10-Q 1 l94112ae10-q.txt ALLEN TELECOM INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from Not Applicable to __________________ -------------- Commission file number 1-6016 ------ ALLEN TELECOM INC. ------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 38-0290950 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 25101 Chagrin Boulevard, Suite 350, Beachwood, Ohio 44122 -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (Registrant's Telephone Number, Including Area Code) (216) 765-5800 --------------- NOT APPLICABLE -------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock: Outstanding at Class of Common Stock April 30, 2002 --------------------- -------------- Par value $1.00 per share 30,465,172 -------------- ALLEN TELECOM INC. ------------------ TABLE OF CONTENTS -----------------
Page No. ------------- PART I. FINANCIAL INFORMATION: ITEM 1 - Financial Statements: Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Income (Loss) - Three Months Ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2002 and 2001 5 Condensed Consolidated Statements of Stockholders' Equity - Three Months Ended March 31, 2002 and 2001 6 Notes to the Condensed Consolidated Financial Statements 7 - 12 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 18 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risks 19 PART II. OTHER INFORMATION: ITEM 2 - Changes in Securities and Use of Proceeds 19 ITEM 6 - Exhibits and Reports on Form 8-K 19 Signatures 20 Exhibit Index 21
2 ALLEN TELECOM INC. PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1 - FINANCIAL STATEMENTS ----------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Amounts in Thousands)
March 31, December 31, 2002 2001 ---------------------- -------------------- (Unaudited) ASSETS Current Assets: Cash and equivalents $ 14,213 $ 16,368 Accounts receivable (less allowance for doubtful accounts of $3,411 and $3,338, respectively) 94,266 92,291 Inventories: Raw materials 65,844 66,957 Work in process 20,009 23,639 Finished goods 27,423 33,430 ------------ ------------ Total inventories (net of reserves) 113,276 124,026 ------------ ------------ Deferred income taxes 2,271 2,660 Recoverable income taxes 22,511 20,169 Other current assets 2,436 2,416 ------------ ------------ Total current assets 248,973 257,930 Property, plant and equipment, net 39,177 41,290 Goodwill 141,060 140,995 Deferred income taxes 39,751 39,401 Other assets 30,606 32,340 ------------ ------------ TOTAL ASSETS $ 499,567 $ 511,956 ============ ============ LIABILITIES Current Liabilities: Notes payable and current maturities of long-term obligations $ 12,154 $ 12,318 Accounts payable 35,036 40,355 Accrued expenses 27,211 27,827 Income taxes payable 2,883 4,781 Deferred income taxes 9,911 9,852 ------------ ------------ Total current liabilities 87,195 95,133 Long-term debt 91,206 140,530 Deferred income taxes 2,130 2,164 Other liabilities 15,996 15,772 ------------ ------------ TOTAL LIABILITIES 196,527 253,599 ------------ ------------ REDEEMABLE CONVERTIBLE PREFERRED STOCK 1,000,000 shares at redemption value (liquidation preference of $50.00 per share) (Note 3) 50,000 -- ------------ ------------ STOCKHOLDERS' EQUITY Common stock 32,500 32,500 Paid-in capital 203,536 203,548 Retained earnings 65,899 69,676 Accumulated other comprehensive loss (32,286) (30,671) Less: Treasury stock (common shares, at cost) (15,415) (15,440) Unearned compensation (1,194) (1,256) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 253,040 258,357 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 499,567 $ 511,956 ============ ============
See accompanying Notes to the Condensed Consolidated Financial Statements. 3 ALLEN TELECOM INC. ------------------ CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) -------------------------------------------------- (Amounts in Thousands, Except Per Share Data) (Unaudited)
Three Months Ended March 31, 2002 2001 --------- --------- Sales $ 89,869 $ 108,543 Cost of sales (68,702) (78,639) --------- --------- Gross profit 21,167 29,904 Operating expenses: Selling, general and administrative expenses (13,154) (14,365) Research and development and product engineering costs (6,609) (6,900) Amortization of goodwill (Note 5) -- (1,980) --------- --------- Operating income 1,404 6,659 Interest expense (2,500) (2,916) Interest income 134 321 --------- --------- (Loss) income before taxes and minority interest (962) 4,064 Benefit (provision) for income taxes 340 (1,585) --------- --------- (Loss) income before minority interest (622) 2,479 Minority interest (20) (42) --------- --------- NET (LOSS) INCOME $ (642) $ 2,437 ========= ========= (LOSS) EARNINGS PER COMMON SHARE: Basic and Diluted $ (.02) $ .09 ========= ========= Weighted average common shares outstanding: Basic 30,030 27,930 Assumed exercise of stock options -- 420 --------- --------- Diluted 30,030 28,350 ========= =========
See accompanying Notes to the Condensed Consolidated Financial Statements. 4 ALLEN TELECOM INC. ------------------ CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Amounts in Thousands) (Unaudited)
Three Months Ended March 31, -------------------------------------------- 2002 2001 -------------------- ------------------- CASH FLOW FROM OPERATIONS: Net (loss) income $ (642) $ 2,437 Adjustments to reconcile (loss) income to operating cash flow: Depreciation 3,023 3,753 Amortization of goodwill -- 1,980 Amortization of capitalized software 897 668 Other amortization 150 78 Changes in operating assets and liabilities: Receivables (2,488) (4,998) Inventories 10,083 (31,197) Accounts payable and accrued expenses (6,203) 17,088 Income tax payable (4,177) 1,413 Other, net (10) (1,275) ------------ ------------ CASH PROVIDED (USED) BY OPERATING ACTIVITIES 633 (10,053) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,479) (3,859) Capitalized software product costs (419) (890) Sales and retirements of fixed assets 164 5,808 Investment in subsidiaries (59) -- ------------ ------------ CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,793) 1,059 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of borrowings (49,461) (5,748) Acquisition of treasury stock (167) (1,111) Issuance of preferred stock 47,488 -- Collection on installment note receivable 1,100 1,000 Treasury stock sold to employee benefit plan 180 196 Exercise of stock options -- 657 ------------ ------------ CASH USED BY FINANCING ACTIVITIES (860) (5,006) ------------ ------------ NET CASH USED (2,020) (14,000) Effect of foreign currency exchange rate changes on cash (135) 1,539 Net cash flow from change in year-end of subsidiaries (Note 1) -- 20,431 Cash and equivalents at beginning of year 16,368 10,539 ------------ ------------ CASH AND EQUIVALENTS AT END OF PERIOD $ 14,213 $ 18,509 ============ ============ Supplemental cash flow data: Cash paid during the period for: Interest $ 1,492 $ 1,837 Income taxes 4,288 1,706
See accompanying Notes to the Condensed Consolidated Financial Statements. 5
ALLEN TELECOM INC. ------------------ CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY --------------------------------------------------------- (Amounts in Thousands) (Unaudited) Common Paid-In Comprehensive Retained Total Stock Capital (Loss) Income Earnings ----------- ----------- --------- -------------- ---------- FOR THE THREE MONTHS ENDED MARCH 31, 2002: Beginning Balance, January 1, 2002 $258,357 $32,500 $203,548 $69,676 Preferred stock issuance costs (3,135) (3,135) Comprehensive loss: Net loss (642) $ (642) (642) Foreign currency translation adjustments (1,615) (1,615) ---------- Comprehensive loss $ (2,257) ========== Treasury stock reissued 180 (12) Acquisition of treasury stock (167) Amortization of unearned compensation 62 -------- ------- -------- ------- Ending Balance, March 31, 2002 $253,040 $32,500 $203,536 $65,899 ======== ======= ======== ======= FOR THE THREE MONTHS ENDED MARCH 31, 2001: Beginning Balance, January 1, 2001 $234,981 $30,092 $184,066 $69,067 Net income from change in fiscal year-end of subsidiaries (Note 1) 2,432 2,432 Comprehensive income: Net income 2,437 $ 2,437 2,437 Foreign currency translation adjustments 4,285 4,285 --------- Comprehensive income $ 6,722 ========= Treasury stock reissued 195 102 Acquisition of treasury stock (1,111) Exercise of stock options 657 101 556 Amortization of unearned compensation 78 -------- ------- -------- ------- Ending Balance, March 31, 2001 $243,954 $30,193 $184,724 $73,936 ======== ======= ======== ======= Accumulated Other Comprehensive Treasury Unearned Income (Loss) Stock Compensation -------------- ---------- ------------ FOR THE THREE MONTHS ENDED MARCH 31, 2002: Beginning Balance, January 1, 2002 $(30,671) $(15,440) $ (1,256) Preferred stock issuance costs Comprehensive loss: Net loss Foreign currency translation adjustments (1,615) Comprehensive loss Treasury stock reissued 192 Acquisition of treasury stock (167) Amortization of unearned compensation 62 -------- -------- -------- Ending Balance, March 31, 2002 $(32,286) $(15,415) $ (1,194) ======== ======== ======== FOR THE THREE MONTHS ENDED MARCH 31, 2001: Beginning Balance, January 1, 2001 $(31,948) $(14,730) $ (1,566) Net income from change in fiscal year-end of subsidiaries (Note 1) Comprehensive income: Net income Foreign currency translation adjustments 4,285 Comprehensive income Treasury stock reissued 93 Acquisition of treasury stock (1,111) Exercise of stock options Amortization of unearned compensation 78 -------- -------- -------- Ending Balance, March 31, 2001 $(27,663) $(15,748) $ (1,488) ======== ======== ========
See accompanying Notes to the Condensed Consolidated Financial Statements. 6 ALLEN TELECOM INC. ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES: GENERAL In the opinion of the management of Allen Telecom Inc. (the "Company"), the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments necessary to present fairly the financial position of the Company as of March 31, 2002 and the consolidated results of its operations, cash flows and changes in stockholders' equity for the periods ended March 31, 2002 and 2001. The results of operations for such interim periods are not necessarily indicative of the results for the full year. The year-end 2001 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. CONSOLIDATION POLICY The Company's consolidated financial statements include the accounts of all wholly owned and majority owned subsidiaries. Intercompany accounts and transactions have been eliminated. To facilitate preparation of financial statements, the Company's principal European operations, for periods on or prior to December 31, 2000, were included in the consolidated financial statements on a two-month delayed basis. Effective January 1, 2001, such European operations changed their fiscal year-end from October 31 to December 31, consistent with the balance of the Company's operations. The results of operations (net income of $2,432,000) for these European subsidiaries for the period November and December 2000, were recorded directly to retained earnings in the first quarter of 2001 and the results of operations for the period January 1, 2001 through March 31, 2001 were included in first quarter 2001 reported results of operations. Cash flow of such European operations for the two month period November and December 2000 is summarized as follows (amounts in millions): Net income from operations $ 2.4 Increase in inventories (8.7) Decrease in receivables 3.2 Increase in accounts payable 14.1 Decrease in taxes payable (6.1) Net increase in fixed assets (1.2) Borrowings 16.1 Other .6 ------ Increase in cash and equivalents $ 20.4 ====== 7 ALLEN TELECOM INC. ----------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (Continued) 2. SPECIAL CHARGES: In the fourth quarter 2001, the Company incurred incremental pretax charges of $2,305,000, or $.05 per basic and diluted share after related income tax effect, with respect to the planned closing of the Company's U.S. base station subsystem and components manufacturing facility in Nevada and consolidation into the newly acquired Bartley manufacturing facility in Massachusetts. These costs included termination costs of substantially all employees at the Nevada manufacturing facility of $570,000, closedown costs of the manufacturing facility of $744,000, a loss on assets, principally relating to disposal of equipment, of $591,000 and inventory related charges of $400,000. The following is a summary of the status of exit costs remaining (amounts in thousands, except employee data):
SEVERANCE ----------------------- DISPOSITION NUMBER OF OF BUILDING ACCRUAL EMPLOYEES AND EQUIPMENT OTHER ------- --------- ------------- ----- Balance, December 31, 2001.................. $ 570 76 $ 601 $ 338 Charged against accrual..................... (164) (61) (101) (61) --------------------------------------------------------- Balance, March 31, 2002..................... $ 406 15 $ 500 $ 277 =======================================================
The term of severance is based on years of service or determined by contractual obligation, and is payable over a period of time. Severance will be paid out in its entirety by January 31, 2003 3. REDEEMABLE CONVERTIBLE PREFERRED STOCK On March 20, 2002, the Company issued 1,000,000 shares of Series D 7.75% Convertible Preferred Stock (liquidation preference of $50.00 per share). Dividends on the Preferred Stock may be paid in cash, common stock, or a combination thereof. Unpaid and/or undeclared dividends do not accumulate but the number of shares of common shares entitled to be received upon conversion of the Convertible Preferred Stock will automatically increase, as specified in the stock agreement. 8 ALLEN TELECOM INC. ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (Continued) 3. REDEEMABLE CONVERTIBLE PREFERRED STOCK (continued): Each share of Convertible Preferred Stock is convertible at the option of the holder at any time into shares of common stock of the Company, par value $1 per share, at an initial conversion rate of $7.70 per share (equivalent to a conversion rate of 6.4935 shares of common stock at a liquidation preference of $50.00), subject to adjustment under certain conditions (including the occurrence of certain change of control transactions). On or after February 20, 2005, the Company may, at its option, as discussed below, cause all of the outstanding shares of Convertible Preferred Stock to be automatically converted into common stock at the then prevailing conversion ratio. The Company may exercise that conversion right if, for at least 20 trading days within any consecutive 30-day trading period (including the last trading day), the closing price of its common stock equals or exceeds 125% of the then prevailing conversion price of the Convertible Preferred Stock. Subject to legal availability of funds, the shares of Convertible Preferred Stock are mandatorily redeemable by the Company for cash at their liquidation preference on or after February 15, 2014 (unless previously converted into common shares of the Company) and are not redeemable by the Company before that date. The net proceeds from the issuance of $47,488,000, after deducting the underwriters discount and issuance costs incurred to date, was used to repay a portion of the Company's outstanding indebtedness under its domestic revolving credit facility. The underwriting discount and the estimated total expenses of the offering, aggregating $3,135,000, were charged directly to retained earnings. 9 ALLEN TELECOM INC. ----------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (Continued) 4. SEGMENT DISCLOSURES: The following table shows sales to external customers, results of operations and asset positions for the Company's two operating segments (amounts in thousands):
Three Months Ended March 31, 2002 2001 ------------------- ---------------------- Sales to external customers: Wireless communications equipment: Base station subsystems and components $ 33,707 $ 59,423 Repeater and in-building coverage products 22,470 22,820 Base station and mobile antennas 16,626 20,520 Geolocation products 12,490 -- ------------------------------------------- Total wireless communications equipment 85,293 102,763 Wireless engineering and consulting services 4,576 5,780 ------------------------------------------- Total sales $ 89,869 $ 108,543 ------------------------------------------- Results of operations: Wireless communications equipment $ 3,289 $ 10,262 Wireless engineering and consulting services (17) 158 ------------------------------------------- 3,272 10,420 Goodwill amortization (Note 5) -- (1,980) General corporate expenses (1,868) (1,781) ------------------------------------------- Operating income $ 1,404 $ 6,659 ------------------------------------------- As of March 31, 2002 December 31, 2001 ------------------- ---------------------- Segment Assets: Wireless communications equipment $ 260,678 $ 272,674 Wireless engineering and consulting services 12,715 12,360 ------------------------------------------- Total segment assets 273,393 285,034 Goodwill 141,060 140,995 Deferred income taxes 42,022 42,061 Other general corporate assets 43,092 43,866 ------------------------------------------- Total assets $ 499,567 $ 511,956 -------------------------------------------
10 ALLEN TELECOM INC. ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (Continued) 5. Impact of New Accounting Pronouncements: Effective January 1, 2002, the Company implemented Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Accordingly, the Company ceased amortizing goodwill (including goodwill reported in past business combinations) in the first quarter 2002. This change improved the reported Net (Loss) Income Per Common Share by $.07 per common share (basic and diluted). The following supplemental information is presented, on a pro-forma basis, for the consolidated results of operations for the first quarter of 2001, as compared with actual first quarter 2002, adjusted to exclude amortization of goodwill in the first quarter of 2001 (amounts in thousands):
Three Months Ended March 31, ---------------------------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------------------------------------------------------------- Reported net (loss) income $ (642) $ 2,437 Add back goodwill amortization (net of related income taxes) -- 1,975 ------------------------------------------ Pro-forma net (loss) income $ (642) $ 4,412 ------------------------------------------ Reported (loss) earnings per common share (basic and diluted) $(.02) $.09 Effect of add back of goodwill amortization -- .07 ------------------------------------------ Pro-forma (loss) earnings per common share $(.02) $.16 ----------------------------------------------------------------------------------------------------
The Company has not yet completed the initial assessment of goodwill under the new fair value model for determining impairment. The fair value measurement of goodwill under the new model will reflect the estimates and expectations of the market as of January 1, 2002, the date of adoption. Impairment charges, if any, from this initial evaluation would be reported as a "Cumulative Effect of an Accounting Change" in the Company's consolidated statement of income (loss). In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and associated asset retirement costs. The new rules apply to legal obligations associated with the retirement of long-lived assets 11 ALLEN TELECOM INC. ------------------ NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) (Continued) 5. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS (continued): that result from the acquisition, construction, development and (or) normal operation of a long-lived asset. SFAS No. 143 is effective for the Company at the beginning of January 1, 2003. The Company believes the adoption of SFAS No. 143 will not, at this time, have a material impact on its consolidated financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The Company implemented SFAS No. 144 on January 1, 2002, as required, and the adoption of this statement did not have a material impact on the Company's financial position or results of operations. 6. ACQUISITION: On December 18, 2001, the Company acquired substantially all of the assets and certain liabilities of Bartley R.F. Systems, Inc. ("Bartley"). The results of Bartley's operations are included in the consolidated financial statements for the three-month period ended March 31, 2002. The Company is in process of obtaining third-party valuations of acquired intangible assets; thus, the allocation of the purchase price and the amount of goodwill currently recorded (in the amount of $20,168,000) are subject to refinement. 7. RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform to the current year presentation. 12 ALLEN TELECOM INC. ------------------ ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- OVERVIEW We design, manufacture, and market wireless communications infrastructure equipment and provide wireless engineering and consulting services for the global wireless communications markets. Our products and services improve the capacity, coverage and performance of wireless networks, including emerging 3G networks. As part of our commitment to our customers' evolving needs, we have also developed new products for E 911 geolocation and other emerging wireless equipment markets such as next generation power amplifiers. Our products and services serve all major wireless standards and frequencies. RESULTS OF OPERATIONS SUMMARY: We reported a net loss of $0.6 million ($.02 per common share, basic and diluted) for the first quarter 2002, as compared with net income of $2.4 million ($.09 per common share, basic and diluted) for the first quarter 2001. Total sales decreased 17% from $108.5 million in the first quarter 2001 to $89.9 million in the first quarter 2002. The weighted average common shares outstanding for the Basic Earnings Per Common Share computation increased for the first quarter of 2002, as compared with the comparable 2001 period, due primarily to shares issued in connection with our fourth quarter 2001 acquisition of Bartley R.F. Systems Inc. In the future, when computing Basic Earnings Per Common Share, net income will be reduced by dividends, to the extent declared, on the Redeemable Convertible Preferred Stock issued in the first quarter of 2002. Such dividends, as and if declared, would amount to $3,875,000 annually. For purposes of computing Diluted Earnings Per Common Share, and only if such calculation results in dilution, Preferred Stock dividends will not reduce earnings; however, the weighted average shares outstanding will increase by 6,493,500 common shares representing the amount of common shares into which the Preferred Stock is currently convertible. The strong U.S. dollar relative to the Euro negatively impacted reported sales of European operations in the first quarter of 2002 as compared to the first quarter of 2001. As a result of exchange differences, reported sales in the three months ended March 31, 2002 were $1.7 million lower, as compared with the corresponding prior year period, assuming the exchange rates stayed the same. 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (Continued) WIRELESS COMMUNICATIONS EQUIPMENT: Wireless communications equipment sales were down 17% from $102.8 million in first quarter 2001 to $85.3 million in the first quarter 2002. Sales for the geolocation product line were $12.5 million in first quarter 2002 compared with no sales in first quarter 2001. Sales for the repeaters and in-building coverage product line were essentially flat at $22.5 million in first quarter 2002 compared with $22.8 million in first quarter 2001. Sales decreased for the base station subsystems and components and base station and mobile antenna product lines from $59.4 million to $33.7 million, or 43%, and from $20.5 million to $16.6 million, or 19%, respectively. These sales declines are due to reduced spending by wireless communications carriers and OEM's in most world markets. Geographically, sales were down in all parts of the world with the exception of the United States, where sales increased 20% due to the Bartley acquisition, which improved sales of our base station subsystems and components product line, and strong sales of geolocation products. The following table sets forth our wireless communications equipment segment sales by product line:
------------------------------------------------------------------------------------------- SALES BY PRODUCT LINE ------------------------------------------------------------------------------------------- ($ MILLIONS) 1Q 2002 1Q 2001 -------------------------------- Base Station Subsystems and Components $ 33.7 $ 59.4 Repeater and In-Building Coverage Products 22.5 22.8 Base Station and Mobile Antennas 16.6 20.6 Geolocation Products 12.5 -- ------------------------------------------------------------------------------------------- Total Wireless Communications Equipment $85.3 $ 102.8 --------------------------------
Backlog for this segment decreased 23% from $122.6 million at December 31, 2001 to $94.8 million at March 31, 2002. The decrease was due primarily to reduced orders, capital spending and the lack of future market visibility from our domestic and European OEM customers, as well as a decrease in Geolocation backlog. Gross profit margins were 23.7% in the first quarter 2002, as compared with 27.4% in the first quarter 2001. The lower gross profit margins in 2002 were due to lower sales volumes and increased price discounting, particularly in the base station subsystems and components product lines. These lower gross profit margins were partially offset by higher margins from our geolocation product line. Selling, general and administrative expenses were $10.3 million, or 12.1% of sales, and $11.0 million, or 10.7% of sales, for the first quarters of 2002 and 2001, respectively. Spending is lower due primarily to lower volume related sales commissions. Spending as a percentage of sales is higher due to the spreading of fixed costs on lower sales. 14 ALLEN TELECOM INC. ------------------ ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (Continued) WIRELESS ENGINEERING AND CONSULTING SERVICES: Wireless engineering and consulting services sales were down $1.2 million or 21% from $5.8 million in first quarter 2001 to $4.6 million in first quarter 2002. Sales decreased due to the low level of software sales and a decline in engineering consulting services in the Company's markets. Gross profit margins for this segment were 20.6% in the first quarter 2002, as compared with 30.6% in the first quarter 2001. This decrease in margins is primarily attributable to lower software sales, which contribute higher margins than other products and services, as well as less than full deployment of engineers. Selling, general and administrative expenses decreased to 21.0% of sales for the first quarter of 2002 compared to 27.8% for the first quarter of 2001. This lower ratio was primarily due to lower bad debt expense and lower personnel expenses. RESEARCH AND DEVELOPMENT: Research and development and product engineering costs were 7.4% and 6.4% of sales in the first quarter of 2002 and 2001, respectively. The increased rate of spending as a percentage of sales is attributable to the decrease in sales. We believe that product development costs will remain fairly consistent in dollars throughout the year. INTEREST AND FINANCING EXPENSES: Net interest expense decreased $.2 million, or 8.8%, to $2.4 million in the first quarter 2002 from $2.6 million in the first quarter 2001. The decrease in net interest expense is primarily due to lower interest rates offset in part, by increased average quarterly debt levels and lower interest income. On March 20, 2002, we issued $50.0 million of Preferred Stock that generated cash proceeds, net of fees and expenses, of $47.5 million. After payment of all fees and expenses, we expect net proceeds from the offering to approximate $46.9 million. The $47.5 million of net proceeds, to date, was used to pay down domestic bank borrowings. We estimate interest savings as a result of this debt reduction would approximate $2.4 million on an annual basis based on our current average interest rate of approximately 5.0%. 15 ALLEN TELECOM INC. ------------------ ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (Continued) PROVISION FOR INCOME TAXES: Our effective income tax rate was 35.0% and 39.0% for the quarters ended March 31, 2002 and 2001, respectively. The principal reason for the decrease is due to the change in accounting for goodwill amortization that was almost entirely non-deductible for income taxes purposes in 2001. The 2002 tax rate is in line with our current expectation for the full year. Through March 31, 2002, we have recorded a net U.S. deferred tax asset pertaining to recognition of net operating loss carryforwards, net deductible temporary differences and tax credits in the amount of approximately $41.8 million. The U.S. deferred tax asset has remained unchanged from December 31, 2001. We have not provided a valuation allowance relating to this asset, as we believe it is more likely than not that we will realize the value of this asset. This determination is primarily based upon our expectation that future U.S. operations will be sufficiently profitable to utilize the operating loss carryforwards, as well as various tax, business and other planning strategies available to us. We cannot provide assurance that we will be able to realize this asset or that future valuation allowances will not be required. The failure to utilize this asset would adversely effect our results of operations and financial position. NEW ACCOUNTING STANDARDS: Effective January 1, 2002, we implemented Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets". Accordingly, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this statement. Earnings per common share for the period ending March 31, 2001 would have increased by $.07 per share, excluding the amortization of goodwill, which was eliminated in 2002 when this new Standard went into effect. We have not yet completed the initial assessment of goodwill under the new fair value model for determining impairment. The fair value measurement of goodwill under the new model will reflect the estimates and expectations of the market as of January 1, 2002, the date of adoption. Impairment charges, if any, from this initial evaluation would be reported as a "Cumulative Effect of an Accounting Change" in the Company's consolidated statement of income (loss). See Note 5 of the Notes to Condensed Consolidated Financial Statements for additional information. 16 ALLEN TELECOM INC. ------------------ ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (Continued) ----------- LIQUIDITY AND CAPITAL RESOURCES: As set forth in the Condensed Consolidated Statements of Cash Flows, $.6 million of cash was generated by operations for the three months ended March 31, 2002 as compared to $10.1 million of cash used in the comparable 2001 period. This improvement of cash generation is due primarily to a reduction of inventory, partially offset by lower trade payables and income tax payments. From March 31, 2001 to March 31, 2002, our consolidated inventory decreased $29.4 million to $113.3 million. We used $1.8 million of cash in investing activities in the first quarter 2002, due principally to $1.5 million for capital expenditures. For the first quarter 2001, $1.1 million was generated from investing activities that included proceeds from the sale of an unused facility. Cash used by financing activities for the three months ended March 31, 2002 and March 31, 2001 was $.9 million and $5.0 million, respectively. On March 20, 2002, we issued $50.0 million of Redeemable Convertible Preferred Stock, which netted, to date, $47.5 million of cash after deduction of certain fees and expenses (see Note 3 of the Condensed Consolidated Financial Statements for additional information). Cash proceeds from this offering, as well as cash generated by other activities, were used to repay borrowings of $49.5 million in the first quarter 2002. The $5.0 million cash usage from financing activities in the first quarter of 2001 was principally the result of repayment of borrowings. As a result of our preferred stock offering, and the resulting pay-down of domestic revolving debt, we permanently reduced our domestic revolving credit agreement commitment from $105.0 million to $76.9 million. On a worldwide basis, at March 31, 2002, we had $123.9 million of lines of credit of which $92.3 million were unused and available, as compared with $71.4 million of available unused credit lines at December 31, 2001. 17 ALLEN TELECOM INC. ------------------ ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- (Continued) LEGAL DISCLAIMER: Statements included in this Form 10-Q, which are not historical in nature, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding the Company's future performance and financial results are subject to a number of risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Factors that could cause the Company's actual results to materially differ from forward-looking statements made by the Company, include, among others, the cost incurred, savings realized and timing of the integration of acquisitions, such as the integration of Bartley R.F. Systems and the consolidation of the Company's Nevada facility into Bartley's Amesbury, MA facility; the cost, success and timetable for new product development including, for example, products for 3G, E 911 and power amplification; the health, economic stability and relative currency valuations in world and national markets; the cost and outcome of litigation, including, for example, a lawsuit filed by a competitor in the E 911 geolocation business claiming infringement by the Company of intellectual property rights; the cost and availability of capital and financing to the Company and its customers; the uncertain timing and level of purchases by the limited number of the Company's customers of both current products and services, and those under development; the effective realization of inventory, receivables and other working capital assets to cash; the impact of competitive products and pricing in the Company's markets; the ability of the company to generate future U.S. profits or to implement other tax planning strategies needed to utilize the Company's tax loss carry forwards; the impact of U.S. and foreign government legislative/regulatory actions, including, for example, the scope and timing of E 911 geolocation requirements in the U.S. markets and spectrum availability and licensing for new wireless applications; the impact of future business conditions on the Company's ability to meet terms and conditions of the Company's borrowing agreements; the cost, timing and availability of personnel, facilities, materials and vendors required for the Company's current and future products; and whether and when backlog will be converted to customer sales. Allen Telecom Inc.'s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q may contain additional factors. 18 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. --------------------------------------------------------------------- See "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2001. There has been no material change from the end of the previous fiscal year to March 31, 2002. PART II - OTHER INFORMATION --------------------------- ITEM 2 - CHANGE IN SECURITIES AND USE OF PROCEEDS. On March 20, 2002, the Company issued 1,000,000 shares of its Series D 7.75% Convertible Preferred Stock in a public offering for consideration of $50,000,000, before underwriter's discount and issuance costs. The Series D Convertible Preferred Stock has a liquidation preference of $50.00 per share and will initially be convertible into common stock at the rate of approximately 6.4935 shares of common stock per share of Series D Convertible Preferred Stock, for a per share conversion price of $7.70 per share of common stock. Additional information on the Series D Convertible Preferred Stock transaction is contained in this Form 10-Q for the quarterly period ended March 31, 2002 in "Part I Financial Information" under the caption "Notes to Condensed Consolidated Financial Statements" under "Note 3: Redeemable Convertible Preferred Stock" and is incorporated herein by reference. The effective date of the registration statement under which the Series D 7.75% Convertible Preferred Stock was registered was March 14, 2002. The Commission File number assigned to the registration statement is 333-82696. The managing underwriter of the offering was Bear Stearns & Co. Inc. Underwriting discounts were $2,500,000 and other fees are estimated to be approximately $635,000, for a total of $3,135,000 in fees. Net proceeds of the offering are anticipated to aggregate approximately $46,865,000. The net proceeds of the offering to date were used to repay a portion of the outstanding indebtedness under the Company's domestic revolving credit facility. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- (3) Articles of Incorporation (b) Reports on Form 8-K -------------------- On February 14, 2002, the Company filed a Current Report on Form 8-K, under Item 5 "Other Events", whereby it filed a press release dated February 13, 2002, reporting Allen Telecom's fourth quarter and full year 2001 sales and earnings results. 19 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Allen Telecom Inc. ------------------ (Registrant) Date: May 10, 2002 By: /s/ Robert A. Youdelman ------------ ------------------------------------- Robert A. Youdelman Executive Vice President (Chief Financial Officer) Date: May 10, 2002 By: /s/ James L. LePorte, III ------------ ------------------------------------- James L. LePorte, III Vice President Finance (Principal Accounting Officer) 20 EXHIBIT INDEX ------------- ALLEN TELECOM INC. ------------------ Exhibit Number (3.1) Certificate of Designations of Series D 7.75% Convertible Preferred Stock of Allen Telecom Inc. 21