<PAGE> 1
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 September 30, 1998
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
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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) 765-5818
---------------
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 October 31, 1998
--------------------- ----------------
Par value $1.00 per share 27,435,363
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<PAGE> 2
ALLEN TELECOM INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
-------------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
CONSOLIDATED CONDENSED BALANCE SHEETS -
September 30, 1998 and December 31, 1997 3
CONSOLIDATED STATEMENTS OF INCOME -
Three and Nine Months Ended
September 30, 1998 and 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine Months Ended
September 30, 1998 and 1997 5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY - Nine Months Ended
September 30, 1998 and 1997 6
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS 7 - 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11 - 16
ITEM 3 - QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK 17
PART II. OTHER INFORMATION:
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - FINANCIAL STATEMENTS
-----------------------------
ALLEN TELECOM INC.
------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(Amounts in Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 12,395 $ 30,775
Accounts receivable (less allowance for doubtful
accounts of $2,289 and $1,934, respectively) 87,073 105,714
Inventories: Raw materials 47,742 49,583
Work in process 19,749 24,505
Finished goods 23,286 19,680
--------- ---------
Total inventories (net of reserves) 90,777 93,768
--------- ---------
Assets of discontinued emissions testing business 885 1,034
Other current assets (Note 2) 10,024 10,745
--------- ---------
Total current assets 201,154 242,036
Property, plant and equipment, net 59,799 60,543
Excess of cost over net assets of businesses acquired 124,668 126,923
Assets of discontinued emissions testing business (Note 6) 25,779 32,329
Other assets (Note 2) 39,987 52,602
--------- ---------
TOTAL ASSETS $ 451,387 $ 514,433
========= =========
LIABILITIES
Current Liabilities:
Notes payable and current maturities of long-term
obligations $ 2,961 $ 6,119
Accounts payable 32,208 75,195
Accrued expenses 36,969 35,261
Income taxes payable 2,772 13,197
Deferred income taxes 1,188 1,249
--------- ---------
Total current liabilities 76,098 131,021
Long-term debt 108,749 97,915
Deferred income taxes 1,288 6,818
Other liabilities 18,818 17,857
--------- ---------
TOTAL LIABILITIES 204,953 253,611
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 29,754 29,746
Paid-in capital 180,562 180,538
Retained earnings 63,183 70,091
Accumulated other comprehensive income (loss) (8,638) 207
Less: Treasury stock (at cost) (16,404) (16,992)
Unearned compensation (2,023) (2,768)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 246,434 260,822
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 451,387 $ 514,433
========= =========
</TABLE>
See accompanying notes to the Consolidated Condensed Financial Statements.
3
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ALLEN TELECOM INC.
------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $ 90,955 $ 111,389 $ 302,337 $ 322,751
--------- --------- --------- ---------
Costs and expenses:
Cost of sales (Note 4) (69,027) (70,856) (226,999) (207,495)
Selling, general and
administrative expenses (Note 4) (17,993) (16,995) (54,901) (50,014)
Research and development and
product engineering costs (7,398) (7,985) (23,244) (22,282)
Other income (loss), net (Note 2) 7,797 (150) 5,456 2,075
Interest expense (2,342) (1,138) (5,993) (2,870)
Interest income 356 231 1,020 694
--------- --------- --------- ---------
Income (loss) before taxes and
minority interests 2,348 14,496 (2,324) 42,859
Benefit (provision) for income taxes 818 (5,450) 1,976 (16,750)
--------- --------- --------- ---------
Income (loss) before minority
interests 3,166 9,046 (348) 26,109
Minority interests (568) (1,116) (1,850) (4,419)
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
2,598 7,930 (2,198) 21,690
Discontinued emissions testing operation:
Loss for disposal (net of income taxes)
(Note 6) (4,710) - (4,710) -
--------- --------- --------- ---------
NET INCOME (LOSS) $ (2,112) $ 7,930 $ (6,908) $ 21,690
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE, BASIC AND
DILUTED:
Continuing operations $ .10 $ .29 $ (.08) $ .80
Discontinued operations (.17) - (.17) -
--------- --------- --------- ---------
Net income (loss) $ (.07) $ .29 $ (.25) $ .80
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 27,240 27,070 27,190 26,850
Assumed exercise of stock options 100 510 180 430
--------- --------- --------- ---------
Diluted 27,340 27,580 27,370 27,280
========= ========= ========= =========
</TABLE>
See accompanying notes to the Consolidated Condensed Financial Statements.
4
<PAGE> 5
ALLEN TELECOM INC.
------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (2,198) $ 21,690
Adjustments to reconcile income to net cash flow:
Depreciation 11,610 10,094
Amortization of goodwill 4,687 2,393
Amortization of capitalized software 1,494 2,190
Other amortization 493 1,169
Non-cash loss on write-down of assets 17,010 -
Gain on investments (15,877) (2,181)
Changes in operating assets and liabilities:
Receivables 16,597 (18,609)
Inventories 1,500 (17,953)
Accounts payable and accrued expenses (12,463) 14,611
Income tax payable (19,896) (5,201)
Other, net (2,209) 965
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 748 9,168
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in telecommunications companies (29,710) (43,805)
Capital expenditures (12,662) (17,482)
Sales and retirements of fixed assets 18 919
Capitalized software product costs (2,926) (3,230)
Sale of investments 17,744 1,580
-------- --------
CASH USED BY INVESTING ACTIVITIES (27,536) (62,018)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 8,905 35,836
Treasury stock sold to employee benefit plan 1,228 1,273
Exercise of stock options 313 1,894
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 10,446 39,003
-------- --------
Net Cash (Used) Provided By Discontinued
Centralized Emissions Testing Business (1,659) 7,989
-------- --------
NET CASH USED (18,001) (5,858)
Effect of exchange rate changes on cash
(379) (1,940)
Cash and equivalents at beginning of year 30,775 23,879
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 12,395 $ 16,081
======== ========
Supplemental cash flow data:
Interest capitalized $ 286 $ 210
Cash paid during the period for:
Interest 5,462 3,150
Income taxes 16,564 21,730
</TABLE>
See accompanying notes to the Consolidated Condensed Financial Statements.
5
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ALLEN TELECOM INC.
------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(Amounts in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Paid-In
Total Income (Loss) Earnings Income (Loss) Stock Capital
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Beginning Balance, January 1, 1998 $260,822 $70,091 $207 $29,746 $180,538
Comprehensive Income (loss):
Net loss (6,908) $( 6,908) (6,908)
---------
Other comprehensive loss:
Unrealized gain on securities recorded to income (9,588) (9,588)
Less: Tax on unrealized gain recorded to income 4,027 4,027
-------- ---------
Net: Unrealized gain on securities
recorded to income (5,561) (5,561)
Foreign currency translation adjustments (3,284) (3,284)
----------
Other comprehensive loss (8,845) (8,845)
----------
Comprehensive loss $(15,753)
==========
Exercise of stock options 313 51 262
Treasury stock reissued 1,226 402
Restricted stock, net (557) (43) (640)
Amortization of unearned compensation 383 - - - -
---------- ------- ------- ------- --------
Ending Balance, September 30, 1998 $246,434 $63,183 $(8,638) $29,754 $180,562
========== ======= ======== ======= ========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
Beginning Balance, January 1, 1997 $225,951 $46,742 $ (510) $29,614 $170,945
Comprehensive Income:
Net income 21,690 $21,690 21,690
-------
Other comprehensive income:
Unrealized gain on securities arising
during period 15,531 15,531
Less: Tax on unrealized gain on securities (6,522) (6,522)
-------- -------
Net: Unrealized gain on securities 9,009 9,009
Foreign currency translation adjustments (6,245) (6,245)
-------
Other Comprehensive income 2,764 2,764
-------
Comprehensive Income $24,454
=======
Exercise of stock options 1,897 103 2,039
Treasury stock reissued 1,273 741
Restricted stock, net (109) (16) (303)
Amortization of unearned compensation 849
Common stock issued in acquisitions 6,515 - - - 5,717
-------- ------- ------- ------- --------
Ending Balance, September 30, 1997 $260,830 $68,432 $ 2,254 $29,701 $179,139
======== ======= ======= ======= ========
<CAPTION>
Unearned Treasury
Compensation Stock
-----------------------------
<S> <C> <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998:
Beginning Balance, January 1, 1998 $(2,768) $(16,992)
Comprehensive Income (loss):
Net loss
Other comprehensive loss:
Unrealized gain on securities recorded to income
Less: Tax on unrealized gain recorded to income
Net: Unrealized gain on securities
recorded to income
Foreign currency translation adjustments
Other comprehensive loss
Comprehensive loss
Exercise of stock options
Treasury stock reissued 824
Restricted stock, net 362 (236)
Amortization of unearned compensation 383 -
------- ---------
Ending Balance, September 30, 1998 $(2,023) $(16,404)
======== =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997:
Beginning Balance, January 1, 1997 $(2,908) $(17,932)
Comprehensive Income:
Net income
Other comprehensive income:
Unrealized gain on securities arising
during period
Less: Tax on unrealized gain on securities
Net: Unrealized gain on securities
Foreign currency translation adjustments
Other Comprehensive income
Comprehensive Income
Exercise of stock options (245)
Treasury stock reissued 532
Restricted stock, net 210
Amortization of unearned compensation 849
Common stock issued in acquisitions - 798
------- --------
Ending Balance, September 30, 1997 $(1,849) $(16,847)
======= ========
</TABLE>
See accompanying notes to the Consolidated Condensed Financial
Statements.
6
<PAGE> 7
ALLEN TELECOM INC.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. General:
--------
In the opinion of the management of Allen Telecom Inc. (the "Company"),
the accompanying unaudited consolidated condensed interim financial
statements reflect all adjustments necessary to present fairly the
financial position of the Company as of September 30, 1998 and the
consolidated results of its operations, cash flows and changes in
stockholders' equity for the periods ended September 30, 1998 and 1997.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year. The year-end 1997
consolidated condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. 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,
1997. Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 method of presentation.
2. Other Income (loss):
--------------------
The components of "Other Income (loss), net" pertain to gains and
losses from various telecommunication investments and are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
RF Micro Devices, Inc. $5,758 $ (10) $ 13,791 $ 490
NextWave Telecom Inc. - - (6,638) -
Other 2,039 (140) (1,697) 1,585
----- ----- ------- -----
$7,797 $(150) $ 5,456 $2,075
===== ===== ===== =====
</TABLE>
The Company owns stock of RF Micro Devices, Inc. ("RFMD"), which
completed an initial public offering of its common stock on June 3,
1997. The composition of the Company's holdings at December 31, 1997
(included in "Other assets") and the remaining unsold shares at
September 30, 1998 (included in "Other current assets") are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Unrealized Market
Shares Cost Gains Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997 1,021 $2,778 $9,890 $12,668
September 30, 1998 67 225 988 $ 1,213
----------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
ALLEN TELECOM INC.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
The Company's investment in RFMD was subject to certain trading
restrictions, which were substantially eliminated in the first quarter
of 1998, at which time the Company decided to sell its holdings. As a
result, the Company transferred unrealized appreciation, previously
recorded in stockholders' equity, in the pretax amount of $11,590,000
to "Other income (loss), net" in the first quarter. During the third
quarter of 1998, the Company realized a before-tax gain of $5,273,000
from selling 898,000 shares (based on the difference between selling
price and the recorded market value at June 30, 1998), using specific
identification to allocate the cost basis. Through the third quarter of
1998, the Company has recognized year-to-date before-tax gains of
$13,791,000 million, of which $1,213,000 remains unrealized at
September 30, 1998. "Other income (loss), net" for the third quarter of
1998 includes before-tax unrealized gains of $485,000 related to
adjusting the remaining unsold 67,000 shares to market value ($18.125
per share) at September 30, 1998. Future changes in unrealized holding
gains or losses related to the remaining 67,000 shares will be
reflected in current earnings until the date of sale. At October 31,
1998, RFMD stock closed at $23.75.
Additionally, in the third quarter of 1998, the Company sold its common
stock investment in Telecom Wireless Solutions, Inc. which is included
in "Other income (loss), net".
The Company has an investment in and a receivable from NextWave Telecom
Inc. ("NextWave"), which was previously awarded telecommunications
licenses under a competitive auction bid process. In 1998, the Federal
Communication Commission issued guidelines with respect to alternatives
for certain C Block licensees in regard to the payment or return of
licenses previously awarded. These guidelines were less favorable than
had been requested by certain licensees. In the first quarter of 1998,
the Company recognized impairment in the entire value of its investment
in and receivable from NextWave as a result of that action. On June 8,
1998, certain subsidiaries of NextWave filed for relief under Chapter
11 of the United States bankruptcy code.
The net impact on earnings per share for such Other Income (loss) for
the three and nine months ended September 30, 1998 was $.17 and $.12
per basic and diluted share, respectively, after related tax effects.
8
<PAGE> 9
ALLEN TELECOM INC.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
3. Impact of New Accounting Pronouncements:
----------------------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998. This statement is effective for
financial statements issued for all fiscal quarters of fiscal years
beginning after June 15, 1999. Accordingly, the Company will adopt the
provisions of the standard on January 1, 2000. The Company utilizes
hedging activities primarily in its foreign subsidiaries to limit
exchange rate risk. The Company has not yet determined the effect, if
any, of the adoption of this Statement on results of operations and
financial position.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". This statement provides guidance on the
accounting treatment for certain costs incurred in developing or
purchasing software for the internal use of the Company. The Company
will adopt the standard on January 1, 1999, requiring the Company to
expense certain costs and capitalize others incurred on a prospective
basis. The Company has determined that once adopted, the statement will
not have a material impact on results of operations.
4. Operations:
-----------
In the second quarter of 1998, the Company announced the consolidation
and rationalization of certain product lines. In this connection, the
Company has recorded a $15,800,000 before-tax special charge to
earnings (or $.38 per basic and diluted share after related income
taxes) related to inventory, other asset write-offs and employee
terminations. Of this amount, $12,200,000 is recorded in cost of sales,
and $3,600,000 in selling, general and administrative expenses for the
nine months ended September 30, 1998.
5. Provision for Income Taxes:
---------------------------
The Benefit (provision) for income taxes for the three and nine months
ended September 30, 1998, includes a $3,700,000 deferred tax benefit,
or $.13 per basic and diluted share, with respect to a change in the
applicable income tax rate on the undistributed earnings (prior to
1998) of a foreign subsidiary as a result of the Company's acquisition
of an additional interest in such subsidiary. The acquisition allows
for the Company's pro rata share of earnings (when distributed) to be
taxed at a lower rate.
9
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ALLEN TELECOM INC.
------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
(Continued)
6. Discontinued Operations:
------------------------
In the third quarter of 1998, the Company recognized an additional loss
for its discontinued centralized vehicle emissions testing business
operated by its Marta Technologies Inc. ("Marta") subsidiary in the
pretax amount of $7,350,000, $4,710,000 after related income tax
benefit of $2,640,000 ($.17 per basic and diluted common share)
relating principally to the diminution in the estimated value of its
Cincinnati, Ohio emissions testing program resulting from reduced
revenues, anticipated losses and legal fees.
In early 1998, Marta reopened the Cincinnati, Ohio program for testing.
In connection with the 1996 suspension of that contract by the Ohio
Environmental Protection Agency ("Ohio EPA"), Marta was granted a
preliminary injunction on September 23, 1996 and a permanent injunction
on November 19, 1997 against Ohio EPA and its Director, enjoining them
from (i) conducting a hearing regarding termination of the contract,
(ii) terminating the Ohio contract, or (iii) prohibiting Marta from
performing its obligations under the Ohio contract. On December 31,
1997, Marta filed a lawsuit against Ohio EPA and its Director in an
amount not less than $40 million claiming damages for Ohio EPA's
unilateral and illegal suspension of the program and numerous other
actions which will, in the future, increase costs to operate the
program and/or reduce the amount of revenues the State was
contractually obligated to provide. Subsequent thereto, the State
counterclaimed, denied Marta's allegations and demanded $10 million in
liquidated damages, contract damages and/or civil penalties as a result
of Marta's alleged failure to meet the terms of the contract. In the
opinion of management, based on the advice of counsel, it cannot
predict the outcome of these lawsuits, and the Company has not recorded
any asset or liability with respect thereto.
10
<PAGE> 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
RESULTS OF OPERATIONS
- ---------------------
Summary:
- --------
Allen Telecom Inc. (the "Company") reported income from continuing operations of
$2.6 million ($.10 per common share) for the three months ended September 30,
1998, as compared with $7.9 million ($.29 per common share) for the three months
ended September 30, 1997. For the nine months ended September 30, 1998, the
Company reported a loss from continuing operations of $2.2 million ($.08 per
common share), compared to income of $21.7 million ($.80 per common share) in
1997. All per share amounts refer to both basic and diluted earnings per common
share.
Included in results of operations for the nine months ended September 31, 1998
are special charges related to the consolidation and rationalization of certain
product lines. These actions include, among others, the discontinuance of
product development and marketing efforts on the SmartCell wireless local loop
product, which did not achieve adequate market acceptance, the consolidation of
two manufacturing operations of the Systems product line, the formation of a
worldwide Systems business, and the reorganization of the Company's North
American-based sales force. As a result of asset write-offs, severance and other
costs associated with such actions, the Company incurred a charge in the second
quarter of 1998 in the amount of $15.8 million before-tax, or $.38 per share
after related income taxes. (See also Note 4 of Notes To Consolidated Condensed
Financial Statements.)
In addition, the Company recognized before-tax net gains in the amount of $7.8
million ($.17 per common share) and $5.5 million ($.12 per common share) for the
three and nine-month periods ended September 30, 1998 with respect to
transactions regarding certain telecommunication investments. See Note 2 of
Notes to Consolidated Condensed Financial Statements for information concerning
such items.
Sales:
- ------
Sales for the third quarter 1998 of $91.0 million decreased approximately 18.3%
(or $20.4 million) from the comparable three-month 1997 period and, at $302.3
million for the nine months ended September 30, 1998, decreased approximately
6.3% (or $20.4 million) from the comparable 1997 period. The decrease in sales
in the third quarter of 1998 is due principally to lower sales of the Company's
Systems products, which include repeaters and amplifiers, and to a lesser
extent, its Site Management products, which include filters, combiners and
duplexers. Sales of foreign operations were negatively impacted by the strong
U.S. dollar relative to certain European currencies in fiscal 1998 as compared
to fiscal 1997. As a result of exchange differences, reported sales in the nine
months ended September 30, 1998 were $6 million lower as compared with the
corresponding prior year period, assuming the exchange rates stayed the same.
11
<PAGE> 12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
(Continued)
The Company currently sees no significant change in its markets, which includes
the weakness in certain Asian economies that have been and are expected to be
important markets for wireless equipment products. The U.S. wireless
telecommunications market also continues to be soft. As previously indicated,
the Company has been advised by certain European original equipment
manufacturers ("OEMs") that their large inventory buildup will continue to
negatively impact near term orders.
Operations:
- -----------
Gross profit margins were 24.1% in the third quarter of 1998, as compared with
36.4% in the third quarter of 1997. For the nine-month periods ended September
30, 1998 and 1997, gross profit margins were 28.9% prior to the aforementioned
special charges, and 35.7%, respectively. The significantly lower gross profit
margins in 1998 were due to lower sales, increased pricing pressure and a
greater sales mix of lower margin products.
Selling, general and administrative expenses were 19.8% and 15.3% of sales for
the third quarters of 1998 and 1997, and 16.9% (before special charges) and
15.5% for the nine-month periods ended September 30, 1998 and 1997,
respectively. The increase in this ratio for 1998 reflects the impact of fixed
costs on lower sales as compared to 1997. Selling, general and administrative
expenses for the 1998 third quarter and year-to-date period were also impacted
by lower staffing and operating expenses as a result of actions instituted in
late 1997 to lower costs. Savings related to additional cost saving actions
taken late in the second quarter of 1998 are expected to more fully benefit the
fourth quarter of 1998. Further impacting these ratios is higher amortization of
goodwill ($4.7 million compared with $2.4 million in the respective 1998 and
1997 nine-month periods, respectively) due primarily to the acquisition of the
remaining 20% minority ownership interest in the Company's FOREM S.r.l
subsidiary ("Forem") in 1997. Also included in the third quarter of 1998 are $.9
million in costs which were associated with the proposed sale of the Company's
Comsearch division which was terminated in October 1998.
Research and development and product engineering costs were 8.1% and 7.2% of
sales in the third quarter of 1998 and 1997, and 7.7% and 6.9% for the
nine-month periods ended September 30, 1998 and 1997, respectively. The increase
in this ratio for the third quarter reflects the spreading of slightly lower
costs on lower sales. The slight increase in costs for the 1998 nine-month
period over the comparable 1997 period is due to increased spending for the
development of the Company's geolocation product (which is designed to locate
subscribers who dial 911 from a wireless telephone) and other research and
development projects.
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
(Continued)
Interest and Financing Expenses:
- --------------------------------
Net interest and financing costs increased to $2.0 million and $5.0 million from
$.9 million and $2.2 million in the three and nine months ended September 30,
1998 and 1997, respectively. The principal reason for the increase is higher
outstanding borrowings incurred for the purchase of the 20% minority interest in
Forem in late 1997 and lower cash flow from operations.
Provision for Income Taxes:
- ---------------------------
In the third quarter of 1998, the Company recorded an income tax benefit despite
reporting income before taxes, which would otherwise have resulted in an
expected income tax provision. The third quarter of 1998 included a $3.7 million
deferred tax benefit with respect to a change in the applicable income tax rate
on the undistributed earnings (prior to 1998) of a foreign subsidiary as a
result of the Company's acquisition of an additional interest in such
subsidiary. The acquisition allows for the Company's pro rata portion of
earnings (when distributed) to be taxed at a lower income tax rate. This benefit
was offset, in part, by certain additional tax provisions. The aforementioned
was also the reason for the high level of income tax benefit, relative to the
loss before taxes, for the nine months ended September 30, 1998.
Minority Interests:
- -------------------
Minority interest expense decreased from $1.1 million and $4.4 million in the
third quarter and nine months ended September 30, 1997, respectively, to $.6
million and $1.9 million for the comparable 1998 periods. This decrease is
primarily due to the acquisition in late 1997 of the 20% minority interest in
Forem.
Discontinued Operations:
- ------------------------
The Company is continuing its attempt to sell its centralized automotive
emissions testing business. In early 1998, Marta Technologies, Inc. ("Marta"),
the subsidiary which operates this business, re-started the Cincinnati, Ohio
program which had been shut down since August 1996. Based on the programs'
operations to date, as well as the Company's inability to resolve operational
and legal issues with the State of Ohio, the Company has re-evaluated the
carrying value of its investment in this program. As described in Note 6 of the
Notes To Consolidated Condensed Financial Statements, Marta previously
instituted litigation against the State of Ohio for damages with respect to both
the shut-down of the program and other actions which increased costs or reduced
revenues of the Ohio program.
13
<PAGE> 14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
(Continued)
In the third quarter of 1998, the Company recognized an additional loss for the
disposal of the Marta business in the pretax amount of $7.3 million ($4.7
million after related income tax benefit of $2.6 million), or $.17 per basic and
diluted common share. This loss provision is principally related to the
estimated diminution in value of the Cincinnati, Ohio program resulting from
reduced revenues, anticipated losses, and legal fees. It is possible that the
continued inability to resolve operational and legal issues with respect to this
program could further negatively impact the carrying value and ultimate recovery
value of this program upon sale or other disposition.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
As set forth in the Consolidated Condensed Statement of Cash Flows, the Company
generated $.7 million in operations for the nine months ended September 30, 1998
as compared with $9.2 million for the comparable 1997 period. The decline in
cash flow from operations is principally due to lower net income in 1998 offset,
in part, by a lower investment in working capital. Further, the Company expended
$29.7 million for investments in telecommunications companies, relating
primarily to the final purchase price for the outstanding minority interest in
Forem. This payment to acquire Forem is the principal reason for the decline in
Accounts payable and increase in long-term debt in the Consolidated Condensed
Balance Sheet at September 30, 1998. The Company also generated $17.7 million in
cash from the sale of investments. At September 30, 1998, the Company had
available unused worldwide lines of credit in the amount of $92 million.
On October 7, 1998, the Company entered into an agreement to purchase 12% of the
outstanding 38% minority interest in its Mikom GmbH subsidiary, bringing the
Company's total interest in Mikom to 74%. The purchase price was $9.0 million in
cash. The transaction will be reflected in the Company's fourth quarter results,
at which time goodwill will increase.
YEAR 2000:
- ----------
Many computer systems and other equipment with embedded chips or processors use
only two digits to represent the year, and may be unable to accurately process
certain data before, during or after the year 2000. If not corrected, these
systems could cause date-related transaction failures. This is commonly known as
the Year 2000 ("Y2K") issue. This Y2K issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company and each of its operating businesses are in the process of
implementing a Y2K readiness program with the objective of having all of their
business systems, including those that effect the Company's facilities and
manufacturing operations, functioning properly with respect to Y2K issues before
June 30, 1999. Each operating
14
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
(Continued)
subsidiary is at a different stage in terms of Y2K readiness. Generally, those
subsidiaries with North American operations are closer to Y2K readiness than
those subsidiaries with extensive international operations. The first component
of the Company's Y2K readiness program is to identify the internal business
systems of the Company that are susceptible to system failures or processing
errors as a result of the Y2K issue. This effort is substantially complete with
all operating businesses having identified the business systems that may require
remediation or replacement and established priorities for repair or replacement.
The identification of embedded chips in non-information technologies (such as
security, telephone systems, etc) in manufacturing and other equipment is
expected to be completed by the first quarter 1999.
The second part of the Company's Y2K readiness program involves the actual
remediation and replacement of internal business systems and such embedded chips
by June 30, 1999, and to complete final testing as well as systems for Y2K
readiness by September 30, 1999. The Company is substantially complete with
respect to the remediation efforts of its internal business systems, has tested
most such internal business systems and has developed contingency plans with
respect to one such system that is not yet Y2K compliant. Independent
verification of Y2K compliance of these internal software systems will be
completed by September 30, 1999. The Company will develop other contingency
plans, as necessary, with respect to imbedded chips in non-information
technology equipment and systems as the Company's readiness program develops
further.
As part of the Company's Y2K readiness program, significant service providers,
vendors, suppliers and customers that the Company believes are critical to
business operations after January 1, 2000, are substantially all identified and
steps are being undertaken to reasonably determine their stages of Y2K
readiness. In many cases, entities outside of North America have a lower level
of Y2K awareness, which have impacted the Company's ability to evaluate their
Y2K readiness.
Because of the significant number of business systems used by the Company and
the extent of the Company's foreign operations (including some third parties
that are not actively promoting Y2K issues), the Company believes it is
reasonably possible that it may experience some disruption in its business due
to the Y2K issue. The Company currently believes that the greatest risk of
disruption in its businesses exists in certain international markets. There are
a number of uncertainties regarding the Y2K issue. For example, if the Company
is unsuccessful in identifying or fixing all Y2K problems in its critical
operations, or if the Company is affected by the inability of critical suppliers
or customers to continue operations due to such a problem, the Company's results
of operations or financial conditions could be materially impacted.
15
<PAGE> 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ALLEN TELECOM INC.
------------------
(Continued)
The total costs that the Company expects to incur in connection with Y2K issues
is dependant on the Company's ability to identify Y2K problems, the nature of
the Y2K problems, and the ability of third parties (including the Company's
suppliers, vendors and customers) to successfully address their own Y2K issues.
The total cost associated with required Y2K remediation efforts is not expected
to be material to the Company's financial position. The total estimated external
cost of Y2K remediation efforts is approximately $2 million, and the Company has
expended approximately $1 million through September 30, 1998.
- --------------------------------------------------------------------------------
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
certain risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Allen
Telecom's Annual Report on Form 10-K contains certain detailed factors that
could cause the Company's actual results to materially differ from
forward-looking statements made by the Company, including, among others, the
costs and timetable for new product development, the health and economic
stability of the world and national markets, the uncertain level of purchases by
current and prospective customers of the Company's products and services, the
impact of competitive products and pricing, the potential impact of the
Company's attempts to sell its discontinued operations in the vehicle emissions
testing business, the ultimate market value of the Company's investments in
telecom ventures, and the successful discovery and correction of potential "Year
2000" computer sensitive problems by both the Company and its key suppliers and
customers.
16
<PAGE> 17
PART II - OTHER INFORMATION
---------------------------
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- --------------------------------------------------------------------
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
(a) Exhibits
--------
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
17
<PAGE> 18
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: November 12, 1998 By: /s/ Robert A. Youdelman
----------------- ---------------------------------
Robert A. Youdelman
Executive Vice President
(Chief Financial Officer)
Date: November 12, 1998 By: /s/ James L. LePorte, III
----------------- ---------------------------------
James L. LePorte, III
Vice President, Treasurer
and Controller
(Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
-------------
ALLEN TELECOM INC.
------------------
Exhibit Number
- --------------
(11) Statement re computation of per share earnings.
(27) Financial Data Schedule.
19
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
ALLEN TELECOM INC.
(Amounts in Thousands)
Net income and common shares used in the calculations of earnings per common
share were computed as follows:
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
- -------
Net income (loss) applicable to
Common stock - Basic and Diluted $ (2,112) $ 7,930 $ (6,908) $ 21,690
======== ======== ======== ========
Common Shares:
- --------------
Weighted average common shares outstanding-
Basic 27,240 27,070 27,190 26,850
Assumed exercise of stock options 100 510 180 430
-------- -------- -------- --------
Common shares - Diluted 27,340 27,580 27,370 27,280
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLEN
TELECOM'S SEPTEMBER 30, 1998 CONSOLIDATED STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,395
<SECURITIES> 0
<RECEIVABLES> 90,247
<ALLOWANCES> (2,289)
<INVENTORY> 90,777
<CURRENT-ASSETS> 201,154
<PP&E> 115,667
<DEPRECIATION> (55,868)
<TOTAL-ASSETS> 451,387
<CURRENT-LIABILITIES> 76,098
<BONDS> 108,749
0
0
<COMMON> 29,754
<OTHER-SE> 216,680
<TOTAL-LIABILITY-AND-EQUITY> 451,387
<SALES> 302,337
<TOTAL-REVENUES> 302,337
<CGS> (226,999)
<TOTAL-COSTS> (226,999)
<OTHER-EXPENSES> (77,917)
<LOSS-PROVISION> (255)
<INTEREST-EXPENSE> (4,973)
<INCOME-PRETAX> (2,324)
<INCOME-TAX> 1,976
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (4,710)
<CHANGES> 0
<NET-INCOME> (6,908)
<EPS-PRIMARY> (.25)<F1>
<EPS-DILUTED> (.25)<F1>
<FN>
<F1>The Earnings per Share amounts have been calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings
per Share". The above captions for primary and fully diluted include the basic
and diluted EPS amounts, respectively.
</FN>
</TABLE>
