--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 Carnegie Blvd., Suite 300, Charlotte, North Carolina 28209
--------------------------------------------------------- ----------
(Address of principal executive offices) Zip Code
(704) 553-0038
----------------------------------------------------
(Registrant's telephone number, including area code)
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 (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$0.02 per share, at April 20, 2001 was 64,649,031 shares.
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Glenayre Technologies, Inc. and Subsidiaries
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INDEX
Part I - Financial Information:
Item 1. Financial Statements Page
----
Independent Accountants' Review Report............................. 3
Condensed Consolidated Balance Sheets as of
March 31, 2001 (Unaudited) and December 31, 2000................ 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 (Unaudited).......... 5
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2001 (Unaudited)........... 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 (Unaudited).......... 7
Notes to Condensed Consolidated Financial Statements (Unaudited)... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 12
Item 3. Quantitative and Qualitative Disclosures
about Market Risk............................................... 16
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K.................................. 17
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2
Glenayre Technologies, Inc. and Subsidiaries
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Independent Accountants' Review Report
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of March 31, 2001, and the
related condensed consolidated statements of operations for the three-month
periods ended March 31, 2001 and 2000, the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 2001 and the condensed
consolidated statements of cash flows for the three-month periods ended March
31, 2001 and 2000. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Glenayre
Technologies, Inc. as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein) and in our report dated February 5, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
Ernst & Young LLP
Charlotte, North Carolina
April 19, 2001
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Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31, 2001 December 31, 2000
------------------- ---------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 68,389 $ 71,866
Restricted cash........................................ 13,153 16,893
Accounts receivable, net............................... 83,881 94,977
Notes receivable....................................... 4,914 4,434
Inventories............................................ 38,942 40,104
Deferred income taxes.................................. 21,669 19,140
Prepaid expenses and other current assets.............. 5,056 6,177
-------- --------
Total current assets.............................. 236,004 253,591
Notes receivable, net...................................... 5,736 7,224
Property, plant and equipment, net......................... 93,598 89,055
Goodwill, net.............................................. 44,635 45,311
Deferred income taxes...................................... 36,941 34,917
Other assets............................................... 9,811 15,988
-------- --------
TOTAL ASSETS............................................... $426,725 $446,086
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 16,824 $ 25,150
Accrued liabilities.................................... 40,236 43,299
Other current liabilities.............................. 65 66
-------- --------
Total current liabilities......................... 57,125 68,515
Other liabilities.......................................... 6,557 6,644
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding......... -- --
Common stock, $.02 par value; authorized: 200,000,000
shares; outstanding: March 31, 2001- 64,649,031
shares; December 31, 2000 - 64,446,012 shares......... 1,292 1,288
Contributed capital..................................... 360,049 359,181
Retained earnings (deficit)............................. (2,419) 3,235
Accumulated other comprehensive income.................. 4,121 7,223
-------- --------
Total stockholders' equity........................... 363,043 370,927
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $426,725 $446,086
======== ========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
See notes to condensed consolidated financial statements.
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Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
-----------------------------------
2001 2000
-------- -------
NET SALES.................................................. $ 45,925 $58,656
-------- -------
COSTS AND EXPENSES:
Cost of sales........................................ 25,757 27,516
Selling, general and administrative expense.......... 20,774 16,927
Provision for doubtful receivables................... 2,833 169
Research and development expense..................... 11,592 8,779
Depreciation and amortization expense................ 4,685 5,038
Adjustment to loss on sale of business............... (94) (524)
-------- -------
Total Costs and Expenses............................ 65,547 57,905
-------- -------
INCOME (LOSS) FROM OPERATIONS.............................. (19,622) 751
-------- -------
OTHER INCOME (EXPENSES):
Interest income..................................... 1,507 1,293
Interest expense.................................... (65) (14)
Realized gain on available-for-sale securities,
net................................................ 9,871 --
Other, net.......................................... (30) 5
-------- -------
Total Other Income (Expenses), net.................. 11,283 1,284
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES.......................... (8,339) 2,035
PROVISION (BENEFIT) FOR INCOME TAXES....................... (2,685) 910
-------- -------
NET INCOME (LOSS).............................................. $ (5,654) $ 1,125
======== =======
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE............................................. $(0.09) $0.02
======== =======
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION........................................ $(0.09) $0.02
======== =======
See notes to condensed consolidated financial statements
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Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
Accumulated
Common Stock Other Total
------------ Contributed Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
------ ------ ----------- ----------- ------------- -------------
Balances, December 31, 2000........ 64,446 $1,288 $359,181 $ 3,235 $ 7,223 $370,927
Net Loss........................... (5,654) (5,654)
Other Comprehensive Income:
Change in unrealized
gain/loss on securities
available-for-sale, net of tax... (3,102) (3,102)
---------
(8,756)
Stock Options exercised............ 207 4 883 887
Repurchase of common stock......... (4) -- (15) (15)
------ ------ -------- ------- ------- --------
Balances, March 31, 2001........... 64,649 $1,292 $360,049 $(2,419) $ 4,121 $363,043
====== ====== ======== ======= ======= ========
See notes to condensed consolidated financial statements
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Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
Three Months Ended March 31,
----------------------------------
2001 2000
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................................. $(7,312) $ 1,517
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................. (8,588) (1,645)
Proceeds from sale of equipment............................ 11 59
Proceeds from sale of available-for-sale 11,546 ---
securities................................................ ------- -------
Net cash used in investing activities................ 2,969 (1,586)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities............................... (6) (5)
Issuance of common stock................................... 887 12,625
Repurchase of common stock................................. (15) ---
------- -------
Net cash provided by financing activities............ 866 12,620
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................ (3,477) 12,551
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD.................................................. 71,866 73,513
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....................... $68,389 $86,064
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................................... $ 65 $ 16
Income taxes................................................ 606 808
See notes to condensed consolidated financial statements
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7
Glenayre Technologies, Inc. and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001. The Company's financial
results in any quarter are highly dependent upon various factors, including the
timing and size of customer orders and the shipment of products for large
orders. Large orders from customers can account for a significant portion of
products shipped in any quarter. Accordingly, the shipment of products in
fulfillment of such large orders can dramatically affect the results of
operations of any single quarter.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 2000.
1. Restricted Cash
Restricted cash at March 31, 2001 consisted of term deposits pledged as
collateral to secure letters of credit substantially all of which expire in less
than one year.
2. Accounts and Notes Receivables
Accounts receivable consist of:
March 31, December 31,
2001 2000
-------- -----------
Trade receivables.......................... $ 99,515 $108,453
Retainage receivables...................... 261 261
Other...................................... 3,546 4,121
-------- --------
103,322 112,835
Less: allowance for doubtful accounts...... (19,441) (17,858)
-------- --------
$ 83,881 $ 94,977
======== ========
Trade receivables at March 31, 2001 and December 31, 2000 included unbilled
costs and estimated earnings under contracts in the amount of approximately $6
million and $16 million, respectively. Unbilled amounts are invoiced upon
reaching certain milestones.
Notes receivable consist of:
March 31, December 31,
2001 2000
-------- -----------
Current......................... $ 4,914 $ 4,434
Non-current..................... 14,944 16,073
------- -------
19,858 20,506
Less: reserves.................. (9,208) (8,849)
------- -------
$10,650 $11,658
======= =======
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Glenayre Technologies, Inc. and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
The Company's notes receivables are principally concentrated in the
telecommunications industry. During the second quarter and third quarter 1999
several customers either (i) sought bankruptcy protection, (ii) sought debt
restructuring from the Company, (iii) delayed scheduled note payments or (iv)
experienced a deterioration in financial condition. During the third quarter
2000, the Company determined that nearly all of these impaired notes would not
be collected and wrote off $43 million of the impaired balances. The remaining
amounts owed on impaired notes from customers totaled approximately $10 million
at March 31, 2001 and $9 million at December 31, 2000. The reserve on these
notes was approximately $9 million at March 31, 2001 and December 31, 2000.
Subsequent to September 30, 1999, interest income on these notes is recognized
only as cash is received. Interest income recorded on these notes was
approximately $21,000 and $58,000 during the three-month periods ended March 31,
2001 and March 31, 2000, respectively.
3. Inventories
March 31, December 31,
Inventories consist of: 2001 2000
--------- ------------
Raw materials.......................... $25,339 $26,290
Work-in-process........................ 6,529 7,590
Finished goods......................... 7,074 6,224
------- -------
$38,942 $40,104
======= =======
4. Goodwill
Goodwill is shown net of accumulated amortization of $23 million and $22 million
at March 31, 2001 and December 31, 2000, respectively.
5. Other Assets
Included in Other Assets is the Company's remaining investment in Western
Multiplex Corporation ("MUX"), a former subsidiary, of which the Company sold
95% in November 1999. During the three-month period ended March 31, 2001, the
Company sold 1,025,500 shares of MUX stock at a pre-tax gain of $10.7 million.
As of March 31, 2001, the Company had approximately 868,000 shares remaining in
its investment in MUX. As of March 31, 2001, the market value of the Company's
remaining interest in MUX has appreciated. Accordingly, as of March 31, 2001,
the Company recorded a cumulative unrealized holding gain of approximately $4.1
million, net of tax of $2.0 million, on the remaining shares of this available-
for-sale security.
Additionally, during the first quarter 2001, the Company recorded a pre-tax
impairment charge of approximately $900,000 related to the decline in value
deemed to be other than temporary on an additional available-for-sale investment
held by the Company.
Available-for-sale Securities
-----------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---- ---------- ---------- ----------
Marketable equity securities as of March 31, 2001.. $1,953 $6,151 $21 $8,083
The estimated fair value of the Company's remaining available-for-sale
marketable equity securities at April 19, 2001 totaled approximately $8.2
million.
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Glenayre Technologies, Inc. and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
6. Income Taxes
The Company's consolidated income tax provision was different from the amount
computed using the U.S. statutory income tax rate for the following reasons:
Three Months Ended,
March 31,
--------------------------------
2001 2000
------------- -------------
Income tax provision at U.S. statutory rate..... $(2,920) $712
Foreign sales corporation benefit............... (50) (75)
Non-deductible goodwill......................... 235 235
Other non-deductible............................ 50 38
------- ----
Income tax provision (benefit).................. $(2,685) $910
======= ====
The Company believes that it is more likely than not that the net deferred tax
asset recorded at March 31, 2001 will be fully realized.
7. Income (Loss) per Common Share
The following table sets forth the computation of income (loss) per share:
Three Months Ended,
March 31,
--------------------------------
2001 2000
------------- -------------
Numerator:
Net income (loss)............................... $(5,654) $ 1,125
Denominator:
Denominator for basic income (loss) per share -
weighted average shares........................ 64,578 63,222
Effect of dilutive securities:
Stock options................................... -- 3,768
------------- -------------
Denominator for diluted income (loss) per share-
adjusted weighted average shares and assumed
conversions..................................... 64,578 66,990
============= =============
Income (loss) per weighted average common share... $ (0.09) $ 0.02
============= =============
Income (loss) per common share - assuming
dilution........................................ $ (0.09) $ 0.02
============= =============
8. Restructuring
During the first quarter 2001, in conclusion of its third quarter 1999
restructuring, the Company made cash payments of approximately $175,000 of
accrued severance benefits. Additionally, included in the Company's statement
of operations for the three-month period ended March 31, 2000, is a reversal of
approximately $470,000 of accrued severance benefits, lease termination costs
and asset impairment charges. The total pre-tax reversal related to the third
quarter 1999 restructuring was recorded as a reduction of approximately $250,000
to cost of sales, $150,000 to loss on sale of assets and $70,000 to selling,
general and administrative expenses.
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Glenayre Technologies, Inc. and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
9. Contingent Liability
On November 1, 1999 the Company sold 95% of the equity interest in its microwave
radio business, MUX. The Company is contingently liable for MUX's building
lease payments. The maximum contingent liability as of March 31, 2001 for these
obligations is approximately $3.3 million.
10. Segment Reporting
Glenayre is a worldwide provider of telecommunications equipment and related
software used in the wireless personal communications service markets including
messaging, voice processing and mobile data systems. Glenayre has two principal
product segments: wireless messaging and Enhanced Services platform.
Three Months Ended
March 31,
------------------------------------
Segment net sales 2001 2000
----------------- ----------------- --------------
Wireless messaging............................................ $18,998 $30,491
Enhanced Services platform.................................... 26,927 28,165
----------------- --------------
Total......................................................... $45,925 $58,656
================= ==============
Three Months Ended
March 31,
------------------------------------
2001 2000
----------------- --------------
Wireless messaging............................................... $ 15,128 $ 19,177
Enhanced Services platform....................................... 20,637 21,924
Total Contribution Margin....................................... 35,765 41,101
Segment support costs............................................ (48,693) (33,757)
Corporate activities............................................. (2,103) (2,079)
Depreciation and amortization.................................... (4,685) (5,038)
Adjustment to loss on sale of business........................... 94 524
Interest income (expense), net................................... 1,442 1,279
Realized gain on available-for-sale securities, net.............. 9,871 --
Other income (expense), net...................................... (30) 5
Income (loss) before income taxes................................ $ (8,339) $ 2,035
================= ==============
March 31, December 31,
2001 2000
----------------- --------------
Segment Assets
--------------
Wireless messaging............................................... $185,269 $214,744
Enhanced Services platform....................................... 110,746 97,285
Deferred Income Taxes............................................ 58,610 54,057
Corporate Assets................................................. 72,100 80,000
----------------- --------------
Total............................................................ $426,725 $446,086
================= ==============
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Glenayre Technologies, Inc. and Subsidiaries
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Glenayre is a worldwide provider of communication solutions for mobile and
active subscribers. The Company designs, manufactures, markets and services its
products principally under the Glenayre name. These products include enhanced
services, unified messaging, advanced messaging services and devices, and
prepaid wireless and card services as well as networking infrastructure used to
deliver these services. Glenayre's products are used in cellular, PCS,
wireless, data, wireless messaging, and IP networks.
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from Glenayre's consolidated statements
of operations:
Three Months Ended March 31,
----------------------------------------
2001 2000
----------------- ----------------
Net sales................................................. 100.0% 100.0%
Cost of sales............................................. 56.0 46.9
----------------- ----------------
Gross profit............................................ 44.0 53.1
Operating expenses:
Selling, general and administrative..................... 45.2 29.2
Provision for doubtful receivables...................... 6.1 *
Research and development................................ 25.2 15.0
Depreciation and amortization........................... 10.2 8.6
Adjustment to loss on sale of business.................. * (1.0)
----------------- ----------------
Total operating expenses.............................. 86.6 51.8
----------------- ----------------
Income (loss) from operations............................. (42.7) 1.3
Interest, net............................................. 3.1 2.2
Realized gain on available-for-sale securities, net....... 21.5 --
Other, net................................................ * *
----------------- ----------------
Income (loss) before income taxes......................... (18.1) 3.5
Provision (benefit) for income taxes...................... (5.8) 1.6
----------------- ----------------
Net income (loss)......................................... (12.3)% 1.9%
================= ================
------------------------
* less than 0.5%
The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas:
Three Months Ended March 31,
----------------------------------------
2001 2000
----------------- ----------------
(in thousands)
Wireless messaging products........................ $18,998 $30,491
Enhanced Services platform products................ 26,927 28,165
------- -------
$45,925 $58,656
======= =======
(percentage of net sales)
Wireless messaging products........................ 41.4% 52.0%
Enhanced Services platform products................ 58.6 48.0
------- -------
100.0% 100.0%
======= =======
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Glenayre Technologies, Inc. and Subsidiaries
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Three-Month Period Ended March 31, 2001 and 2000
Net Sales. Net sales for the three months ended March 31, 2001 decreased 22% to
$46 million as compared to $59 million for the three months ended March 31,
2000. International sales (sales outside the United States) were $9 million for
the three months ended March 31, 2001 as compared to $23 million for the three
months ended March 31, 2000 and accounted for 19% and 40% of net sales for the
three months ended March 31, 2001 and 2000, respectively.
The decline in net sales resulted primarily from a decline in wireless messaging
infrastructure sales as the Company's infrastructure customers, as anticipated,
reduced capital spending as a result of continued carrier consolidation, loss by
carriers of one way paging subscribers and an overall poor economic environment.
The Company believes that second quarter 2001 revenue will be flat as compared
to first quarter 2001. These are forward-looking statements that are subject to
the factors discussed in the cautionary statement attached as Exhibit 99 to this
Form 10-Q. There can be no assurance that the Company's sales levels or growth
will remain at, reach or exceed historical levels in any future period. The
Company is currently reviewing its operations and operating structure to develop
a plan to streamline and enhance its overall competitiveness. Upon completion
of this restructuring plan, which is expected in the second quarter of 2001, it
is management's intention to provide additional guidance.
In the wireless messaging product segment, one customer accounted for
approximately 15% of net sales for the three-month period ended March 31, 2001.
For the three-month period ended March 31, 2000, an additional customer in the
wireless messaging segment accounted for approximately 13% of net sales. In the
Enhanced Services platform product segment, there was one customer that
accounted for approximately 11% of net sales for the three-month period ended
March 31, 2001. The Company believes that its dependence on any one customer is
mitigated by the large number of companies in the Company's customer base and
the timing for development and expansions of their systems.
Gross Profit. Gross profit was 44% and 53% of net sales for the three-month
periods ended March 31, 2001 and 2000, respectively. The decrease in margin
percentages for the 2001 period is primarily due to (i) lower sales volume of
historically higher margin wireless messaging infrastructure products and (ii)
additional slow moving inventory reserves recorded as a result of lower sales
forecasts for certain end of life cycle prepaid and wireless messaging device
products. Glenayre's gross profit margins may be affected by several factors
including (i) the mix of products sold, (ii) the price of products sold and
(iii) increases in material costs and other components of cost of sales.
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $21 million and $17 million for the three-month
periods ended March 31, 2001 and 2000, respectively. The increase in the 2001
period is primarily attributable to increased employee related expenses as a
result of increased headcount in the Company's quality, technical operations and
marketing functional areas.
Provision for Doubtful Receivables. The provision for doubtful receivables was
approximately $3 million and $200,000 for the three-month periods ended March
31, 2001 and 2000, respectively. The increase was primarily attributable to
specific reserves taken for two customers experiencing poor financial condition,
with one filing for bankruptcy.
Research and Development Expense. Research and development expenses were $12
million and $9 million for the three months ended March 31, 2001 and 2000,
respectively. The increase in the 2001 period is primarily attributable to
increased employee related and subcontracting expenses for the Company's
Enhanced Services platform products. The Company relies on its research and
development related to new products and the improvement of existing products for
the continued growth in net sales. Research and development costs are expensed
as incurred.
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Glenayre Technologies, Inc. and Subsidiaries
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Depreciation and Amortization Expense. Depreciation and amortization expense
was $4.7 million and $5.0 million for the three months ended March 31, 2001 and
2000, respectively. The decrease in expenses for the 2001 period is a result of
(i) lower capital expenditures and (ii) older assets becoming fully depreciated.
Interest Income, Net. Interest income, net was $1.5 million and $1.3 million
for the three-month periods ended March 31, 2001 and 2000, respectively.
Interest income in 2001 was higher due primarily to interest earned on the
Company's only remaining prior financing commitment. The Company expects that
the level of interest income, net in 2001 will vary in accordance with the level
of cash and cash equivalents available for investment.
Provision for Income Taxes. The effective tax rates for the three-month periods
ended March 31, 2001 and 2000 differed from the combined U.S. federal and state
statutory tax rate of approximately 40% due primarily to (i) nondeductible
goodwill amortization, (ii) the utilization of foreign sales corporation
benefits, and (iii) the application of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes," ("SFAS 109"), in computing the
Company's tax provision. The difference between the effective tax rates in 2001
compared to 2000 is primarily the result of a decrease in earnings.
Financial Condition and Liquidity
Liquidity and Capital Resources. At March 31, 2001 the Company had cash and
cash equivalents and restricted cash totaling $82 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit,
substantially all of which expire in less than one year. At March 31, 2001,
Glenayre's principal source of liquidity is $68 million of cash and cash
equivalents.
Accounts payable decreased at March 31, 2001 compared to December 31, 2000
primarily as a result of decreased inventory purchases. Accrued expenses at
March 31, 2001 decreased from year-end 2000 primarily due to reductions in (i)
salaries and other payroll accruals due to timing differences, (ii) employee
incentive accruals as a result of payments made in 2001 for bonuses earned in
2000 and (iii) sales commissions offset partially by an increase in deferred
revenue.
In December 2000, the Board of Directors of the Company rescinded its dormant
stock repurchase program authorized in September 1996 and authorized the
repurchase of up to 3 million shares of the Company's common stock. As of
December 31, 2000, the Company had repurchased 12,500 shares at a total cost of
approximately $40,000. In the first quarter of 2001, the Company purchased an
additional 4,000 shares at a total cost of approximately $15,000.
The Company's cash generally consists of money market demand deposits and the
Company's cash equivalents generally consist of high-grade commercial paper,
bank certificates of deposit, treasury bills, notes or agency securities
guaranteed by the U.S. government, and repurchase agreements backed by U.S.
government securities with original maturities of three months or less. The
Company expects to use its cash and cash equivalents for working capital and
other general corporate purposes, including the expansion and development of its
existing products and markets and the expansion into complementary businesses.
Additionally, the competitive telecommunications market may require customer
financing commitments. These commitments may be in the form of guarantees,
secured debt or lease financing. Since June 30, 1999, it has been the Company's
policy not to offer customer financing or guarantees. During the third quarter
2000, the Company renegotiated its only prior financing commitment for wireless
messaging infrastructure and voicemail products reducing the commitment from
approximately $30 million to approximately $10 million. This commitment, which
expires in 2001, has a remaining financing
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14
Glenayre Technologies, Inc. and Subsidiaries
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commitment of approximately $500,000 at March 31, 2001. Amounts outstanding
under this financing arrangement as of March 31, 2001 were approximately $9
million.
In 1999, the Company consolidated its manufacturing activities in Quincy,
Illinois and ceased manufacturing activities in its Vancouver, B.C. facility.
The Company is currently exploring opportunities that will satisfy the
requirements of its remaining Vancouver operations. This includes the
development, subsequent sale and partial lease back of an office tower to meet
the Company's operational needs for its engineering, marketing and customer
service groups located in Vancouver, B.C. In 2000, the Company spent
approximately $8 million related to the office tower development. During the
first quarter of 2001, the Company spent approximately $3 million related to the
office tower development. The total remaining cost to complete the construction
is estimated at approximately $7 million.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to (i) support the short-term
and long-term liquidity requirements for current operations (including annual
capital expenditures) and (ii) to repurchase common stock as discussed above.
Company management believes that, if needed, it can establish borrowing
arrangements with lending institutions.
Income Tax Matters. For 2000, Glenayre's actual cash outlay for taxes was
limited to foreign income taxes primarily due to current losses and the
availability of foreign sales corporation benefits. The Company's cash outlay
for taxes is not expected to be significant in 2001 due to net operating loss
carryforwards.
As of March 31, 2001, the Company has U.S. tax net operating loss carryforwards
("NOLs") aggregating $116 million, of which $33 million relates to the 1997
acquisitions of Open Development Corporation and Wireless Access, Inc. ("WAI").
However, the ability to utilize WAI's acquired NOLs to offset future taxable
income is subject to restrictions and there can be no assurance that it will be
utilized in 2001 or future periods.
The Company has recorded a deferred tax asset of $59 million, net of a valuation
allowance of $16 million, at March 31, 2001, in accordance with SFAS 109. This
amount represents management's best estimate of the amount of NOLs and other
future deductions that are more likely than not to be realized as offsets to
future taxable income.
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Glenayre Technologies, Inc. and Subsidiaries
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk arising from adverse changes in interest
rates and foreign currency exchange rates. The Company's investment policy
requires investment of surplus cash in high-grade commercial paper, bank
certificates of deposits, Treasury bills, notes or agency securities guaranteed
by the U.S. Government and repurchase agreements backed by U.S Government
securities. The Company typically invests its surplus cash in these types of
securities for periods of relatively short duration. Although the Company is
exposed to market risk related to changes in short-term interest rates on these
investments, the Company manages these risks by closely monitoring market
interest rates and the duration of its investments. Due to the short-term
duration and the limited dollar amounts exposed to market interest rates,
management believes that fluctuations in short-term interest rates will not have
a material adverse effect on the Company's results of operations. Additionally,
the competitive telecommunications market has historically required customer
financing commitments. These commitments may be in the forms of guarantees,
secured debt or lease financing and are subject to fair market value adjustments
based on prevailing market interest rates. The Company does not believe that
future exposure to adjustments in interest rates related to customer financing
will have a material impact on the Company's results of operations. Although a
substantial portion of the Company's annual sales are negotiated in United
States dollars, certain contracts in the normal course of business are
negotiated in a foreign currency. When appropriate, the Company may seek to
mitigate its currency exchange fluctuation risk by entering into currency
hedging transactions. Due to the limited amount of such hedging transactions,
management believes that fluctuations in currency exchange rates will not have a
material adverse effect on the Company's results of operations. The Company does
not enter into financial investments for speculation or trading purposes and is
not a party to any financial or commodity derivatives.
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Glenayre Technologies, Inc. and Subsidiaries
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PART II - OTHER INFORMATION
ITEMS 1 through 5 are inapplicable and have been omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 15 Letter regarding unaudited interim financial
information.
Exhibit 99 Cautionary statement under safe harbor provisions of
the Private Securities Litigation Reform Act of
1995.
(b) Reports on Form 8-K
None.
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17
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.
Glenayre Technologies, Inc.
---------------------------------
(Registrant)
/s/ Bert Klein
---------------------------------
Bert Klein
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: April 25, 2001
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number 333-
15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated January 30, 1997), Registration Statement Number 333-
38169 on Form S-8 dated October 17, 1997, Registration Statement Number 333-
39717 on Form S-8 dated November 7, 1997, Registration Statement Number 333-
56375 on Form S-8 dated June 9, 1998, Registration Statement number 333-81161 on
Form S-8 dated June 21, 1999 Registration Statement number 333-81155 on Form S-8
dated June 21, 1999 and Registration Statement number 333-37446 on Form S-8
dated May 19, 2000 of our report dated April 19, 2001, relating to the unaudited
condensed consolidated interim financial statements of Glenayre Technologies,
Inc. and subsidiaries which are included in its Form 10-Q for the quarter ended
March 31, 2001.
Ernst & Young LLP
Charlotte, North Carolina
April 19, 2001
EXHIBIT 99
CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Glenayre Technologies, Inc. ("Glenayre" or the "Company"), from time to time,
makes "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect the expectations of
management of the Company at the time such statements are made. Glenayre is
filing this cautionary statement to identify important factors that could cause
Glenayre's actual results to differ materially from those in any forward-looking
statements made by or on behalf of Glenayre.
Decline in the Wireless Messaging Infrastructure Market
Over the last two years, the wireless messaging infrastructure market has
contracted and continued declines are likely as the loss of one-way paging
subscribers by carriers has not been completely replaced by two-way paging
subscribers. If the wireless messaging infrastructure market continues to
contract, it will result in decreased sales of Glenayre's products, which would
have a material adverse effect on Glenayre's business.
Effective Convergence of Technologies
In recent years, the markets for each of wireless services, Internet services
and prepaid technologies have grown significantly. Glenayre is dependent on the
continued growth of these markets as well as the effective and successful
convergence of these technologies for its Enhanced Services platform, such as
the Modular Voice Processing system and Intelligis LSP, and related applications
and solutions such as voice, fax and data messaging, short message services, one
touch call return, continuous calling, voice activated dialing, unified
messaging and CONSTANT TOUCH(TM). The markets for these technologies are still
emerging and continued growth in demand and market acceptance of these
converging services is uncertain. If the commercial market for these services
and related bundled or converged technologies is lower than Glenayre
anticipates, or grows more slowly than Glenayre anticipates, it will have a
material adverse effect on Glenayre's business. There can be no assurance that
these technologies will be successfully integrated or that a significant
commercial market for the integrated services will continue and/or develop.
Potential Market Changes Resulting from Rapid Technological Advances
Glenayre's business has historically focused primarily on wireless messaging and
is subject to competition from alternative forms of communication. Glenayre's
business is also focused on the wireless telecommunications industry. The
wireless telecommunications industry is characterized by rapid technological
change, including digital cellular telephone systems, which compete, directly or
indirectly, with certain of Glenayre's products or the services provided by
certain of Glenayre's customers. While the introduction of more advanced forms
of telecommunication may provide opportunities to Glenayre for the development
of new products, these advanced forms of telecommunication may reduce the demand
for wireless messaging devices and thus the type of wireless messaging systems
and related software designed and sold by Glenayre. In addition, Glenayre has
been focusing its efforts on growing its Enhanced Services platform products,
such as the Modular Voice Processing system and Intelligis LSP, and enhanced
services solutions such as voice, fax and data messaging, short message
services, one touch call return, continuous calling, voice activated dialing,
unified messaging and CONSTANT TOUCH(TM). Demand for these products and services
may be affected by changes in technology as well as the
development of substitute products and services by competitors. If changing
technology negatively affects demand for Glenayre's wireless messaging and
Enhanced Services platform products, it could have a material adverse effect on
Glenayre's business.
Growth of Two-Way Wireless Messaging Market
The market for two-way interactive wireless messaging products is emerging, and
the continued growth of the market is uncertain. The Company has focused
significant efforts on developing products and strategic alliances. The
development of the Company's business in this area is dependent upon its ability
to deliver adequate quantities of its advanced two-way interactive wireless
messaging devices. The development of the two-way interactive wireless
messaging device market will also be affected by other technological changes in
wireless messaging services, governmental regulatory activities and general
economic conditions. If the market for interactive devices does not continue to
grow or grows slower than anticipated by Glenayre, it would negatively affect
demand for Glenayre's products. Currently there are a limited number of two-way
interactive communications service providers. The growth of sales of two-way
interactive wireless messaging device systems by Glenayre to those customers may
be delayed depending upon delays in the market acceptance of two-way interactive
wireless messaging devices by the consumers of such wireless messaging device
service providers. Since the Company's two-way interactive wireless messaging
devices are produced by a third party manufacturer, manufacturing delays and
component part delays or shortages could adversely affect the Company's delivery
of two-way interactive wireless messaging devices impacting sales both of the
devices, wireless messaging and wireless messaging infrastructure products.
Competition
In the market for wireless messaging infrastructure, Glenayre currently faces
competition from a number of alternative wireless telecommunications
technologies, including cellular-based telephone and messaging services, mobile
satellite systems, specialized and private mobile radio systems, digital
cellular telephone systems and broadband personal communications services.
Although these technologies are generally higher priced than traditional
wireless messaging services, technological improvements could result in
increased capacity and efficiency for wireless two-way communication and could
result in increased competition for Glenayre. Additionally, Glenayre currently
faces competition for its Enhanced Services platform from a number of companies,
including: Comverse Technologies, Inc., ADC Telecommunication, InterVoice-Brite,
Inc., Openwave, Lucent/Octel Communications Corporation and Unisys Corporation.
Lastly, Glenayre also faces competition for prepaid wireless products and
services from several domestic and foreign competitors, including: InterVoice-
Brite, Inc., Comverse Technologies, Inc., Precision Systems, Inc., Logica-
Aldiscon, LHS, Sixbell, Nortel, Ericsson, Nokia, Alcatel-DSC and Lucent. Many
of the Company's competitors have substantially greater financial, technical,
marketing and distribution resources than Glenayre and Glenayre may be unable to
successfully compete with these companies for the sale of its messaging products
and Enhanced Services platform.
Variability of Quarterly Results
The Company's financial results in any single quarter are highly dependent upon
the timing and size of customer orders and the shipment of products for large
orders. Large orders from customers can account for a significant portion of
products shipped in any quarter. One customer accounted for approximately 10%
of net sales for the year ended December 31, 2000. No one customer accounted
for 10% or greater of net sales for the year ended December 31, 1999. Sales to
two customers totaled approximately 13% and 11%, respectively, of 1998 net
sales. Beyond 2000, the customers with whom the Company does the largest amount
of business are expected to vary from year to year and quarter to quarter as a
result of the timing for development and expansion of customers' communications
networks and systems, the
continued expansion into international markets and changes in the proportion of
revenues generated by Glenayre's newly developed products and services.
Furthermore, if a customer delays or accelerates its delivery requirements or a
product's completion is delayed or accelerated, revenues expected in a given
quarter may be deferred or accelerated into subsequent or earlier quarters.
Therefore, annual financial results are more indicative of the Company's
performance than quarterly results, and results of operations in any quarterly
period may not be indicative of results likely to be realized in the following
quarterly periods.
Volatility of Stock Price
The market price of Glenayre Common Stock is volatile. The market price of
Glenayre Common Stock could be subject to significant fluctuations in response
to variations in Glenayre's quarterly operating results and other factors such
as announcements of technological developments or new products by Glenayre,
developments in Glenayre's relationships with its customers, strategic alliances
and partnerships, technological advances by existing and new competitors,
general market conditions in the industry and changes in government regulations.
In addition, in recent years conditions in the stock market in general and
shares of technology companies in particular have experienced significant price
and volume fluctuations that have often been unrelated to the operating
performance of these specific companies.
Proprietary Technology
Glenayre owns or licenses numerous patents used in its operations. Glenayre
believes that while these patents are useful to Glenayre, they are not critical
or valuable on an individual basis. The collective value of the intellectual
property of Glenayre is comprised of its patents, blueprints, specifications,
technical processes and cumulative employee knowledge. Although Glenayre
attempts to protect its proprietary technology through a combination of trade
secrets, patent, trademark and copyright law, nondisclosure agreements and
technical measures, such protection may not preclude competitors from developing
products with features similar to Glenayre's products. The laws of certain
foreign countries in which Glenayre sells or may sell its products, including
The Republic of Korea, The People's Republic of China, Saudi Arabia, Thailand,
Dubai, India and Brazil, do not protect Glenayre's proprietary rights in the
products to the same extent as do the laws of the United States. Though the
Company believes its technology does not infringe any third party rights, the
Company is currently party to certain infringement claims. In addition, there
can be no assurance that other parties will not assert future infringement
claims. An adverse decision in an infringement claim asserted against the
Company could result in the Company being prohibited from using the allegedly
infringing technology. In such an instance, the Company might need to expend
substantial resources to develop alternative technology or to license the
allegedly infringing technology. There can be no assurance that these efforts
would be successful. Regardless, with respect to currently pending claims, the
Company does not believe that an adverse resolution would have a materially
adverse effect on the Company.
Potential Changes in Government Regulation
Many of Glenayre's products operate on radio frequencies. Radio frequency
transmissions and emissions and certain equipment used in connection therewith
are regulated in the United States, Canada and internationally. Regulatory
approvals generally must be obtained by Glenayre in connection with the
manufacture and sale of certain of its products, and by Glenayre's
telecommunications service provider customers to operate the systems that
utilize certain Glenayre products. The enactment by federal, state, local or
international governments of new laws or regulations or a change in the
interpretation of existing regulations could affect the market for Glenayre's
products. Although recent deregulation of international telecommunications
industries along with recent radio frequency spectrum allocations made by the
Federal Communications Commission in the United States have increased the demand
for Glenayre's
products by providing users of those products with opportunities to establish
new personal communications services, the trend toward deregulation and current
regulatory developments favorable to the promotion of new and expanded personal
communications services may not continue and future regulatory changes may not
have a positive impact on Glenayre. The issuance of radio frequency licenses
generally stimulates demand for Glenayre's products. However, delays in the
issuance of licenses may adversely affect sales and the timing of sales of
Glenayre's products. While many of Glenayre's current Enhanced Services platform
solutions are not directly subject to regulation, there can be no assurance that
the government will not regulate these services in the future.
Financing Customer Purchases
In the past, Glenayre has financed customer purchases of its products for
development of the two-way interactive wireless messaging market for the build-
out of two-way networks by its customers who acquired two-way licenses auctioned
by the FCC (the "Two-Way License Holders"). Glenayre does not expect to enter
into significant additional customer financing arrangements. Since June 30,
1999, it has been the Company's policy not to offer customer financing or
guarantees. As of March 31, 2001, the Company has a prior financing commitment
to one customer for wireless messaging infrastructure and voicemail products of
up to $10 million, of which there are currently borrowings totaling
approximately $9 million. Accordingly, there is a risk of default on the
Company's remaining customer financing arrangements. The Company generally
retains a security interest in equipment for which it provides financing.
International Business Risks
Approximately 34% of 2000 fiscal year net sales were generated in markets
outside of the United States. International sales are subject to the customary
risks associated with international transactions, including political risks,
local laws and taxes, the potential imposition of trade or currency exchange
restrictions, tariff increases, transportation delays, difficulties or delays in
collecting accounts receivable, exchange rate fluctuations and the effects of
prolonged currency destabilization in major international markets. Although a
substantial portion of the international sales of Glenayre's products and
services for fiscal year 2000 was negotiated in United States dollars, Glenayre
may not be able to maintain such a high percentage of United States dollar
denominated international sales. The Company seeks to mitigate its currency
exchange fluctuation risk by entering into currency hedging transactions. The
Company also acts to mitigate certain risks associated with international
transactions through the purchase of political risk insurance and the use of
letters of credit. However, there can be no assurance that these efforts will
successfully limit Glenayre's currency exchange fluctuation risk.
Continuation and Expansion of Strategic Alliances and Partnerships
Glenayre has entered into numerous strategic alliances, including alliances with
AnyDevice.com, Inc.; Arch Wireless, Inc.; DataLink.net, Inc.; Galileo
International, L.L.C.; GoSMS.com, Ltd.; HandSignal, Inc.; HiddenMind Technology,
Inc.; JP Systems, Inc.; MobileSys, Inc.; Notify Technology Corporation;
OfficeDomain, Inc.; PCS Innovations, Inc.; Vast Solutions, Inc; Veriprise
Wireless Corp.; WirelessMD, Inc.; w-Trade Technologies, Inc.; and Wysdom, Inc.
Additionally, Glenayre has entered into several Original Equipment Manufacturer
agreements with companies that market and distribute Glenayre's products and
Glenayre intends to enter into service reseller arrangements. Glenayre is
dependent upon these alliances to augment its research and development efforts
as well as to distribute Glenayre's products and services. If these strategic
alliances or partnerships are not successful or are terminated, it may have a
material adverse effect on Glenayre's business. Glenayre intends to continue
entering into strategic alliances and partnerships; however, there can be no
assurance that additional arrangements with suitable partners on acceptable
terms will be available. The inability of Glenayre to grow its current strategic
alliances and partnerships or enter into arrangements with additional partners
on acceptable terms may have a material adverse effect on Glenayre's business.