIC] There were other successes by Allen Telecom businesses in 2000 that are noteworthy. Our fiber optic distributed antenna products were an integral part of the wireless telecommunications network installed throughout the Australian Olympic complex. The success of this installation was a clear indication of the flexibility and viability of this technology for a very complex wireless network with constantly changing demand. Many believe this approach will be utilized extensively for 3G network designs. In our repeater and in-building coverage business, we developed a number of new applications during the year 2000, which provide substantial opportunities for this product line. These included the San Francisco Airport project, an $8.8 million order for EDGE compatible boosters with Orange in the U.K., a major opportunity outfitting trains in Switzerland, as well as a number of subway projects (Prague, Singapore) and tunnel projects (including the world's longest highway tunnel in Norway, 17.4 miles). 11 9 [PHOTO OF EQUIPMENT] telia The sophisticated technology used in Telia's multi-channel, highly linear, power amplifier represents a major new product initiative within Allen Telecom. Telia's expertise and experience in power amplifier design is being combined with the industrialization skills at FOREM to position Allen Telecom as a provider of 3G amplifiers to the major wireless OEMs. As 3G networks are rolled out and as existing systems face capacity constraints, there will be an increasing demand for multi-channel, highly linear, power amplifiers. We also believe there will be a significant increase in the number of power amplifiers outsourced by the OEMs, creating a unique opportunity for Allen Telecom to build this new business. [PHOTO OF EQUIPMENT] tekmar sistemi The Tekmar Sistemi product called Britecell(TM) is compatible with the higher data speeds that will be essential for third generation deployment inside buildings and other unique environments. Given the weaker propagation characteristics of the frequencies chosen for UMTS in Europe and the fact that the highest wireless data usage is expected to occur inside buildings and other similar environments, the ability of Britecell and other Tekmar Sistemi products to improve signal quality inside a variety of structures should be a very valuable tool for the OEMs and carriers as they plan the build out of their 3G networks. 12 10 [PHOTO OF EQUIPMENT] antenna specialists Antenna Specialists is focusing on many new opportunities offered in today's mobile antenna market, including new satellite digital audio broadcast antennas (right) and telematics. The dual system antenna (left) combines the GPS and cellular functions for satellite and voice communications into one antenna. As the number of wireless applications grows and becomes available to all mobile customers, the antenna configuration is essential in providing the high-quality transmission required for these services. As a technology leader with fifty years of experience in the mobile antenna business, we will continue to be a driving force in this industry. comsearch Comsearch's IQ-Link(R) software tool was developed to support the engineering of fixed microwave networks and has been used by engineers to design over 60,000 links around the globe. IQ.Link incorporates proprietary and comprehensive engineering algorithms, which include interference analysis, line of sight and availability assessment. Using detailed engineering specifications, IQ.Link quickly and efficiently handles interference calculations in network sizes from as small as 10 links, to over 10,000 links. Comsearch provides expert engineering services, software and data for major telecom vendors and operators, both domestic and global. 13 11 SALES by quarter (millions of dollars) 1999 2000 76.4 88.9 78.0 89.1 90.3 107.7 91.5 106.9
EARNINGS PER SHARE by quarter (excluding special items) 1999 2000 $(.05) $.06 $.00 $.08 $.03 $.12 $.06 $.13
BACKLOG by quarter (millions of dollars) 1/31/01 1999 2000 2001 64.7 99.8 139.1 70.2 116.0 72.2 130.1 84.9 111.3
Our mobile antenna business built new relationships in the area of satellite broadcast radio and the automotive telematics markets, which should represent large opportunities in upcoming years. Both of these opportunities will require unique vehicular antennas to achieve the requisite level of performance. We also were pleased with the continued development and improvement in profitability of our wireless engineering and consulting services division in rebounding from difficult times in 1997 and 1998. Based on the worldwide acceptance of its microwave software products, Comsearch is looking towards geographic expansion of its other services in order to enhance its business growth. Comsearch's recent e-commerce initiatives for delivery of some services gives it a unique advantage in the global marketplace. Based on the outlook of these new technologies and opportunities, in addition to continued strong growth in our traditional products and businesses, we expect significantly faster growth in revenues and profits than we achieved in 2000. It is indeed a pleasure to be able to report on the positive results achieved in 2000. It could not have been accomplished without a great deal of creative effort and resolve on the part of our employees. Through their efforts, we have been able to move beyond the difficulties of the previous two years and position ourselves for a very bright future. /s/ Philip Wm. Colburn Philip Wm. Colburn Chairman of the Board /s/ Robert G. Paul Robert G. Paul President and Chief Executive Officer 14 12 consolidated statements of operations (amounts in thousands, except per share data)
Year Ended December 31, 2000 1999 1998 SALES $ 392,608 $ 336,213 $ 390,644 Cost of sales 277,666 247,064 296,044 ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 114,942 89,149 94,600 Operating expenses: Selling, general and administrative expenses 54,271 54,819 65,377 Research and development and product engineering costs 25,442 27,946 30,742 Amortization of goodwill 7,822 7,020 6,295 ------------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) 27,407 (636) (7,814) Other income, net -- 3,370 6,065 Interest and financing expenses: Interest expense (11,022) (9,632) (8,276) Interest income 1,989 1,486 1,471 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before taxes and minority interests 18,374 (5,412) (8,554) (Provision for) benefit from income taxes (7,530) 1,844 5,310 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before minority interests 10,844 (3,568) (3,244) Minority interests (91) (1,650) (2,268) ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 10,753 (5,218) (5,512) Discontinued operations - gain (loss) from emission testing business 1,300 2,363 (4,710) ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 12,053 $ (2,855) $ (10,222) ==================================================================================================================================== EARNINGS (LOSS) PER COMMON SHARE: Basic and Diluted: Income (loss) from continuing operations $ .38 $ (.19) $ (.21) Discontinued emission testing business .05 .09 (.17) ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ .43 $ (.10) $ (.38) ==================================================================================================================================== Weighted average shares outstanding: Basic 27,820 27,480 27,220 Diluted 28,270 27,480 27,220 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. Allen Telecom 2000 annual report 15 13 consolidated balance sheets (amounts in thousands)
As of December 31, 2000 1999 ASSETS Current Assets: Cash and cash equivalents $ 10,539 $ 22,085 Accounts receivable, less allowance for doubtful accounts - 2000-$4,739; 1999-$2,537 93,815 87,394 Inventories 101,640 82,713 Deferred income taxes 3,820 6,966 Other current assets 7,311 4,992 ------------------------------------------------------------------------------------------------------------------------------------ Total Current Assets 217,125 204,150 ------------------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment 41,279 49,253 Excess of Cost Over Net Assets of Businesses Acquired 129,190 134,723 Deferred Income Taxes 44,295 30,281 Other Assets 41,133 33,023 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 473,022 $ 451,430 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current maturities of long-term debt $ 3,796 $ 2,181 Accounts payable 45,181 41,139 Accrued expenses (including accrued wages and commissions - 2000-$12,107; 1999-$10,951) 26,305 27,943 Income taxes payable 3,922 2,464 Deferred income taxes 5,290 2,361 ------------------------------------------------------------------------------------------------------------------------------------ Total Current Liabilities 84,494 76,088 ------------------------------------------------------------------------------------------------------------------------------------ Long-Term Debt 134,639 120,905 Deferred Income Taxes 9,168 3,455 Other Liabilities 9,740 10,070 ------------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 238,041 210,518 ------------------------------------------------------------------------------------------------------------------------------------ Commitments and Contingencies (Note 5) -- -- ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' Equity: Common stock, par value $1.00; authorized - 50,000 shares; issued - 2000-30,092; 1999-30,010; outstanding - 2000-28,022; 1999-27,882 30,092 30,010 Paid-in capital 184,066 181,335 Retained earnings 69,067 57,014 Accumulated other comprehensive loss (31,948) (10,685) Less: Treasury stock - common shares, at cost, 2000-2,070; 1999-2,128 shares (14,730) (14,978) Unearned compensation (1,566) (1,784) ------------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 234,981 240,912 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 473,022 $ 451,430 ====================================================================================================================================
The accompanying notes are an integral part of these financial statements. Allen Telecom 2000 annual report 16 14 consolidated statements of cash flows (amounts in thousands)
Year Ended December 31, 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $ 10,753 $ (5,218) $ (5,512) Adjustments to reconcile income (loss) to operating cash flow: Depreciation 13,353 14,914 15,615 Amortization of goodwill 7,822 7,020 6,295 Amortization of capitalized software 2,532 2,776 2,038 Other amortization 313 220 685 Deferred income taxes 5,676 172 (10,315) Non-cash loss on write-off of capital assets 385 3,983 17,010 Gain on sale of investments -- (3,378) (16,486) Non-cash pension gain (1,160) -- -- Changes in operating assets and liabilities: Receivables (16,702) (10,350) 24,496 Inventories (29,155) (1,370) 9,928 Accounts payable and accrued expenses 16,680 7,344 (26,902) Income taxes payable (9,617) (10,717) (19,287) Other, net (3,465) (520) 169 ------------------------------------------------------------------------------------------------------------------------------------ Cash (used) provided by operating activities (2,585) 4,876 (2,266) ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (15,082) (9,491) (18,094) Investments in wireless communications subsidiaries (8,512) (9,042) (42,103) Capitalized software product costs (4,088) (1,927) (3,942) Sale of investments -- 9,686 16,833 Sale of discontinued emission testing business -- 9,387 -- Sales and retirements of fixed assets 1,631 504 334 ------------------------------------------------------------------------------------------------------------------------------------ Cash used by investing activities (26,051) (883) (46,972) ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayment of) long-term borrowings 16,531 (3,214) 36,676 Exercise of stock options 764 1,059 342 Collection on installment notes receivable 2,900 -- -- Treasury stock sold to employee benefit plans 573 871 1,531 ------------------------------------------------------------------------------------------------------------------------------------ Cash provided (used) by financing activities 20,768 (1,284) 38,549 ------------------------------------------------------------------------------------------------------------------------------------ Net cash flow provided (used) by discontinued operations -- 1,810 (2,081) ------------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED) PROVIDED (7,868) 4,519 (12,770) Effect of exchange rate changes on cash (3,678) (2,334) 1,895 Cash and cash equivalents at beginning of year 22,085 19,900 30,775 ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 10,539 $ 22,085 $ 19,900 ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. Allen Telecom 2000 annual report 17 15 consolidated statements of stockholders' equity (amounts in thousands, except common share data)
Comprehensive Common Paid-In Income Retained Total Stock Capital (Loss) Earnings BALANCE, JANUARY 1, 1998 $ 260,822 $ 29,746 $ 180,538 $ 70,091 Comprehensive loss: Net loss (10,222) -- -- $ (10,222) (10,222) --------- Other comprehensive loss: Unrealized gain on securities in income (9,588) -- -- (9,588) -- Less tax on unrealized gain in income 4,027 -- -- 4,027 -- --------- Net unrealized gain on securities in income -- -- -- (5,561) -- Minimum pension liability adjustment (240) -- -- (240) -- Foreign currency translation adjustments 3,339 -- -- 3,339 -- --------- Other comprehensive loss -- -- -- (2,462) -- --------- Comprehensive loss -- -- -- $ (12,684) -- --------- Exercise of stock options 342 56 286 -- Employee stock plans tax benefits 138 -- 138 -- Treasury stock reissued, 163,073 common shares 1,531 -- 288 -- Restricted stock, net (557) (43) (646) -- Amortization of unearned compensation 489 -- -- -- --------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 250,081 29,759 180,604 59,869 Comprehensive loss: Net loss (2,855) -- -- $ (2,855) (2,855) --------- Other comprehensive loss: Minimum pension liability adjustment 240 -- -- 240 -- Foreign currency translation adjustments (8,670) -- -- (8,670) -- --------- Other comprehensive loss -- -- -- (8,430) -- --------- Comprehensive loss -- -- -- $ (11,285) -- --------- Exercise of stock options 1,059 219 765 -- Employee stock plans tax benefits 414 -- 414 -- Treasury stock reissued, 131,285 common shares 871 -- (61) -- Restricted stock, net (619) 32 (387) -- Amortization of unearned compensation 391 -- -- -- --------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 240,912 30,010 181,335 57,014 Comprehensive loss: Net income 12,053 -- -- $ 12,053 12,053 --------- Other comprehensive loss: Foreign currency translation adjustments (21,263) -- -- (21,263) -- --------- Comprehensive loss -- -- -- $ (9,210) -- --------- Exercise of stock options 764 74 656 -- Employee stock plans tax benefits 1,630 -- 1,630 -- Treasury stock reissued, 43,941 common shares 573 -- 359 -- Restricted stock, net (1) 8 86 -- Amortization of unearned compensation 313 -- -- -- --------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 234,981 $ 30,092 $ 184,066 $ 69,067 =========================================================================================================
Accumulated Other Comprehensive Treasury Unearned Income(Loss) Stock Compensation BALANCE, JANUARY 1, 1998 $ 207 $ (16,992) $ (2,768) Comprehensive loss: Net loss -- -- -- Other comprehensive loss: Unrealized gain on securities in income -- -- -- Less tax on unrealized gain in income -- -- -- Net unrealized gain on securities in income -- -- -- Minimum pension liability adjustment -- -- -- Foreign currency translation adjustments -- -- -- Other comprehensive loss (2,462) -- -- Comprehensive loss -- -- -- Exercise of stock options -- -- -- Employee stock plans tax benefits -- -- -- Treasury stock reissued, 163,073 common shares -- 1,243 -- Restricted stock, net -- (236) 368 Amortization of unearned compensation -- -- 489 -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 (2,255) (15,985) (1,911) Comprehensive loss: Net loss -- -- -- Other comprehensive loss: Minimum pension liability adjustment -- -- -- Foreign currency translation adjustments -- -- -- Other comprehensive loss (8,430) -- -- Comprehensive loss -- -- -- Exercise of stock options -- 75 -- Employee stock plans tax benefits -- -- -- Treasury stock reissued, 131,285 common shares -- 932 -- Restricted stock, net -- -- (264) Amortization of unearned compensation -- -- 391 -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 (10,685) (14,978) (1,784) Comprehensive loss: Net income -- -- -- Other comprehensive loss: Foreign currency translation adjustments (21,263) -- -- Comprehensive loss -- -- -- Exercise of stock options -- 34 -- Employee stock plans tax benefits -- -- -- Treasury stock reissued, 43,941 common shares -- 214 -- Restricted stock, net -- -- (95) Amortization of unearned compensation -- -- 313 -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ (31,948) $ (14,730) $ (1,566) ================================================================================
The accompanying notes are an integral part of these financial statements. Allen Telecom 2000 annual report 18 16 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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. Intercompany accounts and transactions have been eliminated. To facilitate preparation of financial statements, the Company's principal European operations are included in the consolidated financial statements on a two-month delayed basis. Effective January 1, 2001, such European operations changed their fiscal year-end from October 31 to December 31, consistent with the balance of the Company's operations. The results of operations for these European operations for November and December 2000 will be recorded directly to retained earnings in the first quarter of 2001. This change in reporting period is not expected to have a significant effect on the consolidated results of operations. REVENUE RECOGNITION: Sales are recognized when products are shipped or services are performed. The Company's revenue recognition policies for its Wireless Engineering and Consulting Services segment are in compliance with American Institute of Certified Public Accountants Statements of Position 97-2 and 98-4, on Software Revenue Recognition. Sales of licensed products are recorded when shipped. Maintenance revenue, which is derived under separate contract, is recognized ratably over the contract period. 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. 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, 2000 and 1999 (amounts in thousands):
2000 1999 ---- ---- Raw material $ 56,366 $ 43,608 Work-in-process 25,674 19,343 Finished goods 19,600 19,762 -------------------------------------------------------------------------------- $101,640 $ 82,713 ================================================================================
Certain of these inventories pertain to the production of sophisticated equipment that 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 is based on the term of the related lease or the estimated useful lives, whichever is shorter. Maintenance, repairs and minor renewals and betterments are charged to expense. Property, plant and equipment consisted of the following at December 31, 2000 and 1999 (amounts in thousands):
2000 1999 ---- ---- Land and improvements $ 1,663 $ 2,729 Buildings 16,568 25,684 Machinery and equipment 80,462 76,821 Leasehold improvements 5,967 6,148 -------------------------------------------------------------------------------- 104,660 111,382 Less accumulated depreciation and amortization (63,381) (62,129) -------------------------------------------------------------------------------- $ 41,279 $ 49,253 ================================================================================
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 three to ten years. The Company also capitalizes costs incurred in the development of computerized databases, which are amortized over periods of three to twenty years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. In 2000, 1999 and 1998, approximately $4,088,000, $1,927,000 and $3,658,000, respectively, of these costs were capitalized and approximately $2,532,000, $2,776,000 and $1,630,000, respectively, were amortized (excluding impairment writedowns of $5,359,000 in 1998). EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED (GOODWILL): The excess of investments in consolidated subsidiaries over the fair value of assets at acquisition is being amortized on a straight-line basis over periods not exceeding forty years. The Company's policy is to evaluate goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of determining impairment and recoverability, the Company periodically reviews the operating results and cash flows of individual business units and would re-evaluate goodwill, Allen Telecom 2000 annual report 19 17 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 when required, based on an undiscounted operating cash flow basis. An impairment loss, if required, would be recorded in the period such determination is made. Goodwill is net of accumulated amortization of $32,927,000 and $24,896,000 as of December 31, 2000 and 1999, respectively. 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 sales 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 component of Accumulated other comprehensive loss. 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 $25,442,000 $26,317,000 and $28,812,000 in 2000, 1999 and 1998, respectively. In addition, the Company incurred other engineering expenses relating to product development (that do not meet the accounting definition of "Research and Development") in the amount of $1,629,000 and $1,930,000 in 1999 and 1998, respectively. There were no such other engineering costs in 2000. 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 since the exercise price of the employee stock options equals the market price of the underlying stock on the date of option grant. The Company presents the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." See Note 4 for additional information. INCOME TAXES: A deferred tax asset and/or liability is computed for both the expected future impact of differences between the financial statements and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. EARNINGS PER COMMON SHARE: Basic earnings per share are based on the weighted average number of common shares outstanding during the period. Diluted earnings per common share are based on the weighted average number of common shares outstanding during the period plus, 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. A reconciliation of the Basic and Diluted shares is provided below (in thousands):
2000 1999 1998 ---- ---- ---- Weighted average common shares outstanding - Basic 27,820 27,480 27,220 Additional common shares issuable for stock options 450 -- -- -------------------------------------------------------------------------------- Common shares-Diluted 28,270 27,480 27,220 ================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS: The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998, which is now effective. Accordingly, the Company has adopted the provisions of the standard on January 1, 2001. The Company utilizes hedging activities primarily in its foreign subsidiaries to limit foreign currency exchange rate risk on receivables and to offset the impact of currency rate changes with regard to certain intercompany payables and foreign denominated purchase obligations. The adoption of SFAS No. 133 as of January 1, 2001 did not have a material impact on the Company's results of operations or financial position. RECLASSIFICATIONS: In the fourth quarter of 2000, the Company adopted the provisions of Emerging Issues Task Force issue No. 00-10, Accounting for Shipping and Handling Fees and Costs ("EITF No. 00-10"). Accordingly, prior year amounts have been reclassified to conform with the 2000 presentation. The previously reported amounts for each of sales and cost of sales have been increased, in the following amounts, to conform with the current presentation (amounts in thousands):1999, $2,516; 1998, $2,640. These reclassifications had no net impact on previously reported results of operations or stockholders' equity. In addition, certain other amounts in the 1999 and 1998 financial statements have been reclassified to conform to the 2000 presentation. NOTE 2: FINANCING Long-term obligations consisted of the following (amounts in thousands):
2000 1999 ---- ---- Credit agreement borrowings $ 62,431 $ 46,235 Floating rate industrial revenue bonds due 2012-2025 11,900 11,900 Senior notes payable due 2001-2007 65,000 65,000 Other 90 350 Unamortized debt expense (986) (1,070) --------------------------- 138,435 122,415 Less current maturities (3,796) (1,510) --------------------------- $ 134,639 $ 120,905 ===========================
Allen Telecom 2000 annual report 20 18 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 In 2000, the Company amended its domestic revolving credit agreement and increased the aggregate amount to $105,000,000 and extended the maturity to December 31, 2003. Of the total $105,000,000 commitment at December 31, 2000, $13,016,000 has been utilized for the issuance of letters of credit relating principally to the Company's industrial revenue bonds. The outstanding borrowings under this domestic revolving credit agreement totaled $58,100,000 at December 31, 2000. The balance of funds available under this revolving credit agreement may be utilized for borrowings or other letters of credit; however, a maximum of $25,000,000 may be allocated to such letters of credit. At December 31, 2000, $33,884,000 was available under this agreement. This obligation is collateralized by substantially all domestic assets. The Company has also pledged 65% of the stock of applicable foreign subsidiaries in support of this obligation. Interest may be determined on a LIBOR or prime rate basis at the Company's option. The Company has agreed to pay a facility fee in the range of 0.2% to 0.4% per annum on the total amount of the commitment. During 2000, the average interest rate for all domestic credit agreement borrowings was 8.25%. The Company also has $32,000,000 of short-term credit lines which may be utilized by its European subsidiaries. At year end, there were no direct borrowings under these agreements. 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 $2,184,000 (due 2001-2013), and variable rate borrowings with various international banks of $2,237,000 (due 2001-2008). Further, one of the aforementioned arrangements is a mortgage note, under which the Company has pledged the respective land and building as collateral. This facility had an aggregate net book value of $3,754,000 at December 31, 2000. During 2000, the average interest rate for all foreign credit arrangements approximated 4.6%. The floating rate industrial revenue bonds bear interest at rates based upon a short-term tax exempt bond index, as defined in the agreements, which approximated 4.6% at December 31, 2000. During 2000, the average interest rate for all industrial revenue borrowings approximated 4.2%. In 1997, the Company issued $65,000,000 (due 2001-2007) of notes in a private placement transaction. These notes have a weighted average life of 7 1/2 years and a weighted average interest rate of 6.65%. The notes are collateralized and rank equally with the Company's other secured indebtedness. The aggregate maturities of long-term obligations for the years 2001 through 2005 are as follows (amounts in thousands):
2001 2002 2003 2004 2005 ---- ---- ---- ---- ---- $3,796 $11,472 $69,427 $8,182 $8,231
The Company's borrowing agreements include various restrictive covenants as to the amount and type of indebtedness, investments and guarantees, maintenance of net worth, working capital, earnings before interest, taxes, depreciation and amortization, the purchase or redemption of the Company's shares and the disposition of assets of the Company not in the ordinary course of business. The Company was in compliance with these covenants at December 31, 2000. NOTE 3: OTHER ASSETS, LIABILITIES AND INCOME Other assets consisted of the following (amounts in thousands):
2000 1999 ---- ---- Capitalized computer software and database files $ 8,244 $ 7,365 Insurance deposits 9,238 7,765 Other 23,651 17,893 -------------------------------------------------------------------------------- $41,133 $33,023 ================================================================================
Other liabilities consisted of the following (amounts in thousands):
2000 1999 ---- ---- Minority interests $ 117 $ 563 Long-term pension and postretirement benefits 6,214 5,973 Other 3,409 3,534 -------------------------------------------------------------------------------- $ 9,740 $10,070 ================================================================================
The components of Other income, net, pertain principally to gains and losses from communications investments and is comprised of the following (amounts in thousands):
2000 1999 1998 ---- ---- ---- RF Micro Devices Inc. $ -- $ (165) $ 14,400 NextWave Telecom Inc. -- 3,500 (6,638) Other -- 35 (1,697) -------------------------------------------------------------------------------- $ -- $ 3,370 $ 6,065 ================================================================================
In 1998, the Company sold its investment in RF Micro Devices. This investment was accounted for pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Also, in 1998, the Company recognized an impairment in the entire carrying value of its investment in and receivable from NextWave (a C-Block wireless communications carrier) as certain subsidiaries of NextWave filed for relief under Chapter 11 of the United States Bankruptcy Code. In 1999, the Company sold its investment in NextWave and recognized the above noted gain. Also in 1998, the Company wrote off its investment in Windata Inc. as a result of that company's decision to liquidate with no recovery to the Company. Allen Telecom 2000 annual report 21 19 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 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, 500,000 shares of Series C Junior Participating Preferred Stock are authorized for issuance under the Company's Stockholder Rights Plan. The Company can fix the powers, designations, preferences and rights of each of the preferred stock series. The Company has two active stock option plans, the 1992 Stock Plan and the 1994 Non-Employee Directors Stock Option Plan. The 1982 Stock Plan, under which options still 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 shares for which the Company may grant options and award restricted shares of common stock under the 1992 Stock Plan cannot exceed 3,528,221 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 exercises of stock appreciation rights in 2000, 1999 and 1998. 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 Non-Employee Director who previously had not been employed by the Company automatically receives an option to purchase 3,000 shares of common stock per year ("Formula Awards"). No Non-Employee Director who previously has been employed by the Company is eligible to receive Formula Awards. 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 under the 1994 Stock Plan. Formula awards and discretionary awards granted under the 1994 Stock 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. In addition to the foregoing, certain Non-Employee Directors may receive non-qualified discretionary awards of options to purchase shares of common stock which are not pursuant to the 1994 Stock Plan. The options which are not pursuant to the 1994 Stock Plan are awarded at a price not less than the fair market value on the date the option is granted, have a ten-year term and either vest 33 1/3% on each of the first, second and third anniversaries of the grant or vest in the same manner as the 1992 and 1994 Stock Plans, depending upon the grant. Additionally, the non-qualified awards are subject to certain accelerated vesting upon cessation of service. The following table summarizes the status of outstanding options as of December 31, 2000:
Stock Options Outstanding Stock Options Exercisable ------------------------- ------------------------- Weighted Average Weighted ---------------- Average Range of Contractual Exercise Exercise Exercise Prices Shares Life Price Shares Price --------------- ------ ---- ----- ------ ----- $ 5.38-$10.77 1,069,047 7.14 years $ 7.43 160,031 $ 6.85 $ 11.28-$19.97 1,571,143 6.96 years $16.07 744,668 $ 15.78 $ 20.00-$28.00 420,771 5.18 years $21.61 420,271 $ 21.61 ----------------------------------------------------------------------------------------- $ 5.38-$28.00 3,060,961 6.78 years $13.82 1,324,970 $ 16.55 =========================================================================================
Stock option activity for the three years ended December 31, 2000 is summarized as follows:
Weighted Average Shares Exercise Price ------ -------------- Balance, December 31, 1997 1,968,703 $ 15.08 Granted (weighted average fair value $8.79) 558,600 $ 15.55 Exercised (56,094) $ 6.06 Terminated and cancelled (353,110) $ 18.02 -------------------------------------------------------------------------------- Balance, December 31, 1998 2,118,099 $ 14.96 Granted (weighted average fair value $4.63) 1,032,500 $ 7.58 Exercised (246,246) $ 4.30 Terminated and cancelled (280,589) $ 14.51 -------------------------------------------------------------------------------- Balance, December 31, 1999 2,623,764 $ 13.10 Granted (weighted average fair value $10.52) 613,000 $ 16.36 Exercised (85,838) $ 8.89 Terminated and cancelled (89,965) $ 14.99 -------------------------------------------------------------------------------- Balance, December 31, 2000 3,060,961 $ 13.82 ================================================================================
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 60%, 56% and 51%, risk free interest rates of 6.09%, 5.49% and 5.31%, and expected lives of 7.1 years, 7.1 years and 6.3 years for 2000, 1999 and 1998, respectively. The calculations assume no future dividend payments. Restricted stock awards made to date under the 1992 Stock Plan were issued at no cash cost to the recipients; however, such employees generally agreed to forego salary increases and new stock option grants for a period of two years, other than for exceptional promotions. The restricted shares generally 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 Allen Telecom 2000 annual report 22 20 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 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 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, 2000 is summarized as follows:
Shares ------ Balance, December 31, 1997 285,456 Granted (weighted average fair value $16.50) 20,000 Vested (37,365) Terminated and cancelled (62,841) -------------------------------------------------------------------------------- Balance, December 31, 1998 205,250 Granted (weighted average fair value $8.00) 50,000 Vested (2,517) Terminated and cancelled (18,434) -------------------------------------------------------------------------------- Balance, December 31, 1999 234,299 Granted (weighted average fair value $13.94) 15,000 Vested (28,524) Terminated and cancelled (6,518) -------------------------------------------------------------------------------- Balance, December 31, 2000 214,257 ================================================================================
Unearned compensation with respect to restricted shares, representing the fair value of the restricted shares at the date of award, is charged to income over a ten-year period or the period of actual vesting whichever is shorter. Compensation expense with respect to restricted shares, net of forfeitures, amounted to $313,000 in 2000, $193,000 in 1999, and $26,000 in 1998. At December 31, 2000 and 1999, 3,697,011 and 3,773,797 common shares, respectively, were reserved for outstanding stock options and for future grants of stock options and restricted shares under all Stock Plans. 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 No. 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):
2000 1999 1998 ---- ---- ---- Net income (loss): As reported $12,053 $(2,855) $(10,222) Pro forma $10,136 $(5,035) $(12,042) Earnings (loss) per common share, Basic and diluted: As reported $.43 $(.10) $(.38) Pro forma $.36 $(.18) $(.44)
23 NOTE 5: COMMITMENTS AND CONTINGENCIES The Company's leases consist primarily of facilities and equipment and expire principally between 2001 and 2010. A number of leases require that the Company pay certain executory costs (taxes, insurance and maintenance) and contain renewal and purchase options. Annual rental expense for operating leases included in results from continuing operations approximated $4,942,000 in 2000, $4,400,000 in 1999 and $3,900,000 in 1998. Future minimum payments under noncancellable operating leases as of December 31, 2000 were as follows (amounts in thousands): 2001 $ 6,774 2002 6,850 2003 6,253 2004 4,785 2005 2,639 Thereafter 10,544 -------------------------------------------------------------------------------- Total minimum lease payments $37,845 ================================================================================
The Company is self-insured for health care and worker's compensation up to predetermined amounts above which third party insurance applies. The Company is fully insured through third party insurance for general liability and product liability. The Company is contingently liable to insurance carriers under its worker's compensation and liability policies and has provided letters of credit in favor of these carriers in the amount of $700,000. In the normal course of business the Company is subject to proceedings, lawsuits and other claims involving such matters as product liability, casualty claims and employment practices. In the opinion of management, after review and consultation with counsel, the Company is not presently party to any such litigation that would have a material adverse effect on its business, results of operations or cash flow. 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 identified potential environmental damage at one formerly occupied manufacturing facility. In this regard, the Company has engaged a contractor to evaluate the site and determine the cost, if any, to resolve environmental damage at this site. While the ultimate cost cannot yet be specifically determined, the Company currently believes the costs of remediation will not exceed $200,000. The Company also 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. Allen Telecom 2000 annual report 24 21 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 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 for hourly employees it 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 for the Company's plans included the following components (amounts in thousands):
2000 1999 1998 ---- ---- ---- Service cost benefits earned during the year $ 1,006 $ 1,413 $ 1,549 Interest cost on the projected benefit obligation 2,496 2,404 2,261 Actual income on plan assets (868) (5,970) (1,779) Net curtailment/settlement (gain)/loss (1,160) 13 (29) Net amortization and deferral (2,237) 3,395 (880) -------------------------------------------------------------------------------- Net periodic pension (income) cost $ (763) $ 1,255 $ 1,122 ================================================================================
A reconciliation of the plans' projected benefit obligation, fair value of plan assets, and funding status is as follows (amounts in thousands):
2000 1999 ---- ---- Projected benefit obligation: Balance, beginning of year $ 33,879 $ 35,348 Service cost 1,006 1,413 Interest cost 2,496 2,404 Benefits paid and plan expenses (2,220) (2,241) Loss/(Gain) recognized 1,431 (4,215) Settlements and other (1,141) 1,170 -------------------------------------------------------------------------------- $ 35,451 $ 33,879 ================================================================================ Fair value of plan assets: Balance, beginning of year $ 32,526 $ 28,312 Return on assets 868 5,970 Employer contributions 589 485 Benefits paid and plan expenses (2,220) (2,241) -------------------------------------------------------------------------------- $ 31,763 $ 32,526 ================================================================================ Funding Status: Projected benefit obligation $(35,451) $(33,879) Fair value of plan assets 31,763 32,526 -------------------------------------------------------------------------------- Unfunded obligation (3,688) (1,353) Unrecognized: Net gain (1,051) (4,842) Prior service cost 1,778 1,942 Transition assets (17) (76) Additional minimum liability (195) -- -------------------------------------------------------------------------------- Net accrued liability $ (3,173) $ (4,329) ================================================================================
Plan assets consist principally of equity securities (including 92,000 common shares of the Company). With respect to certain of the Company's pension plans, the accumulated pension obligation exceeds the fair value of the plan assets, as follows (amounts in thousands):
2000 1999 ---- ---- Accumulated benefit obligation $4,493 $4,282 Related fair value of plan assets -- --
The weighted average rates used in determining pension cost for the plans are:
2000 1999 ---- ---- Discount rate 7 1/2% 7 3/4% Expected rate of increase in compensation 5% 5% Expected long-term rate of return on plan assets 9 3/4% 9 3/4%
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 are as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Service cost benefits attributed to service during period $-- $ 3 $ 4 Interest cost on accumulated postretirement benefit obligation 114 101 105 Amortization of (gain) loss (6) (1) 2 -------------------------------------------------------------------------------- Net post-retirement health care cost $ 108 $ 103 $ 111 ================================================================================
The components of the accumulated post-retirement benefit obligations (all of which are unfunded) are as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Retirees $ 1,641 $ 1,409 $ 1,403 Fully eligible active plan participants 80 125 69 Other active plan participants -- -- 72 Unrecognized net gain (loss) (32) 110 60 -------------------------------------------------------------------------------- Accumulated postretirement benefit obligations $ 1,689 $ 1,644 $ 1,604 ================================================================================
A reconciliation of the accumulated post-retirement benefit cost is as follows (amounts in thousands):
2000 1999 ---- ---- Balance as of January 1 $ 1,644 $ 1,604 Net postretirement benefit cost: Service cost -- 3 Interest cost 114 101 Amortization of losses (6) (1) Actual benefits paid (63) (63) -------------------------------------------------------------------------------- Balance as of December 31 $ 1,689 $ 1,644 ================================================================================
Allen Telecom 2000 annual report 25 22 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 The actuarial calculation assumed a health care cost trend rate of 8.4% in 2000, 8.8% in 1999 and 9.2% in 1998. The assumed trend rate was reduced based on the most current data. The assumed rate decreases approximately 0.4% per year through the year 2009 to 5.0% and remains constant beyond that point. Assumed health care cost trend rates have an effect on the amounts reported for the health care plans. A one-percentage-point change (plus or minus) in the assumed health care cost trend rules would have the following effects (amounts in thousands):
Plus Minus 1% Point 1% Point -------- -------- Effect on total of service and interest cost components $ 4 $ (3) Effect on post-retirement benefit obligation $ 62 $(55)
The weighted average discount rate used in determining the accumulated post-retirement benefit obligations was 7.50% in 2000, 7.75% in 1999 and 6.75% in 1998. Note 7: Income Taxes Information with respect to income taxes in continuing operations is as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Income (loss) before taxes and minority interests: Domestic $ 7,850 $(21,804) $(22,892) Foreign 10,524 16,392 14,338 ---------------------------------------------------------------------------------------------------------------------------- $ 18,374 $ (5,412) $ (8,554) ============================================================================================================================ Provision for (benefit from) income taxes: Current: Federal $ (6,122) $(11,779) $ (6,206) Foreign 7,636 9,363 10,661 State and local 340 400 550 ---------------------------------------------------------------------------------------------------------------------------- 1,854 (2,016) 5,005 ---------------------------------------------------------------------------------------------------------------------------- Deferred: Federal 5,528 (946) (5,472) Foreign 720 1,740 (4,571) State and local (572) (622) (272) ---------------------------------------------------------------------------------------------------------------------------- 5,676 172 (10,315) ---------------------------------------------------------------------------------------------------------------------------- $ 7,530 $ (1,844) $ (5,310) ============================================================================================================================
A reconciliation of the provision for (benefit from) income taxes at the U.S. Federal statutory rate of 35% to the reported tax is as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Provision for (benefit from) computed at the U.S. Federal statutory rate $ 6,431 $(1,894) $(2,994) State and local income taxes, net of Federal income tax effect 418 246 311 Net lower tax rates on foreign income (404) (663) (1,228) Impact of non-deductible goodwill amortization 2,680 2,380 2,112 Benefit of foreign sales corporation and other tax credits (400) (1,025) (1,513) Impact of tax rate change on prior undistributed foreign earnings -- (998) (3,670) Other, net (1,195) 110 1,672 ----------------------------------------------------------------------------------------------------------------------------------- $ 7,530 $(1,844) $(5,310) ====================================================================================================================================
The following table summarizes the total provision for (benefit from) income taxes (amounts in thousands):
2000 1999 1998 ---- ---- ---- Continuing operations $ 7,530 $(1,844) $(5,310) Discontinued operations 700 1,403 (2,640) Allocated to equity: Employee stock plans (1,630) (415) (139) Pension gain (loss) -- 148 (148) -------------------------------------------------------------------------------- $ 6,600 $ (708) $(8,237) ================================================================================
The components of deferred tax assets (liabilities) are comprised of the following as of December 31, 2000 and 1999 (amounts in thousands):
2000 1999 ---- ---- Gross deferred tax assets: Inventory $ 6,035 $ 7,108 Bad debt reserves 791 802 Pensions and deferred compensation 3,382 1,910 Tax credit carryforwards 3,762 3,280 Plant consolidation reserves 1,802 2,330 Net operating loss carryforwards 22,935 16,558 Depreciation 340 -- Unremitted foreign earnings 5,647 6,268 Other 758 941 -------------------------------------------------------------------------------- 45,452 39,197 -------------------------------------------------------------------------------- Gross deferred tax liabilities: Intangible assets (2,334) (1,543) Depreciation -- (320) Withholding taxes (3,558) (1,537) Other (5,903) (4,366) -------------------------------------------------------------------------------- (11,795) (7,766) -------------------------------------------------------------------------------- Net deferred tax asset $ 33,657 $ 31,431 --------------------------------------------------------------------------------
Allen Telecom 2000 annual report 26 23 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 During 2000, 1999 and 1998, general business tax credits of approximately $400,000, $680,000 and $835,000 generated in the respective years were used to reduce the provision for income taxes. At December 31, 2000, the Company also has available alternative minimum tax credits in the amount of $476,000 available to reduce future Federal income tax liabilities. United States income taxes are not provided on undistributed earnings of the Company's foreign subsidiaries because of the intent to reinvest these earnings. The amount of undistributed earnings which are considered to be indefinitely reinvested is approximately $73,000,000 at December 31, 2000. While the amount of federal income taxes, if such earnings are distributed in the future, cannot now be determined, such taxes may be reduced by tax credits and other deductions. The Company has U.S. net operating loss carryforwards totaling approximately $72,700,000 available to reduce future taxable income. Of such carryforwards, $4,800,000 expires in 2011 and $67,900,000 in 2018 through 2020. At December 31, 2000, the Company has recorded a net U.S. deferred tax asset pertaining to the recognition of the benefit on the aforementioned operating loss carryforwards, net deductible temporary differences and tax credits in the amount of approximately $32,580,000. The Company has not provided any valuation allowance with respect to this asset, as it believes its realization is "more likely than not." NOTE 8: INDUSTRY SEGMENT AND GEOGRAPHIC DATA The Company conducts its business through two segments based on products provided and services rendered: Wireless Communications Equipment and Wireless Engineering and Consulting Services. Wireless Communications Equipment consists of three product lines: Base Station Subsystems and Components, Repeaters and In-Building Coverage Products, and Base Station and Mobile Antennas. The Company provides products and services on a global basis to many of the world's largest wireless communications OEMs and carriers. The Company supplies many different customized Base Station Subsystems and Components that are incorporated in cell sites including filters, duplexers, power amplifiers, combiners, microwave radios and related products. Repeater and In-Building Coverage products support both coverage and capacity enhancements for wireless communications carriers, these products include repeaters, distributed antenna systems, bi-directional boosters as well as test equipment and analysis software. The Base Station and Mobile Antenna product line manufactures a comprehensive line of base station and mobile antennas serving all major wireless standards and frequencies. The Wireless Engineering and Consulting Services segment provides frequency planning and microwave coordination services as well as network design and field engineering services to wireless communication carriers. The following shows the operating results and asset positions for each of the reportable segments for the years ended December 31, 2000, 1999 and 1998 (amounts in thousands):
2000 1999 1998 ---- ---- ---- Sales to external customers: Wireless communications equipment $ 367,505 $ 313,653 $ 363,229 Wireless engineering and consulting services 25,103 22,560 27,415 -------------------------------------------------------------------------------- Total sales $ 392,608 $ 336,213 $ 390,644 ================================================================================ Operating income (loss): Wireless communications equipment $ 38,226 $ 11,098 $ 12,256 Wireless engineering and consulting services 4,426 1,034 (7,867) -------------------------------------------------------------------------------- 42,652 12,132 4,389 Goodwill amortization (7,822) (7,020) (6,295) General corporate expenses (7,423) (5,748) (5,908) -------------------------------------------------------------------------------- Operating income (loss) $ 27,407 $ (636) $ (7,814) ================================================================================ Segment Assets: Wireless communications equipment $ 261,227 $ 248,148 $ 244,487 Wireless engineering and consulting services 13,676 14,579 16,527 -------------------------------------------------------------------------------- 274,903 262,727 261,014 Goodwill 129,190 134,723 131,939 Assets of discontinued emission testing business -- -- 25,799 Deferred income taxes 48,115 37,247 24,175 Other general corporate assets 20,814 16,733 22,658 -------------------------------------------------------------------------------- Total assets $ 473,022 $ 451,430 $ 465,585 ================================================================================ Depreciation and software amortization: Wireless communications equipment $ 12,830 $ 14,296 $ 13,990 Wireless engineering and consulting services 2,955 3,264 3,510 Fixed asset and capitalized software additions: Wireless communications equipment $ 16,925 $ 10,730 $ 18,361 Wireless engineering and consulting services 2,227 643 3,635
Allen Telecom 2000 annual report 27 24 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 The geographic distribution of the Company's sales and long-lived assets (excluding deferred income taxes) is as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Sales: United States $ 196,783 $ 179,772 $ 233,637 Italy 156,189 110,701 113,401 Germany 37,581 55,055 50,905 Other 74,708 59,429 71,115 Intercompany (72,653) (68,744) (78,414) -------------------------------------------------------------------------------- Total $ 392,608 $ 336,213 $ 390,644 ================================================================================ Long-lived assets: United States $ 184,087 $ 190,950 $ 220,505 Italy 13,649 12,650 13,347 Germany 9,041 8,181 7,487 Other 4,825 5,218 5,097 -------------------------------------------------------------------------------- Total $ 211,602 $ 216,999 $ 246,436 ================================================================================
Sales to one major communications equipment customer accounted for 15% of consolidated sales in 2000. No customers accounted for more than 10% of sales in 1999 and 1998. NOTE 9: ACQUISITIONS AND DISPOSITIONS In 1998, the Company acquired additional minority interests in several subsidiaries. In June 1998, the Company acquired an additional 10% of Telia S.A. in France ("Telia") bringing its ownership interest to 72%. In July 1998, the Company acquired the remaining 40% minority interest of Mikom Vertriebs und Service G.m.b.H., in Austria bringing its ownership interest to 100%. In October 1998, the Company acquired an additional 12% interest in Mikom G.m.b.H. ("Mikom") bringing its total interest to 74%. In November 1998, the Company acquired the remaining outstanding 35.7% minority interest in Tekmar Sistemi S.r.l. in Italy bringing its ownership interest to 100%. All such transactions were in cash and aggregated approximately $15,400,000. In 1999, the Company acquired the remaining outstanding 26% minority interest in Mikom, bringing its ownership interest to 100%, together with most of the shares in two related European entities. Total consideration was approximately $17,556,000, including $9,290,000 and $6,173,000 paid in cash, in 1999 and 2000, respectively, and the balance paid, in cash, in 2001 (included in Accounts Payable at December 31, 2000). In 2000, the Company acquired the remaining outstanding 28% minority interest of Telia, bringing its ownership interest to 100%, for a cash payment of $2,193,000. On March 1, 1999, the Company sold its Marta Technologies, Inc. ("Marta") subsidiary, which operated its discontinued centralized automotive emission testing business. Pursuant to the terms of the agreement, the Company received cash of $9,387,000 and a three year, $3,000,000, 12% installment note in exchange for the outstanding capital stock of Marta. Previously contingent purchase price in the amount of $2,000,000 was earned, when, in February 2000, the purchaser was awarded an emissions testing contract. The additional purchase price consideration was in the form of a 12% installment note. Accordingly, in the first quarter of 2000, the Company reported additional gain of $1,300,000 from disposal of discontinued operations, net of related income taxes of $700,000. The gain on sale of this discontinued operation in 1999, in the amount of $2,363,000 is net of related income taxes in the amount of $1,403,000. In 1998, the Company recognized an additional loss for this business in the amount of $4,710,000 after related income tax benefit of $2,640,000. NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS Financial Accounting Standards Board ("FASB") Statements No. 107, "Disclosure about Fair Value of Financial Instruments," and No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," are part of a continuing process by the FASB to improve information regarding financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for such financial instruments as defined by the Statements. CASH AND SHORT-TERM INVESTMENTS: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. LONG-TERM INVESTMENTS: It is not practicable to estimate the fair value of the Company's 8% investment in the common and preferred stock of its former specialty rubber products business 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, 2000 and December 31, 1999 reflect the corresponding fair value of such investment. LONG-TERM DEBT: The fair values of the Company's long-term debt either approximate fair value or are estimated using discounted cash flow analysis based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Allen Telecom 2000 annual report 28 25 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 OFF-BALANCE SHEET INSTRUMENTS: The Company utilizes letters of credit to back certain financing instruments, insurance policies and payment obligations. The letters of credit reflect fair value as a condition of their underlying purpose and are subject to fees competitively determined. The Company enters into foreign currency contracts to offset the impact of currency rate changes related to accounts receivable and certain payment obligations. The fair value of such contracts are based on quoted market prices of comparable contracts. The carrying amounts and fair values of financial instruments at December 31, 2000 and 1999 are as follows (amounts in thousands):
Carrying Amount Fair Value 2000 1999 2000 1999 ---- ---- ---- ---- Cash and cash equivalents $ 10,539 $ 22,085 $ 10,539 $ 22,085 Non-current investments 4,334 4,334 4,334 4,334 Long-term debt 139,421 124,156 141,885 124,156 Off-balance sheet financial instruments: Letters of credit 1,115 6,933 1,115 6,933 Foreign currency contracts 2,773 14,746 2,966 14,204
NOTE 11: SUPPLEMENTAL CASH FLOW DISCLOSURE The following non-cash items were effected and are not reflected in the Consolidated Statements of Cash Flows: In 2000, Accumulated other comprehensive loss, representing adjustments from translating foreign currency financial statements, increased from $10,685,000 at December 31, 1999 to $31,948,000 at December 31, 2000. In 1999, the Company purchased the remaining outstanding interest in Mikom and two affiliated European companies. This acquisition resulted in additional Goodwill of $9,608,000. This acquisition also increased Accounts Payables at December 31, 1999 by $8,266,000 and eliminated minority interest liability of $6,500,000. In 1999, the Company sold Marta assets of $22,958,000 and, further, the purchaser assumed a $12,436,000 capital lease obligation. As described in Note 9, in 2000 the Company received a $2,000,000 installment note receivable relating to the sale of Marta. There were no significant non-cash transactions in 1998. Information with respect to cash paid during the year for interest and taxes is as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Interest paid $10,620 $ 9,240 $ 8,020 Interest capitalized -- -- 286 Income taxes paid, net 10,207 8,605 24,096
NOTE 12: SPECIAL CHARGES In 2000, 1999 and 1998, the Company incurred net special charges pertaining to the discontinuation of certain product lines, the closing and consolidation of manufacturing facilities and other items. Such costs are included in the Consolidated Statements of Operations as follows (amounts in thousands):
2000 1999 1998 ---- ---- ---- Cost of sales $ 106 $ 6,109 $12,539 Selling, general and administrative expenses (141) 5,877 6,886 Research and development and product engineering costs -- 325 -- -------------------------------------------------------------------------------- Total (income) loss $ (35) $12,311 $19,425 ================================================================================
In 2000, the Company incurred pretax charges of $1,678,000, or $.04 per basic and diluted share after related income tax effect, incremental to its 1999 restructuring charge. These 2000 charges, which were not accruable at December 31, 1999, include termination costs of employees notified subsequent to December 31, 1999, relocation costs, asset write-offs, and other termination related benefits. In 2000, the Company also recognized a non-cash pretax gain of $1,160,000, or $.03 per basic and diluted share after related income tax effect, with respect to a pension curtailment gain as a result of a reduction in workforce in connection with the aforementioned restructuring. The Company also adjusted the loss accrual for the disposal of the facility as a result of its sale in January 2001 and recorded income in the amount of $553,000, or $.01 per basic and diluted share after related income tax effect. In 1999, restructuring costs aggregated $12,311,000 and included provisions for the closure of a manufacturing facility, a loss on the sale of this facility, the termination of substantially all employees, a loss on the disposal of equipment and inventory related charges of $4,690,000 all in the Wireless Communications Equipment segment. The facility had a net book value of $4,805,000 at December 31, 2000, classified in other assets. In 1998, the Company initiated a number of cost reduction efforts to improve and adjust operations to existing market conditions. These actions included, among others, the discontinuance of product development and marketing efforts on certain products, the formation of a worldwide Repeater and In-Building Coverage business, the consolidation of two manufacturing operations of the Repeater and In-Building Coverage product line, and the reorganization of the Company's North American-based sales force and Wireless Engineering and Consulting Services business. As a result of asset write-offs, severance and other costs associated with such actions, the Company incurred before-tax charges for the year of $19,425,000 (including $4,706,000 of inventory related charges), or $.47 per basic and dilut- Allen Telecom 2000 annual report 29 26 notes to consolidated financial statements year ended december 31, 2000, 1999 and 1998 ed share after related taxes. Substantially all such costs were incurred and expended in 1998. The following is a summary of the status of certain exit costs incurred (amounts in thousands, except employee data):
Severance -------------------- Sale of Number of Building and Accrual Employees Equipment Other ------- --------- ------------ ----- Accrual $ 1,531 115 $ 3,764 $ 1,110 Charged against accrual (157) (22) (1,493) (593) -------------------------------------------------------------------------------- Balance, December 31, 1999 1,374 93 2,271 517 Additions to the accrual 327 5 393 958 Charged against accrual (1,482) (98) (562) (1,158) Accrual adjustment credited to income -- -- (553) -- -------------------------------------------------------------------------------- Balance, December 31, 2000 $ 219 -- $ 1,549 $ 317 ================================================================================
NOTE 13: 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 -------- ------- -------- ------- 2000 Sales $ 88,859 $ 89,175 $ 107,690 $ 106,884 Gross profit 25,382 27,584 31,930 30,046 Income from continuing operations 570 2,242 4,285 3,656 Gain from discontinued operations 1,300 -- -- -- Net income 1,870 2,242 4,285 3,656 Earnings per common share: Basic and Diluted: Continuing operations $ .02 $ .08 $ .15 $ .13 Discontinued operations .05 -- -- -- Net income .07 .08 .15 .13 -------------------------------------------------------------------------------- 1999 Sales $ 76,469 $ 78,002 $ 90,289 $ 91,453 Gross profit 22,230 23,357 25,848 17,714 Income (loss) from continuing operations (1,436) 17 2,632 (6,431) Gain from discontinued operations 2,363 -- -- -- Net income (loss) 927 17 2,632 (6,431) Earnings (loss) per common share: Basic and Diluted: Continuing operations $ (.05) $ -- $ .10 $ (.23) Discontinued operations .08 -- -- -- Net income (loss) .03 -- .10 (.23) --------------------------------------------------------------------------------
As described in Note 1, in the fourth quarter of 2000 the Company adopted the provisions of EITF No. 00-10. Accordingly, the previously reported amounts for each of sales and cost of sales for each of the periods below have been increased to conform with the current presentation (amounts in thousands):
Quarter Ended: 2000 1999 -------------- ---- ---- March 31 $903 $556 June 30 735 501 September 30 925 753 December 31 -- 706
These reclassifications had no net impact on previously reported results of operations or stockholders' equity. In the first quarter of 2000, the Company incurred incremental pretax charges of approximately $1,678,000, or $.04 per basic and diluted share after related income tax effect, in connection with the restructuring, announced during the fourth quarter of 1999, of certain operations including the discontinuance of certain product lines, the closing of a manufacturing facility, termination costs of employees and other items. Of this pretax charge, $960,000 was recorded in cost of sales and $718,000 in selling, general and administrative expenses. In the third quarter of 2000, the Company recognized a pretax gain of approximately $1,160,000, or $.03 per basic and diluted share after related income tax effect, with respect to a pension curtailment gain as a result of a reduction in force in connection with the aforementioned restructuring, of this gain $406,000 was recorded in cost of sales and $754,000 in selling, general and administrative expenses. In the fourth quarter of 2000, the Company adjusted the loss accrual for the disposal of a facility and recorded income in the amount of $553,000 (included in cost of sales) or $.01, per basic and diluted share, after related income tax effect. Income (loss) from continuing operations in the third quarter of 1999 includes net gains in the amount of $3,013,000 ($.07 per basic and diluted share) pertaining principally to a gain on the sale of a telecommunications investment. The fourth quarter of 1999 includes a $998,000 deferred tax benefit, or $.04 per basic and diluted share, with respect to a change in the applicable income tax rate on the undistributed earnings (prior to 1999) of a foreign subsidiary. In the fourth quarter of 1999, the Company recorded a $12,311,000 before-tax special charge to earnings, or $.29 per basic and diluted share after related income taxes. (See Note 12 for additional information.) NOTE 14: SUBSEQUENT EVENT On January 23, 2001, the Company announced that it had entered into a non-binding letter of intent, subject to certain conditions, to acquire Smith-Woolley Telecom ("SWT"), a division of Smith-Woolley Chartered Surveyors located in England. SWT provides acquisition, design and construction services for wireless communications sites for United Kingdom based carriers. This transaction, if consummated, will be accounted for as a purchase. Allen Telecom 2000 annual report 30 27 independent accountants' report To the Board of Directors and Stockholders of Allen Telecom Inc. We have audited the accompanying consolidated balance sheets of Allen Telecom Inc. and its subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Allen Telecom Inc. and its subsidiaries for the year ended December 31, 1998, were audited by other auditors whose report, dated February 16, 1999 (except as to paragraph five of Note 9 as originally presented in the financial statements for the year ended December 31, 1998, which is as of March 1, 1999), expressed an unqualified opinion on these statements. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such 2000 and 1999 consolidated financial statements present fairly, in all material respects, the financial position of Allen Telecom Inc. and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Cleveland, Ohio February 22, 2001 management's report 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 accountants, 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 accounting principles generally accepted in the United States of America. /s/ ROBERT G. PAUL Robert G. Paul President and Chief Executive Officer /s/ ROBERT A. YOUDELMAN Robert A. Youdelman Executive Vice President and Chief Financial Officer /s/ JAMES L. LEPORTE James L. LePorte, III Vice President - Finance Allen Telecom 2000 annual report 31 28 management's discussion and analysis of financial condition and results of operations OVERVIEW We design, manufacture, and market wireless communications infrastructure equipment and provide wireless engineering and consulting services for the global wireless communications markets. Our products and services improve the capacity, coverage and performance of wireless networks, including emerging 3G networks. As part of our commitment to our customers' evolving needs, we have also developed new products for E 911 geolocation and other emerging wireless equipment markets such as next generation power amplifiers. Our products and services serve all major wireless standards and frequencies. We were founded in 1928 as Allen Electric & Equipment Company and have been listed on the New York Stock Exchange since September 1971. We have repositioned our business through a series of strategic acquisitions and divestitures during the 1990's and have been known as Allen Telecom Inc. since February 1997. SALES. Our sales are derived primarily from wireless infrastructure equipment and engineering services provided to wireless communications original equipment manufacturers, or OEMs, and carriers. We make the majority of our communications equipment sales pursuant to orders received under master purchase agreements or specific purchase contracts, and our wireless engineering and consulting services are typically provided on the basis of time and materials or specific service contracts. Sales are recorded at the time products are shipped or services are performed. We derive a significant portion of our sales from some of the world's largest wireless communications carriers and OEMs. Our top 10 customers accounted for 55.2%, 47.7%, and 34.2% of total sales in 2000, 1999 and 1998, respectively. Nortel Networks, our largest customer, accounted for 15.2% of total sales in 2000. No customer accounted for more than 10% of our total sales in 1998 or 1999, and Nortel Networks was our only customer to account for more than 10% in 2000. We manufacture, distribute and market our products to the following geographic regions: Asia, Australia, Europe, Latin America and North America. International sales constituted approximately 57% to 59% of total sales for each of the last three years. We expect international sales as a percentage of total sales to increase over the next several years as we benefit from the expected build out of 3G wireless networks, primarily in Europe. We expect this trend to be offset by anticipated sales of our E 911 geolocation products in the United States. Export sales from the United States are primarily to major wireless carriers and are typically payable in U.S. dollars. European-based sales are to major OEMs and wireless carriers, and are typically denominated in Euros. As a result of our international position, we are subject to foreign currency translation fluctuations that impact the amount of sales we report in U.S. dollars for financial reporting purposes. Other than these translation effects, we do not believe that such currency fluctuations have significantly impacted our competitive position or our sales to domestic or international customers for either our U.S. or international operations. Our historical sales have reflected seasonal fluctuations due to the effect of less infrastructure build out and product installations in the winter months, primarily as a result of the impact of inclement weather conditions. We report our sales in two segments, Wireless Communications Equipment and Wireless Engineering and Consulting Services. Our Wireless Communications Equipment segment consists of three product lines. When we begin to record sales of Geolocation Products, we plan to create a new product line as part of our Wireless Communications Equipment segment. The table below sets forth our sales by segments and product lines: 32 Sales by Segments and Product Lines (in millions)
year ended december 31, 2000 1999 1998 ---- ---- ---- Wireless Communications Equipment: Base Station Subsystems and Components $ 190.9 48.6% $ 143.3 42.6% $ 184.5 47.2% Repeaters and In-Building Coverage Products 78.8 20.1% 93.5 27.8% 92.7 23.8% Base Station and Mobile Antennas 97.8 24.9% 76.8 22.9% 86.0 22.0% --------------------------------------------------------------------------------------------------------------------------------- Total Wireless Communications Equipment 367.5 93.6% 313.6 93.3% 363.2 93.0% Wireless Engineering and Consulting Services 25.1 6.4% 22.6 6.7% 27.4 7.0% --------------------------------------------------------------------------------------------------------------------------------- Total Sales $ 392.6 100.0% $ 336.2 100.0% $ 390.6 100.0% =================================================================================================================================
Allen Telecom 2000 annual report 33 29 management's discussion and analysis of financial condition and results of operations BACKLOG. Backlog includes all purchase orders and contracts for products and services with requested delivery dates within one year. Generally, purchase orders are subject to cancellation at the request of the customer. Cancelled orders are, in some instances, subject to cancellation or restocking charges payable to us. COST OF SALES. Cost of sales consists primarily of direct material costs of production components; production salaries, wages and employee benefits; fees paid to contract manufacturers; costs of our manufacturing facilities, including rent, depreciation, utilities, maintenance and insurance; and indirect supervisory manufacturing salaries, wages and employee benefits. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses generally include salaries, wages, commissions, employee benefits, travel and entertainment, communications, third party professional fees, and a portion of facility expenses related to sales and administrative activities. RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING COSTS. Research and development and product engineering costs relate to our engineering and technical operations and include salaries, wages, employee benefits, test equipment, test labs, third party contract research, prototype expenses and related facility expenses. Over the last three years, we have invested a significant portion of our research and development resources in our new initiatives, including products for emerging 3G networks, E 911 geolocation products, as well as next generation power amplifiers. OTHER INCOME, NET. Other income, net principally includes non-recurring gains and losses relating to the sale of investments. INCOME TAXES. We operate our business in 19 countries and accrue and pay income taxes in each of those countries in accordance with each country's tax rates and rules. REPORTING MATTER. In order to facilitate the timely preparation of our financial statements on a consolidated basis, we historically have included the results of our principal European operations on a two-month delayed basis. Effective January 1, 2001, such European operations changed their fiscal year-end from October 31 to December 31, consistent with the balance of our operations. The results of operations for these European operations for November and December 2000 will be recorded directly to retained earnings in the first quarter of 2001. This change in the reporting period is not expected to have a significant effect on our consolidated results of operations. 34 RESULTS OF OPERATIONS The following table sets forth our consolidated results of operations as a percentage of sales for the periods shown:
year ended december 31, 2000 1999 1998 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of sales 70.7 73.5 75.8 -------------------------------------------------------------------------------- Gross profit 29.3 26.5 24.2 Operating expenses: Selling, general and administrative expenses 13.8 16.3 16.7 Research and development and product engineering costs 6.5 8.3 7.9 Amortization of goodwill 2.0 2.1 1.6 -------------------------------------------------------------------------------- Operating income (loss) 7.0 (0.2) (2.0) Other income, net 0.0 1.0 1.5 Net interest expense 2.3 2.4 1.7 -------------------------------------------------------------------------------- Income (loss) before taxes and minority interests 4.7 (1.6) (2.2) (Provision for) benefit from income taxes (1.9) 0.5 1.4 Minority interests (0.0) (0.5) (0.6) -------------------------------------------------------------------------------- Income (loss) from continuing operations 2.8% (1.6)% (1.4)% ================================================================================
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 SALES. Sales increased $56.4 million, or 16.8%, to $392.6 million in 2000 from $336.2 million in 1999. As a result of the lower valued Euro compared to the U.S. dollar, our reported sales, when translated into U.S. dollars, were $27.1 million lower in 2000 than they would have been had the average exchange rate remained constant from 1999 to 2000. Sales from our Wireless Communications Equipment segment increased $53.9 million, or 17.2%, to $367.5 million in 2000 from $313.6 million in 1999 primarily due to greater demand for Base Station Subsystems and Components and Base Station and Mobile Antennas, partially offset by a decline in sales of Repeater and In-Building Coverage Products. Sales of Base Station Subsystems and Components increased 33.2% in 2000 from 1999 due primarily to increased base station deployments around the world. Sales of Base Station and Mobile Antennas increased 27.3% in 2000 from 1999 primarily due to increased deployments of cell sites in the United States that included our base station antenna products. The decline in sales of Repeater and In-Building Coverage Products was principally attributable to lower sales of certain test and measurement products and decreased repeater sales to some European wireless carriers. Allen Telecom 2000 annual report 35 30 management's discussion and analysis of financial condition and results of operations Sales from our Wireless Engineering and Consulting Services segment increased $2.5 million, or 11.1%, to $25.1 million in 2000 from $22.6 million in 1999 primarily due to greater demand for consulting services by fixed wireless operators. International sales constituted approximately 59% of total sales in both 2000 and 1999. Geographically, all regions experienced an increase in sales in 2000 from 1999, with the exception of Asia, which had a decrease in sales to customers in China. We plan to open a second manufacturing facility in China during the first quarter of 2001, which we believe will help position us to achieve sales growth in the rapidly growing China market. BACKLOG. Backlog increased $26.4 million, or 31.1%, to $111.3 million at December 31, 2000 from $84.9 million at December 31, 1999. Backlog for our Wireless Communications Equipment segment increased $23.3 million to $106.9 million at December 31, 2000 from $83.6 million at December 31, 1999. Backlog for our Wireless Engineering and Consulting Services segment increased $3.1 million to $4.4 million at December 31, 2000 from $1.3 million at December 31, 1999. GROSS PROFIT. Gross profit increased $25.8 million, or 28.9%, to $114.9 million in 2000 from $89.1 million in 1999. Our gross profit margin increased to 29.3% in 2000 from 26.5% in 1999 principally due to lower restructuring charges of $0.1 million recorded in 2000 compared to $6.1 million recorded in 1999, and the cost benefits resulting from these restructuring actions. Excluding restructuring charges, our gross profit margins would have increased to 29.3% in 2000 from 28.3% in 1999 primarily due to improved gross profit margins for our Wireless Engineering and Consulting Services segment. Gross profit margins for our Wireless Communications Equipment segment increased to 28.5% in 2000 from 26.5% in 1999 and, excluding restructuring charges, would have remained relatively constant at 28.6% in 2000 and at 28.3% in 1999. Gross profit margins for our Wireless Engineering and Consulting Services segment increased to 39.0% in 2000 from 27.4% in 1999 primarily due to increased sales of higher margin software, and increased utilization of our engineers for various engineering services projects. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $0.5 million, or 1.0%, to $54.3 million in 2000 from $54.8 million in 1999 primarily due to lower restructuring charges as well as cost savings related to these restructuring actions, partially offset by higher commissions and incentive compensation costs. Special charges associated with restructuring actions were $5.9 million in 1999. Excluding special charges, these expenses would have been $54.4 million, or 13.9% of sales, in 2000 and $48.9 million, or 14.6% of sales, in 1999. Selling, general and administrative expenses for our Wireless Communications Equipment segment declined $2.4 million, or 5.5%, in 2000 from 1999 primarily due to lower restructuring charges. Special charges associated with restructuring actions were $5.9 million in 1999. As a percentage of sales, excluding special charges, these expenses declined to 11.3% in 2000 from 12.1% in 1999 due to savings resulting from restructuring actions and general cost controls as sales increased. Selling, general and administrative expenses for our Wireless Engineering and Consulting Services segment increased $0.2 million, or 4.0%, in 2000 from 1999. As a percentage of sales, these expenses declined to 21.3% in 2000 from 22.8% in 1999 as a result of increased sales with continuing cost controls. RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING COSTS. Research and development and product engineering costs decreased $2.5 million, or 9.0%, to $25.4 million in 2000 from $27.9 million in 1999 primarily due to the divestiture of Signal Science Inc., or SSI, in October 1999. SSI primarily provided contract research and development services to the U.S. government. Excluding $3.2 million of research and development costs related to SSI in 1999, these costs increased $0.7 million, or 2.7%, in 2000 from 1999. As a percentage of sales, these costs, excluding expenses related to SSI, remained relatively constant at approximately 7% in 2000 and 1999. We continue to invest heavily in our emerging initiatives, including products for 3G networks, E 911 geolocation products, as well as next generation power amplifiers. We anticipate that our spending on research and development and product engineering costs will increase in 2001 to support these new product initiatives, as well as others. Our research and development and product engineering costs in 1999 and 2000 related exclusively to our Wireless Communications Equipment segment. AMORTIZATION OF GOODWILL. Goodwill amortization increased $0.8 million, or 11.4%, to $7.8 million in 2000 from $7.0 million in 1999 primarily due to the acquisition of minority interests in certain of our European subsidiaries during 2000 and 1999. NET INTEREST EXPENSE. Net interest expense increased $0.9 million, or 10.9%, to $9.0 million in 2000 from $8.1 million in 1999. This increase in net interest expense is primarily due to increased debt levels and higher borrowing costs. The increased debt levels were due to increased working capital needs, higher capital expenditures, as well as acquisitions of minority interests in certain of our European subsidiaries during 2000 and 1999, partially offset by proceeds from the sale of investments and discontinued operations. Allen Telecom 2000 annual report 36 31 management's discussion and analysis of financial condition and results of operations INCOME TAXES. Income tax expense increased $9.3 million to $7.5 million in 2000 from a tax benefit of $1.8 million in 1999. The effective tax rate of 41.0% in 2000 is higher than the federal statutory rate of 35.0% primarily as a result of goodwill amortization of $7.7 million that is not deductible for tax purposes. Through December 31, 2000, we have recorded a net U.S. deferred tax asset pertaining to the recognition of net operating loss carryforwards, net deductible temporary differences and tax credits in the amount of $32.6 million. We have not provided a valuation allowance relating to this asset, as we believe it is more likely than not that we will realize the value of this asset. This determination is based upon anticipated future U.S. taxable income and available tax planning strategies. We cannot assure you that we will be able to realize this asset or that future valuation allowances will not be required. The taxable losses generally may be carried forward for periods of up to twenty years. MINORITY INTERESTS. Minority interests expense decreased $1.6 million to $0.1 million in 2000 from $1.7 million in 1999 primarily due to the acquisition of the remaining minority interests in certain of our European subsidiaries in 2000 and 1999. SPECIAL CHARGES. With respect to restructuring actions which commenced in 1999, we incurred additional charges and gains in 2000, which resulted in a $35,000 net gain, including the following: (i) a pretax charge of $1.7 million primarily related to termination costs of employees, relocation costs, asset write-offs, and other termination related benefits which were not accruable at the time of the 1999 restructuring; (ii) a non-cash pretax gain of $1.2 million with respect to a pension curtailment gain resulting from the workforce reduction; and (iii) a gain of $0.5 million in the form of an adjustment to the loss accrual for the disposal of a facility sold in January 2001. Of this $35,000 net gain, a $106,000 charge was recorded in cost of sales and a gain of $141,000 was recorded in selling, general and administrative expenses. Please refer to Note 12 of the Notes to Consolidated Financial Statements for additional information regarding special charges in 1999 and 2000. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 SALES. Sales decreased $54.4 million, or 13.9%, to $336.2 million in 1999 from $390.6 million in 1998 due primarily to declining demand for products in both our Wireless Communications Equipment segment and our Wireless Engineering and Consulting Services segment. As a result of the lower valued Euro compared to the U.S. dollar, our reported sales, when translated into U.S. dollars, were $2.8 million lower in 1999 than they would have been had the average exchange rate remained constant from 1998 to 1999. Sales from our Wireless Communications Equipment segment declined $49.6 million, or 13.7%, to $313.6 million in 1999 from $363.2 million in 1998 primarily due to lower sales of Base Station Subsystems and Components and Base Station and Mobile Antennas. Sales of Base Station Subsystems and Components decreased 22.3% in 1999 from 1998 due principally to the slowdown in some OEM production levels, particularly in the first six months of 1999; a decline in sales of equipment racks to one specific wireless carrier; and lower sales of tower mounted amplifiers. Sales of Base Station and Mobile Antennas decreased 10.7% in 1999 from 1998 primarily due to lower sales of base station antennas, which were down 11.3% from 1998 levels, in both international and domestic markets. Sales of Repeaters and In-Building Coverage Products increased by 0.9% in 1999 from 1998 primarily due to the benefit of large installation contracts in 1999 in Brazil, Italy, Switzerland and the United States, offset by a $8.1 million decrease in sales of Extend-A-Cell frequency translating repeater products in 1999. Sales from our Wireless Engineering and Consulting Services segment decreased $4.8 million, or 17.5%, to $22.6 million in 1999 from $27.4 million in 1998 primarily due to the discontinuance of certain products and services and a decrease in orders for our network planning services in the United States. International sales accounted for 58.8% of total sales in 1999 compared to 57.3% in 1998. Geographically, all regions experienced a decline in sales in 1999 from 1998, particularly the United States and Asia. BACKLOG. Backlog increased $32.1 million, or 60.7%, to $84.9 million at December 31, 1999 from $52.8 million at December 31, 1998. Backlog of our Wireless Communications Equipment segment increased $31.7 million to $83.6 million at December 31, 1999 from $51.9 million at December 31, 1998. Backlog of our Wireless Engineering and Consulting Services segment increased $0.4 million to $1.3 million at December 31, 1999 from $0.9 million at December 31, 1998. GROSS PROFIT. Gross profit decreased $5.5 million, or 5.8%, to $89.1 million in 1999 from $94.6 million in 1998. Our gross profit margin increased to 26.5% in 1999 from 24.2% in 1998 primarily because of cost savings resulting from restructuring actions taken in 1998 and lower restructuring charges of $6.1 million in 1999 compared to $12.5 million in 1998. Excluding special charges, gross profit margins increased to 28.3% in 1999 from 27.4% in 1998 due to improved gross margins for our Wireless Engineering and Consulting Services segment. Gross profit margins for our Wireless Communications Equipment segment improved to 26.5% in 1999 from 24.8% in 1998 and, Allen Telecom 2000 annual report 37 32 management's discussion and analysis of financial condition and results of operations excluding special charges relating to restructuring actions, gross margins would have remained constant at 28.3%. Savings from previous restructuring efforts and increased production at lower cost facilities in Brazil, China and Mexico offset decreased pricing in 1999. Gross profit margins for our Wireless Engineering and Consulting Services segment increased to 27.4% in 1999 from 16.4% in 1998, primarily due to better utilization of engineers and increased sales of higher margin software. In addition, cost savings resulting from restructuring actions taken in 1998 contributed to this improvement. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased $10.6 million, or 16.1%, to $54.8 million in 1999 from $65.4 million in 1998 principally due to cost savings resulting from prior restructuring actions. As a percentage of sales, these expenses decreased to 16.3% in 1999 from 16.7% in 1998. Special charges associated with restructuring actions were $5.9 million in 1999 and $6.9 million in 1998. Excluding special charges, these expenses would have been $48.9 million, or 14.6% of sales, in 1999 and $58.5 million, or 15.0% of sales, in 1998. Selling, general and administrative expenses for our Wireless Communications Equipment segment decreased $4.0 million, or 8.4%, in 1999 from 1998 primarily due to cost savings resulting from various restructuring actions taken in these years. Special charges associated with these restructuring efforts were $5.9 million in 1999 and $4.3 million in 1998. As a percentage of sales, excluding special charges, these expenses would have remained relatively constant at 12% in both 1999 and 1998. Selling, general and administrative expenses for our Wireless Engineering and Consulting Services segment decreased $6.4 million, or 55.4%, in 1999 from 1998 primarily due to the restructuring actions taken at the end of 1998. We incurred a restructuring charge of $2.6 million in 1998 due to the discontinuance of certain products and services. As a percentage of sales, these expenses decreased to 22.8% in 1999 from 42.1% in 1998, or 32.5% excluding the restructuring charge in 1998. RESEARCH AND DEVELOPMENT AND PRODUCT ENGINEERING COSTS. Research and development and product engineering costs declined $2.8 million, or 9.1%, to $27.9 million in 1999 from $30.7 million in 1998 principally due to the sale in October 1999 of SSI. As a percentage of sales, these costs remained relatively constant at 8% in 1999 and 1998. During 1999, we made substantial investments in new initiatives, including E 911 geolocation products as well as power amplifiers and microwave radios. Our research and development and product engineering costs in 1998 and 1999 related exclusively to our Wireless Communications Equipment segment. AMORTIZATION OF GOODWILL. Goodwill amortization increased $0.7 million, or 11.5%, to $7.0 million in 1999 from $6.3 million in 1998 primarily due to the acquisition of minority interests in certain of our European subsidiaries in 1998. NET INTEREST EXPENSE. Net interest expense increased $1.3 million, or 19.7%, to $8.1 million in 1999 from $6.8 million in 1998. This increase in net interest expense is primarily due to increased debt levels relating to acquisitions of minority interests in certain of our European subsidiaries and higher borrowing costs. INCOME TAXES. Our income tax benefit decreased $3.5 million to $1.8 million in 1999 from $5.3 million in 1998. The tax benefit in 1999 included the impact of a $1.0 million tax benefit related to a change in the applicable income tax rate on our pro rata share of undistributed earnings (prior to 1999) of a foreign subsidiary as a result of our acquisition of an additional interest in such subsidiary. The acquisition allows for our pro rata earnings (when distributed) of this foreign subsidiary to be taxed at a lower rate. The $5.3 million benefit in 1998 is principally due to a tax benefit of $3.7 million relating to the pro rata share of undistributed earnings of such subsidiary. SPECIAL CHARGES. In October 1999, we initiated a restructuring of certain domestic operations which included the discontinuation of certain product lines and consolidation of manufacturing operations. This consolidation included a reduction of workforce and the closure of a U.S. manufacturing plant (sold in January 2001) that operated at a substantial loss for the previous two years. As a result of these actions, we incurred a $12.3 million charge in 1999. Of this charge, $4.0 million related to a non-cash write-off of capital assets, $4.9 million related to other non-cash losses, and $3.4 million were cash related charges. Approximately $0.3 million of these charges will be expended in 2001. In 1998, we initiated a number of cost reduction efforts with our In-Building Coverage Products and Wireless Engineering and Consulting Services product lines. As a result of asset write-offs, severance and other costs related to these actions, we incurred a $19.4 million charge. Please refer to Note 12 to the Notes to Consolidated Financial Statements for additional information relating to this charge. Allen Telecom 2000 annual report 38 33 management's discussion and analysis of financial condition and results of operations QUARTERLY RESULTS OF OPERATIONS The following are our unaudited quarterly consolidated statements of operations for 2000 and 1999. We have prepared this unaudited information on a basis consistent with the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we considered necessary for a fair presentation of our financial position and operating results for the quarters presented. You should read this quarterly financial data in conjunction with the historical Condensed Consolidated Financial Statements and the related notes thereto included in our Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission. In 2000 and 1999, we recorded several non-recurring items that impacted the comparability of quarterly financial results, including restructuring charges, other income and taxes. Please refer to Note 13 to the Notes to Consolidated Financial Statements for additional information regarding these items.
Three Months Ended Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 31, Dec. 31, (in thousands) 2000 2000 2000 2000 1999 1999 1999 1999 ---- ---- ---- ---- ---- ---- ---- ---- Sales (1) $ 88,859 $ 89,175 $ 107,690 $ 106,884 $ 76,469 $ 78,002 $ 90,289 $ 91,453 Cost of sales (1) 63,477 61,591 75,760 76,838 54,239 54,645 64,441 73,739 ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 25,382 27,584 31,930 30,046 22,230 23,357 25,848 17,714 Operating expenses: Selling, general and administrative expenses 14,343 13,137 13,373 13,418 12,349 11,732 13,221 17,517 Research and development and product engineering costs 6,186 6,381 6,924 5,951 7,664 7,710 6,890 5,682 Amortization of goodwill 1,918 1,943 1,980 1,981 1,727 1,735 1,733 1,825 ------------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) 2,935 6,123 9,653 8,696 490 2,180 4,004 (7,310) Other income (loss), net -- -- -- -- (165) 390 3,013 132 Net interest expense 1,961 2,208 2,369 2,495 2,064 1,928 2,128 2,026 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before taxes and minority interest 974 3,915 7,284 6,201 (1,739) 642 4,889 (9,204) (Provision for) benefit from income taxes (391) (1,634) (2,966) (2,539) 607 (222) (1,810) 3,269 Minority interests (13) (39) (33) (6) (304) (403) (447) (496) ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) from continuing operations 570 2,242 4,285 3,656 (1,436) 17 2,632 (6,431) Discontinued operations 1,300 -- -- -- 2,363 -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ 1,870 $ 2,242 $ 4,285 $ 3,656 $ 927 $ 17 $ 2,632 $ (6,431) ====================================================================================================================================
NOTE: (1) Sales and cost of sales for quarterly periods in 2000 and 1999 have been reclassified to conform to the provisions of Emerging Issues Task Force issue No. 00-10 "Accounting for Shipping and Handling Fees and Costs." The previously reported amounts for each of sales and cost of sales have been increased by the following amounts to conform with the current presentation:
(in thousands) 2000 1999 Three Months Ended March 31 $903 $556 June 30 735 501 September 30 925 753 December 31 -- 706
These reclassifications had no net impact on previously reported results of operations or stockholders' equity. Allen Telecom 2000 annual report 39 34 management's discussion and analysis of financial condition and results of operations DISCONTINUED OPERATIONS In March 1999, we sold a subsidiary, Marta Technologies Inc., that operated our discontinued automotive emission testing programs. Pursuant to the sale agreement, we received cash of $9.4 million and a $3.0 million, three year, 12% installment note and the purchaser assumed (among other liabilities) $12.4 million in long-term capital lease obligations. In 2000, we realized a gain of $1.3 million, after related income taxes, relating to previously contingent purchase price consideration earned on the sale of Marta (in the form of a 12% interest bearing installment note). LIQUIDITY AND CAPITAL RESOURCES We generally fund our operations and working capital needs through cash generated from operations and borrowings under our revolving credit facility. Due to the rapid increase in sales during the second half of 2000, cash flow from operations was a use of $2.6 million in 2000 as compared to a source of cash of $4.9 million in 1999. This change in cash flow from operations was primarily due to an increase in investment in working capital, principally receivables and inventory. Cash flow from operations increased to $4.9 million in 1999 from a use of $2.3 million in 1998 primarily due to a reduced investment in working capital, principally receivables, as a result of a lower level of business in 1999. Net cash used by investing activities increased to $26.1 million in 2000 compared to a use of $0.9 million in 1999 due to a higher level of capital expenditures (fixed assets and capitalized software) of $19.2 million in 2000 as compared to $11.4 million in 1999. In addition, 1999 benefited from $19.1 million of cash generated from the sale of investments and discontinued operations. Net cash from financing activities increased to $20.8 million in 2000 compared to a use of $1.3 million in 1999 primarily due to higher borrowings to support increased working capital needs, capital expenditures, and investments in our European subsidiaries. If wireless carriers implement E 911 geolocation solutions, and such implementation results in purchase orders and sales for our geolocation products, we expect a significant increase in our working capital requirements. Based on current FCC regulations, this could occur as early as the second half of 2001. In addition, we estimate our total capital expenditure needs in 2001 to be $24.0 million, of which approximately $1.7 million was committed at December 31, 2000. Further, we anticipate using capital resources for the potential acquisition of Smith-Woolley Telecom if the acquisition is consummated. We have a $105.0 million domestic revolving credit facility that expires on December 31, 2003. Borrowings under this facility are collateralized by substantially all our domestic assets as well as a pledge of 65% of the stock of certain domestic and foreign subsidiaries. At December 31, 2000, we had outstanding approximately $58.1 million under this credit facility and had approximately $33.9 million available under this facility. In addition, we had approximately $30.0 million available under non-committed foreign lines of credit. As indicated above, the strong U.S. dollar relative to the Euro has negatively impacted the translated value of our European subsidiaries, whose assets and liabilities are denominated principally in European currencies. Our "Accumulated Other Comprehensive Loss" (representing the net impact on the translated net asset investment of foreign subsidiaries) has increased to $31.9 million at December 31, 2000 from $10.7 million at December 31, 1999. This decline in the translated value of our net foreign asset position, despite increased earnings, is the principal reason for the decline in Stockholders' Equity at December 31, 2000 compared with December 31, 1999. We believe that our cash flow from operations and amounts available under our revolving credit facility will be adequate to fund operations and capital expenditures for at least the next twelve months, including our potential acquisition of Smith-Woolley Telecom. DERIVATIVE FINANCIAL INSTRUMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998, which is now effective. Accordingly, we have adopted the provisions of the standard on January 1, 2001. We utilize hedging activities primarily in our foreign subsidiaries to limit foreign currency exchange rate risk on receivables and to offset the impact of currency rate change with regard to certain intercompany payables and foreign denominated purchase obligations. The adoption of SFAS 133 as of January 1, 2001 did not have a material impact on the Company's results of operations or financial position. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk exposure relating to derivatives results from the use of foreign currency forward contracts to offset the impact of currency rates against certain assets related to accounts receivable. There were no open contracts related to accounts receivable as of December 31, 2000. We also entered into a foreign currency forward contract in November 2000 to offset the impact of currency rate change with regard to a foreign denominated purchase obligation relating to our purchase of the remaining minority interest of a European subsidiary. Additionally, we entered into a foreign currency forward contract in December 2000 to offset the impact of currency rate change with regard to certain intercompany payable obligations. We do not enter into derivative instrument transactions for trading or speculative purposes. Allen Telecom 2000 annual report 40 35 management's discussion and analysis of financial condition and results of operations Our on-balance sheet instruments that are subject to interest rate fluctuations are various components of long-term debt. We believe the risks are minimal. As of December 31, 2000, 48.8% of our long-term debt is fixed rate debt and not subject to interest rate fluctuation. The variable rate debt is primarily made up of our domestic revolving credit facility and industrial revenue bonds. The revolving credit debt interest is determined on a LIBOR or prime rate basis, at our option. The industrial development bonds carry interest rates that are established based on the low yield, tax free bond market. The tables below provide information about our derivative financial instruments and other financial instruments that are sensitive to changes in exchange and interest rates. For derivative instruments, the table presents December 31, 1999 and December 31, 2000 contract amounts and related average contractual exchange rates by expected maturity date. For debt obligations at December 31, 2000, the table presents principal payments and related weighted average interest rates by expected maturity dates. ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
Carrying Value Fair Value at Dates Maturing in at Dates Maturing in -------------------- -------------------- (U.S. $ equivalent in thousands) 2000 2001 2000 2001 Italian Lira Functional Currency (Lira) Foreign Exchange Agreements: Receive Lira/Pay U.S. dollars Contract Amount $2,004.0 -- $2,050.0 -- Average Contractual Exchange Rate 1,810.6 -- 1,852.3 -- Receive Lira/Pay British pounds Contract Amount $4,476.4 -- $4,496.5 -- Average Contractual Exchange Rate 2,817.5 -- 3,028.7 -- Euro Functional Currency Foreign Exchange Agreements: Receive U.S. dollars/Pay Euros Contract Amount -- $988.6 -- $1,036.4 Average Contractual Exchange Rate -- 0.8987 -- 0.9422 German Mark Functional Currency (DM) Foreign Exchange Agreements: Receive DM/Pay U.S. dollars Contract Amount $8,265.7 $1,784.7 $7,723.6 $1,929.8 Average Contractual Exchange Rate 1.814 2.2413 1.9421 2.0727
Debt Obligations Expected Maturity Date Fair (U.S. $ equivalent in thousands) 2001 2002 2003 2004 2005 Thereafter Total Value ---- ---- ---- ---- ---- ---------- ----- ----- Long Term Debt: Fixed Rate (US) $3,000 $10,833 $10,833 $7,833 $7,833 $24,668 $65,000 $65,000 Average interest rate 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% Fixed Rate (Lira) $377 $393 $410 $328 $242 $526 $2,276 $2,276 Average interest rate 4.3% 4.3% 4.3% 4.3% 5.2% 6.3% 4.9% 4.9% Fixed Rate (DM) $385 $190 $84 $21 -- -- $680 $680 Average interest rate 4.4% 4.5% 4.4% 3.5% -- -- 4.4% 4.4% Fixed Rate (FF) $34 -- -- -- -- -- $34 $34 Average interest rate 9.0% -- -- -- -- -- 9.0% 9.0% Variable Rate (US) -- -- $58,100 -- -- $11,900 $70,000 $70,000 Average interest rate -- -- 8.3% -- -- 4.2% 7.6% 7.6 % Variable Rate (Lira) -- $56 -- -- $156 $1,219 $1,431 $1,431 Average interest rate -- 4.7% -- -- 0.7% 0.7% 1.0% 1.0%
Allen Telecom 2000 annual report 41 36 five year summary of operations (amounts in thousands, except per share data)
Year Ended December 31, 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- OPERATING RESULTS SALES (see note below) $392,608 $336,213 $390,644 $435,253 $371,538 Cost of sales (see note below) (277,666) (247,064) (296,044) (284,336) (240,441) ----------------------------------------------------------------------------------------------------------------------------------- Gross profit 114,942 89,149 94,600 150,917 131,097 Operating expenses: Selling, general and administrative expenses (54,271) (54,819) (65,377) (69,267) (56,621) Research and development and product engineering costs (25,442) (27,946) (30,742) (30,367) (21,023) Amortization of goodwill (7,822) (7,020) (6,295) (3,404) (2,432) Write-off of in-process research and development costs -- -- -- -- (2,662) ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 27,407 (636) (7,814) 47,879 48,359 Other income, net -- 3,370 6,065 1,885 952 Net interest expense (9,033) (8,146) (6,805) (3,051) (2,785) ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before taxes and minority interests 18,374 (5,412) (8,554) 46,713 46,526 (Provision for) benefit from income taxes (7,530) 1,844 5,310 (17,723) (19,665) ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before minority interest 10,844 (3,568) (3,244) 28,990 26,861 Minority interests (91) (1,650) (2,268) (5,009) (6,305) ----------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 10,753 (5,218) (5,512) 23,981 20,556 Discontinued operations: Loss from emission testing business -- -- -- -- (3,766) Gain (loss) on disposal of emission testing business 1,300 2,363 (4,710) -- (3,724) ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before extraordinary item 12,053 (2,855) (10,222) 23,981 13,066 Extraordinary item - extinguishment of debt -- -- -- (632) -- ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $12,053 $(2,855) $(10,222) $23,349 $13,066 ================================================================================================================================== EARNINGS (LOSS) PER COMMON SHARE: Basic: Income (loss) from continuing operations $.38 $(.19) $(.21) $.89 $.78 Discontinued operations: Loss from emission testing business -- -- -- -- (.14) Gain (loss) on disposal of emission testing business .05 .09 (.17) -- (.14) Extraordinary item - extinguishment of debt -- -- -- (.02) -- ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $.43 $(.10) $(.38) $.87 $.50 ================================================================================================================================== Diluted: Income (loss) from continuing operations $.38 $(.19) $(.21) $.88 $.76 Discontinued operations: Loss from emission testing business -- -- -- -- (.14) Gain (loss) on disposal of emission testing business .05 .09 (.17) -- (.14) Extraordinary item - extinguishment of debt -- -- -- (.02) -- ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $.43 $(.10) $(.38) $.86 $.48 ================================================================================================================================== FINANCIAL CONDITION Total assets $473,022 $451,430 $465,585 $514,433 $410,512 Working capital 132,631 128,062 133,465 111,015 94,378 Current ratio 2.57 2.68 2.92 1.85 1.90 Total debt 138,435 123,086 140,223 104,034 55,955 Stockholders' equity 234,981 240,912 250,081 260,822 225,951 Debt to equity ratio .59 .51 .56 .40 .25 Book value per common share 8.39 8.64 9.10 9.55 8.44 Shares outstanding at year end 28,022 27,882 27,473 27,298 26,763 Return on stockholders' equity 5.1% (1.2%) (4.0%) 9.4% 6.0% Capital expenditures 15,082 9,491 18,094 22,247 20,992 Depreciation 13,353 14,914 15,615 12,808 12,231 Number of employees 2,500 2,200 3,000 3,300 2,900 -----------------------------------------------------------------------------------------------------------------------------------
Note: Sales and cost of sales for the years ended December 31, 1999, 1998, 1997 and 1996 have been reclassified to conform to the provisions of EITF No. 00-10 "Accounting for Shipping and Handling Fees and Costs." The previously reported amounts for each of sales and cost of sales have been increased (with no net impact on previously reported results of operations or stockholders' equity) by: 1999 - $2,516; 1998 - $2,640; 1997 - $2,745 and 1996 - $2,040, to conform to the current year presentation. Allen Telecom 2000 annual report 42 shareholder information EXCHANGE LISTINGS Common Stock (Ticker Symbol - ALN) New York Stock Exchange Pacific Exchange TRANSFER AGENT AND REGISTRAR Fifth Third Bank MD 10AT66-3212 38 Fountain Square Plaza Cincinnati, Ohio 45263 (513) 744-8676 INDEPENDENT AUDITORS Deloitte & Touche LLP 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, 44122-5687, (216) 765-5855. 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 www.allentele.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 1, 2001, Allen Telecom Inc. had 28,063,701 outstanding shares of Common Stock owned by 1,698 holders of record. ANNUAL STOCKHOLDERS' MEETING The Annual Meeting of Stockholders will be held at the Hilton Cleveland East/Beachwood at 3663 Park East Drive, Beachwood, Ohio 44122, on Friday, April 27, 2001 at 9:30 AM. DIVIDENDS DECLARED ON COMMON STOCK For the years ended 1996 through 2000 the Company paid no cash or stock dividends. MARKET PRICE RANGE OF COMMON STOCK (dollars per share)
2000 1999 1998 High Low High Low High Low ---------------------------------------------------------------------- 1st Quarter 19.94 10.56 8.69 4.50 21.13 15.50 2nd Quarter 20.00 12.88 11.88 5.75 17.44 9.56 3rd Quarter 21.94 15.69 11.50 7.88 11.63 6.19 4th Quarter 24.00 14.13 12.38 8.00 8.38 4.69
[STOCK PRICE BAR CHART]
98 99 00 4.69 4.50 10.56 21.13 12.38 24.00
STOCK PRICE (dollars per share) 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 John F. McNiff Trustee, Haven Fund; former 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 Martyn F. Roetter Vice President, Communications and Information Technology, Arthur D. Little, Inc., Cambridge, Massachusetts Gary B. Smith President, Color ID, LLC Cornelius, North Carolina Kathleen M. H. Wallman President, Chief Executive Officer Wallman Strategic Consulting LLC Washington, D.C. MANAGEMENT Robert G. Paul President and Chief Executive Officer Robert A. Youdelman Executive Vice President and Chief Financial Officer James L. LePorte, III Vice President - Finance Peter G. de Villiers Vice President Laura C.Meagher Secretary and General Counsel Roger L. Schroeder Treasurer Andrea Casini Managing Director, Tekmar Sistemi Terry N. Garner President, Grayson Wireless F. Kim Goryance President, Antenna Specialists Douglass R. Hall President, Comsearch Peter Mailandt President, Decibel Products Jack Powell Chairman, Telia S.A. Karl-Heinz Schmidt President, MIKOM Gianpiero Villa President, FOREM 43 [ALLEN TELECOM LOGO] [BACKGROUND GRAPHIC] Allen Telecom Inc. 25101 Chagrin Boulevard Beachwood, Ohio 44122