--------------------------------------------------------------------------------
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 June 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 July 24, 2000 was 64,424,063 shares.
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<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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INDEX
Part I - Financial Information:
<TABLE>
<CAPTION>
Item 1. Financial Statements
Page
----
<S> <C>
Independent Accountants' Review Report...................................... 3
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and December 31, 1999........................ 4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2000 and 1999 (Unaudited).................. 5
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2000 and 1999 (Unaudited).................... 6
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2000 (Unaudited)..................... 7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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..................................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................. 21
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders..... ................... 22
Item 6. Exhibits and Reports on Forms 8-K........................................... 22
</TABLE>
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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 June 30, 2000, and the
related condensed consolidated statements of operations for the three-month
periods and six-month periods ended June 30, 2000 and 1999, the condensed
consolidated statement of stockholders' equity for the six months ended June 30,
2000 and the condensed consolidated statements of cash flows for the six-month
periods ended June 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
July 18, 2000
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3
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $96,759 $73,513
Restricted cash................................................ 7,286 10,355
Accounts receivable, net....................................... 87,089 88,736
Notes receivable............................................... 2,383 7,083
Inventories.................................................... 24,383 28,130
Deferred income taxes.......................................... 15,790 16,668
Prepaid expenses and other current assets...................... 6,041 4,249
-------- --------
Total current assets...................................... 239,731 228,734
Notes receivable, net.............................................. 1,781 4,707
Property, plant and equipment, net................................. 84,131 88,654
Goodwill........................................................... 46,655 47,999
Deferred income taxes.............................................. 40,286 40,507
Other assets....................................................... 2,970 2,957
-------- --------
TOTAL ASSETS....................................................... $415,554 $413,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................... $16,317 $18,073
Accrued liabilities............................................ 40,445 52,534
Other current liabilities...................................... 81 92
-------- --------
Total current liabilities................................. 56,843 70,699
Other liabilities.................................................. 7,290 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: June 30, 2000 - 64,328,482
shares; December 31, 1999 - 62,430,153 shares................ 1,286 1,248
Contributed capital............................................ 358,389 345,097
Accumulated deficit............................................ (8,254) (10,867)
-------- --------
Total stockholders' equity................................ 351,421 335,478
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $415,554 $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.
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4
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES.......................................................... $56,672 $53,477
------- -------
COSTS AND EXPENSES:
Cost of sales................................................ 22,893 33,909
Selling, general and administrative expense.................. 17,686 19,927
Provision for doubtful receivables........................... 342 64,855
Research and development expense............................. 9,516 10,471
Depreciation and amortization expense........................ 5,095 8,129
Unrealized loss on subordinated notes........................ --- 8,100
------- -------
Total Costs and Expenses............................... 55,532 145,391
------- -------
INCOME (LOSS) FROM OPERATIONS...................................... 1,140 (91,914)
------- -------
OTHER INCOME (EXPENSES):
Interest income.............................................. 1,717 958
Interest expense............................................. (14) (51)
Gain (Loss) on disposal of assets............................ 129 (535)
Other, net................................................... (129) 39
------- -------
Total Other Income (Expenses), net.................... 1,703 411
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................................... 2,843 (91,503)
PROVISION (BENEFIT) FOR INCOME TAXES............................... 1,355 (29,747)
------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 1,488 (61,756)
INCOME FROM DISCONTINUED OPERATIONS (net of
income tax) ................................................. --- 415
------- -------
NET INCOME (LOSS).................................................. $1,488 $(61,341)
======= ========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations........................................ $0.02 $(0.99)
Discontinued Operations...................................... --- 0.00
------- -------
$0.02 $(0.99)
======= =======
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations........................................ $0.02 $(0.99)
Discontinued Operations...................................... --- 0.01
------- --------
$0.02 $(0.98)
======= ========
</TABLE>
See notes to condensed consolidated financial statements
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5
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES.......................................................... $115,327 $114,788
-------- --------
COSTS AND EXPENSES:
Cost of sales................................................ 50,410 67,041
Selling, general and administrative expense.................. 34,612 39,440
Provision for doubtful receivables........................... 511 65,244
Research and development expense............................. 18,295 20,971
Depreciation and amortization expense........................ 10,133 16,418
Unrealized loss on subordinated notes........................ --- 8,100
Adjustment to loss on sale of business....................... (524) ---
-------- --------
Total Costs and Expenses............................... 113,437 217,214
-------- --------
INCOME (LOSS) FROM OPERATIONS...................................... 1,890 (102,426)
-------- --------
OTHER INCOME (EXPENSES):
Interest income.............................................. 3,010 3,561
Interest expense............................................. (29) (266)
Gain (Loss) on disposal of assets............................ 303 (812)
Other, net................................................... (296) 353
-------- --------
Total Other Income (Expenses), net.................... 2,988 2,836
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................................... 4,878 (99,590)
PROVISION (BENEFIT) FOR INCOME TAXES............................... 2,265 (35,939)
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 2,613 (63,651)
INCOME FROM DISCONTINUED OPERATIONS (net of
income tax) ................................................. --- 713
-------- --------
NET INCOME (LOSS).................................................. $2,613 $(62,938)
======== =========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations........................................ $0.04 $(1.02)
Discontinued Operations...................................... --- 0.01
-------- --------
$0.04 $(1.01)
======== ========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations........................................ $0.04 $(1.02)
Discontinued Operations...................................... --- 0.01
-------- --------
$0.04 $(1.01)
======== ========
</TABLE>
See notes to condensed consolidated financial statements
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6
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Total
------------ Contributed Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ----------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999........ 62,430 $1,248 $345,097 $(10,867) $335,478
Net Income......................... 2,613 2,613
Stock options exercised............ 1,898 38 13,292 13,330
------ ------ -------- ------- --------
Balances, June 30, 2000............. 64,328 $1,286 $358,389 $(8,254) $351,421
====== ====== ======== ======= ========
</TABLE>
See notes to condensed consolidated financial statements
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7
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------
2000 1999
----------------- ----------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES........ $15,132 $16,276
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (5,332) (7,292)
Proceeds from sale of equipment.................................. 134 66
------- -------
Net cash used in investing activities...................... (5,198) (7,226)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities..................................... (18) (115)
Issuance of common stock......................................... 13,330 195
------- -------
Net cash provided by financing activities.................. 13,312 80
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 23,246 9,130
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD....................................................... 73,513 12,283
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..... $96,759 $21,413
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest........................................................ $35 $271
Income taxes.................................................... $1,411 $2,315
</TABLE>
See notes to condensed consolidated financial statements
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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 six-month periods ended
June 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
The Company signed an agreement dated as of September 30, 1999 for the sale of
95% of the equity interest in its microwave radio business, Western Multiplex
Corporation ("MUX"). MUX markets products for use in point-to-point microwave
communication systems and was acquired by the Company in April 1995. The
transaction closed on November 1, 1999 and the Company received cash of
approximately $37 million. 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 six-month periods ended June 30, 2000 presented in the
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 June 30, 2000 related to these obligations is approximately $4.0
million.
2. Restricted Cash
Restricted cash at June 30, 2000 consisted of term deposits pledged as
collateral to secure letters of credit substantially all of which expire during
2000.
3. Accounts and Notes Receivables
Accounts receivable consist of:
June 30, December 31,
2000 1999
---------- ------------
Trade receivables ........................... $ 102,062 $ 104,206
Retainage receivables........................ 319 319
Other........................................ 1,653 1,883
--------- ---------
104,034 106,408
Less: allowance for doubtful accounts........ (16,945) (17,672)
--------- ---------
$ 87,089 $ 88,736
========= =========
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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 June 30, 2000 and December 31, 1999 included unbilled costs
and estimated earnings under contracts in the amount of approximately $23
million and $25 million, respectively. Unbilled amounts are invoiced upon
reaching certain milestones.
Notes receivable consist of:
June 30, December 31,
2000 1999
------- --------------
Current .............................. $ 2,383 $ 7,083
Non-current .......................... 54,627 57,724
-------- --------
57,010 64,807
Less: reserves ....................... (52,846) (53,017)
-------- --------
$ 4,164 $ 11,790
======== ========
The Company's 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. As a result, amounts owed on notes from these customers of
approximately $55 million at June 30, 2000 and $62 million at December 31, 1999
were considered impaired. The average amount of impaired notes during the
three-month and six-month periods ended June 30, 2000 was approximately $57
million and $59 million, respectively. The reserve on these notes was
approximately $53 million at June 30, 2000 and December 31, 1999. Reserve
activity during the three and six months ended June 30, 2000 included additions
to the reserves of approximately $20,000 and $290,000 and write-offs of
approximately $470,000. Interest receivable from these notes of approximately
$2.3 million was fully reserved as of June 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 $121,000 during the three-month and six-month periods ended June 30, 2000,
respectively.
4. Inventories
June 30, December 31,
Inventories consist of: 2000 1999
--------------- ---------------
Raw materials........................... $13,271 $14,742
Work-in-process......................... 8,805 8,452
Finished goods.......................... 2,307 4,936
--------- ---------
$24,383 $28,130
======= =======
5. Goodwill
Goodwill is shown net of accumulated amortization of $21 million and
$19 million at June 30, 2000 and December 31, 1999, respectively.
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10
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
2000 1999 2000 1999
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate $ 996 $(32,027) $ 1,707 $(34,857)
Change in valuation allowance ............. 50 1,502 50 (2,481)
Foreign taxes at rates other than U.S.
statutory rate ......................... 168 (203) 168 (336)
State taxes (net of federal benefit) ...... --- (31) --- (296)
U.S. Research and Experimentation Credits . (50) (80) (50) (160)
Benefit from foreign sales corporation .... (75) (40) (150) (80)
Non-deductible goodwill amortization ...... 235 1,132 470 2,271
Other non-deductible ...................... 31 --- 70 ---
-------- -------- -------- --------
Income tax provision (benefit) ............ $ 1,355 $(29,747) $ 2,265 $(35,939)
======== ======== ======== ========
</TABLE>
The Company believes that it is more likely than not that the net deferred tax
asset recorded at June 30, 2000 will be fully realized.
7. 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 Six Months Ended
June 30, June 30,
------------------------------ ------------------------
2000 1999 2000 1999
---- ---- ---- ----
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) from continuing operations........... $1,488 $(61,756) $2,613 $(63,651)
Denominator:
Denominator for basic income (loss) from
continuing operations per share -weighted
average shares......................................... 64,257 62,168 63,737 62,142
Effect of dilutive securities:
stock options........................................... 2,789 --- 3,300 ---
------ ------ ------ ------
Denominator for diluted income (loss) from
continuing operations per share-
adjusted weighted average shares and assumed
conversions............................................ 67,046 62,168 67,037 62,142
====== ====== ====== ======
Income (loss) from continuing operations per
weighted average common share.......................... $0.02 $(0.99) $0.04 $(1.02)
====== ======= ======= =======
Income (loss) from continuing operations per
common share-assuming dilution......................... $0.02 $(0.99) $0.04 $(1.02)
====== ======= ======= =======
</TABLE>
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<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
8. 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 $8.3
million related to the staff reduction were paid before June 30, 2000. During
the three and six month periods ended June 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 and six month periods ended June 30, 2000, the
Company reversed approximately $190,000 and $210,000, 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 $250,000 was paid through the
second 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 three and six month periods ended June 30, 2000, the Company reversed
approximately $120,000 and $630,000, respectively, of accrued lease termination
costs and asset impairment charges related to the 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 three and six month periods ended June 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 $10,000 and $20,000, respectively.
During the three and six months ended June 30, 2000, the total pre-tax reversal
for the third quarter 1999 restructuring was recorded as a reduction of
approximately $160,000 and $410,000 to cost of sales, $30,000 and $180,000 to
loss on sale of assets, $0 and $70,000 to selling, general and administrative
expenses, and $130,000 and $120,000 to research and development expenses,
respectively.
The reserve balance for the third quarter 1999 restructuring was approximately
$870,000 at June 30, 2000. Additionally, the Company has remaining reserves from
first quarter 1999 restructuring totaling approximately $10,000.
Management believes the remaining reserves for business restructuring are
adequate to complete the above plans.
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Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
The following is a summary of activity for the six-month period ended June 30,
2000 for the 1999 restructuring reserves.
<TABLE>
<CAPTION>
Lease
Severance and Cancellation 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................................ (5,540) (1,080) (6,620)
Change in estimate..................... (190) (630) (820)
----- ------ ------
Balance at June 30, 2000............... $840 $ 40 $880
===== ====== ======
</TABLE>
9. 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 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 Six Months Ended
June 30, June 30,
------------------------------------ ----------------------------------
Segment net sales 2000 1999 2000 1999
----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Wireless Messaging................ $27,747 $32,318 $58,237 $77,522
Enhanced Services Platform........ 28,925 21,159 57,090 37,266
-------- -------- -------- --------
Total.................................. $56,672 $53,477 $115,327 $114,788
======== ======== ======== ========
</TABLE>
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13
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Wireless Messaging................ $19,260 $21,480 $38,438 $51,046
Enhanced Services Platform........ 22,826 16,071 44,749 26,979
-------- -------- -------- --------
Total Contribution Margin...... 42,086 37,551 83,187 78,025
Segment support costs............. (34,181) (44,084) (67,940) (82,774)
Corporate activities.............. (1,670) (77,252) (3,748) (81,259)
Depreciation and amortization..... (5,095) (8,129) (10,133) (16,418)
(Loss) adjustment to loss on
sale of business............... --- --- 524 ---
Interest income (expense), net.... 1,703 907 2,981 3,295
(Loss) adjustment to loss on
disposal of assets............. 129 (535) 303 (812)
Other income (expense)............ (129) 39 (296) 353
-------- -------- -------- --------
Income (loss) from continuing
operations before income taxes.. $2,843 $(91,503) $4,878 $(99,590)
======== ======== ======== ========
<CAPTION>
June 30, March 31, December 31,
2000 2000 1999
---------------------- -------------------- --------------------
(Restated) (Restated)
Segment Assets
---------------
Wireless Messaging................ $219,493 $213,816 $232,295
Enhanced Services Platform........ 56,216 62,032 57,457
Deferred Income Taxes............. 56,076 57,176 57,176
Corporate Assets.................. 83,769 80,808 66,630
---------- ---------- ----------
Total............................. $415,554 $413,832 $413,558
========== ========== ==========
</TABLE>
10. Subsequent Events
As part of the Company's strategy to expand into new markets for its Enhanced
Services Platform business the Company, on June 30, 2000, entered into stock
purchase agreements 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 transaction closed in July 2000.
Accordingly, the Company will record the purchase as an investment in
available-for-sale securities in the third quarter 2000. Additionally, on June
30, 2000, the Company and Multi-Link entered into a volume purchase agreement
where Multi-Link has agreed to purchase from the Company not less than $2.5
million of equipment over the next three years. The volume purchase agreement
also provides that the Company would be Multi-Link's exclusive provider of voice
messaging equipment.
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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, 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, PCS, wireless,
data, paging and IP networks.
The Company signed an agreement dated as of September 30, 1999 for the sale of
95% of the equity interest in its microwave radio business, Western Multiplex
Corporation ("MUX"). MUX markets products for use in point-to-point microwave
communication systems and was acquired by the Company in April 1995. The
transaction closed on November 1, 1999 and the Company received cash of
approximately $37 million. 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 has filed a Registration Statement with the
Securities and Exchange Commission for an initial public offering. In the event
that MUX completes its initial public offering, the Company would be eligible to
begin selling its shares of MUX beginning 90 days after the completion of the
initial public offering.
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 Six Months Ended
June 30, June 30,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 40.4 63.4 43.7 58.4
----- ---- ------ ----
Gross profit ......................................... 59.6 36.6 56.3 41.6
Operating expenses:
Selling, general and administrative................... 31.2 37.3 30.0 34.4
Provision for doubtful receivables.................... 1.0 121.3 * 56.8
Research and development.............................. 16.8 19.6 15.9 18.3
Depreciation and amortization......................... 9.0 15.2 8.8 14.3
Unrealized loss on subordinated notes................. --- 15.1 --- 7.0
Adjustment to loss on sale of business................ --- --- * ---
----- ------ ------ ------
Total operating expenses.......................... 57.6 208.5 54.7 130.8
----- ----- ------ ------
Income (loss) from operations ............................ 2.0 (171.9) 1.6 (89.2)
Interest, net............................................. 3.0 1.7 2.6 2.9
Gain (loss) on disposal of assets......................... * (1.0) * (1.0)
Other, net................................................ * * * *
----- ----- ------ ------
Income (loss) from continuing operations before
income taxes.......................................... 4.6 (171.1) 4.2 (86.8)
Provision (benefit) for income taxes...................... 2.3 (55.6) 2.0 (31.3)
----- ------ ------- -----
Income (loss) from continuing operations.................. 2.6% (114.7)% 2.3% (54.8)%
===== ====== ======= ======
</TABLE>
----------------
* less than 0.5%
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Glenayre Technologies, Inc. and Subsidiaries
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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 Six Months Ended
June 30, June 30,
------------------------------ --------------------------
2000 1999 2000 1999
------------- ------------ --------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Wireless Messaging Products ....................... $27,747 $32,318 $58,237 $77,522
Enhanced Services Platform Products................ 28,925 21,159 57,090 37,266
------- ------- -------- --------
$56,672 $53,477 $115,327 $114,788
======= ======= ======== ========
(percentage of net sales)
Wireless Messaging Products........................ 49% 60% 50% 68%
Enhanced Services Platform Products................ 51 40 50 32
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
Three-Month and Six-Month Periods Ended June 30, 2000 and 1999
Net Sales. Net sales for the three months ended June 30, 2000 increased 6% to
$56.7 million as compared to $53.5 million for the three months ended June 30,
1999. Net sales were $115.3 million and $114.8 million for the six months ended
June 30, 2000 and 1999, respectively. International sales (sales outside the
United States) were approximately $25 million for the three months ended June
30, 2000 as compared to approximately $27 million for the three months ended
June 30, 1999 and accounted for 45% and 50% of net sales for the three months
ended 2000 and 1999, respectively. International sales were approximately $49
million for the six months ended June 30, 2000 as compared to approximately $54
million for the six months ended June 30, 1999 and accounted for 42% and 47% of
net sales for the six months ended June 30, 2000 and 1999, respectively.
The increase in net sales for the three-month and six-month periods ended June
30, 2000 as compared to those same periods in 1999 resulted from a continued
robust market demand in North America for the Company's enhanced services
platform MVP(TM) product offset partially 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, driven by 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 six-month periods ended June 30, 1999 and 2000.
Gross Profit. Gross profit margins were 60% and 37% for three-month periods
ended June 30, 2000 and 1999, respectively. Gross profit margins were 56% and
42% for the six-month periods ended June 30, 2000 and 1999, respectively. The
increase in margin percentages for the 2000 periods is primarily due to (i)
higher sales of enhanced services platform product which yield higher gross
margins, (ii) cost savings associated with the consolidation of the Company's
manufacturing facilities to Quincy, Illinois, (iii) charges incurred in the
second quarter 1999 for a bankruptcy filing of a customer for which certain
inventory parts had been purchased, (iv) additional slow moving inventory
reserves recorded in the second quarter 1999 as a result of lower forecast for
1999 revenues related to paging infrastructure, (v) decrease in international
project risk accruals due to actual costs of satisfying both contractual and
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<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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statutory requirements being less than previously expected, (vi) decreases in
warranty reserves in second quarter 2000 for changes in estimated costs or
completion of projects originally requiring the warranty provision and (vii) the
reduction of slow moving inventory reserves due to changing market conditions
and a focus on the two way wireless internet resulting in higher utilization of
paging infrastructure inventory. These decreases are offset partially by a
charge 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. 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 $17.7 million and $19.9 million for the three-month periods ended
June 30, 2000 and 1999, respectively and $34.6 million and $39.4 million for the
six-month periods ended June 30, 2000 and 1999, respectively. The decreases in
the 2000 periods are primarily attributable to lower employee related expenses
including salaries and wages, fringe benefits and travel as well as lower
facility lease expense due to the first and third quarter 1999 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
$342,000 and $511,000 for the three-month and six-month periods ended June 30,
2000 compared to $65 million for the three-month and six-month periods ended
June 30, 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 (i) Financial Condition and
Liquidity-Liquidity and Capital Resources and (ii) Note 3 to the Condensed
Consolidated Financial Statements).
Research and Development Expense. Research and development expenses were $9.5
million and $10.5 million for the three-month periods ended June 30, 2000 and
1999, respectively, and $18.3 million and $21.0 million for the six-month
periods ended June 30, 2000 and 1999, respectively. The decreases in the 2000
periods are primarily attributable to a reduction in employee related expenses
including salaries and wages, fringe benefits and hiring due to the third
quarter 1999 restructuring, partially offset by higher employee incentive bonus
expenses accrued as a result of meeting certain incentive plan targets in 2000.
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.
Depreciation and Amortization Expense. Depreciation and amortization expense was
$5.1 million and $8.1 million for the three-month periods ended June 30, 2000
and 1999, respectively, and $10.1 million and $16.4 million for the six-month
periods ended June 30, 2000 and 1999, respectively. The decreases in expenses
for the three-month and six-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 assets in the third quarter 1999, (ii) lower capital
expenditures 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 are included in Other Assets as an
available-for-sale debt security. Based on the weak financial condition of
Conxus, the
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Glenayre Technologies, Inc. and Subsidiaries
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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.
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 in connection with the
sale. The loss on sale 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 June 30, 2000 and 1999, respectively and $3.0 million
and $3.3 million for the six-month periods ended June 30, 2000 and 1999,
respectively. Interest earned for the three months ended June 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. Interest earned for the six months ended June 30, 2000
is lower due to interest income being recorded only as received on certain notes
receivables where customers have experienced financial difficulties, offset
partially by an increase in cash and cash equivalents. 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
six-month periods ended June 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 and (iv) 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.
Financial Condition and Liquidity
Liquidity and Capital Resources. At June 30, 2000 the Company had cash and cash
equivalents and restricted cash totaling $104 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit,
substantially all of which expire during 2000. At June 30, 2000, Glenayre's
principal source of liquidity is $95 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 $9 million of the Company's cash and cash equivalents.
Approximately $3 million of trade accounts and interest receivables and $36
million or 64% of the gross notes receivable balance of $57 million as of June
30, 2000 was due from Conxus Communications, Inc. ("Conxus"), which was engaged
in the buildout of a major narrowband personal communications services
--------------------------------------------------------------------------------
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<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
network in the advanced voice and text paging market. In August 1999, Conxus
converted its bankruptcy to liquidation under Chapter 7 with the United States
Bankruptcy Court for the District of Delaware. The Company expects that
substantially all of the receivables from Conxus will not be collected and as a
result recorded additional bad debt reserves to fully reserve receivables from
Conxus of approximately $38 million as of June 30, 1999. The Company also holds
$9.5 million in subordinated notes from Conxus, which were fully reserved, as no
additional amounts are expected to be collected.
Historically, the Company had not experienced any significant issues related to
the collection of receivables from its customers. However, in addition to the
Conxus bankruptcy, several other events occurred or continued with more
intensity in 1999 including (i) a bankruptcy filing by another U.S. customer,
(ii) a South American customer seeking debt restructuring and (iii) increased
resource requirements to collect receivables from customers in certain
international countries where currency valuation issues could also affect the
Company's ability to collect its notes and accounts receivable. As a result of
these and other deteriorations in the paging infrastructure market, the Company
changed its estimates for the allowance for doubtful receivables as discussed in
Note 4 to the Company's Consolidated Financial Statements as filed on Form 10-K
for the year ended December 31, 1999. The Company recorded an increase to the
Accounts Receivable and Notes Receivable reserves of approximately $65 million
in the aggregate in the second quarter 1999.
Inventories decreased at June 30, 2000 compared to December 31, 1999 due to an
adjustment based on current technological advances, to value a portion of the
Company's wireless messaging inventory to market and an increase in inventories
at 1999 year end for potential operating inefficiencies from the manufacturing
consolidation process and actual inefficiencies 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 June 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) customer deposits,
(vi) warranty reserves, (vii) international long-term projects and (viii) income
taxes payable offset by an increase in deferred revenue in employee incentive
plan accruals.
As of June 30, 2000, the Company had restructuring reserves of $880,000 related
to the 1999 restructurings. See Note 8 to the Company's Condensed Consolidated
Financial Statements. As a result of these charges, subsequent to June 30, 2000,
the Company expects to make cash payments from operating cash flows for employee
termination and lease exit costs of approximately $880,000 over the next two
years.
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. As of June
30, 2000, the Company has a prior financing commitment to one customer for
paging infrastructure and voicemail products of up to $30 million. This
commitment has been in place since March 21, 1997 and expires on December 31,
2000. There have been no amounts outstanding under this financing arrangement
since June 30, 1999. During the term of the commitment, the largest amount
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Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
borrowed by the customer was approximately $23 million as of December 31, 1997.
The Company cannot currently predict the extent to which this commitment will be
utilized because the customer may be able to obtain more favorable terms using
traditional financing sources. 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 June
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.
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 June 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 $56 million, net of a valuation
allowance of $15 million, at June 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.
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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 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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Glenayre Technologies, Inc. and Subsidiaries
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Part II-OTHER INFORMATION
ITEMS 1 through 3 are inapplicable and have been omitted.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on May 11, 2000,
the following matters were submitted to a vote of the stockholders of
the Company.
The results of the voting were as follows:
(i) The election of four directors each to serve a three-year term
expiring 2003:
<TABLE>
<CAPTION>
Nominees Shares Voted in Favor Shares Withheld
-------- --------------------- ---------------
<S> <C> <C>
Clarke H. Bailey 56,338,707 3,360,065
Donald S. Bates 56,339,232 3,359,540
Peter W. Gilson 56,338,880 3,359,892
Thomas C. Israel 56,339,155 3,359,617
</TABLE>
(ii) The amendment to the Company's 1996 Incentive Stock Plan was
approved by a vote of 49,921,146 in favor and 9,656,082 against,
with 121,544 abstaining. There were no broker non-votes.
(iii) The proposal to approve the appointment of Ernst & Young LLP as
independent auditors of the Company was approved by a vote of
59,483,364 in favor, 109,915 against and 105,493 abstaining.
ITEM 5 is inapplicable and has been omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit 10.1 Employment Agreement dated June 18, 1999 between
the Company and Eric L. Doggett incorporated herein
by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999. On April 27, 2000, the Registrant and
Bert Klein entered into an Employment Agreement in
connection with his employment as Senior Vice
President and Chief Financial Officer that is
substantially identical in all material respects to
the Employment Agreement dated June 18, 1999 with
Eric L. Doggett except as to title, amount of base
salary, rate of bonus participation and number of
shares subject to stock options.
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.
</TABLE>
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(b) Reports on Form 8-K
During the three months ended June 30, 2000, the Company filed
a Current Report on Form 8-K dated June 2, 2000. Under Item 5,
the Company reported that it was amending its Preferred Shares
Right Agreement which was filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form 8-A, File No.
0-15761. This amendment permits the Company's largest investor,
The State of Wisconsin Investment Board, to increase its
holdings up to 20 percent of Glenayre's outstanding shares of
common stock.
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Glenayre Technologies, Inc. and Subsidiaries
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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.
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(Registrant)
/s/ Bert C. Klein
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Bert C. Klein
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: July 27, 2000
