--------------------------------------------------------------------------------
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 September 30, 2000
--------------------------
[ ] 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
$.02 per share, at October 23, 2000 was 64,887,016 shares.
--------------------------------------------------------------------------------
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information:
Item 1. Financial Statements
Page
----
<S> <C>
Independent Accountants' Review Report......................................... 3
Condensed Consolidated Balance Sheets as of
September 30, 2000 (Unaudited) and December 31, 1999................... 4
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2000 and 1999 (Unaudited)............. 5
Condensed Consolidated Statements of Operations for the
nine months ended September 30, 2000 and 1999 (Unaudited).............. 6
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2000 (Unaudited)............... 7
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 (Unaudited).............. 8
Notes to Condensed Consolidated Financial Statements (Unaudited)............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 24
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K.............................................. 25
</TABLE>
2
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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 September 30, 2000, and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2000 and 1999, the condensed consolidated
statement of stockholders' equity for the nine-month period ended September 30,
2000 and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 2000 and 1999. 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 generally accepted auditing standards, 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, 1999, 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 7, 2000, 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, 1999, 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
October 16, 2000
3
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $88,471 $73,513
Restricted cash................................................ 16,835 10,355
Accounts receivable, net....................................... 97,430 88,736
Notes receivable............................................... 1,919 7,083
Inventories.................................................... 29,733 28,130
Deferred income taxes.......................................... 18,803 16,668
Prepaid expenses and other current assets...................... 5,142 4,249
-------- --------
Total current assets...................................... 258,333 228,734
Notes receivable, net.............................................. 4,370 4,707
Property, plant and equipment, net................................. 83,490 88,654
Goodwill........................................................... 45,983 47,999
Deferred income taxes.............................................. 35,646 40,507
Other assets....................................................... 25,968 2,957
-------- --------
TOTAL ASSETS....................................................... $453,790 $413,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $21,401 $18,073
Accrued liabilities............................................ 38,933 52,534
Other current liabilities...................................... 70 92
-------- --------
Total current liabilities................................. 60,404 70,699
Other liabilities.................................................. 7,355 7,381
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: September 30, 2000 - 64,439,812
shares; December 31, 1999 - 62,430,153 shares................ 1,288 1,248
Contributed capital............................................ 359,162 345,097
Retained earnings (deficit).................................... 5,186 (10,867)
Accumulated other comprehensive income......................... 20,395 ---
-------- --------
Total stockholders' equity................................ 386,031 335,478
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $453,790 $413,558
======== ========
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES.......................................................... $68,647 $61,274
------- -------
COSTS AND EXPENSES:
Cost of sales................................................ 31,934 36,504
Selling, general and administrative expense.................. 17,437 21,595
Provision for doubtful receivables........................... 909 2,891
Research and development expense............................. 10,740 10,347
Depreciation and amortization expense........................ 5,045 7,927
Write-off of goodwill and other intangibles.................. --- 50,919
------- -------
Total Costs and Expenses............................... 66,065 130,183
------- -------
INCOME (LOSS) FROM OPERATIONS...................................... 2,582 (68,909)
------- -------
OTHER INCOME (EXPENSES):
Interest income.............................................. 1,684 885
Interest expense............................................. (24) (14)
Gain (Loss) on disposal of assets............................ 75 (2,862)
Escrow Settlement............................................ 10,857 ---
Other, net................................................... (114) (381)
------- -------
Total Other Income (Expenses), net.................... 12,478 (2,372)
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................................... 15,060 (71,281)
PROVISION (BENEFIT) FOR INCOME TAXES............................... 1,620 (9,283)
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 13,440 (61,998)
INCOME FROM DISCONTINUED OPERATIONS (net of
income tax) ................................................. --- 1,266
------- -------
NET INCOME (LOSS).................................................. $13,440 $(60,732)
======= =========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations........................................ $0.21 $(1.00)
Discontinued Operations...................................... --- 0.02
----- -------
$0.21 $(0.98)
===== =======
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations........................................ $0.20 $(1.00)
Discontinued Operations...................................... --- 0.02
----- -------
$0.20 $(0.98)
===== =======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES.......................................................... $183,974 $176,062
-------- --------
COSTS AND EXPENSES:
Cost of sales................................................ 82,344 103,545
Selling, general and administrative expense.................. 52,049 61,035
Provision for doubtful receivables........................... 1,420 68,135
Research and development expense............................. 29,035 31,318
Depreciation and amortization expense........................ 15,178 24,345
Write-off of goodwill and other intangibles.................. --- 50,919
Unrealized loss on subordinated notes........................ --- 8,100
Adjustment to loss on sale of business....................... (524) ---
-------- --------
Total Costs and Expenses............................... 179,502 347,397
-------- --------
INCOME (LOSS) FROM OPERATIONS...................................... 4,472 (171,335)
-------- --------
OTHER INCOME (EXPENSES):
Interest income.............................................. 4,694 4,446
Interest expense............................................. (53) (280)
Gain (Loss) on disposal of assets............................ 378 (3,674)
Escrow Settlement............................................ 10,857 ---
Other, net................................................... (410) (28)
-------- --------
Total Other Income (Expenses), net.................... 15,466 464
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................................... 19,938 (170,871)
PROVISION (BENEFIT) FOR INCOME TAXES............................... 3,885 (45,222)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 16,053 (125,649)
INCOME FROM DISCONTINUED OPERATIONS (net of
income tax) ................................................. --- 1,979
------- ---------
NET INCOME (LOSS).................................................. $16,053 $(123,670)
======= =========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations........................................ $0.25 $(2.02)
Discontinued Operations...................................... --- 0.03
----- -------
$0.25 $(1.99)
===== ======
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations........................................ $0.24 $(2.02)
Discontinued Operations...................................... --- 0.03
----- ------
$0.24 $(1.99)
===== ======
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Retained Other Total
---------------------- Contributed Earnings Comprehensive Stockholders'
Shares Amount Capital (deficit) Income Equity
-------- --------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999........ 62,430 $1,248 $345,097 $(10,867) $ --- $335,478
Net Income......................... 16,053 16,053
Other Comprehensive Income:
Unrealized gain on securities
available for sale, net of tax.. 20,395 20,395
--------
Comprehensive Income............... 36,448
Stock options exercised............ 2,010 40 14,065 14,105
------ ------ -------- ------ ------- --------
Balances, September 30, 2000....... 64,440 $1,288 $359,162 $5,186 $20,395 $386,031
====== ====== ======== ====== ======= ========
</TABLE>
See notes to condensed consolidated financial statements
7
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. $12,390 $23,612
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (9,103) (9,544)
Proceeds from sale of equipment.................................. 249 68
Investments in available-for-sale securities..................... (2,650) ---
-------- -------
Net cash used in investing activities...................... (11,504) (9,476)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities..................................... (33) (115)
Issuance of common stock......................................... 14,105 262
-------- -------
Net cash provided by financing activities.................. 14,072 147
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 14,958 14,283
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD....................................................... 73,513 12,283
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $88,471 $26,566
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest........................................................ $49 $286
Income taxes.................................................... $2,180 $3,013
</TABLE>
See notes to condensed consolidated financial statements
8
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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 generally accepted accounting principles 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 and nine-month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. 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, 1999.
1. Discontinued Operations
On November 1, 1999 the Company sold 95% of the equity interest in its microwave
radio business, Western Multiplex Corporation ("MUX") and received cash of
approximately $37 million. MUX markets products for use in point-to-point
microwave communication systems and was acquired by the Company in April 1995.
The transaction is recorded as the disposal of a segment of business in the
fourth quarter 1999. Accordingly, the operating results of MUX have been
classified as discontinued operations for the three-month and nine-month periods
ended September 30, 1999 presented in the condensed consolidated statements of
operations. Additionally, the Company is contingently liable for MUX's building
lease payments and up to October 31, 2000 for certain key employee severance
benefits should the buyer not offer such key MUX employees a similar position
with substantially the same or greater responsibilities and the same or greater
compensation. The maximum contingent liability as of September 30, 2000 for
these obligations is approximately $3.9 million.
2. Restricted Cash
Restricted cash at September 30, 2000 consisted of term deposits pledged as
collateral to secure letters of credit substantially all of which expire in less
than one year.
3. Accounts and Notes Receivables
Accounts receivable consist of:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Trade receivables............................ $112,536 $104,206
Retainage receivables........................ 564 319
Other........................................ 1,667 1,883
-------- ---------
114,767 106,408
Less: allowance for doubtful accounts........ (17,337) (17,672)
-------- ---------
$97,430 $88,736
======== =========
</TABLE>
9
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
Trade receivables at September 30, 2000 and December 31, 1999 included unbilled
costs and estimated earnings under contracts in the amount of approximately $20
million and $25 million, respectively. Unbilled amounts are invoiced upon
reaching certain milestones.
Notes receivable consist of:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- -------------------
<S> <C> <C>
Current.......................................... $1,919 $7,083
Non-current...................................... 13,218 57,724
------- --------
15,137 64,807
Less: reserves................................... (8,848) (53,017)
------- --------
$6,289 $11,790
======= ========
</TABLE>
The Company's notes receivables are principally concentrated in the
telecommunications industry. Historically, the Company had not experienced any
significant issues related to the collection of receivables from its customers.
However, 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 $9 million at September 30,
2000 and $62 million at December 31, 1999. The average amount of impaired notes
during the three-month and nine-month periods ended September 30, 2000 was
approximately $43 million and $53 million, respectively. The reserve on these
notes was approximately $9 million at September 30, 2000 and $53 million at
December 31, 1999. During the three-month and nine-month periods ended September
30, 2000 there were additions to the reserves of approximately $1 million and $2
million, respectively, and write-offs of approximately $43 million and $44
million, respectively. Additionally, during the third quarter of 2000, the
Company had recoveries on impaired notes totaling $2 million. Interest
receivable from these notes of approximately $2.3 million was fully reserved as
of September 30, 2000 and December 31, 1999. Subsequent to September 30, 1999,
interest income on these notes is recognized only as cash is received. Interest
income recorded on these notes was $63,000 and $184,000 during the three-month
and nine-month periods ended September 30, 2000, respectively.
4. Inventories
<TABLE>
<CAPTION>
September 30, December 31,
Inventories consist of: 2000 1999
------------------- -------------------
<S> <C> <C>
Raw materials.............................. $18,653 $14,742
Work-in-process............................ 9,658 8,452
Finished goods............................. 1,422 4,936
-------- ---------
$29,733 $28,130
======== =========
</TABLE>
5. Goodwill
Goodwill is shown net of accumulated amortization of $21 million and $19 million
at September 30, 2000 and December 31, 1999, respectively.
10
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
In the third quarter 1999, the Company wrote off approximately $43 million of
goodwill and approximately $8 million of other intangibles related to the
acquisition of Wireless Access, Inc. ("WAI").
In November 1997 the Company acquired WAI, a developer of two-way paging
devices. The purchase price was negotiated based on projections of revenues from
sales of the paging devices and future applications (the "acquired WAI
products"). Actual WAI revenues from November 1997 to September 1999 were
considerably less than the projected sales used in the purchase price
calculations. Sales of paging devices for 1998 were negatively affected by
manufacturing start-up problems in the second quarter 1998. Design issues caused
further delays in sales in the latter part of 1998 and in the first half of
1999. Additionally, the two-way paging market has not developed as rapidly as
expected and the Company's lower end device began to experience price
competition in the second quarter 1999. In the third quarter 1999, after
incurring significant operating losses related to the WAI business, management
decided to restructure the WAI operations. Although the Company will continue to
deliver its full two-way paging device to certain markets for an appropriate
time period, the remaining WAI resources are expected to be almost entirely
refocused to develop a new architecture for other advanced wireless
communication products unrelated to the acquired technology.
Management made this strategic change due to the following reasons, which were
not readily apparent during the acquisition process: (i) performance issues with
the paging devices causing delays in timing of product delivery and product
acceptance; (ii) slower than expected development of the two-way messaging
market; (iii) a reduction in the overall expected market size for two-way paging
devices; and (iv) the speed and cost to adapt the product for future
applications has been competitively hindered by the current architecture.
Given this strategic change, the Company anticipates that the future forecasted
results for the acquired WAI products will be significantly less than had been
anticipated at the time of the Company's acquisition of WAI. As a result of this
strategic change, the WAI workforce was significantly decreased and future WAI
requirements for sales and engineering development are expected to be contracted
from elsewhere within the Company. After making these changes, the Company
evaluated the ongoing value of the non-current assets of WAI. Based on this
evaluation, the Company determined that assets, principally goodwill and other
intangibles, with a carrying value of approximately $51 million at September 30,
1999 were impaired and wrote them down by the remaining balance. Fair value was
based on estimates of discounted future cash flows to be generated by the
acquired WAI products.
During the third quarter 2000, the Company entered into an escrow settlement
with the former WAI shareholders. The Acquisition Agreement ("the Agreement")
between the Company and the former WAI shareholders provided that $12 million of
the purchase price would be placed in escrow for the purpose of satisfying any
claims of indemnity that the Company might make. The Agreement contained
representations and warranties by the former shareholders of WAI that its
AccessMate and AccessLink II pager products, which at the time of the
acquisition were under development, would be manufactured in specified
quantities and by dates set forth in the Agreement. The Agreement further
provided that the WAI shareholders would indemnify the Company in the event that
these pager products did not comply with the manufacture dates and products
specifications. In February 1999, the Company made an indemnity claim against
the former WAI shareholders for the entire amount of the escrow on the ground
that WAI failed to comply with or was late in complying with the manufacture
dates and product specifications. In January 2000, the representative of the
former shareholders of WAI filed an answering statement to this claim denying
the allegations of the Company and asserting that the former shareholders of WAI
were entitled to all funds accumulated in escrow. In August of 2000, the Company
and the former shareholders entered into a settlement agreement that disbursed
$11.5 million of the escrow funds
11
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
to the Company. As part of this settlement the former WAI shareholders were
disbursed $2.1 million of the funds. The Company incurred approximately $600,000
of costs which have been netted against the proceeds received. As all of the
goodwill and other intangibles related to the WAI acquisition were determined to
be impaired and were written off in the third quarter 1999, the net proceeds
from the escrow settlement of $10.9 million are included in the Company's
condensed statements of operations for both the three-month and nine-month
periods ended September 30, 2000. Additionally, the settlement agreement
releases all claims by both parties to the Agreement.
6. Other Assets
Included in Other Assets is the Company's remaining investment in MUX (See Note
1.) During the third quarter of 2000, MUX successfully completed its initial
public offering. As of September 30, 2000 the market value of the Company's
remaining interest in MUX has appreciated. Accordingly, in the third quarter
2000, the Company recorded an unrealized holding gain, of $20.3 million, net of
tax of $11.0 million, on this available-for-sale security.
On June 30, 2000 as part of the Company's strategy to expand into new markets
for its Enhanced Services Platform business the Company entered into a stock
purchase agreement with Multi-Link Telecommunications, Inc. ("Multi-Link"), a
Colorado corporation, and a shareholder, to acquire in the aggregate 264,439
shares of common stock for $2.1 million representing approximately 6.5%
ownership in Multi-Link. The Company also acquired warrants to purchase 100,000
shares of Multi-Link common stock. The Company recorded the purchase, which
occurred on July 3, 2000, as an investment in available-for-sale securities.
7. 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate.... $5,271 $(24,948) $ 6,978 $(59,805)
Change in valuation allowance.................. 50 --- 100 (2,481)
Foreign taxes at rates other than U.S.
statutory rate.............................. 90 (70) 258 (406)
State taxes (net of federal benefit)........... --- (77) --- (373)
U.S. Research and Experimentation Credit....... (50) (80) (100) (240)
Benefit from foreign sales corporation......... --- (40) (150) (120)
Non-deductible goodwill amortization........... 235 15,897 705 18,083
Acquired subsidiary purchase price
adjustment resulting from escrow
settlement.................................. (4,010) --- (4,010) ---
Other non-deductible........................... 34 35 104 120
-------- -------- -------- ---------
Income tax provision (benefit)................. $ 1,620 $(9,283) $ 3,885 $(45,222)
======== ======== ======== =========
</TABLE>
The Company believes that it is more likely than not that the net deferred tax
asset recorded at September 30, 2000 will be fully realized.
12
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
8. Income (Loss) from Continuing Operations per Common Share
The following table sets forth the computation of income (loss) from continuing
operations per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2000 1999 2000 1999
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) from continuing operations........... $13,440 $(61,998) $16,053 $(125,649)
Denominator:
Denominator for basic income (loss) from
continuing operations per share -
weighted average shares................................ 64,424 62,196 63,979 62,160
Effect of dilutive securities:
stock options.......................................... 2,660 --- 3,111 ---
-------- -------- ------- --------
Denominator for diluted income (loss) from continuing
operations per share- adjusted weighted average shares
and assumed conversions................................... 67,084 62,196 67,090 62,160
====== ====== ====== ======
Income (loss) from continuing operations
per weighted average common share...................... $0.21 $(1.00) $0.25 $(2.02)
===== ====== ===== ======
Income (loss) from continuing operations
per common share-assuming dilution..................... $0.20 $(1.00) $0.24 $(2.02)
===== ====== ===== ======
</TABLE>
9. Restructuring
During the third quarter 1999, the Company recorded a pre-tax charge of
approximately $8.7 million related to a 27% reduction in the Company's global
workforce. This headcount reduction resulted in the elimination of approximately
400 positions and impacted all functional areas of the Company. Approximately
50% or 200 of the positions impacted were directly associated with the
consolidation of the Company's Vancouver manufacturing operations to its Quincy,
Illinois facility. Severance and outplacement services of approximately $8.8
million related to the staff reduction were paid before September 30, 2000.
During the nine-month period ended September 30, 2000, the Company expensed
approximately $60,000 for retention performance bonuses related to the third
quarter 1999 restructuring, which were earned by employees in 2000.
Additionally, during the three-month and nine-month periods ended September 30,
2000, the Company reversed approximately $10,000 and $220,000, respectively, of
accrued severance benefits related to this reduction of the Company's workforce.
Additionally, the Company recorded a pre-tax charge in the third quarter of 1999
of approximately $670,000, of which approximately $270,000 was paid through the
third quarter 2000, for consolidation and exit costs from its Vancouver, BC,
Charlotte, NC, Hong Kong, Guangzhou, China, New Delhi, India, and Torrance, CA
facilities and a pre-tax charge of approximately $2.0 million for the impairment
of long-lived assets. The consolidation and exit process was completed for all
the above facilities by the end of 1999 with the exception of the Vancouver
manufacturing facility, which was completed in the first quarter 2000. Further,
during the nine-month period ended September 30, 2000, the Company reversed
approximately $630,000 of accrued lease termination costs and asset impairment
charges related to the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
third quarter 1999 restructuring. This reversal was due to: (i) assets
previously determined as excess being utilized at the Quincy manufacturing
facility, (ii) greater than anticipated proceeds from the disposal of assets in
the Vancouver facility and (iii) change in the estimated timing of the exit of
the leased portion of the Vancouver facility.
Further, during the nine-month period ended September 30, 2000, the Company
recorded charges to selling, general and administrative expenses for changes in
estimates for prior restructurings related to employee termination benefits and
asset impairment charges totaling $20,000.
During the three-month and nine-month periods ended September 30, 2000, the
total pre-tax reversal for the third quarter 1999 restructuring was recorded as
a reduction of approximately $0 and $180,000 to loss on sale of assets, $30,000
and $100,000 to selling, general and administrative expenses, and $0 and
$120,000 to research and development expenses, respectively. Additionally,
during the three-month period ended September 30, 2000, the Company recorded
additional expenses of $20,000 to cost of sales for changes in estimates and
during the nine-month period ended September 30, 2000 a net reversal of $390,000
to cost of sales for changes in estimates.
The reserve balance for the third quarter 1999 restructuring was approximately
$380,000 at September 30, 2000.
Management believes the remaining reserves for business restructuring are
adequate to complete the above plans.
The following is a summary of activity for the nine-month period ended September
30, 2000 for the 1999 restructuring reserves.
<TABLE>
<CAPTION>
Severance Lease Cancellation and
and Benefits Other Exit Costs Total
--------------------- ------------------------ --------------------
<S> <C> <C> <C>
Balance at December 31, 1999...... $6,510 $1,750 $8,260
Expense accrued................... 60 --- 60
Charges........................... (6,010) (1,100) (7,110)
Change in estimate................ (200) (630) (830)
-------- -------- --------
Balance at September 30, 2000..... $360 $20 $380
======== ======== ========
</TABLE>
10. Segment Reporting
Glenayre is a worldwide provider of telecommunications equipment and related
software used in the wireless personal communications service markets including
wireless messaging, voice processing and mobile data systems. Glenayre has two
principal product segments: Wireless Messaging and Enhanced Services Platform.
Prior to 2000, the support functions related to the Company's two product
segments functioned as stand alone operating units and the Company evaluated
performance and allocated resources based on income from continuing operations
before income taxes, interest income (expense) and other (income) expense which
included support costs. However, beginning in the first quarter 2000, these
support functions which include research and development, customer service,
administration and non-direct manufacturing costs are positioned so that they
support both of the Company's product segments in order to improve financial
results and capital utilization. Due to this change, the costs associated with
these functions are no longer specific to one product segment. Therefore, the
Company currently measures segment results only to the contribution margin level
(sales less direct manufacturing costs) in conjunction with the Company's
consolidated results of operations in measuring that segment's performance and
allocating
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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)
resources. This represents a change in the Company's segment reporting and the
Company accordingly has restated its segment information where applicable to
reflect this change.
Additionally, the Company previously included the Enhanced Services Platform
trade receivables and inventories in the Wireless Messaging segment assets, as
historically, no efficient and timely process existed to determine these
amounts. However, for 2000, the Company has established processes to determine
these amounts for Enhanced Services Platform and, therefore, is reporting these
assets as a component of Enhanced Services Platform assets. Further, the Company
previously reported its demand deposit money market cash in the Wireless
Messaging segment assets. The Company believes this cash should be stated as a
corporate asset as it is controlled, monitored, and allocated for business
purposes by the corporate treasury function. Accordingly, the Company has
restated its segment assets where applicable to reflect this change.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ----------------------------------
Segment net sales 2000 1999 2000 1999
----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Wireless Messaging.............. $34,128 $40,748 $92,365 $118,270
Enhanced Services Platform...... 34,519 20,526 91,609 57,792
-------- -------- -------- --------
Total........................... $68,647 $61,274 $183,974 $176,062
======== ======= ======== ========
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Restated) (Restated)
Wireless Messaging.............. $21,669 $26,404 $60,109 $77,450
Enhanced Services Platform...... 25,504 15,699 70,253 42,679
-------- -------- -------- --------
Total Contribution Margin.... 47,173 42,103 130,362 120,129
Segment support costs........... (37,996) (44,778) (105,938) (127,553)
Corporate activities............ (1,550) (7,388) (5,298) (88,647)
Depreciation and amortization... (5,045) (7,927) (15,178) (24,345)
Write-off of goodwill and other
intangibles.................. --- (50,919) --- (50,919)
(Loss) adjustment to loss on
sale of business............. --- --- 524 ---
Interest income (expense), net.. 1,660 871 4,641 4,166
(Loss) adjustment to loss on
disposal of assets........... 75 (2,862) 378 (3,674)
Escrow Settlement............... 10,857 --- 10,857 ---
Other income (expense).......... (114) (381) (410) (28)
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes $15,060 $(71,281) $19,938 $(170,871)
======== ======== ======== ========
</TABLE>
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Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
September 30, December 31,
2000 1999
------------------ -----------------
(Restated)
Segment Assets
Wireless Messaging.............. $251,670 $232,295
Enhanced Services Platform...... 64,931 57,457
Deferred Income Taxes........... 54,449 57,175
Corporate Assets................ 82,740 66,631
-------- --------
Total........................... $453,790 $413,558
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Glenayre Technologies, Inc. ("Glenayre" or the "Company") 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, advance messaging services and devices, and prepaid wireless and card
services as well as networking infrastructure used to deliver these services.
Glenayre's products are deployed in cellular, personal communication services,
wireless, data, paging and internet protocol networks.
On November 1, 1999 the Company sold 95% of the equity interest in its microwave
radio business, Western Multiplex Corporation ("MUX") and received cash of
approximately $37 million. MUX markets products for use in point-to-point
microwave communication systems and was acquired by the Company in April 1995.
The transaction was recorded as the disposal of a segment of business in the
fourth quarter 1999. Accordingly, the operating results of MUX have been
classified as discontinued operations for all periods presented in the
consolidated statements of operations. MUX has expanded the scope of its
business to include point-to-multi-point products, a greater international
presence and a focus on new market segments. In connection with these changes in
strategy, MUX completed its initial public offering in August 2000. The Company
is eligible to begin selling its shares of MUX, subject to certain regulatory
restrictions, after November 1, 2000.
Results of Continuing 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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 46.5 59.6 44.8 58.8
---- ---- ----- ----
Gross profit .................................. 53.5 40.4 55.2 41.2
Operating expenses:
Selling, general and administrative............ 25.4 35.2 28.3 34.7
Provision for doubtful receivables............. 1.3 4.7 0.8 38.7
Research and development....................... 15.6 16.9 15.8 17.8
Depreciation and amortization.................. 7.3 12.9 8.3 13.8
Unrealized loss on subordinated notes.......... --- --- --- 4.6
Write-off of goodwill.......................... --- 83.1 --- 28.9
Adjustment to loss on sale of business......... --- --- * ---
------ ----- ------ --------
Total operating expenses................... 49.7 152.8 52.8 138.5
---- ----- ----- -----
Income (loss) from operations ..................... 3.8 (112.5) 2.4 (97.3)
Interest, net...................................... 2.4 1.4 2.6 2.4
Gain (loss) on disposal of assets.................. * (4.7) * (2.1)
Escrow Settlement.................................. 15.8 --- 5.9 ---
Other, net......................................... * (0.6) * *
----- ---- ----- -------
Income (loss) from continuing operations before
income taxes................................... 21.9 (116.3) 10.8 (97.1)
Provision (benefit) for income taxes............... 2.4 (15.1) 2.1 (25.7)
----- -------- ----- ------
Income (loss) from continuing operations........... 19.6% (101.2)% 8.7% (71.4)%
==== ======= ===== ======
</TABLE>
---------------------------
* less than 0.5
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The following table sets forth for the periods indicated net sales represented
by the Company's product marketing segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ --------------------------
2000 1999 2000 1999
------------- ------------ ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Wireless Messaging Products ....................... $34,128 $40,748 $92,365 $118,270
Enhanced Services Platform Products................ 34,519 20,526 91,609 57,792
------- ------- -------- --------
$68,647 $61,274 $183,974 $176,062
======= ======= ======== ========
(percentage of net sales)
Wireless Messaging Products........................ 50% 67% 50% 67%
Enhanced Services Platform Products................ 50 33 50 33
---- ---- ---- ----
100% 100% 100% 100%
=== === === ===
</TABLE>
Three-Month and Nine-Month Periods Ended September 30, 2000 and 1999
Net Sales. Net sales for the three-month period ended September 30, 2000
increased 12% to $68.6 million as compared to $61.3 million for the three-month
period ended September 30, 1999. Net sales were $184.0 million and $176.1
million for the nine-month periods ended September 30, 2000 and 1999,
respectively. International sales (sales outside the United States) were
approximately $19.5 million for the three-month period ended September 30, 2000
as compared to approximately $22.6 million for the three-month period ended
September 30, 1999 and accounted for 28% and 37% of net sales for the three-
month periods ended 2000 and 1999, respectively. International sales were
approximately $68.1 million for the nine-month period ended September 30, 2000
as compared to approximately $76.7 million for the nine-month period ended
September 30, 1999 and accounted for 37% and 44% of net sales for the nine-
month periods ended September 30, 2000 and 1999, respectively.
The increase in net sales for the three-month and nine-month periods ended
September 30, 2000 as compared to those same periods in 1999 resulted primarily
from a continued robust market demand in North America for the Company's
Enhanced Services Platform MVP(TM) product which was partially offset by a
decline in net sales of the Company's traditional paging infrastructure market,
which the Company believes has stabilized at a level comparable to the third
quarter 1999. However, the Company believes that the wireless messaging market
driven by the two-way wireless internet and Enhanced Services Platform market,
with a robust growth in core customer base, will both yield sales growth in
2000. 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.
There was no one single customer who accounted for 10% of net sales for the
three-month and nine- month periods ended September 30, 2000 or for the
nine-month period ended September 30, 1999. Sales to one customer totaled
approximately 13% for the three-month period ended September 30, 1999.
Gross Profit. Gross profit margins were 53% and 40% for three-month periods
ended September 30, 2000 and 1999, respectively. Gross profit margins were 55%
and 41% for the nine-month periods ended September 30, 2000 and 1999,
respectively. The increase in margin percentages for both the 2000 periods is
primarily attributable to (i) higher sales of Enhanced Services Platform
products which yield higher gross margins than the Company's other products,
(ii) restructuring severance charges incurred in the third quarter 1999 for
employee terminations in the Company's Vancouver, BC manufacturing facility,
(iii) additional slow moving inventory reserves recorded in the second and third
quarter 1999 as a result
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of lower forecasted infrastructure sales and for a customer which filed
bankruptcy and for which parts had been purchased and (iv) the decrease in
international project risk accruals due to actual costs of satisfying both
contractual and statutory requirements being less than previously expected.
These decreases are offset partially by (i) charges incurred in the second
quarter 2000 to revalue the Company's wireless messaging device inventory to
market as a result of technological advances in the device market and (ii)
vendor cancellation charges incurred in the third quarter 2000 on excess
purchase commitments for paging devices. 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 $17.4 million and $21.6 million for the three-month periods ended
September 30, 2000 and 1999, respectively and $52.0 million and $61.0 million
for the nine-month periods ended September 30, 2000 and 1999, respectively. The
decreases in the 2000 periods are primarily attributable to (i) lower employee
related expenses, (ii) lower facility lease expense due to the first and third
quarter 1999 restructurings and (iii) additional employee severance and exit
facility costs incurred in 1999 for restructurings. This decrease is partially
offset by higher employee incentive bonus expenses accrued as a result of
meeting certain incentive plan targets and higher sales commissions expense due
to an increase in orders booked in 2000.
Provision for Doubtful Receivables. The provision for doubtful receivables was
$900,000 and $2.9 million for the three-month periods ended September 30, 2000
and 1999, respectively and $1.4 million and $68.1 million for the nine-month
periods ended September 30, 2000 and 1999, respectively. Prior to the second
quarter 1999, the Company's bad debt write offs had not been significant.
However, the risk inherent in the Company's portfolio of receivables increased
due to financial difficulties, including bankruptcy, being experienced by
several of the Company's customers in the second quarter 1999, coupled with
pressure by customers for extended payment terms. Accordingly, significant
increases in the Company's allowances for doubtful accounts were recognized.
(See Note 3 to the Condensed Consolidated Financial Statements).
Research and Development Expense. Research and development expenses were $10.7
million and $10.3 million for the three-month periods ended September 30, 2000
and 1999, respectively, and $29.0 million and $31.3 million for the nine-month
periods ended September 30, 2000 and 1999, respectively. The decreases in the
2000 periods are primarily attributable to a reduction in employee related
expenses due to the third quarter 1999 restructuring and additional employee
severance expenses incurred in 1999 for restructurings. These decreases are
partially offset by higher employee incentive bonus expenses accrued as a result
of meeting certain incentive plan targets in 2000 and higher subcontracting
expenses for enhanced service platform products. The Company relies on its
research and development programs for new products and the improvement of
existing products for the continued growth in net sales. Research and
development costs are expensed as incurred.
Write-off of Goodwill and Other Intangibles and Escrow Settlement. In the third
quarter 1999, the Company wrote off approximately $43 million of goodwill and
approximately $8 million of other intangibles related to the acquisition of
Wireless Access, Inc. ("WAI").
In November 1997 the Company acquired WAI, a developer of two-way paging
devices. The purchase price was negotiated based on projections of revenues from
sales of the paging devices and future applications (the "acquired WAI
products"). Actual WAI revenues from November 1997 to September 1999 were
considerably less than the projected sales used in the purchase price
calculations. Sales of paging devices for 1998 were negatively affected by
manufacturing start-up problems in the second quarter 1998. Design issues caused
further delays in sales in the latter part of 1998 and in the first half of
1999. Additionally, the two-way paging market has not developed as rapidly as
expected and the Company's lower end device began to experience price
competition in the second quarter 1999. In the
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Glenayre Technologies, Inc. and Subsidiaries
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third quarter 1999, after incurring significant operating losses related to the
WAI business, management decided to restructure the WAI operations. Although the
Company will continue to deliver its full two-way paging device to certain
markets for an appropriate time period, the remaining WAI resources are expected
to be almost entirely refocused to develop a new architecture for other advanced
wireless communication products unrelated to the acquired technology.
Management made this strategic change due to the following reasons, which were
not readily apparent during the acquisition process: (i) performance issues with
the paging devices causing delays in timing of product delivery and product
acceptance; (ii) slower than expected development of the two-way messaging
market; (iii) a reduction in the overall expected market size for two-way paging
devices; and (iv) the speed and cost to adapt the product for future
applications has been competitively hindered by the current architecture.
Given this strategic change, the Company anticipates that the future forecasted
results for the acquired WAI products will be significantly less than had been
anticipated at the time of the Company's acquisition of WAI. As a result of this
strategic change, the WAI workforce was significantly decreased and future WAI
requirements for sales and engineering development are expected to be contracted
from elsewhere within the Company. After making these changes, the Company
evaluated the ongoing value of the non-current assets of WAI. Based on this
evaluation, the Company determined that assets, principally goodwill and other
intangibles, with a carrying value of approximately $51 million at September 30,
1999 were impaired and wrote them down by the remaining balance. Fair value was
based on estimates of discounted future cash flows to be generated by the
acquired WAI products.
During the third quarter 2000, the Company entered into an escrow settlement
with the former WAI shareholders. The Acquisition Agreement ("the Agreement")
between the Company and the former WAI shareholders provided that $12 million of
the purchase price would be placed in escrow for the purpose of satisfying any
claims of indemnity that the Company might make. The Agreement contained
representations and warranties by the former shareholders of WAI that its
AccessMate and AccessLink II pager products, which at the time of the
acquisition were under development, would be manufactured in specified
quantities and by dates set forth in the Agreement. The Agreement further
provided that the WAI shareholders would indemnify the Company in the event that
these pager products did not comply with the manufacture dates and products
specifications. In February 1999, the Company made an indemnity claim against
the former WAI shareholders for the entire amount of the escrow on the ground
that WAI failed to comply with or was late in complying with the manufacture
dates and product specifications. In January 2000, the representative of the
former shareholders of WAI filed an answering statement to this claim denying
the allegations of the Company and asserting that the former shareholders of WAI
were entitled to all funds accumulated in escrow. In August of 2000, the Company
and the former shareholders entered into a settlement agreement that disbursed
$11.5 million of the escrow funds to the Company. As part of this settlement the
former WAI shareholders were disbursed $2.1 million of the funds. The Company
incurred approximately $600,000 of costs which have been netted against the
proceeds received. As all of the goodwill and other intangibles related to the
WAI acquisition were determined to be impaired and were written off in the third
quarter 1999, the net proceeds from the escrow settlement of $10.9 million are
included in the Company's condensed statements of operations for both the
three-month and nine-month periods ended September 30, 2000. Additionally, the
settlement agreement releases all claims by both parties to the Agreement.
Depreciation and Amortization Expense. Depreciation and amortization expense was
$5.0 million and $7.9 million for the three-month periods ended September 30,
2000 and 1999, respectively, and $15.2 million and $24.3 million for the
nine-month periods ended September 30, 2000 and 1999, respectively. The
decreases in expenses for the three-month and nine-month periods are a result of
(i) the write-off of goodwill related to the 1997 acquisition of Wireless
Access, Inc. ("WAI") and other fixed and intangible
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assets in the third quarter 1999, (ii) older assets becoming fully depreciated
and (iii) disposal of capital assets related to the 1999 restructurings.
Unrealized loss on subordinated notes. In May 1998, as part of an overall
financing program with the customer, the Company purchased $11.7 million in 9%
convertible subordinated senior notes ("subordinated notes") from Conxus
Communications, Inc. ("Conxus") which were included in Other Assets as an
available-for-sale debt security. Based on the weak financial condition of
Conxus, the Company recorded other than temporary unrealized losses on the
subordinated notes in its results of operations for second quarter 1998 and
third quarter 1998 of $583,000 and $767,000, respectively. On May 18, 1999,
Conxus filed for protection under Chapter 11 with the United States Bankruptcy
Court for the District of Delaware. As a result, the Company included in its
results of operations a further write down of $8.1 million to reflect the
expected amount to be realized of $2.2 million upon the conclusion of the
bankruptcy proceedings. In October 1999, the Company collected $2.1 million
related to the subordinated notes.
Adjustment to Loss on Sale of Business. In December 1998, Glenayre sold its
network management business, which it had been operating since January 1997. For
the year ended December 31, 1998, a loss on disposal of $7.9 million was
reported in loss from operations before income taxes. The loss consists of the
write-offs of assets, facility closing costs, severance payments to employees,
certain transition costs associated with training employees of the buyer and
other charges related to the sale. During the fourth quarter 1999 and the first
quarter 2000, the Company reversed approximately $550,000 and $520,000,
respectively, of expenses previously included in the $7.9 million loss on sale
of the Company's network management business. These credit adjustments were
primarily related to specific transition costs in the sale agreement and
facility closing costs, which will not be incurred by the Company.
Interest Income, Net. Interest income, net was $1.7 million and $900,000 for the
three-month periods ended September 30, 2000 and 1999, respectively, and $4.6
million and $4.2 million for the nine-month periods ended September 30, 2000 and
1999, respectively. Interest earned for the three-month and nine- month periods
ended September 30, 2000 was higher due to an increase in cash and cash
equivalents generating higher investment interest income, offset partially by
interest income only being recorded as received for certain notes where
customers have experienced financial difficulties. Additionally, interest income
is higher for the nine-month period ended September 30, 2000 due to interest
expense incurred in the first quarter 1999 for borrowings on the Company's prior
credit facility. The Company expects that the level of interest income, net in
2000 will vary in accordance with the level of secured debt financing and the
level of cash and cash equivalents available for investment.
Provision for Income Taxes. The effective tax rates for the three-month and
nine-month periods ended September 30, 2000 and 1999 differed from the combined
U.S. federal and state statutory tax rate of approximately 40% due primarily to
(i) the change in the valuation allowance, (ii) nondeductible goodwill
amortization, (iii) higher tax rates on earnings indefinitely reinvested in
certain non-U.S. jurisdictions, (iv) the receipt of previously escrowed funds
related to the 1997 acquisition of Wireless Access that is treated as a purchase
price adjustment for tax purposes and (v) 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 2000 compared to 1999 is primarily the result of the
change in the valuation allowance as well as a variance between the adjustments
in each year for realization of tax benefits of net operating loss carryforwards
for financial statement purposes in accordance with SFAS 109.
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Financial Condition and Liquidity
Liquidity and Capital Resources. At September 30, 2000 the Company had cash and
cash equivalents and restricted cash totaling $105.3 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 September
30, 2000, Glenayre's principal source of liquidity is $88.5 million of cash and
cash equivalents. The Company is currently pursuing a new credit facility which
is expected to be used primarily to collateralize the Company's letters of
credit, which are currently restricting $16.8 million of the Company's cash and
cash equivalents.
Inventories decreased at September 30, 2000 compared to December 31, 1999 due to
(i) an adjustment based on current technological advances, to value a portion of
the Company's wireless messaging inventory to market, (ii) an increase in
inventories at 1999 year end for potential operating inefficiencies from the
manufacturing consolidation process and (iii) actual efficiencies obtained as a
result of the manufacturing consolidation process during 2000. This decrease is
being partially offset by the reduction in the second quarter 2000 of slow
moving inventory reserves as a result of changing market conditions which are
focused on the two-way wireless internet.
Accrued expenses at September 30, 2000 decreased from year-end 1999 primarily
due to reductions in (i) restructuring reserves, (ii) reserves for sale of the
network management business, (iii) salaries and other payroll accruals due to
timing differences, (iv) reserves for wireless messaging rework, (v) state sales
tax, (vi) international long-term projects and (vii) income taxes payable
partially offset by an increase in deferred revenue and employee incentive plan
accruals.
As of September 30, 2000, the Company had restructuring reserves of $380,000
related to the 1999 restructurings. See Note 9 to the Company's Condensed
Consolidated Financial Statements. As a result of these charges, subsequent to
September 30, 2000, the Company expects to make cash payments from operating
cash flows for employee termination and lease exit costs of approximately
$380,000 over the next year.
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. In general, 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 paging infrastructure and voicemail products reducing the commitment from
$30 million to $10 million. This commitment has been in place since March 21,
1997 and expires on December 31, 2000. Amounts outstanding under this financing
arrangement as of September 30, 2000 are $3.8 million. The largest amount
borrowed by the customer was approximately $23 million as of December 31, 1997.
The customer has communicated to the Company their intention to fully utilize
this commitment by December 31, 2000. From time to time, the Company has also
arranged for third-party investors to assume a portion of its commitments. As a
general policy since June 30, 1999, the Company no longer guarantees customer
financing arrangements with third parties. The Company's maximum exposure from
third-party guarantees issued prior to June 30, 1999 is approximately $400,000
as of September 30, 2000 versus the largest amount of approximately $4 million
at September 30, 1997. These financing arrangements are secured by equipment
sold by Glenayre. The majority of these commitments expire on or before February
28, 2001.
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During 1997, the Company began the construction of an 110,000 square foot
expansion of its Vancouver facility to be used primarily for research and
development and service. However, during the first quarter 1999, the Company
halted the construction in progress on the facility and revised plans to
complete only a parking facility and a 16,000 square foot first level at a total
cost of approximately $12 million, substantially all of which was paid as of
December 31, 1999. The Company is currently exploring opportunities that will
satisfy the requirements for its Vancouver operations.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to support the short-term and
long-term liquidity requirements for current operations (including annual
capital expenditures and prior financing commitments outstanding to one
customer). Company management believes that, if needed, it can establish
additional borrowing arrangements with lending institutions.
Income Tax Matters. For 1999, Glenayre's actual cash outlay for taxes was
limited to U.S. alternative minimum tax and foreign and state income taxes
primarily due to the availability of foreign sales corporation benefits and the
utilization of research and development tax credits. The Company's cash outlay
for taxes is not expected to be significant in 2000 due to net operating loss
carryforwards.
As of September 30, 2000, the Company has U.S. tax net operating loss
carryforwards ("NOLs") aggregating $33 million related to the 1997 acquisitions
of Open Development Corporation and 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 2000 or future periods.
The Company has recorded a deferred tax asset of $54 million, net of a valuation
allowance of $15 million, at September 30, 2000, 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.
Impact of Recently Issued Accounting Standards. In June 1998, the FASB issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which is required to be adopted in years beginning after June 15, 2000. The
Company expects to adopt the new Statement effective January 1, 2001. The
Statement will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of this new Statement will have a significant
effect on earnings or the financial position of the Company.
In December 1999 the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). The
provisions of the statement are effective beginning in the fourth quarter 2000.
The Company believes its current revenue recognition policies comply with the
provisions of SAB 101. Accordingly, SAB 101 is not expected to effect the
Company's revenue, earnings or financial position.
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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 often 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 its
prior commitment to one customer for 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.
The Company seeks 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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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 27 Financial Data Schedule. (Filed in
electronic format only. Pursuant to Rule
402 of Regulation S-T, this schedule shall
not be deemed filed for purposes of Section
11 of the Securities Act of 1933 or Section
18 of the Securities Exchange Act of 1934.)
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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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 C. Klein
----------------------------------------
Bert C. Klein
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: October 27, 2000
