- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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 April 25, 2000 was 64,235,363 shares.
- --------------------------------------------------------------------------------
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information:
Item 1. Financial Statements
Page
----
<S> <C> <C>
Independent Accountants' Review Report....................................... 3
Condensed Consolidated Balance Sheets as of
March 31, 2000 (Unaudited) and December 31, 1999....................... 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and 1999 (Unaudited)................. 5
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2000 (Unaudited).................. 6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (Unaudited)................. 7
Notes to Condensed Consolidated Financial Statements (Unaudited)............ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk...................................................... 19
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K........................................... 20
</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 March 31, 2000, and the
related condensed consolidated statements of operations for the three-month
periods ended March 31, 2000 and 1999, the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 2000 and the condensed
consolidated statements of cash flows for the three-month periods ended March
31, 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
April 14, 2000
3
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents....................................... $86,064 $73,513
Restricted cash................................................. 10,292 10,355
Accounts receivable, net........................................ 87,218 88,736
Notes receivable................................................ 8,904 7,083
Inventories..................................................... 22,397 28,130
Deferred income taxes........................................... 16,159 16,668
Prepaid expenses and other current assets....................... 4,078 4,249
-------- --------
Total current assets............................................ 235,112 228,734
Notes receivable, net........................................... 2,368 4,707
Property, plant and equipment, net.............................. 84,991 88,654
Goodwill........................................................ 47,327 47,999
Deferred income taxes........................................... 41,017 40,507
Other assets.................................................... 3,017 2,957
-------- --------
TOTAL ASSETS.................................................... $413,832 $413,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................ $15,094 $18,073
Accrued liabilities............................................. 42,072 52,534
Other current liabilities....................................... 92 92
-------- --------
Total current liabilities....................................... 57,258 70,699
Other liabilities............................................... 7,346 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: March 31, 2000- 64,207,944
shares; December 31, 1999 - 62,430,153 shares................... 1,284 1,248
Contributed capital............................................. 357,686 345,097
Accumulated deficit............................................. (9,742) (10,867)
-------- --------
Total stockholders' equity...................................... 349,228 335,478
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $413,832 $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 IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------------
2000 1999
--------------------- ---------------------
<S> <C> <C>
NET SALES.......................................................... $58,656 $61,311
------- -------
COSTS AND EXPENSES:
Cost of sales................................................ 27,516 33,132
Selling, general and administrative expense.................. 17,096 19,902
Research and development expense............................. 8,779 10,500
Depreciation and amortization expense........................ 5,038 8,289
Adjustment to loss on sale of business....................... (524) ---
---------- -----------
Total Costs and Expenses............................... 57,905 71,823
---------- -----------
INCOME (LOSS) FROM OPERATIONS...................................... 751 (10,512)
---------- -----------
OTHER INCOME (EXPENSES):
Interest income............................................. 1,293 2,603
Interest expense............................................ (14) (215)
Other, net.................................................. 5 37
---------- -----------
Total Other Income (Expenses), net.................... 1,284 2,425
---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.............................................. 2,035 (8,087)
PROVISION (BENEFIT) FOR INCOME TAXES............................... 910 (6,192)
---------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS........................... 1,125 (1,895)
INCOME FROM DISCONTINUED OPERATIONS (net of
income tax)..................................................... --- 298
---------- -----------
NET INCOME (LOSS).................................................. $1,125 $(1,597)
========== ===========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations....................................... $0.02 $(0.03)
Discontinued Operations..................................... --- 0.00
---------- -----------
$0.02 $(0.03)
========== ===========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations....................................... $0.02 $(0.03)
Discontinued Operations..................................... --- 0.00
---------- -----------
$0.02 $(0.03)
========== ===========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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......................... 1,125 1,125
Stock options exercised............ 1,778 36 12,589 12,625
--------- --------- -------- -------- --------
Balances, March 31, 2000........... 64,208 $1,284 $357,686 $(9,742) $349,228
========= ======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. $1,517 $14,976
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (1,645) (3,791)
Proceeds from sale of equipment.................................. 59 25
-------- --------
Net cash used in investing activities...................... (1,586) (3,766)
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities..................................... (5) (60)
Issuance of common stock......................................... 12,625 163
------ ---------
Net cash provided by financing activities.................. 12,620 103
------ ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS...................................................... 12,551 11,313
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD........................................................ 73,513 12,283
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $86,064 $23,596
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.......................................................... $16 $218
Income taxes...................................................... 808 1,392
</TABLE>
See notes to condensed consolidated financial statements
7
<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 period ended March 31, 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
months ended March 31, 1999 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 March 31, 2000 related to
these obligations is approximately $4.1 million.
2. RESTRICTED CASH
Restricted cash at March 31, 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:
March 31, December 31,
2000 1999
---------- ---------------
Trade receivables........................ $102,328 $104,206
Retainage receivables.................... 319 319
Other.................................... 1,796 1,883
-------- ---------
104,443 106,408
Less: allowance for doubtful accounts.... (17,225) (17,672)
-------- ---------
$87,218 $88,736
======== =========
8
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Trade receivables at March 31, 2000 and December 31, 1999 included unbilled
costs and estimated earnings under contracts in the amount of approximately $24
million and $25 million, respectively. Unbilled amounts are invoiced upon
reaching certain milestones.
Notes receivable consist of:
March 31, December 31,
2000 1999
----------------- -----------------
Current............................... $8,904 $7,083
Non-current........................... 55,190 57,724
-------- --------
64,094 64,807
Less: reserves........................ (52,822) (53,017)
-------- --------
$11,272 $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 worsening financial
condition. As a result, in 2000 and 1999 amounts owed on notes from these
customers of approximately $62 million at March 31, 2000 and December 31, 1999
were considered impaired. The average amount of impaired notes during the
three-month period ended March 31, 2000 was approximately $62 million. The
reserve on these notes was approximately $52 million and $53 million at March
31, 2000 and December 31, 1999, respectively. Reserve activity during the three
months ended March 31, 2000 included an addition to the reserves of
approximately $270,000 and write-offs of approximately $470,000. Interest
receivable from these notes of approximately $2.3 million was fully reserved as
of March 31, 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 $58,000 during the three-month period ended
March 31, 2000.
4. INVENTORIES
March 31, December 31,
Inventories consist of: 2000 1999
----------------- -----------------
Raw materials.......................... $11,514 $14,742
Work-in-process........................ 7,123 8,452
Finished goods......................... 3,760 4,936
--------- ---------
$22,397 $28,130
========= =========
5. GOODWILL
Goodwill is shown net of accumulated amortization of $20 million and
$19 million at March 31, 2000 and December 31, 1999, respectively.
9
<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:
Three Months Ended,
March 31,
-----------------------------
2000 1999
-------------- -----------
Income tax provision at U.S. statutory rate...... $712 $(2,830)
Reduction in valuation allowance................. --- (3,983)
Foreign taxes at rates other than U.S.
statutory rate................................ --- (133)
State taxes (net of federal benefit)............. --- (265)
U.S. Research and Experimentation Credits.... --- (80)
Foreign sales corporation benefit................ (75) (40)
Non-deductible goodwill.......................... 235 1,139
Other non-deductible ............................ 38 ---
------ ------
Income tax provision (benefit)................... $910 $(6,192)
====== =======
The Company believes that it is more likely than not that the net
deferred tax asset recorded at March 31, 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:
Three Months Ended,
March 31,
------------------------
2000 1999
-------- --------
Numerator:
Net income (loss) from continuing operations........ $1,125 $(1,895)
Denominator:
Denominator for basic income (loss) from
continuing operations per share -
weighted average shares............................. 63,222 62,116
Effect of dilutive securities:
Stock options....................................... 3,768 ---
-------- ---------
Denominator for diluted income (loss) from
continuing operations per share-adjusted
weighted average shares and assumed
conversions......................................... 66,990 62,116
========= ========
Income (loss) from continuing operations per
weighted average common share........................ $0.02 $(0.03)
========= ========
Income (loss) from continuing operations per
common share - assuming dilution..................... $0.02 $(0.03)
========= =========
10
<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, of which approximately $7.1 million was paid before
March 31, 2000, primarily for severance and outplacement on approximately 400
positions related to a 27% reduction of the Company's global workforce. This
headcount reduction impacted all functional areas of the Company but the
majority of the positions impacted, approximately 200, are associated with
consolidating the Company's Vancouver manufacturing operations to its Quincy,
Illinois manufacturing facility. During the first quarter 2000, the Company
expensed approximately $60,000 for retention performance bonuses related to the
third quarter 1999 restructuring, which were earned by employees in the first
quarter 2000. Additionally, during the first quarter 2000, the Company reversed
approximately $25,000 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 $220,000 was paid through the
first 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. Further, during the fourth quarter 1999, the Company
expensed approximately $150,000 for additional lease termination costs and asset
impairments at its Vancouver facility related to the third quarter 1999
restructuring. 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 first quarter 2000, the Company reversed approximately $470,000 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.
During the first quarter 2000, the total pre-tax reversal of the third quarter
1999 accrued restructuring was recorded as a reduction of approximately $250,000
to cost of sales, $150,000 to loss on sale of assets, and $70,000 to selling,
general and administrative expenses.
The reserve balance for the third quarter 1999 restructuring was approximately
$2.4 million at March 31, 2000. Additionally, the Company has remaining reserves
from first quarter 1999 and second quarter 1999 restructurings totaling
approximately $40,000.
Management believes the remaining reserves for business restructuring are
adequate to complete the above plans.
The following is a summary of activity during the three months ended March 31,
2000 for the 1999 restructuring reserves.
Lease Cancellation
Severance and and
Benefits Other Exit Costs Total
-------- ---------------- -----
Balance at December 31, 1999 $6,513 $1,746 $8,259
Expense accrued 61 -- 61
Charges (4,442) (958) (5,400)
Change in estimate (10) (502) (512)
------ ----- ------
Balance at March 31, 2000 $2,122 $ 286 $2,408
====== ===== ======
11
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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.
For the years ended 1999, 1998 and 1997, 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, in 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 and therefore, the
Company currently only measures segment results 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, there was no efficient and timely process 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. To incorporate this
change, the Company has restated below the amounts for 1999 previously reported
as segment assets. It was impracticable for the Company to restate previously
reported assets for 1998 and 1997 and therefore these amounts represent the
historical method which includes Enhanced Services Platform receivables and
inventories in the Wireless Messaging Segment assets.
Three Months Ended
March 31,
--------------------------------------
Segment net sales 2000 1999
- ----------------- --------------- -----------------
Wireless Messaging................ $30,491 $45,204
Enhanced Services Platform...... 28,165 16,107
------- -------
Total.................................. $58,656 $61,311
======= =======
12
<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 Twelve Months Ended
March 31, December 31,
-------------------- -----------------------------
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Wireless Messaging..................... $19,177 $29,561 $104,022 $180,349 $209,353
Enhanced Services Platform............. 21,924 10,908 60,864 47,944 52,722
------ ------ ------ ------ ------
Total Contribution Margin............ 41,101 40,469 164,886 228,293 262,075
Segment support costs.................. (33,757) (40,996) (250,019) (192,301) (165,694)
Corporate activities................... (2,079) (1,697) (9,711) (8,934) (10,693)
Charge for purchased research
and development........................ -- -- -- -- (38,700)
Depreciation and amortization.......... (5,038) (8,288) (29,860) (38,645) (20,834)
(Loss) adjustment to loss on
sale of business....................... 524 -- 554 (7,858) --
Write-off of goodwill and
other intangibles...................... -- -- (50,919) (26,705) (5,183)
Interest income (expense), net......... 1,279 2,388 5,302 8,209 10,386
(Loss) adjustment to loss on
disposal of assets..................... 174 (277) (4,431) (171) (254)
Other income (expense)................. (169) 314 483 (1,004) (1,893)
------ ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes
and cumulative effect of change
in accounting principle................ $2,035 $(8,087) $(173,715) $(39,116) $29,210
======= ====== ======= ====== ======
<CAPTION>
December 31,
March 31, -----------------------------------
2000 1999 1998 1997
---------- --------- --------- ----------
(Restated) (Not Restated)
Segment Assets
- --------------
<S> <C> <C> <C> <C>
Wireless Messaging................. $226,175 $239,947 $471,743 $457,190
Enhanced Services Platform......... 62,032 57,457 21,577 60,694
Discontinued Operations............ -- -- 34,451 35,563
Deferred Income Taxes.............. 57,176 57,175 21,585 15,031
Corporate Assets................... 68,449 58,979 12,439 21,683
------- ------- ------- -------
Total............................ $413,832 $413,558 $561,795 $590,161
======= ======= ======= =======
</TABLE>
13
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 used 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.
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 March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 46.9 54.0
----- -----
Gross profit....................................... 53.1 46.0
Operating expenses:
Selling, general and administrative................ 29.2 31.8
Research and development........................... 15.0 17.1
Depreciation and amortization...................... 8.6 13.5
Adjustment to loss on sale of business............. (1.0) --
----- -----
Total operating expenses....................... 51.8 62.4
----- -----
Income (loss) from operations......................... 1.3 (16.4)
Interest, net......................................... 2.2 3.9
Other, net............................................ * *
----- -----
Income (loss) from continuing operations before
income taxes................................... 3.5 (13.2)
Provision (benefit) for income taxes.................. 1.6 (10.1)
----- -----
Income (loss) from continuing operations.............. 1.9% (3.1)%
===== =====
</TABLE>
- -----------------
* less than 0.5%
14
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
The following table sets forth for the periods indicated net sales represented
by the Company's product segments:
Three Months Ended March 31,
-----------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
Wireless Messaging Products ................ $30,491 $45,204
Enhanced Services Platform Products......... 28,165 16,107
------- --------
$58,656 $61,311
======= =======
(PERCENTAGE OF NET SALES)
Wireless Messaging Products ................ 52.0% 73.7%
Enhanced Services Platform Products ........ 48.0 26.3
------- -------
100.0% 100.0%
======= ======
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
NET SALES. Net sales for the three months ended March 31, 2000 decreased 4% to
$59 million as compared to $61 million for the three months ended March 31,
1999. International sales (sales outside the United States) were $23 million for
the three months ended March 31, 2000 as compared to $27 million for the three
months ended March 31, 1999 and accounted for 40% and 45% of net sales for the
three months ended March 31, 2000 and 1999, respectively.
The decline in net sales resulted from the contraction of the traditional paging
market which the Company believes has stabilized at a level comparable to the
second quarter 1999 and the decrease in paging device sales as the rollout of
the two-way ReFLEX 25 devices did not begin until late in the first quarter
2000. This decrease is being partially offset by a robust market demand in North
America for the Company's enhanced services platform MVP(TM) product. 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 for the Company 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.
Sales to one customer totaled approximately 11% and 12% of net sales for the
three-month periods ended March 31, 2000 and 1999, respectively. Additionally,
another single customer accounted for 11% of net sales for the three-month
period ended March 31, 1999. The Company believes that the dependence on any one
customer is mitigated by the large number of companies in the Company's customer
base and the timing for development and expansions of their systems.
GROSS PROFIT. Gross profit was 53% and 46% of net sales for the three-month
periods ended March 31, 2000 and 1999, respectively. The increase in margin
percentages for the 2000 period is primarily due to higher sales of enhanced
services platform product which yield higher gross margins and cost savings
associated with the consolidation of the Company's manufacturing facilities to
Quincy, Illinois. 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.
15
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $17 million and $20 million for the three-month periods ended
March 31, 2000 and 1999, respectively. The decrease in the 2000 period is
primarily attributable to lower employee related expense including travel,
salaries and fringe benefits as well as lower facility lease expense due to the
first and third quarter 1999 restructurings. This decrease is being partially
offset by higher employee incentive bonus expenses accrued as a result of
meeting certain incentive plan targets for the first quarter 2000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $9
million and $11 million for the three months ended March 31, 2000 and 1999,
respectively. The decrease in the 2000 period is primarily attributable to lower
employee related expense including salaries, fringe benefits and hiring due to
the third quarter 1999 restructuring. This decrease is partially offset by
higher employee incentive bonus expenses as a result of meeting certain
incentive plan targets for the first quarter 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 million and $8 million for the three months ended March 31, 2000 and 1999,
respectively. The decrease in expenses for the 2000 period is 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.
INTEREST INCOME, NET. Interest income, net was $1 million and $2 million for the
three-month periods ended March 31, 2000 and 1999, respectively. Interest earned
in 2000 was 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 interest on 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-months ended
March 31, 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) lower 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 nondeductible goodwill amortization, the change
in the valuation allowance and 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 March 31, 2000 the Company had cash and cash
equivalents and restricted cash totaling $96 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit,
substantially all of which expire during 2000. At March 31, 2000, Glenayre's
principal source of liquidity is $86 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 $10 million of the Company's cash and cash equivalents.
Approximately $3 million of trade accounts and interest receivables and $36
million or 56% of the gross notes receivable balance of $64 million as of March
31, 2000 was due from Conxus Communications, Inc. ("Conxus"), which was engaged
in the buildout of a major narrowband personal communications services
16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
network in the advanced voice and text paging market. In August 1999, Conxus
filed for bankruptcy 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 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 of 1999.
Inventories decreased at March 31, 2000 compared to December 31, 1999 due to an
increase in inventories at 1999 year end for potential operating inefficiencies
that may have resulted from the manufacturing consolidation process and actual
efficiencies obtained as a result of the manufacturing consolidation process
during the first quarter 2000.
Accounts payable decreased at March 31, 2000 compared to December 31, 1999
primarily as a result of decreased inventory purchases. Accrued expenses at
March 31, 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 paging device rework, (v) customer deposits and (vi) warranty
reserves offset by an increase in deferred revenue and an increase in employee
incentive plan accruals.
As of March 31, 2000, the Company had restructuring reserves of $2.4 million
related to the 1999 restructurings. See Note 8 to the Company's Condensed
Consolidated Financial Statements. As a result of these charges, subsequent to
March 31, 2000, the Company expects to make cash payments from operating cash
flows for employee termination and lease exit costs of approximately $2.4
million over the next two years.
The Company's cash and 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 March
31, 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
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, since the customer
17
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 March 31, 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 a 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 (i) 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 March 31, 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 $57 million, net of a valuation
allowance of $15 million, at March 31, 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.
18
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
19
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
20
<PAGE>
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/ Stanley Ciepcielinski
------------------------------------
Stanley Ciepcielinski
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: April 28, 2000
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number
333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective
Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement
Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997, Registration Statement
Number 333-56375 on Form S-8 dated June 9, 1998, Registration Statement number
333-81161 on Form S-8 dated June 21, 1999 and Registration Statement number
333-81155 on Form S-8 dated June 21, 1999 of our report dated April 14, 2000,
relating to the unaudited condensed consolidated interim financial statements of
Glenayre Technologies, Inc. and subsidiaries which are included in its Form 10-Q
for the quarter ended March 31, 2000.
Ernst & Young LLP
Charlotte, North Carolina
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 96,356
<SECURITIES> 0
<RECEIVABLES> 168,537
<ALLOWANCES> 70,047
<INVENTORY> 22,397
<CURRENT-ASSETS> 235,112
<PP&E> 143,278
<DEPRECIATION> 58,287
<TOTAL-ASSETS> 413,832
<CURRENT-LIABILITIES> 57,258
<BONDS> 0
0
0
<COMMON> 1,284
<OTHER-SE> 347,944
<TOTAL-LIABILITY-AND-EQUITY> 413,832
<SALES> 58,656
<TOTAL-REVENUES> 58,656
<CGS> 27,516
<TOTAL-COSTS> 27,516
<OTHER-EXPENSES> 30,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 2,035
<INCOME-TAX> 910
<INCOME-CONTINUING> 1,125
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,125
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Glenayre Technologies, Inc. ("Glenayre" or the "Company"), from time to time,
makes "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect the expectations of
management of the Company at the time such statements are made. Glenayre is
filing this cautionary statement to identify important factors that could cause
Glenayre's actual results to differ materially from those in any forward-looking
statements made by or on behalf of Glenayre.
POTENTIAL DECLINE IN THE PAGING INFRASTRUCTURE MARKET
Over the last two years, the paging infrastructure market, which has
historically been Glenayre's core business, has contracted by approximately 50%.
While Glenayre believes that the market for paging infrastructure will not
continue to decline, there can be no assurance of this. If the paging
infrastructure market contracts further, it may result in decreased sales of
Glenayre's products, which would have a material adverse effect on Glenayre's
business.
EFFECTIVE CONVERGENCE OF TECHNOLOGIES
In recent years, the markets for each of wireless services, Internet services
and prepaid technologies has grown significantly. Glenayre is dependent on the
continued growth of these markets as well as the effective and successful
convergence of these technologies for its Enhanced Services Platform, such as
the Modular Voice Processing system and Intelligis LSP, and related applications
and solutions such as voice, fax and data messaging, short message services, one
touch call return, continuous calling, voice activated dialing, unified
messaging and CONSTANT TOUCH(TM). The markets for these technologies are still
emerging and continued growth in demand and market acceptance of these
converging services is uncertain. If the commercial market for these services
and related bundled or converged technologies is lower than Glenayre
anticipates, or grows more slowly than Glenayre anticipates, it will have a
material adverse effect on Glenayre's business. There can be no assurance that
these technologies will be successfully integrated or that a significant
commercial market for the integrated services will continue and/or develop.
POTENTIAL MARKET CHANGES RESULTING FROM RAPID TECHNOLOGICAL ADVANCES
Glenayre's business has historically focused primarily on paging and is subject
to competition from alternative forms of communication. Glenayre's business is
also focused on the wireless telecommunications industry. The wireless
telecommunications industry is characterized by rapid technological change,
including digital cellular telephone systems, which compete, directly or
indirectly, with certain of Glenayre's products or the services provided by
certain of Glenayre's customers. While the introduction of more advanced forms
of telecommunication may provide opportunities to Glenayre for the development
of new products, these advanced forms of telecommunication may reduce the demand
for pagers and thus the type of paging systems and related software designed and
sold by Glenayre. In addition, Glenayre has been focusing its efforts on growing
its Enhanced
<PAGE>
Services Platform products, such as the Modular Voice Processing system and
Intelligis LSP, and enhanced services solutions such as voice, fax and data
messaging, short message services, one touch call return, continuous calling,
voice activated dialing, unified messaging and CONSTANT TOUCH(TM). Demand for
these products and services may be affected by changes in technology as well as
the development of substitute products and services by competitors. If changing
technology negatively affects demand for Glenayre's paging and Enhanced Services
Platform products, it could have a material adverse effect on Glenayre's
business.
GROWTH OF TWO-WAY INTERACTIVE PAGING MARKET
The market for two-way interactive paging products is emerging, and the
continued growth of the market is uncertain. The Company has focused significant
efforts on developing products and strategic alliances for this market. The
development of the two-way interactive paging market will also be affected by
other technological changes in wireless messaging services, governmental
regulatory activities and general economic conditions. If the market for
interactive paging products does not continue to grow or grows slower than
anticipated by Glenayre, it would negatively affect demand for Glenayre's
products, which could have a material adverse effect on Glenayre's business.
Currently there are a limited number of two-way interactive communications
service providers. The growth of sales of two-way interactive paging systems by
Glenayre to those customers may be delayed depending upon delays in the market
acceptance of two-way interactive paging by the consumers of such paging service
providers.
COMPETITION
In the market for paging infrastructure, Glenayre currently faces competition
from a number of alternative wireless telecommunications technologies, including
cellular-based telephone and messaging services, mobile satellite systems,
specialized and private mobile radio systems, digital cellular telephone systems
and broadband personal communications services. Although these technologies are
generally higher priced than traditional paging services, technological
improvements could result in increased capacity and efficiency for wireless
two-way communication and could result in increased competition for Glenayre.
Additionally, Glenayre currently faces competition for its Enhanced Services
Platform from a number of companies, including: Comverse Technologies, Inc.,
Lucent/Octel Communications Corporation, Unisys Corporation and Centigram
Communications Corporation. Lastly, Glenayre also faces competition for prepaid
wireless products and services from several domestic and foreign competitors,
including: Brite Voice Systems, Inc., Comverse Technologies, Inc., Precision
Systems, Inc., Logica-Aldiscon LHS and Sixbell. Many of the Company's
competitors have substantially greater financial, technical, marketing and
distribution resources than Glenayre and Glenayre may be unable to successfully
compete with these companies for the sale of its messaging products and Enhanced
Services Platform.
VARIABILITY OF QUARTERLY RESULTS
The Company's financial results in any single quarter are highly dependent upon
the timing and size of customer orders and the shipment of products for large
orders. Large orders from customers can account for a significant portion of
products shipped in any quarter. There was no one customer that accounted for
10% or greater of net sales during 1999. Sales to a single customer, which has a
significant United States market presence, totaled approximately 11% and 12% of
1998 and 1997 fiscal year net sales, respectively. An
<PAGE>
additional United States customer accounted for 13% of net sales in 1998. Beyond
1999, the customers with whom the Company does the largest amount of business
are expected to vary from year to year as a result of the timing for development
and expansion of customers' communications networks and systems, the continued
expansion into international markets and changes in the proportion of revenues
generated by Glenayre's newly developed products and services. Furthermore, if a
customer delays or accelerates its delivery requirements or a product's
completion is delayed or accelerated, revenues expected in a given quarter may
be deferred or accelerated into subsequent or earlier quarters. Therefore,
annual financial results are more indicative of the Company's performance than
quarterly results, and results of operations in any quarterly period may not be
indicative of results likely to be realized in the following quarterly periods.
VOLATILITY OF STOCK PRICE
The market price of Glenayre Common Stock is volatile. The market price of
Glenayre Common Stock could be subject to significant fluctuations in response
to variations in Glenayre's quarterly operating results and other factors such
as announcements of technological developments or new products by Glenayre,
developments in Glenayre's relationships with its customers, strategic alliances
and partnerships, technological advances by existing and new competitors,
general market conditions in the industry and changes in government regulations.
In addition, in recent years conditions in the stock market in general and
shares of technology companies in particular have experienced significant price
and volume fluctuations that have often been unrelated to the operating
performance of these specific companies.
PROPRIETARY TECHNOLOGY
Glenayre owns or licenses numerous patents used in its operations. Glenayre
believes that while these patents are useful to Glenayre, they are not critical
or valuable on an individual basis. The collective value of the intellectual
property of Glenayre is comprised of its patents, blueprints, specifications,
technical processes and cumulative employee knowledge. Although Glenayre
attempts to protect its proprietary technology through a combination of trade
secrets, patent law, nondisclosure agreements and technical measures, such
protection may not preclude competitors from developing products with features
similar to Glenayre's products. The laws of certain foreign countries in which
Glenayre sells or may sell its products, including The Republic of Korea, The
People's Republic of China, Saudi Arabia, Thailand, Dubai, India and Brazil, do
not protect Glenayre's proprietary rights in the products to the same extent as
do the laws of the United States. Though the Company believes its technology
does not infringe any third party rights, the Company is currently party to
certain infringement claims. In addition, there can be no assurance that other
parties will not assert future infringement claims. An adverse decision in an
infringement claim asserted against the Company could result in the Company
being prohibited from using the allegedly infringing technology. In such an
instance, the Company might need to expend substantial resources to develop
alternative technology or to license the allegedly infringing technology. There
can be no assurance that these efforts would be successful. Regardless, with
respect to currently pending claims, the Company does not believe that an
adverse resolution would have a materially adverse effect on the Company.
POTENTIAL CHANGES IN GOVERNMENT REGULATION
Many of Glenayre's products operate on radio frequencies. Radio frequency
transmissions and emissions and certain equipment used in connection therewith
are regulated in the United States, Canada and internationally. Regulatory
approvals generally must be
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obtained by Glenayre in connection with the manufacture and sale of certain of
its products, and by Glenayre's telecommunications service provider customers to
operate the systems that utilize certain Glenayre products. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Glenayre's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the Federal Communications Commission ("FCC") in the United
States have increased the demand for Glenayre's products by providing users of
those products with opportunities to establish new personal communications
services, the trend toward deregulation and current regulatory developments
favorable to the promotion of new and expanded personal communications services
may not continue and future regulatory changes may not have a positive impact on
Glenayre. The issuance of radio frequency licenses generally stimulates demand
for Glenayre's products. However, delays in the issuance of licenses may
adversely affect sales and the timing of sales of Glenayre's products.
Additionally, many of Glenayre's current Enhanced Services Platform solutions
are not directly subject to regulation; however, there can be no assurance that
the government will not regulate these services in the future.
FINANCING CUSTOMER PURCHASES
In the past, Glenayre has financed customer purchases of its products for
development of the two-way interactive paging market for the build-out of
two-way networks by its customers who acquired two-way licenses auctioned by the
FCC (the "Two-Way License Holders"). Glenayre does not expect to enter into
significant additional customer financing arrangements. In general, since June
30, 1999, it has been the Company's policy not to offer customer financing or
guarantees. As of March 31, 2000, the Company has a prior financing commitment
to one customer for paging infrastructure and voicemail products of up to $30
million of which there are currently no borrowings. Accordingly, there is a risk
of default of the customer financing arrangements Glenayre has entered into. The
Company generally retains a security interest in equipment for which it provides
financing.
INTERNATIONAL BUSINESS RISKS
Approximately 47% of 1999 fiscal year net sales were generated in markets
outside of the United States. International sales are subject to the customary
risks associated with international transactions, including political risks,
local laws and taxes, the potential imposition of trade or currency exchange
restrictions, tariff increases, transportation delays, difficulties or delays in
collecting accounts receivable, exchange rate fluctuations and the effects of
prolonged currency destabilization in major international markets. Although a
substantial portion of the international sales of Glenayre's products and
services for fiscal year 1999 was negotiated in United States dollars, Glenayre
may not be able to maintain such a high percentage of United States dollar
denominated international sales. The Company seeks to mitigate its currency
exchange fluctuation risk by entering into currency hedging transactions. The
Company also acts to mitigate certain risks associated with international
transactions through the purchase of political risk insurance and the use of
letters of credit. However, there can be no assurance that these efforts will
successfully limit Glenayre's currency exchange fluctuation risk.
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CONTINUATION AND EXPANSION OF STRATEGIC ALLIANCES AND PARTNERSHIPS
Glenayre has entered into several strategic alliances, including alliances with
Loc8.net, InfoWave, Handspring, Aether Systems, Inc., JP Systems, Inc., DigiNet,
Communications Network, Ltd., Inciscent, Inc., GoSMS.com and HiddenMind
Technology, Inc. Additionally, Glenayre has entered into several Original
Equipment Manufacturer ("OEM") agreements with companies that market and
distribute Glenayre's products and Glenayre intends to enter into service
reseller arrangements. Glenayre is dependent upon these alliances to augment its
research and development efforts as well as to distribute Glenayre's products
and services. If these strategic alliances or partnerships are not successful or
are terminated, it may have a material adverse effect on Glenayre's business.
Glenayre intends to continue entering into strategic alliances and partnerships;
however, there can be no assurance that additional arrangements with suitable
partners on acceptable terms will be available. The inability of Glenayre to
grow its current strategic alliances and partnerships or enter into arrangements
with additional partners on acceptable terms may have a material adverse effect
on Glenayre's business.
