SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
[ ] 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 BOULEVARD, SUITE 300, CHARLOTTE, NORTH CAROLINA 28209
(Address of principal executive offices) Zip Code
(704) 553-0038
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
COMMON STOCK, $.02 PAR VALUE
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 6, 2000 was approximately $1.7 billion. The number of shares
of the Registrant's common stock outstanding on March 6, 2000 was 63,694,265.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Location in Form 10-K
Proxy Statement for 2000 Annual Meeting of Stockholders Part III
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Glenayre Technologies, Inc. ("Glenayre" or the "Company") was incorporated
pursuant to the laws of the State of Delaware on September 21, 1987, and is the
successor to a corporation organized on April 7, 1945. The principal executive
offices of the Company are located at 5935 Carnegie Boulevard, Suite 300,
Charlotte, NC 28209. The Company's telephone number is (704) 553-0038. The term
"Glenayre" or the "Company" as used hereinafter means Glenayre Technologies,
Inc. or Glenayre Technologies, Inc. and its subsidiaries.
Glenayre is a worldwide provider of communication solutions for mobile and
active subscribers. The Company designs, manufactures, markets and services its
products principally under the Glenayre name. These products include enhanced
services, unified messaging, advanced messaging services and devices, and
prepaid wireless and card services as well as networking infrastructure used to
deliver these services. Glenayre's products are used in cellular, Personal
Communications Service ("PCS"), wireless, data, paging and Internet protocol
("IP") networks.
Accomplishing another step in its strategic repositioning, on November 1, 1999
the Company sold its Western Multiplex ("MUX") microwave communication systems
business. In exchange for 95% of the stock in MUX, Glenayre received
approximately $37 million in cash. The transaction is recorded as a 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.
NARRATIVE DESCRIPTION OF BUSINESS
SOLUTIONS FOCUS: GLENAYRE EVOLVES AND EXPANDS TO SERVE A CHANGING MARKET
New developments such as the popularity of the Internet and wireless access,
broadband, the growing convergence of voice, data, wireless, and wireline
networks, and the intense competition for subscribers across these networks,
have dramatically altered the way telecommunications services are used.
Communication today is active, not merely passive. People can do more than
receive their messages; they can interact with the messages and do much more, if
they choose. Glenayre sees many new market opportunities because of these
trends.
The Company believes that competition for subscribers will drive carriers to
seek applications that offer added value to subscribers. As telecommunications
and the Internet continue to integrate, Glenayre believes carriers and end-users
will look for a broad range of services that incorporate both voice and data
capabilities. Glenayre is leveraging its strength in data messaging
infrastructure, wireless data devices, and enhanced services platforms and
software to pursue these emerging market opportunities.
Glenayre believes that, for the most part, carriers today are moving away from
the traditional model of generating revenue from the amount of airtime sold;
instead focusing on customer retention strategies and using the Internet to
reduce both administration costs and application deployment costs. Other key
trends in the current market are shorter product lifecycles, faster depreciation
of infrastructure, carrier consolidation and mergers. Subscriber churn continues
to be an issue that plagues the industry. Glenayre believes service
differentiation is the key to success for our customers. The Company is focusing
on the growth markets of enhanced services platform ("ESP") and data-centric
wireless networks and devices and sees the market trends supporting this focus
and offering opportunity for Glenayre.
Historically, Glenayre has been the one-way wireless messaging market leader.
Now, Glenayre is intent on continuing its leadership in the one-way wireless
messaging market, but also on evolving the Glenayre infrastructure and devices
to lead the industry in wireless two-way (interactive) and Internet messaging as
well.
An essential part of Glenayre's strategy is developing application partnerships.
These partnerships facilitate a shorter time-to-market, ensure complete
end-to-end services and shift development from complete inception-to-market
internally to a co-development effort for some products. To that end, Glenayre
successfully hosted its first Developer's Conference in 1999. The conference
encouraged innovation and benefits for all the participants. Also in 1999,
Glenayre announced several
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application development partnerships. The relationship with the Company and
Loc8.net is to develop the use of the interactive network for location-based
services used for people and assets. Glenayre is also a strategic partner with
Infowave. Infowave develops and produces the industry-leading Symmetry(TM)
product, which allows users to interact with their Microsoft Outlook client on
their PC. Glenayre also announced a relationship with Handspring to develop an
interactive communications module called @ctiveLink(TM), that will allow users
to send and receive Web-based messages via their personal digital assistant.
Additionally, the Company has partnered with JP Systems to deliver e-commerce
services to the AccessLink(TM) II and @ctive Link(TM) Messaging Platform(TM) and
InfoBeam web-to-wireless technology, a new level of Internet content access
which will be available for a range of mobile devices and wireless networks.
Also, the Company has announced a partnership with Aether Systems, Inc. and
Inciscent to develop and distribute wireless enabling solutions utilizing
Glenayre's @ctiveLink(TM) module for the Handspring Visor(TM).
All of these strategic relationships are designed to bring new applications for
interactive wireless data to the end users. The Company believes that the
success of these applications will have a positive impact on both the
infrastructure and devices for wireless data.
Additionally, Glenayre has responded to market changes by reorganizing the
corporation. This reorganization included the consolidation of manufacturing
into one facility in Quincy, Illinois. The Vancouver facility, which no longer
provides manufacturing, will remain an important center for product management,
engineering, research and development, and customer support. Functions have also
been consolidated across all major disciplines of the organization including
sales, marketing, customer support, product management and engineering.
Customer satisfaction through quality, performance excellence, and "doing what
we say we'll do" continues to be a top priority and an integral part of the
revised corporate structure. Glenayre has a newly structured quality
organization to ensure corporate operational excellence and quality and to
provide quality leadership strategies and programs. The Quality Organization
will be responsible for consistency in continuous improvement initiatives
throughout the corporation.
Making these organizational changes provides Glenayre with an opportunity to
brand the Company's vision and identify value to the market place. This vision
statement, "Solutions for an @ctive World(TM)," tells the markets that Glenayre
is evolving from an infrastructure provider to a supplier of communication
applications. These applications span across the traditional voice and paging
networks to the new and growing data and Internet networks. The breadth of the
Company's products is believed to be unique in the marketplace and allows
Glenayre the ability to provide a complete end-to-end solution for carriers
around the globe.
The Company's operating activities are currently focused in two marketing areas:
wireless messaging products and enhanced services platform products.
WIRELESS MESSAGING PRODUCTS
Glenayre's Wireless Messaging Products operations accounted for approximately
65%, 82% and 83% of net sales for 1999, 1998, and 1997, respectively and are
sold into the one-way and two-way paging marketplace. Wireless Messaging
products include switches, transmitters, receivers, controllers and related
software and two-way messaging devices since the acquisition of Wireless Access,
Inc. ("WAI") in November 1997. Glenayre believes that it has the leading market
share in the United States and that it is a leading participant internationally
in the paging switch, controller and transmitter market.
Paging is a method of wireless telecommunication that uses an assigned radio
frequency to contact a paging subscriber anywhere within a service area. A
paging system is generally operated by a service provider which incurs the cost
of building and operating the system. Each service provider in the United States
licenses spectrum from the Federal Communications Commission ("FCC") and
elsewhere from the authorized government body to operate a paging frequency
within either a local, regional or national geographical area. Each paging
subscriber is assigned a distinct telephone number which a caller dials (either
directly or via the Internet) to activate the subscriber's pager (a pocket-sized
radio receiver carried by the subscriber).
A paging system is comprised of four general elements: (i) the "Control Point",
(ii) the "Link Medium", (iii) the Paging Radio Frequency ("RF") Network and (iv)
the End User Devices. Information for a subscriber is received (typically via
the public service telephone network or via Internet/e-mail) by a paging switch
located at the Control Point. The message (numeric or alphanumeric) is then
forwarded to the Link Medium via a data network. The information is then
forwarded to the Paging RF Network via means determined by the type of Link
Medium deployed by the paging operator (examples include satellite
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distribution, RF terrestrial, wireline, microwave, etc.). This RF Network
consists of a network of transmitter base stations and controllers. The message
is reformatted and converted to a radio signal, which is then sent by the
transmitters via antennae to the subscriber's pager ("End User Devices"). The
transmitters manufactured by Glenayre are specifically designed to simulcast,
which is the transmission of the same signal by two or more transmitters on the
same channel frequency at the same time in an overlap area (a geographical
region accessible by more than one transmitter). The Company's equipment
exhibits exceptional accuracy in simulcasting performance, resulting in superior
voice and data quality and coverage area, and in superior reliability and
exactitude of message reception. The radio signal is received by the End User
Device which causes the pager or personal messaging device to emit a beep,
vibrate, or otherwise notify the subscriber that a message has been received and
stored in the device. The device then provides the subscriber with information
from the caller in the form of a voice, tone, numeric or alphanumeric message.
This is typically termed "one-way" paging because the initiator does not receive
notification of message received or any response from the target subscriber.
The two-way paging system is similar to one-way paging systems. The inherent
difference is that two-way paging systems close the loop from End User Device
back into the infrastructure equipment and/or back to the initiator of the
message. In order to effect this reverse path communications: (i) the End User
Devices must have an internal transmitter, (ii) the paging provider must deploy
a receiver network to obtain and transfer the data back into the system and
(iii) there must be a reconciliation device which handles the traffic flow.
Glenayre provides (i) personal messaging devices which have both receiver and
transmitter, (ii) the industry standard receiver network equipment and (iii) a
scaleable, network flexible, reconciliation device. Once the End User Device
receives the radio signal from the transmitters via antennae, the two-way End
User Device then transmits information to the receiver RF Network via receiver
antennae. The information is reformatted and sent back into the two-way system
via means determined by the media deployed (typically high speed data networks).
This information path is unique to two-way paging (as opposed to one-way) and
can be used to locate the end user, acknowledge receipt of message and initiate
messaging from the user.
Two-way systems provide such services as device location, two-way
acknowledgment, machine control and feedback and interactive end-user services
such as customer response paging, remote mobile wireless e-mail, subscriber
initiated messaging, subscriber-to-subscriber messaging, advanced voice paging
and other data services.
Glenayre offers its customers an end-to-end solution for two-way applications.
The Company has developed new technology-based products with state-of-the-art
architecture and technology which accommodates the advanced services expected to
be available through two-way service offerings. This systems approach includes
full product lines of radio frequency linear transmitters, advanced network
controllers, the fixed receiver network (to receive messaging from the
end-user), switch equipment, and network management tools.
A pager has an advantage over a landline telephone in that the pager's reception
is not restricted to a single location. Pagers (or personal messaging devices)
also have advantages over a cellular portable telephone in that a pager is
smaller, has a much longer battery life, has excellent coverage and roaming
capability, is more robust and durable, more reliable (the device as well as the
service) and less expensive to use.
The design of a paging system is customer specific and depends on (i) the number
of paging subscribers the service provider desires to accommodate, (ii) the
operating radio frequency, (iii) the geography of the service area, (iv) the
expected system growth and (v) specific features desired by the customer. Paging
equipment hardware and software developed by the Company may be used with all
types of paging services, including voice, tone, numeric (telephone number
display) or alphanumeric messaging (words and numbers display).
PAGING INFRASTRUCTURE PRODUCTS AND SERVICES:
SWITCHES. The smallest Glenayre switch, the GL3000ES, can serve as few as 100
subscribers and can be expanded incrementally to a capacity of 75,000
subscribers. Glenayre's large paging switches, the GL3000L and the GL3000XL,
support subscriber levels from 20,000 to over 1,000,000.
The GL3000 two-way switch is capable of being upgraded to support new two-way
voice and data services, while retaining support for existing one-way services
such as numeric and alphanumeric paging. Service providers can combine one-way
and two-way paging service on one switch. Glenayre believes that its switches
have the most advanced networking capability in the industry. This networking
capability allows the interconnection of multiple switches to offer a number of
wide-area capabilities (such as remote billing, roaming and database backup).
Glenayre believes that the advanced hardware and software features of its
switches ensure high reliability and high volume call processing.
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RF EQUIPMENT - TRANSMITTERS AND RECEIVERS. Transmitters are available in
frequency ranges of 137MHz to 960MHz and in power levels of 4 watts to 500 watts
(not including any power gain from the antennae). Radio link receivers are
available in frequency ranges of 66MHz to 960MHz. Satellite link receivers are
available for integration directly with the transmitters at both Ku- and C-band
frequencies. The Company believes its large installed base of transmitter
equipment provides it with a significant competitive advantage in selling
products for system expansions to existing customers.
In addition to the two-way and 900MHz transmitter product lines, the Company
also provides transmitter and receiver equipment in the VHF (137MHz to 175MHz),
280MHz to 330MHz, and UHF (395MHz to 512MHz) bands. Due to the large volume of
transmitter base stations required in a large paging system, Glenayre's base
stations are designed to minimize the customer's total cost of ownership. As
such they are designed (i) to minimize costs associated with site rental and
ancillary fees, (ii) to provide for scalability and flexibility, (iii) for
reliability and facilitation of maintenance, (iv) for ease of programming and
configuration, (v) to provide maximal operational efficiency, (vi) with flexible
networking and communications capabilities and (vii) to provide for custom
configurations where appropriate.
The GL-R9000 series of receivers detects the responses returned from the two-way
subscriber devices. The GL-R9000 series of receivers takes advantage of
innovative DSP demodulation techniques that maximize receiver sensitivity.
Available in a one-rack unit size, it can support spatial diversity (enabling
sensitivity gains from two separate receive antennae at a fixed receiver site).
Glenayre provides these receivers both as part of the two-way base station
offering as well as in a stand alone configuration which is used for fill-in
locations to enhance geographical coverage. Glenayre believes that its receiver
network equipment is the industry standard in terms of performance, which
translates into lower system costs for the Company's customers.
CONTROLLERS. The Company currently offers or supports four products for
transmitter control: (i) the GL5000 control system is a medium-feature
transmitter control system used primarily in international markets; (ii) the
QT1000 TXC is a full-feature system providing automatic early notification of
system variances and automatic remote adjustment capabilities to ensure that all
transmitters in the system remain synchronized; (iii) the GL-C2000 product line
supports all existing digital paging formats and will support all currently
proposed "high speed" paging and messaging formats (including certain two-way
applications) with data transmission rates from 200 to 6,400 bits per second
when coupled with the appropriate Glenayre RF hardware; and (iv) the GL-C9000,
in combination with the GL3100 RF Director, is designed to control two-way
transmitter systems, with high-speed voice and advanced data capabilities.
Additionally, the GL3100 RF Director provides reverse channel traffic handling
for two-way systems. The latter two controllers have advanced data handling and
flexible networking capabilities which lend themselves to advanced
communications networks.
Glenayre has extended the technology of its GL-C2000 transmitter controller to
control base stations used in two-way systems. The base station controller has
high-speed data capabilities and flexible linking options. The newest control
products of the GL-C2000 line were developed for field scalability to support
the changing needs of service providers as their offerings and subscriber base
grow. Additionally, Glenayre's RF Director is the central control point for a
two-way RF network. The RF Director has been designed to manage a high volume of
forward and reverse channel traffic and is available with optional full
redundancy.
Glenayre also provides a state of the art operations and maintenance control
("OMC") system that provides its customers a means by which to monitor, control,
and upgrade their one-way and two-way systems.
SERVICE AND SUPPORT. Glenayre provides service to customers on a regular basis
including installation, project management of turnkey systems, training, service
or extended warranty contracts with the Company. The Company believes that it is
essential to provide reliable service to customers in order to solidify customer
relationships and to be the vendor of choice when new services or system
expansions are sought by a customer. This relationship is further developed as
customers come to depend upon the Company for installation, system optimization,
warranty and post-warranty services.
The Company has a warranty and maintenance program for both its hardware and
software products and maintains a large customer service network, known as the
Glenayre Care Group, throughout the world. Glenayre's standard warranty provides
its customers with repair or replacement of all defective Glenayre manufactured
equipment. The warranty is valid in the case of the majority of its transmitters
for two years, and in the case of all other products for one year from the later
of date of shipment or date of installation by a Glenayre qualified technician.
The major locations of the Glenayre Care Group are Vancouver, British Columbia;
Quincy, Illinois; Atlanta, Georgia; Amsterdam, the Netherlands; and Singapore.
The Glenayre
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Care Group, the majority of the employees of which are technical specialists,
maintains the Company's installed base of equipment and is equipped with an
automated field service management system to provide more responsive customer
service.
COMPETITION. The Company is a leading worldwide supplier of switches,
transmitters, receivers, controllers and software, used in paging, voice
messaging and message management systems. While the services from the foregoing
products represent a significant portion of the wireless personal communications
systems industry today, the industry is expanding to include new enhanced
services and new markets. Paging like services are being offered using
alternative messaging technologies such as PCS. There can be no assurance that
the Company will obtain market acceptance of its products in the face of
competing technologies or be successful in introducing new products. In
addition, manufacturers of wireless telecommunications equipment, including
those in the cellular telephone and PCS industries, certain of which are larger
and have significantly greater resources than the Company, could attempt to
enter into the Company's markets and compete with Glenayre's products and
systems.
The Company's competitive market position is based upon its knowledge of sales
of products of the type sold by the Company in the segment of the wireless
personal communications industry in which the Company competes, information
derived from its close working relationship with large paging service providers
and market information obtained from industry trade publications and sources.
o UNITED STATES. The Company believes that it has the largest
market share (based on the number of units sold) of the United
States market for sales of one-way and two-way switches and
related equipment and software, and one-way and two-way
transmitters and controllers. Traditionally, our principal
competitor in this market was Motorola, Inc. ("Motorola").
Since Motorola has effectively exited this market, it is the
Company's belief that its leadership position with respect to
the sale of paging switches in the United States substantially
exceeds that of any other paging switch manufacturer. The
Company believes that it captured the largest percentage of
sales of paging switches serving more than 10,000 subscribers
in each of the last three years.
The Company believes sales of its transmitter and controller
products exceeded sales of such products by competitors in
this market, principally smaller manufacturers that primarily
serve small local paging service providers which represents a
small segment of the total domestic infrastructure market.
o INTERNATIONAL. Since Motorola has effectively exited this
market, the Company believes that its leadership position
(based on the number of units sold) of paging switches,
transmitter and controller products outside of the United
States substantially exceeds that of any other paging
infrastructure manufacturer, which currently consist primarily
of small manufacturers that serve small local paging service
providers, which represent a small segment of the total
international infrastructure market.
PAGING MESSAGING DEVICES:
The Company's Consumer Products Group designs, develops and markets innovative,
low-power, two-way wireless data messaging devices. The Company's products are
based on Motorola's family of FLEX two-way paging protocols which the Company
believes will become the industry's standard two-way wireless data messaging
protocols. The two-way wireless data messaging capability of the Company's
devices will allow service providers to reuse their RF spectrum and thereby
offer expanded two-way alphanumeric wireless data messaging services to
significantly more users than would be possible with a traditional one-way
alphanumeric paging network.
ACCESSLINK(TM) II. The AccessLink II allows wireless data messaging service
providers to offer customers full two-way paging service capabilities in a
device to be approximately the same size as today's one-way alphanumeric pagers
with a four-line LCD display and more than 30 days of battery life. The
AccessLink II allows a service provider to ensure guaranteed message receipt by
storing and re-sending a message when the recipient's device is turned off or is
out of the service area. In addition, the AccessLink II provides users with the
ability to create custom replies and to originate messages to another pager or
to an e-mail address. The AccessLink II also utilizes the Company's proprietary
integrated chipset. The AccessMate and AccessLink II are available for both the
ReFLEX25 and the ReFLEX50 protocols and went into commercial production in 1998.
Key AccessLink II features include:
o MESSAGE ORIGINATION. The AccessLink II allows a user to create
and send custom messages from the device. A user is able to
create a message by selecting letters displayed on the
onscreen keyboard using an omni-
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directional keypad. In addition, a user can send a
preprogrammed or user-created message to another AccessLink II
user, to an Internet e-mail user, to a one-way alphanumeric
pager, to a dial-in system that uses synthesized voice
technology to deliver a message or to a fax machine.
o INTERNET CONNECTIVITY. The AccessLink II user can exchange
messages with Internet e-mail users. AccessLink users can have
an e-mail address defined by their service provider that
allows them to receive e-mail messages across the Internet. In
addition, AccessLink II users can originate e-mail messages
from the device and send them to any Internet e-mail user's
address.
o EASE OF USE. The AccessLink II's easy-to-manipulate
omni-directional keypad and innovative user interface provide
the user with an easy means of creating, storing and sending
messages. All information is contained within folders, which
can be opened and closed with the omni-directional keypad. The
AccessLink II's keypad can easily be operated one-handed and
allows the user to scroll through the display and move the
cursor to select options.
o COMPUTER CONNECTIVITY. The AccessLink II provides an
infra-red, IRDA compatible port for wireless connection to
personal or palm top computers. Once connected to the computer
with the appropriate applications software, a user can send
and receive messages with the AccessLink II acting as a
wireless modem.
o HIGH-PERFORMANCE TRANSMITTER. The AccessLink II transmits at a
level that allows for creating and sending long, custom
messages. The Company believes the AccessLink II balances the
need to generate messages with the need for extended battery
life while utilizing a single AA battery.
ACCESSMATE(TM). The AccessMate allows wireless data messaging service providers
to offer customers expanded alphanumeric wireless data messaging services at
prices competitive with today's one-way paging service subscription prices. The
AccessMate is an entry-level two-way wireless data messaging device that has all
the functionality of today's alphanumeric pagers together with the ability to
allow service providers to efficiently manage their network capacity through
spectrum reuse. The AccessMate is approximately the same size as today's one-way
alphanumeric pagers with a four-line LCD display and more than 30 days of
battery life. The AccessMate allows a service provider to offer guaranteed
message receipt by storing and re-sending a message when the recipient's device
is turned off or out of the service area. AccessMate is Glenayre's first device
which utilizes the Company's proprietary integrated chipset. The Company
believes its integrated circuit chipset technology will enable the Company to
decrease the size of its devices while simultaneously reducing the cost and
power consumption of the devices.
COMPETITION. Glenayre believes it is currently the market leader in two-way
messaging device sales. Motorola is the only other company that currently has a
product that operates in a ReFLEX based two-way wireless data messaging network.
Motorola and other potential producers of devices for the two-way wireless data
messaging market, such as Uniden, Sony and Casio, have longer operating
histories, significantly greater financial, technological, management and
marketing resources, greater name recognition and larger installed customer
bases than Glenayre. These other potential competitors do not currently offer
devices for ReFlex networks. In addition, each of these companies can devote
greater resources to developing, marketing and selling their products than
Glenayre and may be able to respond more quickly to new or emerging technologies
and changes in customer needs. Additionally, paging-like services are being
offered using alternative messaging technologies such as PCS. There can be no
assurance that the Company will obtain market acceptance of its products in the
face of competing technologies or be successful in introducing new products. The
failure of Glenayre to compete effectively could result in lower prices, reduced
margins or loss of market share, any of which could have an adverse effect on
the Company.
Other packet networks are BSWD/Mobitex and American Mobile Satellite Corp/Ardis.
Additional competition from device manufacturer's on these networks include
Research in Motion ("RIM"). RIM currently offers devices for these networks.
They are known as the RIM 850, RIM 950 and the Blackberry service product.
Competition in the Company's End User Device markets is based upon quality,
product features, services, technical performance, capabilities, service and
price, in addition to battery life, size, ease of use, appearance, durability,
and reliability. End User Devices represent a much more significant ratio (than
infrastructure) of a paging provider's total capital investment.
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MARKETING AND SALES, CUSTOMERS. The Company markets to paging carriers primarily
in the United States through a direct sales force. To date, the Company's
two-way and guaranteed message delivery device revenues have been primarily from
SkyTel, PageNet, WebLink Wireless, Metrocall, Arch, AirTouch and TSR.
Expansion of sales territories in Canada with PageNet Canada/Madison
Communications and sales channels such as Office Depot are expected to grow in
2000. The Company believes there will also be an expansion of sales channels
with its own e-commerce and third party partners such as Handspring and JP
Systems.
ENHANCED SERVICES PLATFORM PRODUCTS (ESP)
Enhanced Services Platform products from the Company accounted for approximately
35%, 18% and 17% of net sales for 1999, 1998 and 1997, respectively and is
comprised of the Company's INTELLIGIS product line which includes the MVP System
and the openMEDIA prepaid platform. By integrating these two platforms, the
Company believes it will be in a strong position to serve both fixed and
wireless service provider needs for revenue generation. The MVP System and the
prepaid platform provide network operators with the enhanced services, prepaid
wireless and calling card products needed to increase revenues from the current
customer base and to acquire new subscribers. By combining these two platforms
into a single product, the Company believes it will be able to offer a unique
and powerful platform to help carriers reduce their operational costs and become
more profitable. The Intelligis product family allows carriers the ability to
compliment and enhance their core service offering with additional communication
or billing services.
Glenayre's enhanced services platform, MVP(R) Modular Voice Processing system
enables cellular, PCS, wireline and paging network operators to offer their
subscribers value-added services that enhance and complement their core
communication products.
MVP SYSTEM. The MVP system's scaleable architecture provides service providers
with an efficient growth path for their subscriber base. The system can start
out small and grow to handle up to 1,000,000 subscribers. Its modular
architecture allows service providers the ability to add additional capacity as
their subscriber base grows. This protects their capital investment and allows
service providers an elegant growth path. Additionally, it interfaces into the
myriad of trunk interfaces provided by central office switches, cellular
switches, paging terminals, telephone answering systems and inter exchange
carrier ("IXC") switches, even integrating into different telecommunication
networks simultaneously. It also has the capability of integrating into various
Intelligent Networks around the world.
MVP 2120 - The MVP 2120 is a full-featured enhanced services platform that
scales for 24 ports to 120 ports on a single node. The MVP 2120 delivers all of
the applications and is a very solid choice for the small to medium size market.
MVP 4240 - The MVP 4240 doubles the capacity of the MVP 2120 on a single node.
The MVP 4240 is a NEBS-compliant enhanced services platform that is a step above
the MVP 2120. The MVP 4240 is the favorite of medium to large size markets.
Intelligis LSP (Large Solutions Platform) - is the answer to the very large
installations for service providers. Because the Intelligis LSP is an evolution
of the MVP 4240, it utilizes virtually all of its components. Intelligis LSP
allows carriers to grow their systems to very large numbers and still protect
their capital investment in the MVP product family.
ENHANCED SERVICES APPLICATIONS. The platform's flexibility allows service
providers to choose the number and combination of enhanced services to offer,
including voice, fax, and data messaging, short message service, one touch call
return, continuous calling, voice activated dialing, unified messaging, and
CONSTANT TOUCH(TM) Service, a single number service. These services are in great
demand by telecommunication carriers as they try to offer applications that
differentiate their service offering and provide value to help retain
subscribers in an increasingly competitive arena.
Glenayre's enhanced services system provides many voice messaging applications
with intelligent message notification. Subscribers are notified, via their pager
or phone handset, when they receive a new message in their mailbox. The system
alerts subscribers to the number and type of message received, including urgent
and fax messages.
A new application for the enhanced services platform is the Integrated Short
Message Service ("ISMS") feature. ISMS is an economical way for carriers to
deliver message waiting indicators to a digital handset. In many cases short
message traffic is generated by the voice messaging system. Instead of carriers
purchasing a complete Short Message Service Center ("SMSC"),
8
<PAGE>
carriers can deploy ISMS to give subscribers the message waiting indicators over
a digital phone. The ISMS is much less expensive than a complete SMSC.
Glenayre's One Touch Call Return feature allows the subscriber to return calls
with a keystroke. When the caller leaves a message, the system captures the
caller's telephone number, either by Automatic Number Identification or by the
caller manually entering the caller's number. When the subscriber listens to the
message, the callback number plays as part of the voice message. At any time,
the subscriber can press a button and the caller's phone number is dialed by the
system. After the call is completed, the subscriber is returned to the
subscriber's voice mailbox.
Fax messaging permits faxes to be sent directly to a subscriber's voice mailbox.
The subscriber is notified that a fax message has been received in the
subscriber's voice mailbox. The fax is stored in memory and can be printed from
any fax machine when the subscriber is ready to retrieve it. The fax can also be
distributed to other fax machines or other subscribers as part of a fax
broadcast or distribution list.
CONSTANT TOUCH, Glenayre's single number application, gives subscribers control
of their communications. With CONSTANT TOUCH, subscribers combine all personal
and business telephone numbers (pager, home, office, cellular and fax) into a
single number that will reach them anywhere. By incorporating any or all of a
subscriber's telephone numbers, callers only have to use one number to reach the
subscriber.
When a caller dials the subscriber's CONSTANT TOUCH number, the system prompts
them to speak their name and enter their telephone number. The system then calls
a series of preprogrammed numbers to notify the subscriber that a caller is
holding. The system plays the caller's name, "introducing" the caller. The
subscriber can choose to connect with the subscriber's caller or forward the
caller to the subscriber's voice mailbox or assistant.
Glenayre deployed Unified Messaging applications in 1999. With Unified
Messaging, carriers can offer their subscribers a centralized center for their
voice, fax, data and e-mail messages. Unified Messaging provides carriers the
ability to integrate fixed and wireless networks. Unified Messaging allows
subscribers an "inbox" on their computer that consolidates all of their
messages. Instead of calling their voice mailbox, and then logging onto a
computer, all of their messages are in one place. Subscribers simply point and
click to access all of their messages. With text-to-speech, a subscriber's
e-mail messages can be read to them over the phone.
A major development project for the Glenayre enhanced services system is speech
recognition. Glenayre has developed a new voice dialing application allowing
subscribers to place calls using only their voice. The subscriber speaks a name
or telephone number and the system places the call. Glenayre expects to continue
to develop additional speech recognition products for the voice mailbox.
The Company believes that by providing many multi-media applications on a single
platform, carriers will derive value. The Intelligis product family is designed
to provide a great return on investment by providing multiple applications and
revenue streams on a single platform. This gives service providers a means to
generate additional revenue and increase subscriber loyalty.
NETWORK MANAGEMENT SYSTEMS. During 1999, the Company completed the first phase
of an Operational and Management Control System. Intelligis System Management
Unit ("SMU") is a system that monitors the Intelligis product line and provides
service providers with sophisticated, alarming, provisioning and statistical
information relating to the performance of the enhanced services system in a
carriers network. This system will enable wireless and wireline operators to
continually evolve their businesses beyond the competition. The benefits that
Glenayre customers enjoy are reduced maintenance costs, improved customer
retention, better marketing information, enhanced technological leadership and
improved system availability.
PREPAID AND CARD SERVICES. Glenayre's openMEDIA Prepaid Wireless platform offers
a powerful feature set specifically designed for wireless operators throughout
the world. The prepaid product is a business solution that provides customer
care, provisioning, audit trails and call detail records for wireless operator's
prepaid subscribers. The Prepaid Wireless application allows carriers the
ability to offer their core wireless service in a network based prepaid
offering. With Prepaid Wireless, carriers can sell their service offering before
customers use it. This helps with fraud and allows carriers to tap into huge
markets of new subscribers. The Company is developing new releases of its
Prepaid Wireless application to include advanced features such as Web-based
administration, VOIP (Voice over IP), inbound call screening, advanced
cellular-to-cellular call rating, nationwide cellular roaming and Intelligent
Network Solutions.
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<PAGE>
Through a strategic development alliance with AG Communications Systems, a
wholly owned subsidiary of Lucent Technologies, as well as through continued
alliances with Nortel Networks, Motorola and Nokia, Glenayre continues to
develop and deliver the next generation of card services and enhanced services
products utilizing global open standards within the Intelligent Network call
models. This architecture and application environment represents the leading
edge for global super carrier delivery of end user services within a converging
wireless, wireline and IP standards based network infrastructure.
Glenayre's platform is a client/server-based software platform from which
multiple telecommunications applications can be run across shared network and
database resources. The platform provides an interface between telephony and
computing resources, including switches, voice response units ("VRUs"),
databases, billing systems and network management software. The platform
facilitates the generation of call flows and insulates application developers
from low-level programming of hardware components. Glenayre's modular,
client/server architecture permits the replacement and interchangeability of
network hardware components and ensures the reusability of common software
modules as Glenayre develops new applications. The platform provides the
following key features: rapid service creation, modularity, high volume and
scalability, network connectivity and fast call setup, real-time call
management, external interfaces and disaster recovery and reliability.
The Company sees an opportunity for a tight integration between the enhanced
services system and the prepaid system. Development efforts include the
IntelligisSP, which is a new platform that integrates the prepaid and card
service applications with enhanced services. In addition, the Company continues
to develop a new architecture for the prepaid applications. The Glenayre prepaid
platform is also developing the protocols and signaling formats for the
integration into various Intelligent Networks.
COMPETITION. For sales of enhanced services systems, the Company competes in the
United States and internationally primarily with Comverse Technologies, Inc.,
Lucent/Octel Communications Corporation, Unisys Corporation, and Centigram
Communications Corporation.
For sales of Prepaid Wireless products and services, the Company competes in the
United States and internationally primarily with Brite Voice Systems, Inc.,
Comverse Technologies, Inc., Precision Systems, Inc., Logica-Aldiscon (formerly
Aethos), LHS (formerly Priority Call Management), and Sixbell (Chilean Company).
MARKETING AND SALES. The Company markets to cellular, PCS, wireline, prepaid
wireless and paging network operators primarily in the U.S. through a direct
sales force. Glenayre has also entered into several Original Equipment
Manufacturing ("OEM") agreements with companies that will market and distribute
the Intelligis product line throughout the world.
SERVICE AND SUPPORT. Glenayre provides service to customers on a regular basis
including installation, project management of turnkey systems, training, service
or extended warranty contracts with the Company. The Company believes that it is
essential to provide reliable service to customers in order to solidify customer
relationships and to be the vendor of choice when new services or system
expansions are sought by a customer. This relationship is further developed as
customers come to depend upon the Company for installation, system optimization,
warranty and post-warranty services.
The Company has a warranty and maintenance program for both its hardware and
software products and maintains a large customer service network, known as the
Glenayre Care Group, throughout the world. Glenayre's standard warranty provides
its customers with repair or replacement of all defective Glenayre manufactured
equipment. The warranty is valid in the case of the majority of its transmitters
for two years, and in the case of all other products for one year from the later
of date of shipment or date of installation by a Glenayre qualified technician.
The major locations of the Glenayre Care Group are Vancouver, British Columbia;
Quincy, Illinois; Atlanta, Georgia; Amsterdam, Netherlands; and Singapore. The
Glenayre Care Group, the majority of the employees of which are technical
specialists, maintains the Company's installed base of equipment and is equipped
with an automated field service management system to provide more responsive
customer service.
CUSTOMERS
Glenayre sells to a range of customers worldwide. In the United States,
customers include the regional Bell operating companies, public and private
radio common carriers, private carrier paging operators, PCS carriers and
cellular carriers. Internationally, customers include public telephone and
telegraph companies, paging and cellular carriers as well as private
telecommunication service providers servicing cellular, PCS and paging.
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<PAGE>
There was no customer that accounted for 10% or greater of sales during 1999.
Sales to one customer amounted to approximately 11% and 12% of net sales for
1998 and 1997, respectively. An additional customer accounted for 13% of net
sales in 1998. Although a single customer accounted for more than 10% of the
Company's net sales in 1998 and 1997, the dependence on any one customer is
mitigated by the large number of entities in the Company's customer base. The
amount of business with any customer in a reporting period is determined by the
timing of the development and expansion of existing customers' and new
customers' systems.
RESEARCH AND DEVELOPMENT
The Company believes that a strong commitment to research and development is
essential to the continued growth of its business. Glenayre has consistently
developed innovative products and product improvements for the
telecommunications industry, and has often been the first to bring such products
to market. One of the key components of the Company's development strategy is
the promotion of a close relationship between its product development staff,
internally with Glenayre's manufacturing and marketing personnel, and externally
with Glenayre's customers. Utilizing this strategy, Glenayre expects to develop
and bring to market customer-driven products in a timely manner.
The Company believes it is in a much better position to gain significant
efficiencies from research and development. Because of the integration between
the three business units, the research and development organization is also
integrated. This assures the Company that there is no wasted effort or redundant
development. It allows a cross-functional group to drive all of the products
forward.
The Company has extensive expertise in the technologies required to develop
wireless communications systems and products including digital signal processing
("DSP"), voice processing (both frequency modulation ("FM") and linear),
real-time software, networking and network management software, high-speed
digital logic, high and low power radio frequency, protocol development, data
network and system design. Additionally, the Company has a core competency in
devices, packaging, ease of use, integration and implementation. The Company
believes that by having a research and development staff with expertise in these
key areas, it is well positioned to develop enhancements for its existing
products as well as new personal communication products. Investment in advanced
computer-aided design tools for simulation and analysis has allowed Glenayre to
reduce the time for bringing new products to market.
The majority of the Company's research and development staff are engineers or
computer science professionals. Glenayre's research and development efforts are
located in its Vancouver, British Columbia, Canada; Atlanta, Georgia; and Santa
Clara, California facilities. Total research and development costs for the
Company were $41 million, $47 million and $37 million or 17%, 13% and 9% of net
sales for 1999, 1998 and 1997, respectively. The Company devotes substantial
resources to research and development in order to develop new products, improve
existing products and support ongoing custom feature and enhancement
development. The availability of research and development funds depends upon the
Company's revenues and profitability. Reductions in such expenditures could
impair the Company's ability to innovate and compete.
NEW PRODUCTS AND UPGRADES. The principal new products and enhancements by the
Company in 1999 related to its Enhanced Services products include the following:
(i) a new Large System enhanced services platform named Intelligis LSP. This
product, with an increased capacity over the existing MVP 4240 system, is
engineered to serve the Tier 1 ESP market of up to 1,000,000 subscribers.
Intelligis LSP includes a cluster of Intelligis AMUs (MVP 4240-like nodes)
networked together in a peer-to-peer configuration, along with; (ii) an
operations and maintenance unit, the Intelligis SMU. The Intelligis SMU manages
multiple nodes and provides a single interface point for managing the large
system configuration. The Intelligis SMU product allows multiple systems and
nodes to be managed as one unit, simplifying the operators' and system
administrators' task and reducing operating expense for operators; (iii) A
unified messaging server application, Intelligis SMU, that provides subscribers
with Internet access to voice, fax and emails and unifies them into one inbox.
Users have the ability to playback, record, forward, and reply to voice, fax or
emails, all from their desktop personal computer; (iv) Intelligis Services
Platform, ("Intelligis SP"), which provides both prepaid services and enhanced
prepaid and postpaid services - all from a single turnkey system. This new
platform provides optimum value for the infrastructure investment and enables
network operators to bundle prepaid with value-added enhanced services.
STRATEGIC ALLIANCES
The Company believes that in order to leverage its research and development
efforts, strategic alliances are important. The Company sees strategic alliances
as a way to develop an end-to-end solution for the carriers. These strategic
alliances are carefully
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researched and engaged to bring subscriber applications using Glenayre
infrastructure and devices as the foundation for the application. The Company
realizes that there are other companies who have more product expertise in
certain areas, and by leveraging these companies strengths, Glenayre should be
able to provide more infrastructure products. This strategic initiative is an
integral part of our strategy to bring communication solutions to the industry.
In 1999, the Company began strategic initiatives and has entered into agreements
with the following technology companies to jointly develop products and
applications for the industry. These partnerships and joint efforts have
included: (i) Loc8.net which is a location based technology which utilizes GPS
technology to help locate people and assets, (ii) InfoWave which is a company
who has developed a client based wireless integration with Microsoft Outlook and
the Wireless Messaging Device, (iii) Handspring which is a new PDA supplier and
markets its product under the product name Visor will develop a wireless module
to attach onto the Visor model to allow wireless data messaging between a
customer's PDA and other data devices, (iv) JP systems which delivers e-commerce
services to the AccessLink(TM) II and @ctiveLink(TM) Messaging Platform(TM) and
InfoBeam web-to-wireless technology, a new level of Internet content access
available for a range of mobile devices and wireless networks and (v) Aether
Systems, Inc. and Inciscent which develop and distribute wireless enabling
solutions utilizing Glenayre's @activeLink(TM) module for the Handspring
Visor(TM).
In 2000, the Company plans to continue with this strategy of identifying
application needs and entering into relationships with the strongest application
providers in the market. The Company will look for companies with strong
Internet and Web-based applications as well as companies with strong
technological expertise. All of these alliances are designed to drive Glenayre
infrastructure and devices as the usage increases.
MARKETING AND SALES
The Company markets its products and services in the United States and
internationally primarily through a direct sales force. Glenayre also utilizes
distributors and agents to sell its products in certain countries and geographic
regions to markets outside of the Company's core markets. Glenayre maintains
sales offices throughout the United States.
In an effort to better serve its international customers, Glenayre has
established sales offices outside of the United States in various locations
worldwide, including:
Manila, Philippines Singapore
Vancouver, Canada Milton Keynes, England
Mexico City, Mexico Beijing, China
Dubai, United Arab Emirates Amsterdam, Netherlands
Sao Paulo, Brazil Taipei, Taiwan
Tokyo, Japan Shanghai, China
Glenayre has staffed each of these offices with either local or expatriate
multilingual personnel. The Company may need to add personnel and offices in
some of the international markets should the growth in those markets justify
these additional expenditures. See Note 10 to the Company's Consolidated
Financial Statements for information relating to export sales.
As part of the Company's integrated marketing and sales efforts, Glenayre
encourages and facilitates a philosophy of open communication between the
Company and its customers. Toward that end, the Company often invites customer
representatives to meet with Glenayre's engineers and marketing personnel to
collaborate in the development of new and enhanced products.
The competitive telecommunications market often requires customer financing
commitments. These commitments may be in the form of guarantees, secured debt or
lease financing. However, the Company does not expect to enter into significant
additional customer financing arrangements. See Notes 4 and 14 to the Company's
Consolidated Financial Statements.
INTERNATIONAL BUSINESS RISKS
Approximately 47% of 1999 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
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trade or currency exchange restrictions, tariff increases, transportation
delays, difficulties or delays in collecting accounts receivable, and, to a
lesser extent, exchange rate fluctuations. Although a substantial portion of
1999 international sales of the Company's products and services were negotiated
in U.S. dollars, there can be no assurance that the Company will be able to
maintain such a high percentage of U.S. 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 the Company's currency
exchange fluctuation risk.
MANUFACTURING
Glenayre currently manufactures its Wireless Messaging Products at Company
facilities in Quincy, Illinois except for its two-way paging devices, which are
assembled by a third-party manufacturer. The MVP enhanced services platform and
Open Media prepaid services Platform are also manufactured at the Quincy
facility. This represents a change from years prior to 2000 where the MVP
Enhanced Services Platform and Open Media product were built in the Vancouver,
BC facility. Analysis of production facilities suggested that consolidating the
manufacturing of these products with product already being built in the Quincy
facility was the most efficient approach. It is expected that this consolidation
will provide synergy and leverage to enhance the operating margins on both the
transferred product lines and the current Quincy product portfolio.
The Company's manufacturing capabilities include assembling sub-assemblies and
final systems that are configured to its customers' specifications. The
components and assemblies used in the Company's products include electronic
components such as resistors, capacitors, transistors and semiconductors such as
field programmable gate arrays, digital signal processors and microprocessors;
mechanical materials such as cabinets in which the systems are housed; and
peripherals, including disk drives. The components and parts used in the
Company's products are generally available from multiple sources. Some
components, especially those utilizing the latest technology, may only be
available from one source. In those instances where components are purchased
from a single source, the supplier and the specific component are reviewed both
prior to initial specification and then frequently afterward for stability and
performance. Although the Company believes that single source components could
either be obtained from another source or redesigned, temporary delays or
increased costs in obtaining these materials may be experienced. Additionally,
as necessary, the Company purchases sufficient quantities of certain components
that have long-lead requirements in the world market. The Company performs
standard procedures to test, tune and verify products prior to shipment to the
customer.
The Company believes in setting high standards of quality throughout all its
operations. The Company has certification to the ISO 9001 international standard
for quality assurance in areas including design, manufacture, assembly and
service for the Quincy, Illinois and Atlanta, Georgia facilities. Avex
Electronics in Huntsville, Alabama manufactures all of the Company's two-way
paging products. Avex is an ISO 9000, 9001 and 9002 certified contract
manufacturer. ISO is a worldwide federation of national standards bodies, which
have united to develop internationally, accepted quality systems standards so
that customers and manufacturers have a system in place that provides a known
quality. The standards set by ISO cover every facet of quality from management
responsibility to service and delivery. Management believes that adhering to the
stringent ISO 9001 procedures not only creates efficiency in its operations, but
also positions Glenayre to meet the exacting standards required by its
customers.
The Company utilizes Materials Resource Planning ("MRP") systems for production
planning in its manufacturing and state-of-the-art workstations for its
engineering functions. In 1998, Glenayre implemented a new business operating
system linking a significant portion of the Company's business functions.
The Company's believes that its present facilities are adequate for current and
immediate future manufacturing needs.
INTELLECTUAL PROPERTY ASSETS
The Company's intellectual property portfolio consists of its patents,
copyrights, registered and common-law marks, Internet domains, collective
employee knowledge, blueprints, technical specifications, manufacturing
processes and other trade secrets ("Intellectual Property"). The Company
protects its Intellectual Property through a combination of methods, including
maintenance of trade secrets through appropriate corporate policies and
procedures; registration of patents, copyrights, trademarks and service marks;
and implementation of appropriate technical security measures.
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The Company owns or has a license under numerous patents. While the Company's
aggregate patent portfolio is important for competitive and operational reasons,
the Company does not believe that any one patent is of material importance to
the Company's continued operations or market competitiveness.
The Company's registered marks are also valued corporate assets. The Company
protects its most important marks through registrations in the United States and
various foreign countries. The Company's registered marks include "GLENAYRE ",
"CONSTANT TOUCH" and "MVP". In addition, Glenayre has applied for registrations
for @ctiveLink and Solutions for an @ctive World.
Despite the Company's efforts, it is possible that the Company's control of
certain Intellectual Property could be compromised. For example, the laws of
certain foreign countries in which the Company does business do not provide the
same level of protection for intellectual property as do the laws of the United
States. In addition, with respect to trade secrets, it is possible that
competitors, without access to Glenayre's Intellectual Property, could develop
and market products with similar functionality.
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.
BACKLOG
The Company's firm backlog from continuing operations at December 31, 1999 and
1998 was approximately $57 million and $120 million, respectively. A significant
portion of this decrease is related to the reversal in the second quarter 1999
of approximately $46 million in orders from Conxus who filed for Chapter 7
bankruptcy liquidation. Additionally, the backlog decrease from 1999 to 1998 is
partially caused by orders booked in 1999 which on average have shorter delivery
schedules than the orders booked in 1998. In general, the Company expects to
commence shipment of the orders in the backlog within six months of their
respective backlog dates. Approximately all orders on hand at December 31, 1999
are expected to be shipped during 2000. The orders not being shipped in 2000 are
primarily due to the timing of delivery as requested by customers. This is a
forward-looking estimate that is subject to substantial change based on the
timing of installation of systems by the Company's paging service provider
customers and the market acceptance of personal communication products by the
customers of such paging service providers.
GOVERNMENT REGULATION
Many of Glenayre's products operate on radio frequencies or connect to public
telecommunications networks. National, provincial, and/or local governments
regulate radio frequency and telecommunications networks, as well as the
operations of telecommunication service providers in many markets, including the
U.S. market. In some instances, regulatory requirements give the Company an
opportunity to provide additional product solutions to our customers. However,
in introducing products to a market, there is no assurance that the Company
and/or its customers will obtain regulatory approval. In addition, it is always
possible that a new regulation or a change in the interpretation of exiting
regulations could adversely affect the Company's ability to sell products in
that market. Were this to occur, the Company believes it has appropriate
technical, administrative and professional personnel and consultants to address
issues in an efficient and timely manner to minimize the long-term impact on the
Company and its customers.
EMPLOYEES
At December 31, 1999, the Company and its subsidiaries employed approximately
1,300 persons. The Company believes its employee relations to be good.
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ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
principal facilities:
<TABLE>
<CAPTION>
Size Owned Lease
Location (Square Feet) or Leased Expiration Date Uses
-------- ------------- --------- --------------- ----
<S> <C> <C> <C> <C>
Vancouver, 197,668 156,534 owned Research and development,
British Columbia 41,134 leased 2001-2002 product management,
service, accounting,
purchasing and training
facilities.
Quincy, Illinois 154,256 owned Manufacturing, service,
accounting, purchasing and
training facilities.
Santa Clara, California 51,200 leased 2000 Service, sales, accounting,
purchasing, research and
development, and
administration.
Atlanta, Georgia 75,000 owned Sales, service, research
and development, and
training facilities.
Charlotte, North Carolina 14,692 leased 2004 Corporate headquarters,
sales, marketing,
accounting and finance.
Singapore 42,000 owned Service, sales, accounting
and training facilities.
</TABLE>
In addition to its sales offices listed above, Glenayre also maintains sales
offices throughout the United States and internationally. See
"Business--Marketing and Sales." During the first quarter of 1999 Glenayre
halted the construction in progress on a 110,000 square foot expansion of its
Vancouver facilities. The plans were revised and only a parking facility and a
16,000 square foot first level were completed. The total cost of this expansion
was approximately $12 million of which approximately $4.7 million is included in
capital expenditures for the year ended December 31, 1999. Approximately $6.3
million and $900,000 paid toward architecture, engineering and construction
costs relating to the new expansion are included in capital expenditures for the
years ended December 31, 1998 and 1997, respectively. The Company is currently
exploring opportunities that will satisfy the requirements for its Vancouver
operations.
ITEM 3. LEGAL PROCEEDINGS
On January 31, 1997, an amended class action complaint consolidating two
lawsuits filed in the fourth quarter of 1996 (the "Complaint") was filed in the
United States District Court for the Southern District of New York against the
Company and certain of its executive officers and directors. The District Court
dismissed the Complaint in November 1997, but granted the plaintiffs the right
to amend and refile. The plaintiffs filed an amended Complaint, which the
District Court dismissed in December 1998, without the right to refile. The
plaintiffs appealed the dismissal to the United States Court of Appeals for the
Second Circuit. On December 16, 1999, the Court of Appeals affirmed the District
Court's dismissal. The Plaintiffs did not appeal this decision. On February 20,
1997, a shareholder's derivative complaint (the "Shareholder's Complaint") was
filed in the United States District Court for the Southern District Court of New
York against certain current and former directors and against the Company, as a
nominal defendant, alleging that the directors breached their fiduciary
obligations to the Company by subjecting the Company to the class action
referred to above. The Company expects that the plaintiffs will voluntarily
dismiss the Shareholder's Complaint in light of the outcome of the class action
Complaint; however, there can be no assurance of this. Additionally, the Company
is currently involved in various other disputes and legal actions related to its
business operations. In the opinion of the Company, the ultimate resolution of
these actions will not have a material effect on the Company's financial
position, or future results of operations or cash flows.
Additionally, the Company is a party to several intellectual property claims and
disputes related to its business operations. The Company believes that the
ultimate resolution of these claims and disputes will not have a material effect
on the Company's financial position or future results of operations. However, if
such litigation resulted in the Company's inability to use technology,
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<PAGE>
the Company might be required to expend substantial resources to develop
alternative technology or to license such technology on commercially reasonable
terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"GEMS." The table below sets forth the high and low sale prices for the
Company's common stock on The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
Price Range of
Common Stock
------------
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1999
First Quarter....................................... $6.094 $3.375
Second Quarter...................................... 4.813 3.125
Third Quarter....................................... 6.063 2.688
Fourth Quarter...................................... 13.000 2.281
Year Ended December 31, 1998
First Quarter....................................... $14.250 $10.000
Second Quarter...................................... 17.000 10.188
Third Quarter....................................... 12.250 6.375
Fourth Quarter...................................... 7.938 3.969
</TABLE>
At March 6, 2000 there were approximately 2,100 holders of record of the
Company's common stock.
The Company has not paid cash dividends since 1982 and does not anticipate
paying cash dividends in the foreseeable future. The Company expects to utilize
future earnings to finance the development and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Consolidated Financial Data of Glenayre presented below
for each of the five years in the period ended December 31, 1999 has been
derived from the Company's audited Consolidated Financial Statements. The
Company acquired Western Multiplex Corporation ("MUX"), a manufacturer of
microwave radio systems, on April 25, 1995. MUX was sold on November 1, 1999.
The Company made three acquisitions in 1997: (i) CNET, Inc., a developer of
software including network management tools on January 9, 1997, (ii) Open
Development Corporation ("ODC"), a developer of database management platforms
providing applications for calling cards on October 15, 1997, and (iii) Wireless
Access, Inc. ("WAI"), a developer and marketer of two-way paging devices on
November 3, 1997. The results of the acquired companies are included from the
dates of acquisition by the Company except for MUX which is shown as
discontinued operations in years 1995-1999. The Selected Consolidated Financial
Data should be read in conjunction with the Consolidated Financial Statements
and Notes thereto,
16
<PAGE>
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the other financial data included elsewhere herein.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999* 1998* 1997* 1996 1995
----- ---- ---- ---- ----
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Net sales ..................................... $ 238,089 $ 367,039 $ 419,570 $ 362,234 $ 308,397
Income (loss) from continuing operations before
change in accounting principle .............. (127,748) (40,724) 3,697 65,840 75,208
Discontinued operations ...................... (780) 954 3,242 4,604 1,240
Change in accounting principle ................ -- -- (688) -- --
Net income (loss) ............................. (128,528) (39,770) 6,251 70,444 76,448
PER SHARE DATA
Per Weighted Average Common Share:
Income (loss) from continuing operations before
change in accounting principle .............. (2.06) (0.66) 0.06 1.09 1.29
Net income (loss) ............................. (2.07) (0.65) 0.10 1.16 1.31
Per Common Share-Assuming Dilution:
Income (loss) from continuing operations before
change in accounting principle .............. (2.06) (0.66) 0.06 1.04 1.20
Net income (loss) ............................. (2.07) (0.65) 0.10 1.11 1.22
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ......................... $158,035 $154,472 $161,454 $279,031 $223,487
Total assets ............................ 413,558 561,795 590,161 521,210 447,580
Long-term debt, including current portion 669 823 3,747 879 2,147
Stockholders' equity .................... 335,478 462,153 492,359 455,861 390,694
</TABLE>
- -------------------------------------
*The results for 1999 were impacted by a $50.9 million write-off of goodwill and
other intangibles related to the WAI acquisition, restructuring charges of $14.6
million and $8.2 million write-off of uncollectible subordinated notes. The
results for 1998 were impacted by a $26.7 million write-off of goodwill and
other intangibles related to the ODC acquisition, restructuring charges of $6.8
million and a $7.9 million loss on sale of the Company's network management
business. The results for 1997 were impacted by a $38.7 million charge for
purchased research and development related to the ODC and WAI acquisitions and a
$5.2 million write-off of goodwill related to the CNET acquisition. See Note 2
to the Company's Consolidated Financial Statements.
ITEM 7. 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.
Glenayre acquired three companies in the year ended December 31, 1997. In
November 1997, the Company acquired WAI, a developer and marketer of two-way
paging devices. In September 1999, the Company wrote-off goodwill and other
intangibles related to the November 1997 acquisitions of WAI. (See Write-off of
Goodwill and Other Intangibles). Glenayre acquired Open Development Corporation,
a developer of database management systems providing applications for calling
17
<PAGE>
cards in October 1997. In December 1998, the Company wrote-off goodwill and
other intangibles related to the October 1997 acquisition of ODC. (See Write-off
of Goodwill and Other Intangibles) In January 1997, the Company acquired CNET,
Inc., a developer of software including network management tools. In December
1998, the Company sold this network management business. The operating results
of the three acquired companies are included in the consolidated results of
Glenayre since the acquisition dates. In September 1997, the Company announced
plans to consider divesting MUX, allowing Glenayre to focus on its core markets
of paging and enhanced messaging. MUX markets products for use in point-to-point
microwave communication systems and was acquired by Glenayre in April 1995. On
November 1, 1999 the Company completed the sale of MUX and the operating results
of MUX have been classified as discontinued operations for 1997-1999.
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 from continuing operations:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales .............................................................. 100% 100% 100%
Cost of sales .......................................................... 57 52 48
---- ---- ----
Gross profit ....................................................... 43 48 52
Operating expenses
Selling, general and administrative .................................... 34 27 22
Provision for doubtful receivables ................................. 28 * *
Research and development ........................................... 17 13 9
Charge for purchased research and development ...................... -- -- 9
Depreciation and amortization ...................................... 13 11 5
Write-off of goodwill and other intangibles ........................ 21 7 --
Write-off of uncollectible subordinated notes ...................... 3 * --
Loss (adjustment to loss) on sale of business ...................... * 2 --
---- ---- ----
Total operating expenses ............................................... (117) 60 47
---- ---- ----
Income (loss) from operations .......................................... (74) (13) 5
Interest, net .......................................................... 2 2 2
Loss on disposal of assets ............................................. (2) * *
Other, net ............................................................. * * (1)
---- ---- ----
Income (loss) from continuing operations before
income taxes and cumulative effect of
change in accounting principle ..................................... (73) (11) 7
Provision for income taxes ............................................. 19 * 6
---- ---- ----
Income (loss) from continuing operations before
cumulative effect of change in
accounting principles .............................................. (54) (11) 1
Cumulative effect of change in accounting principle .................... -- -- *
---- ---- ----
Income (loss) from continuing operations ............................... (54%) (11%) 1%
==== ==== ====
</TABLE>
- --------------------------------------
*less than 0.5%
The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Wireless messaging products ...................... $153,913 $299,315 $348,959
Enhanced services platform products .............. 84,176 67,724 70,611
-------- -------- --------
$238,089 $367,039 $419,570
======== ======== ========
(PERCENTAGE OF NET SALES)
Wireless messaging products ...................... 65% 82% 83%
Enhanced services platform products .............. 35 18 17
-------- -------- --------
100% 100% 100%
======== ======== ========
</TABLE>
18
<PAGE>
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NET SALES. Net sales for 1999 decreased 35% to $238 million as compared to $367
million in 1998, which decreased 13% from $420 million in 1997. International
sales decreased to $112 million in 1999 as compared to $143 million in 1998 and
$223 million in 1997 and accounted for 47%, 39% and 53% of net sales for 1999,
1998 and 1997, respectively.
The decline in net sales in 1999 was due to the contraction in the overall
paging market. There was a slowdown in paging infrastructure purchases as the
domestic paging providers sought capital financing through normal channels or
were acquired by other telecommunication companies. International customers
experienced similar constraints of available capital resources. Additionally,
sales of the Company's two-way paging devices were negatively impacted by a
slower than expected roll out of the two-way market and recent intense price
competition against its lower end product.
In response to these changes in the market, during the second half of 1999, the
Company implemented a new global strategy in an effort to realize sales growth
and return to profitability during the year 2000 by reducing costs and
repositioning its resources to the appropriate strategic markets. As part of the
Company's repositioning as a profitable growth organization, it has witnessed
changes in the paging marketplace that may suggest an overall stabilization in
the paging infrastructure market versus the decline experienced in 1999. Factors
that contribute to this stabilization include (i) an influx of new Internet
focused companies with a desire to expand into the wireless business, (ii) new
distribution channels, (iii) new end to end applications and (iv) customers with
access to capital. These are forward looking statements that are subject to the
factors discussed in the cautionary statement attached as Exhibit 99 to this
10-K. There can be no assurance that the Company's sales levels or growth will
remain at, reach or exceed historical levels in any future period.
The decrease in sales for 1998 as compared to 1997 resulted primarily from a
decrease in deliveries of the Company's paging infrastructure and MVP product to
the Pacific Rim market caused by currency destabilization in certain Asian
countries. This decrease was partially offset by the inclusion of a full year of
revenues of WAI and ODC products.
GROSS PROFIT. Gross profit was 43% in 1999 compared to 48% in 1998 and 52% in
1997. The declines in gross profit percentages in 1999 and 1998 were primarily
due to (i) restructuring severance expenses incurred for employee terminations
in the Company's Quincy, IL and Vancouver, BC manufacturing facilities, (ii)
additional slow-moving inventory reserves as a result of lower forecasted
infrastructure sales and the bankruptcy filing of a customer in the second
quarter 1999 for which certain inventory parts had been purchased, (iii) lower
margins realized on paging devices and (iv) lower overall higher margin paging
infrastructure sales during the periods. Additionally, the Company's paging
device manufacturer incurred significant charges for rework on the Company's
paging devices in the fourth quarter of 1998 and experienced product start up
problems in the second quarter of 1998.
The Company anticipates its gross profit percentage to be approximately 48% in
2000. However, 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 $81 million, $97 million, and $93 million for 1999, 1998 and 1997,
respectively. The decrease in 1999 is primarily attributable to a decrease in
employee related costs as a result of the third quarter 1999, first quarter 1999
and fourth quarter 1998 restructurings. See Note 9 to the Company's Consolidated
Financial Statements. Additionally, 1999 expenses decreased due to the sale of
the Company's network management business in December 1998. See Note 2 to the
Company's Consolidated Financial Statements. These decreases are being partially
offset by restructuring charges recorded in 1999 for the first quarter 1999 and
third quarter 1999 restructuring plans of approximately $1.3 million and $4.2
million, respectively. The increase for 1998 as compared to 1997 was primarily
due to restructuring expenses incurred in 1998 for cost reduction activities
related to the global reduction of the Company's workforce (see Note 9 to the
Company's Consolidated Financial Statements) and the inclusion of CNET, ODC, and
WAI operating expenses since their dates of acquisition in 1997. These expenses
in 1998 are partially offset by a reduction in employee incentive, bonus and
sales commission expenses.
BUSINESS RESTRUCTURING. During the third quarter 1999, the Company recorded a
pre-tax charge of approximately $8.7 million, of which approximately $2.8
million was paid before December 31, 1999, 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 fourth
quarter 1999, the Company expensed approximately $320,000 for retention
performance bonuses earned related to
19
<PAGE>
the third quarter 1999 restructuring, which were earned by employees in the
fourth quarter. The remainder of these retention and performance bonuses will be
expensed as earned in subsequent periods. Additionally, during the fourth
quarter 1999, the Company expensed approximately $280,000 for severance
adjustments related to this reduction of the Company's workforce.
Additionally, the Company recorded a pre-tax charge of approximately $670,000 of
which approximately $150,000 was paid before December 31, 1999 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 is
expected to be completed by the end of the first quarter 2000. 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 total pre-tax charge for the third quarter 1999 restructuring and exiting of
leased facilities was approximately $4.9 million to cost of sales, $1.0 million
to research and development, $2.0 million to loss on sale of assets, and $4.2
million to selling, general and administrative expenses.
The reserve balance for the third quarter 1999 restructuring was approximately
$8.2 million at December 31, 1999.
During the second quarter 1999, the Company recorded a pre-tax charge for
severance of approximately $1.7 million, of which approximately $1.6 million was
paid before December 31, 1999, for a workforce reduction of approximately 200
employees at its Vancouver and Quincy manufacturing facilities. During the third
quarter of 1999 the Company reduced this pre-tax charge by approximately $80,000
for lower than expected actual severance expenses incurred. The reserve balance
is approximately $20,000 for the second quarter 1999 restructuring at December
31, 1999.
During the first quarter 1999, the Company recorded a pre-tax charge of
approximately $1.6 million related to a reduction of the Company's workforce by
approximately 70 employees at the Vancouver, Charlotte, and Quincy facilities,
exiting costs from the Blaine, Washington leased facility and asset impairment
charges for leasehold improvements located at the Blaine, Washington facility
(noncash charge of approximately $170,000). During 1999, the Company paid
approximately $1.3 million of the first quarter 1999 restructuring costs
primarily for employee termination costs and wrote-off approximately $170,000 in
leasehold improvements. Additionally, during the remainder of 1999, the Company
reversed charges of approximately $90,000 for less than anticipated exit costs
and severance costs. The reserve balance at December 31, 1999 is approximately
$40,000.
During the fourth quarter 1998, the Company recorded a pre-tax charge of
approximately $6.8 million related to a 10% reduction of its global workforce,
the exiting of two leased facilities and impairment of associated long-lived
assets, primarily leasehold improvements. At December 31, 1998 the reserve
balance was $4.3 million. During 1999, the Company reduced the fourth quarter
1998 restructuring charges by approximately $620,000 due to lower than
anticipated employee outplacement fees and severance costs at its Norwood,
Massachusetts facility and lower facility exit costs offset partially by more
than anticipated severance costs at other locations. During 1999 the Company
paid a total of approximately $3.7 million of the fourth quarter 1998
restructuring charge primarily for employee termination costs, operating
facility costs and early termination fees for the Norwood, Massachusetts leased
facility. As of December 31, 1999 the Company has approximately $5,000 accrued
for the fourth quarter 1998 restructuring.
Management believes the remaining reserves for business restructuring are
adequate to complete the above plans.
As a result of the 1999 restructurings the Company anticipates it will have
annualized savings from reduced employee headcount and facility costs during
2000 of approximately $13 million related to costs of sales, $11 million for
selling, general and administrative expenses, $4 million for research and
development expenses and $500,000 related to depreciation expense. The Company
does not expect significant offsetting expense increases or revenue reductions
resulting from the implementation of these business restructurings. These are
forward-looking statements that are subject to the factors discussed in the
cautionary statement attached as Exhibit 99 to this 10-K.
PROVISION FOR DOUBTFUL RECEIVABLES. The provision for doubtful receivables
increased to $67 million in 1999 as compared to $1 million in each of 1998 and
1997. This increase is due primarily to the risk inherent in the Company's
portfolio of receivables due to financial difficulties, including bankruptcy,
being experienced by several of the Company's customers in the second and third
quarters of 1999. Bankruptcy of one customer, Conxus, accounted for
approximately $38 million of the increase from 1998 to 1999. Accordingly,
significant increases in the Company's allowance for doubtful accounts were
20
<PAGE>
recognized during 1999. (See FINANCIAL CONDITION AND Liquidity - Liquidity and
Capital Resources and Note 4 to the Company's Consolidated Financial
Statements).
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses decreased to
$41 million in 1999 compared to $47 million in 1998 and $37 million in 1997. The
decrease for 1999 is primarily related to a reduction in employee related costs
attributable to the first and fourth quarter 1998 restructurings. (See Note 9 to
the Company's Consolidated Financial Statements). The 1998 increase was
primarily due to (i) restructuring expenses incurred in the first quarter of
1998 for severance and other employee related costs associated with streamlining
the Company's paging infrastructure research and development workforce, and (ii)
facility exit costs and employee related costs incurred in the fourth quarter of
1998 for the relocation and integration of the ODC facility to the Company's
Atlanta facility (see Note 9 to the Company's Consolidated Financial
Statements). The 1998 increase was also impacted by the research and development
activities of CNET, ODC, and WAI since their dates of acquisition in 1997. This
increase was partially offset by a decrease in the Company's use of temporary
contract service engineers as well as lower employee incentive and bonus
expenses incurred in 1998. The Company relies on its research and development
programs related to new products and the improvement of existing products for
growth in net sales. Research and development costs are expensed as incurred.
Research and development expenses as a percentage of net sales increased to 17%
in 1999 from 13% in 1998 and 9% in 1997. Glenayre expects spending for research
and development in 2000 to decrease as a percentage of net sales to
approximately 13% with absolute dollars changing in relation to net sales
reflecting the Company's continued focus on the development and timely
introduction of new products.
CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and
development costs of $38.7 million were expensed in 1997. These costs include
$16.4 million and $22.3 million for the purchase of technology under development
associated with ODC's database management products and with WAI's two-way paging
device expertise, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
decreased to $30 million in 1999 compared to $39 million in 1998 and $21 million
in 1997. The decrease in expense for 1999 is a result of (i) the sale of the
Company's network management business in the fourth quarter of 1998, (ii) the
write-off of goodwill related to the 1997 acquisition of Open Development
Corporation and other fixed and intangible assets in the fourth quarter of 1998,
(iii) the write-off of goodwill related to the 1997 acquisition of Wireless
Access, Inc. and other fixed and intangible assets in the third quarter 1999 and
(iv) older assets becoming fully depreciated in 1999 while capital additions
were significantly decreased for 1999. The Company spent $10.9 million, $29.9
million and $32.9 million in 1999, 1998 and 1997, respectively, in order to
provide the equipment and capacity necessary to meet the Company's ongoing
operations. Additionally, goodwill and other intangibles acquired through the
businesses purchased amounted to $113.2 million in 1997. The increases in
depreciation and amortization expense were due to these significant fixed and
intangible asset purchases. Glenayre anticipates equipment purchases in 2000 to
be approximately $12 million and expects depreciation expense to decrease in
2000 compared to 1999. Glenayre anticipates amortization expense for 2000 to be
lower than 1999 (see "Write-off of Goodwill and Other Intangibles").
WRITE-OFF OF GOODWILL AND OTHER INTANGIBLES. In the third quarter 1999, the
Company wrote off approximately $43 million of goodwill and approximately $8
million of other intangibles related to the acquisition of WAI.
In November 1997 the Company acquired WAI, a developer of two-way paging
devices. The purchase price was negotiated based on projections of revenues from
sales of the paging devices and future applications based on the acquired
product architecture (the "acquired WAI products"). Actual WAI revenues from
November 1997 to September 1999 were considerably less than the projected sales
used in the purchase price calculations. Sales of paging devices for 1998 were
negatively affected by manufacturing start-up problems in the second quarter
1998. Design issues caused further delays in sales in the latter part of 1998
and in the first half of 1999. Additionally, the two-way paging market has not
developed as rapidly as expected and the Company's lower end device began to
experience severe price competition in the second quarter 1999. In the third
quarter 1999, after incurring significant operating losses related to the WAI
business, management decided to restructure the WAI operations. Although the
Company will continue to deliver its full two-way paging device to certain
markets for an appropriate time period, the remaining WAI resources are expected
to be focused to develop a new architecture for other advanced wireless
communication products unrelated to the acquired technology.
Management made this strategic change due to the following reasons, which were
not readily apparent during the acquisition process: (i) performance issues with
the paging devices causing delays in timing of product delivery and product
acceptance; (ii) slower than expected rollout of the two-way messaging market;
(iii) a reduction in the overall expected market size for two-way paging devices
due to rapid technological advances creating alternative forms of communication;
and (iv) the speed and cost to adapt the product for future applications has
been competitively hindered by the current architecture.
21
<PAGE>
Given this strategic change, the Company anticipates that the future forecasted
results for the acquired WAI products will be significantly less than had been
anticipated at the time of the Company's acquisition of WAI. As a result of this
strategic change, the WAI workforce was significantly decreased and future WAI
requirements for sales and engineering development are expected to be contracted
from elsewhere within the Company. After making these changes, the Company
evaluated the ongoing value of the non-current assets of WAI. Based on this
evaluation, the Company determined that assets, principally goodwill and other
intangibles, with a carrying value of approximately $51 million at September 30,
1999 were impaired and written down to fair value. Fair value was based on
estimates of discounted future cash flows which were negative and therefore the
remaining intangibles were written off.
In 1998, the Company wrote off $25.3 million of goodwill and $1.4 million of
other intangibles related to its acquisition of ODC, a total of $26.7 million,
compared to the 1997 write-off of $5.2 million of goodwill related to its
acquisition of CNET.
At the time of the acquisition in the fourth quarter 1997, ODC targeted three
principal markets, including prepaid wireless, prepaid wireline, and postpaid
calling to deliver its platform products for database management by telephony
network operators. Operating projections utilized in establishing the negotiated
purchase price of the ODC business included expected revenue from all three of
these markets. Throughout 1998, the Company attempted to capitalize on the
accessibility of all three of these markets as part of the integration of the
ODC business. However, the Company's attempts to deliver the ODC products into
the prepaid wireline and postpaid calling markets were not productive. In the
fourth quarter 1998, after incurring significant operating losses from the ODC
business, management decided to focus on the prepaid wireless market. Management
made this strategic change away from the prepaid wireline and postpaid calling
markets due to the following reasons which were not readily apparent during the
acquisition process: (i) an insufficent internal resource knowledge base related
to these markets to compete at a reasonable operating profit level; (ii) due to
a high level of vendor specific customization, the data management products in
these markets require more capital and manpower resources than anticipated to
develop, deploy and maintain; (iii) the business environment is more aligned to
system integration rather than standardized product offerings; and (iv) the
channels of distribution are weak. Management believes that its future
concentration related to ODC products should continue to be primarily in the
prepaid wireless market due to (i) Glenayre's core knowledge base established in
the wireless market; (ii) distribution channels are in place; and (iii) this
market allows for a standardized product and support. Given this strategic
change, the Company anticipates that the future forecasted results for the ODC
products will be significantly less than had been anticipated at the time of the
Company's acquisition of ODC. As a result of this strategic change, the ODC
operating facility was closed in March 1999 with research and development and
administrative functions relocating to the Company's Atlanta facility. After
making these changes, the Company evaluated the ongoing value of the noncurrent
assets of ODC. Based on this evaluation, the Company determined that assets,
principally goodwill and other intangibles, with a carrying value of $30.9
million were impaired and wrote them down by $26.7 million to their fair value.
Fair value was based on estimated future discounted cash flows to be generated
by ODC.
In the first quarter 1997, the Company acquired CNET, a developer of network
management systems for the global wireless communications industry. During 1997,
revenue goals projected during the acquisition process were not achieved and
significant operating losses were incurred. In the fourth quarter of 1997,
Company management identified significant adverse changes in the market size for
CNET's existing products. These changes were primarily due to fewer than
anticipated end uses of a network management tool and significant on-going
development costs of radio frequency propagation software. Due to the above
changes, the Company revised its projections in the fourth quarter of 1997 and
determined that its projected results would not fully support the future
amortization of the goodwill balance. In accordance with the Company's policy,
management assessed the recoverability of goodwill using an undiscounted cash
flow projection based on the remaining amortization period of six years. Based
on this projection, the cumulative undiscounted cash flow over the remaining
amortization period was insufficient to fully recover the CNET goodwill balance
of $8.1 million. At December 31, 1997, the Company wrote off the short-fall of
$5.2 million. (See LOSS ON SALE OF BUSINESS below.)
The write-off of WAI goodwill and other intangibles reduced amortization expense
in 1999 by $2.4 million. The write-off of ODC goodwill and other intangibles
reduced amortization expense in 1999 as compared to 1998 by approximately $4.9
million. The write-off in 1997 reduced the CNET goodwill amortization expense in
1998 as compared to 1997 by approximately $850,000.
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
22
<PAGE>
charges related to the sale. During the fourth quarter 1999, the Company
reversed approximately $550,000 of expenses previously included in the $7.9
million loss on sale of the Company's network management business. See Note 2 to
the Company's Consolidated Financial Statements.
WRITE-OFF OF UNCOLLECTIBLE 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 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. In August 1999,
Conxus filed for bankruptcy liquidation under Chapter 7 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. In October 1999, the Company collected $2.1
million related to the subordinated notes.
INTEREST INCOME, NET. Interest income, net decreased to $5 million in 1999
compared to $8 million in 1998 and $10 million in 1997. Interest earned in 1999
was lower due to interest income only being recorded as received on certain
notes receivables with customers experiencing financial difficulties partially
offset by additional interest earned on higher cash investments. The Company
expects that the level of interest income, net in 2000 will vary in accordance
with the level of secured debt financing commitments issued by Glenayre and used
by its customers. The decrease in 1998 compared to 1997 was primarily due to a
decrease in cash and cash equivalents partially offset by higher average
balances in customer notes receivable.
LOSS ON DISPOSAL OF ASSETS. The Company recorded a loss on disposal of assets of
$4 million, $200,000 and $300,000 for 1999, 1998 and 1997, respectively. In
1999, the Company incurred significant charges primarily attributable to asset
write-offs and impairment charges associated with the third quarter 1999
restructuring. (See Note 9 to the Company's Consolidated Financial Statements).
Additionally, during 1999 the Company recorded significant write-offs due to (i)
changes in processes, (ii) assets not identified as part of ongoing and specific
physical reviews and (iii) assets identified as abandoned during the process of
consolidating manufacturing facilities.
OTHER, NET. The decrease in expense for 1998 as compared to 1997 was primarily
due to expenses recorded in 1997 related to a realignment of certain domestic
sales, management, and engineering personnel in order to enhance organizational
efficiencies. Additionally, in 1997, the significant decline in relation to the
U.S. dollar of currencies of certain countries, including Canada, Singapore and
Taiwan, created unrealized translation expense as a result of the remeasurement
of the net assets of the Company's foreign operations from the local denominated
currency to the functional currency for consolidation. The translation loss or
gain recorded was not significant in 1998 or 1999 and is expected to vary in
2000 depending on the amount of net assets in foreign countries and exchange
rate fluctuations.
PROVISION FOR INCOME TAXES. The 1999 and 1998 effective tax rates differed from
the combined U.S. federal and state statutory rate of approximately 40% due
primarily to the nondeductible goodwill amortization and the write-off of the
goodwill related to the companies acquired in 1997. The difference between the
1997 effective tax rate and the combined federal and state statutory tax rate is
primarily the result of (i) the utilization of the Company's net operating
losses ("NOLs"), (ii) the charge for purchased research and development, (iii)
nondeductible goodwill amortization, (iv) lower tax rates on earnings
indefinitely reinvested in certain non-U.S. jurisdictions and (v) the
application of Statement of Financial Accounting Standards No. 109 ACCOUNTING
FOR INCOME TAXES, ("SFAS 109"), in computing the Company's tax provision. The
difference between the effective tax rates in each of the years is primarily the
result of an increase in nondeductible goodwill amortization and the write-off
of the goodwill related to the companies acquired in 1997. See Note 8 to the
Company's Consolidated Financial Statements.
At December 31, 1998, the Company had approximately $33 million of NOLs related
to the acquisition of WAI and ODC in 1997 (collectively referred to as "acquired
NOLs"). At December 31, 1999, the NOLs increased to $65 million as a result of
current losses. These NOL's will begin to expire in 2005. However, due to
certain restrictions limiting the Company's future use of WAI's acquired NOLs,
the potential benefit related to these NOLs, approximately $22.5 million, has
been fully reserved.
The maximum quarterly book tax rate is expected to be approximately 43% in 2000.
This rate is expected to vary from quarter to quarter depending on the
profitability of the Company. This variance is primarily due to nondeductible
goodwill amortization, the benefit of the foreign sales corporation and the
utilization of research and experimentation credits. However, the actual book
tax rate may be different from the Company's estimate due to various issues
including (i) future tax legislation, (ii) the changes in the amount of
international business by the Company, (iii) the utilization of U.S. research
and
23
<PAGE>
experimentation tax credits, (iv) changes in federal, state or international
tax rates, (v) the availability of foreign sales corporation tax benefits and
(vi) the actual utilization of the acquired NOLs.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company changed its
accounting policy in 1997 pursuant to Emerging Issues Task Force No. 97-13
("EITF No. 97-13") for the project to implement a new business operating system
that Glenayre began in 1996 and completed in the second quarter of 1998.
Previously all direct costs relating to the project were capitalized, including
the portion related to business process reengineering. In accordance with EITF
No. 97-13, the unamortized balance of these reengineering costs as of November
1997 of approximately $1.1 million, or $688,000 after tax benefit was written
off.
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1999 the Company had cash and
cash equivalents and restricted cash totaling $83.9 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit
substantially all of which expire during 2000. At December 31, 1999, Glenayre's
principal source of liquidity is $73.5 million of cash and cash equivalents. On
June 30, 1999 the Company terminated the $50 million bank line of credit
established in October 1998. During the first quarter of 1999, borrowings under
this credit line ranged from $10 million to $17.5 million. There were no
borrowings under the facility subsequent to the first quarter of 1999. The
Company is currently pursuing a new credit facility, which is expected to be
used primarily to colateralize the Company's letters of credit which are
currently restricting $10.4 million of the Company's cash and cash equivalents.
The increase in cash and cash equivalents of $61.2 million for 1999 is due
principally to the sale MUX for $35.8 million (net), $26.3 million of funds
provided by operations, cash proceeds received from the sale of the Charlotte
facility ($6.2 million) and collection on subordinated notes ($2.1 million),
offset by purchases of plant and equipment amounting to $10.9 million. The cash
provided by operating activities was due primarily to net income (before certain
non-cash charges including depreciation and amortization, the write-off of
goodwill and other intangibles, and the loss on sale of the microwave
communication business) offset by significant increases in restricted cash of
$10.4 million. The restricted cash consists of time deposits pledged as
collateral to secure letters of credit, substantially all of which expire during
2000.
Approximately $3 million of trade accounts and interest receivables and $36
million or 56% of the gross notes receivable balance of $64.8 million as of
December 31, 1999 was due from Conxus, which was engaged in the buildout of a
major narrowband personal communications services 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 collectible 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,
since 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. 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.
The decrease in the gross Accounts Receivable, from $160 million at December 31,
1998 to $106 million at December 31, 1999 is due primarily to lower sales during
the period.
Inventories decreased at December 31, 1999 compared to December 31, 1998 as a
result of significantly lower levels of operating activities.
Accounts payable decreased at December 31, 1999 compared to December 31, 1998
primarily as a result of decreased inventory purchases. Accrued expenses at
December 31, 1999 decreased from year-end 1998 primarily due to reductions in
(i) payroll accruals, (ii) customer deposits, (iii) reserves for paging device
rework, (iv) reserves for sale of the network management business and (v) income
taxes offset partially by an increase in restructuring reserves and deferred
revenues.
24
<PAGE>
On April 20, 1999, the Company and Motorola Inc. ("Motorola") announced the
signing of a Memorandum of Understanding ("MOU") with the intent to enter into a
definitive license agreement that would enable Glenayre to manufacture and sell
all or part of Motorola's paging infrastructure products. Based on significant
market changes since April 1999, the Company currently sees no compelling
competitive or financial reasons to conclude the manufacturing license agreement
as originally planned. The scope of the agreement has been recast to focus on
broader and more strategic partnering opportunities. These include joint
promotional activities to stimulate the global two-way paging market as well as
an expansion of the existing ReFLEX(TM) related licensing agreement. As part of
these activities, Motorola is expected to contribute $3 million and Glenayre $2
million to a joint development fund of $5 million over a three-year period to
promote the global market for two-way paging. This fund is in addition to each
company's independent research and development activities. These agreements,
which supersede and replace the April 1999 MOU, have been reached and were
announced in December 1999. Glenayre's ReFLEX license rights have been broadened
to modules and chipsets, and the application scope has broadened beyond belt top
pagers to include integrated PDA's, telemetry and similar applications. Glenayre
also licensed Motorola's over the air programming protocol, and has finalized
the joint market development fund processes.
The Company signed an agreement as of September 30, 1999 for the sale of 95% of
the equity interest in its microwave radio business, MUX. 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 all periods presented in the
consolidated statements of operations. Additionally, the Company is contingently
liable for MUX's building lease payments and certain key employee severance
benefits should the buyer not be able to meet these lease obligations or not
offer several 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 December 31, 1999 related to these obligations is
approximately $4.3 million.
In October 1999, the Company sold its 45,000 square foot facility located in
Charlotte, North Carolina receiving cash of approximately $6 million. In
conjunction with the sale, the Company leased back 15,000 square feet in the
sold facility for a five-year lease term.
The Company has incurred restructuring charges in each of the quarters since the
fourth quarter 1998. See Note 9 to the Company's Consolidated Financial
Statements. As a result of these charges, subsequent to December 31, 1999, the
Company expects to make cash payments from operating cash flows for employee
termination and lease exit costs of approximately $7.1 million over the next two
years.
Deferred income taxes increased $35.6 million due primarily to the tax benefit
of the current year net operating loss of $11.1 million and temporary
differences of $21.6 million.
In 1996, the Board of Directors of the Company authorized a repurchase program
to buy back 2.5 million shares of the Company's common stock. No shares were
repurchased under this program through December 31, 1999.
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 often requires customer
financing commitments. These commitments may be in the form of guarantees,
secured debt or lease financing. At December 31, 1999, the Company had
agreements to finance and arrange financing for approximately $30 million of
paging infrastructure and voice mail products. The Company cannot currently
predict the extent to which these commitments will be utilized, since certain
customers may be able to obtain more favorable terms using traditional financing
sources. From time to time, the Company also arranges for third-party investors
to assume a portion of its commitments. If exercised, the financing arrangements
will be secured by the equipment sold by Glenayre.
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 an
estimated total cost of approximately $12 million. Approximately $4.7 million,
$6.3 million and $900,000 paid toward architecture, engineering and construction
costs related to the new expansion were included in capital expenditures for the
years ended December 31, 1999, 1998 and 1997, respectively.
25
<PAGE>
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 customer financing commitments) and (ii) to repurchase
shares as discussed above. Company management believes that, if needed, it can
establish additional borrowing arrangements with lending institutions.
INCOME TAX MATTERS. For 1999 and 1998, 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. In 1997 and prior years,
the Company had a favorable income tax position principally because of the
existence of a significant amount of U.S. tax net operating loss carryforwards
established prior to 1988. These tax loss carryforwards were available to
shelter U.S. taxable income generated by the Company. Therefore, the Company's
actual cash outlay for 1997 and prior years was limited to U.S. alternative
minimum tax and foreign and state income taxes. The remainder of prior NOLs were
utilized in 1997.
As described in Note 8 to the Company's Consolidated Financial Statements, at
December 31, 1999, the Company had U.S. NOLs aggregating $65 million, of which
$33 million related to the 1997 acquisitions of ODC and WAI. However, the
ability to utilize WAI's acquired NOL's to offset future income is subject to
restrictions and there can be no assurance that they will be utilized in 2000 or
future periods. Additionally, as the volume of international sales grows, the
percentage of worldwide income taxable in international jurisdictions may
increase as well. As a result, the cash tax rate may be significantly higher in
2000 compared to 1999 and recent years.
The Company has recorded a deferred tax asset of $57 million, net of a valuation
allowance of $15 million, at December 31, 1999, 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. The factors that affect the amount of U.S. taxable
income in the future, in relation to reported income before income taxes,
include primarily the amount of employee stock options exercised and the portion
of such income taxable in jurisdictions outside of the U.S., both of which
reduce the amount of income subject to U.S. tax, and therefore reduce the
utilization of existing net operating loss carryforwards.
At December 31, 1999 and 1998, the valuation allowance was $15 million and $16
million, respectively. This change is primarily due to management's
reconsideration of the Company's ability to utilize the acquired NOL's related
to ODC.
Pursuant to SFAS 109, a valuation allowance should be recognized to reduce the
deferred tax asset to the amount that is more likely than not to be realized. In
assessing the likelihood of realization of the NOL carryforwards, management
considered estimates of future taxable income from ordinary and recurring
operations. These estimates were made by considering past financial information,
adjusted for nonrecurring items including the write-off of goodwill related to
the WAI and ODC acquisitions, restructuring charges, customer bankruptcies, loss
on sale of subsidiary and the operating losses associated with acquired
companies. In its assessment, management also considered the deductible
temporary differences included in the deferred tax asset and estimated the
timing of their reversal. At December 31, 1999, the temporary differences
primarily related to the provision for doubtful receivables. Since the majority
of the provision for doubtful receivables related to customers who have already
sought bankruptcy protection, these reserves are anticipated to reverse in 2000.
Accordingly, the minimum amount of future taxable income that would have to be
generated to realize the NOL carryforwards, including the effect of the timing
differences, is approximately $85 million. In addition to management's
consideration of future taxable income from ordinary and recurring operations,
tax planning strategies were also identified which would generate sufficient
future taxable income if the NOL's are ultimately determined to be at risk of
expiration.
IMPACT OF YEAR 2000. In prior years, the Company discussed the nature and
progress of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of those planning
and implementation efforts, the Company experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Company did not incur expenses exceeding its anticipated amount of
$500,000 for Year 2000 readiness. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
INFLATION. For the three fiscal years ended December 31, 1999, the Company does
not believe inflation has had a material effect on its results of operations.
26
<PAGE>
ITEM 7A. 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 often requires customer financing
commitments. These commitments may be in the forms of guarantees, secured debt
or lease financing and are subject to fair market value adjustments based on
prevailing market interest rates. The Company does not believe that future
exposure to adjustments in interest rates related to customer financing will
have a material impact on the Company's results of operations. Although a
substantial portion of the Company's annual sales are negotiated in United
States dollars, certain contracts in the normal course of business are
negotiated in a foreign currency. 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.
OUTLOOK
Glenayre believes that the communications market will continue to experience
dramatic growth, for both the methods used to communicate as well as the uses
and applications for communications. The various providers of these
communications services will continue to seek to differentiate themselves in
their increasingly competitive markets. Glenayre believes that it is well
positioned to provide the markets with solutions that should allow this
differentiation. Additionally, the new products and solutions being developed by
the Company should expand the uses and applications in this growing market.
The Company believes that the paging infrastructure market has now stabilized
after the 50% contraction in the market over the last two years, and that it
represents solid future business for the Company. Two-way wireless messaging
product sales will continue - driven by applications and the wireless Internet.
New interest by Internet Service Providers ("ISPs"), Applications Service
Providers ("ASPs") and other carriers in these networks has increased our
customers' stock market valuations and access to capital.
The data messaging device market is in the early stage of growth, which will
escalate based on the early 2000 launch of new ReFLEX25 networks in the United
States. These new networks provide the Company with six U.S. nationwide service
providers available to offer its messaging device products. These service
providers should now be expanding their market reach beyond the Fortune 100
companies. Additionally, the Company expects to expand its device market with
the future development of data-centric devices for networks other than ReFLEX.
The ESP market is expected to continue robust growth, especially for larger
wireless communications system networks. The Company is well positioned to
capitalize on this growth with recent developments that provide significant
capacity expansion to meet the needs of these networks. New applications that
provide the Company's customers revenue generating opportunities as well as
reduce consumer churn will further enhance its competitive position. The Company
expects the ESP business to continue increasing as a percentage of the Company's
revenues.
Partnerships and alliances throughout Glenayre are taking on an increasingly
significant role in the Company's strategy to meet the demands for expanding
product applications and solutions and distribution channels as well as market
and product presence in the Internet and Web-based applications areas.
This Outlook section contains forward-looking statements that are subject to the
risks described under the Factors Affecting Future Operating Results immediately
below.
27
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K, the Company's Annual Report to Stockholders, any Form 10-Q or
any Form 8-K of the Company or any other written or oral statements made by or
on behalf of the Company include forward-looking statements reflecting the
Company's current views with respect to future events and financial performance.
Although certain cautionary statements have been made in this Form 10-K relating
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 to this Form 10-K.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements of the Company and its subsidiaries as of
December 31, 1999, 1998 and 1997 and for each of the three years in the period
ended December 31, 1999, as well as the report of independent auditors thereon,
are set forth on the following pages. The index to such financial statements and
required financial statement schedules is set forth below and at Item 14(a) of
this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
(i) Financial Statements:
Page
----
Report of Ernst & Young LLP Independent Auditors........................... 30
Consolidated Balance Sheets at December 31, 1999 and 1998.................. 31
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................................ 32
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.................................. 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................................ 34
Notes to Consolidated Financial Statements................................ 36
(ii) Supplemental Schedules:
(For the years ended December 31, 1999, 1998 and 1997)
Schedule II - Valuation and Qualifying Accounts .......................... 64
All other schedules are omitted because they are not applicable or not
required.
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders
Glenayre Technologies, Inc.
We have audited the consolidated balance sheets of Glenayre Technologies, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Glenayre Technologies, Inc. and subsidiaries at December 31, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Charlotte, North Carolina
February 7, 2000
30
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................................... $73,513 $12,283
Restricted cash.................................................... 10,355 --
Accounts receivable, net........................................... 88,736 153,773
Notes receivable................................................... 7,083 12,810
Inventories........................................................ 28,130 46,502
Deferred income taxes.............................................. 16,668 15,906
Prepaid expenses and other current assets.......................... 4,249 5,630
-------- -------
Total current assets............................................. 228,734 246,904
Notes receivable, net................................................. 4,707 58,724
Property, plant and equipment, net.................................... 88,654 109,661
Goodwill.............................................................. 47,999 119,626
Deferred income taxes................................................. 40,507 5,679
Other assets.......................................................... 2,957 21,201
-------- -------
TOTAL ASSETS ......................................................... $413,558 $561,795
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $18,073 $ 31,968
Accrued liabilities................................................. 52,534 60,258
Other current liabilities........................................... 92 206
-------- -------
Total current liabilities......................................... 70,699 92,432
Other liabilities..................................................... 7,381 7,210
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: 1999-62,430,153 shares; 1998-62,064,290 shares..... 1,248 1,241
Contributed capital................................................. 345,097 343,251
Retained earnings (deficit)......................................... (10,867) 117,661
-------- -------
Total stockholders' equity........................................ 335,478 462,153
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $413,558 $561,795
======== =======
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES ....................................................... $ 238,089 $ 367,039 $ 419,570
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .............................................. 135,597 192,686 202,604
Selling, general and administrative expense ................ 81,334 97,320 93,450
Provision for doubtful receivables ......................... 66,999 1,187 1,155
Research and development expense ........................... 40,831 47,438 36,673
Charge for purchased research and development .............. -- -- 38,700
Depreciation and amortization expense ...................... 29,860 38,645 20,834
Write-off of goodwill and other intangibles ................ 50,919 26,705 5,183
Loss (adjustment to loss) on sale of business .............. (554) 7,858 --
Write-off of uncollectible subordinated notes .............. 8,172 1,350 --
--------- --------- ---------
Total costs and expenses ................................... 413,158 413,189 398,599
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ................................... (175,069) (46,150) 20,971
--------- --------- ---------
OTHER INCOME (EXPENSES):
Interest income ............................................ 5,699 8,780 10,574
Interest expense ........................................... (397) (571) (188)
Loss on disposal of assets ................................. (4,431) (171) (254)
Other, net ................................................. 483 (1,004) (1,893)
--------- --------- ---------
Total other income ......................................... 1,354 7,034 8,239
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ....................................... (173,715) (39,116) 29,210
PROVISION (BENEFIT) FOR INCOME TAXES ............................ (45,967) 1,608 25,513
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ........................ (127,748) (40,724) 3,697
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
(NET OF INCOME TAX) ........................................ (780) 954 3,242
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAX BENEFIT OF $362) .............. -- -- (688)
--------- --------- ---------
NET INCOME (LOSS) ............................................... $(128,528) $ (39,770) $ 6,251
========= ========= =========
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE:
Income (loss) from continuing operations before cumulative effect
of change in accounting principle ............................... $ (2.06) $ (0.66) $ 0.06
Discontinued operations ......................................... (0.01) 0.01 0.05
Cumulative effect of change in accounting principle ............. -- -- (0.01)
--------- --------- ---------
Net income (loss) per weighted average common share ............. $ (2.07) $ (0.65) $0 .10
========= ========= =========
INCOME (LOSS) PER COMMON SHARE--ASSUMING
DILUTION:
Income (loss) from continuing operations before cumulative
effect of change in accounting principle ...................... $ (2.06) $ (0.66) $ 0.06
Discontinued operations ......................................... (0.01) 0.01 0.05
Cumulative effect of change in accounting principle ............. -- -- (0.01)
--------- --------- ---------
Net income (loss) per common share--assuming dilution ........... $ (2.07) $ (0.65) $ 0.10
========= ========= =========
INCOME (LOSS) PER COMMON SHARE--ASSUMING
DILUTION:
Income (loss) from continuing operations before cumulative
effect of change in accounting principle..................... $ (2.06) $ (0.66) $ 0.06
Discontinued operations.......................................... (0.01) 0.01 0.05
Cumulative effect of change in accounting principle.............. -- -- (0.01)
--------- --------- ---------
Net income (loss) per common share--assuming dilution............ $ (2.07) $ (0.65) $ 0.10
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Retained Total
---------------------- Contributed Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 ................. 59,868 $ 1,197 $ 301,771 $ 152,893 $ 455,861
Net income .................................. 6,251 6,251
Stock options exercised ..................... 470 10 2,516 2,526
Shares issued and options assumed
in connection with business
acquisitions .............................. 313 6 26,461 26,467
Utilization of net operating loss
carryforwards ............................... 1,713 (1,713) --
Tax benefit of stock options exercised ...... 1,254 1,254
------ ----- ------- ------- -------
Balances, December 31, 1997 ................. 60,651 1,213 333,715 157,431 492,359
Net loss .................................... (39,770) (39,770)
Stock options exercised ..................... 1,413 28 7,328 7,356
Tax benefit of stock options exercised ...... 2,208 2,208
------ ----- ------- ------- -------
Balances, December 31, 1998 ................. 62,064 1,241 343,251 117,661 462,153
Net loss .................................... (128,528) (128,528)
Stock options exercised ..................... 366 7 1,717 1,724
Tax benefit of stock options exercised ...... 129 129
------ ----- ------- ------- -------
Balances, December 31, 1999 ................. 62,430 $ 1,248 $ 345,097 $ (10,867) $ 335,478
====== ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $(128,528) $ (39,770) $ 6,251
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................................... 30,948 40,086 22,368
Changes in deferred income taxes ...................................... (36,757) (6,554) 18,164
Loss on disposal of equipment ......................................... 3,473 1,166 254
Loss on disposal of microwave communication business .................. 3,235 -- --
Loss (adjustment to loss) on sale of network management
business ........................................................... (554) 7,858 --
Charge for purchased research and development ......................... -- -- 38,700
Write-off of goodwill and other intangibles ........................... 50,919 26,705 5,183
Tax benefit of stock options exercised ................................ 129 2,208 1,254
Write-off of uncollectible subordinated notes ......................... 8,172 1,350 --
Changes in operating assets and liabilities, net of effects of business
dispositions and acquisitions:
Restricted cash .................................................... (10,355) -- --
Accounts receivable ................................................ 58,295 (2,892) (27,922)
Notes receivable ................................................... 59,744 (8,760) (38,084)
Inventories ........................................................ 14,174 2,800 7,083
Prepaids and other current assets .................................. 1,492 1,140 2,172
Other assets ....................................................... 885 (966) (1,127)
Accounts payable ................................................... (11,681) 4,842 1,168
Accrued liabilities ................................................ (17,591) (2,923) 8,532
Other liabilities .................................................. 334 1,878 720
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ............................................................. 26,334 28,168 44,716
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............................. (10,872) (29,949) (32,889)
Proceeds from sale of building and equipment ............................ 6,210 180 46
Proceeds from (purchases of) subordinated notes ......................... 2,145 (11,667) --
Maturities of short-term investments .................................... -- -- 164,103
Purchases of short-term investments ..................................... -- -- (86,087)
Acquisitions, net of cash acquired ...................................... -- -- (123,646)
Net proceeds from sale of microwave communication
business ............................................................ 35,843 -- --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ..................... 33,326 (41,436) (78,473)
--------- --------- ---------
</TABLE>
34
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings ......................... (154) (2,881) (1,478)
Issuance of common stock ................................... 1,724 7,356 2,526
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 1,570 4,475 1,048
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................................. 61,230 (8,793) (32,709)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 12,283 21,076 53,785
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 73,513 $ 12,283 $ 21,076
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................. $ 388 $ 606 $ 114
Income taxes ............................................. 3,824 5,277 6,290
</TABLE>
SUPPLEMENTAL INFORMATION OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
On October 15, 1997, the Company acquired Open Development Corporation ("ODC").
In connection with this acquisition the Company paid $44,742,000 (including
$1,355,000 in acquisition costs) and assumed options to purchase common stock
valued at $3,289,000 for assets and in-process research and development with a
fair value of $59,040,000 and assumed liabilities of $11,009,000.
On November 3, 1997, the Company acquired Wireless Access, Inc. ("WAI"). In
connection with this acquisition the Company paid $83,779,000 (including
$1,939,000 in acquisition costs) and assumed options to purchase common stock
valued at $16,636,000 for assets and in-process research and development with a
fair value of $108,801,000 and assumed liabilities of $8,386,000.
See notes to consolidated financial statements.
35
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. DISCONTINUED OPERATIONS
The Company signed an agreement 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 all periods
presented in the consolidated statements of operations. Additionally, the
Company is contingently liable for MUX's building lease payments and certain key
employee severance benefits should the buyer not be able to meet these lease
obligations or not offer several key MUX employees a similar position with
substantially the same or greater responsibilities and the same or greater
compensation. The maximum contingent liability related to these obligations is
approximately $4.3 million.
Results for discontinued operations consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Sales ................................... $ 33,195 $ 32,903 $ 32,109
======== ======== ========
Income (Loss) from Discontinued Operations:
Income from operations before income tax .... 4,266 1,958 5,584
Provision for income taxes .................. 1,811 1,004 2,342
-------- -------- --------
Net income from operations .................. 2,455 954 3,242
-------- -------- --------
Gain on disposal before income taxes ........ 6,500 -- --
Provision for income taxes .................. 9,735 -- --
-------- -------- --------
Net loss from sale of discontinued operations (3,235) -- --
-------- -------- --------
$ (780) $ 954 $ 3,242
======== ======== ========
</TABLE>
2. BUSINESS ACQUISITIONS
(A) CNET, INC. ACQUISITION AND SUBSEQUENT SALE
On January 9, 1997, the Company completed the acquisition of CNET, Inc.
("CNET"), located in Plano, Texas. CNET develops and provides integrated
operational support systems, network management, traffic analysis, and radio
frequency propagation software products and services for the global wireless
communications industry. CNET licenses its products to cellular, paging and
personal communications services operators and wireless equipment manufacturers
worldwide. The purchase price of $7.7 million consisted of 369,983 shares of the
Company's common stock (including 56,620 shares issuable upon exercise of stock
options) valued at $6.5 million, $1.0 million in cash and $194,000 in
acquisition costs. The consolidated financial statements for the year ended
December 31, 1997 include the operating results of CNET for the period January
9, 1997 to December 31, 1997. The acquisition was accounted for as a purchase
business combination with the purchase price allocated, as follows:
Current assets................................... $1,752
Equipment........................................ 412
Goodwill......................................... 9,343
Other non-current assets......................... 346
Liabilities assumed.............................. (4,118)
------
$7,735
======
In the fourth quarter of 1997, Company management identified significant adverse
changes in the market size for CNET's existing products. These changes were
primarily due to fewer than anticipated end uses of the network
36
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
management tool and significant on-going development costs of the radio
frequency propagation software. These conditions led to operating results and
forecasted future results that were substantially less than had been anticipated
at the time of the Company's acquisition of CNET.
Due to the above changes, the Company revised its projections in the fourth
quarter of 1997 and determined that its projected results would not fully
support the future amortization of the goodwill balance. In accordance with the
Company's policy, management assessed the recoverability of goodwill using an
undiscounted cash flow projection based on the remaining amortization period of
six years. Based on this projection, the cumulative undiscounted cash flow over
the remaining amortization period was insufficient to fully recover the CNET
goodwill balance of $8.1 million. At December 31, 1997, the Company wrote off
the short-fall of $5.2 million.
In December 1998, the Company sold its network management business, which it had
been operating since the acquisition of CNET in January 1997. Under the terms of
the sale agreement, the Company will receive proceeds from the sale only if
certain future revenue milestones are met by the acquirer. These contingent
amounts, which cannot exceed $1.0 million, will be recorded by the Company when
they are received. At the time of sale, the network management business had net
assets of approximately $5.2 million. A loss on disposal of $7.9 million was
reported in income from operations before income taxes in connection with the
sale for the year ended December 31, 1998. The loss on sale consists of the
write-off 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, the Company
reversed approximately $550,000 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.
(B) OPEN DEVELOPMENT CORPORATION ACQUISITION
On October 15, 1997, the Company completed the acquisition of Open Development
Corporation ("ODC"), located in Norwood, Massachusetts. ODC is a developer of
database management platforms and products for telecommunications providers. The
purchase price of $48.0 million consisted of 242,066 shares issuable upon
exercise of stock options of the Company's common stock valued at $3.3 million,
$43.4 million in cash and $1.3 million in acquisition costs. The consolidated
financial statements for the year ended December 31, 1997 include the operating
results of ODC for the period October 15, 1997 to December 31, 1997. The
acquisition was accounted for as a purchase business combination with the
purchase price allocated, as follows:
Current assets................................... $2,979
Equipment........................................ 3,808
Goodwill......................................... 30,581
Purchased research and development
charged to operations.......................... 16,400
Other intangibles................................ 3,700
Deferred tax asset............................... 996
Other non-current assets......................... 576
Liabilities assumed.............................. (11,009)
--------
$ 48,031
========
Actual 1998 revenue and earnings from ODC's products were significantly lower
than anticipated at the date of acquisition, which significantly impacted the
Company's 1998 results. These lower than anticipated results were primarily
attributed to a strategic change in market strategy during 1998 for ODC's
products. This strategic change was from a multiple market approach for the
prepaid wireless, prepaid wireline, and postpaid calling markets to a single
market approach focused solely on the prepaid wireless market, thus eliminating
two markets in which the products were expected to be sold. Operating
projections prepared prior to the acquisition included revenue related to all
three of
37
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
these markets. Management believes that its future concentration for the ODC
products should continue to be primarily in the prepaid wireless market. Given
this strategic change, the Company anticipates that the future forecasted
results for the ODC products will be significantly less than had been
anticipated at the time of the Company's acquisition of ODC. As a result of this
strategic change, the ODC Norwood, Massachusetts operating facility was closed
in the first quarter 1999 with research and development and administrative
functions relocating to the Company's Atlanta facility.
After making these changes, the Company evaluated the ongoing value of the
noncurrent assets of ODC. Based on this evaluation, the Company determined that
assets, principally goodwill and other intangibles, with a carrying value of
$30.9 million were impaired and wrote them down by $26.7 million to their fair
value. Fair value was based on estimated future discounted cash flows to be
generated by ODC.
(C) WIRELESS ACCESS, INC. ACQUISITION
On November 3, 1997, the Company completed the acquisition of Wireless Access,
Inc. ("WAI"), located in Santa Clara, California. WAI develops and markets
two-way paging devices. The purchase price of $100.4 million consisted of
1,341,916 shares issuable upon exercise of stock options of the Company's common
stock valued at $16.6 million, $81.9 million in cash and $1.9 million in
acquisition costs. The consolidated financial statements for the year ended
December 31, 1997 include the operating results of WAI for the period November
3,1997 to December 31, 1997. The acquisition was accounted for as a purchase
business combination with the purchase price allocated, as follows:
Current assets................................... $13,076
Equipment........................................ 1,354
Goodwill......................................... 59,500
Purchased research and development
charged to operations.......................... 22,300
Other intangibles................................ 10,035
Deferred tax asset............................... 2,536
Liabilities assumed.............................. (8,386)
--------
$100,415
========
Pro forma results of operations assuming the acquisitions of CNET, ODC, and WAI
had occurred as of January 1, 1996 have not been presented because their effect
on net sales and net income would not be significant.
The amounts allocated to purchased research and development for ODC and WAI were
determined through established valuation techniques in the high-technology
communications industry, were based on adjusted after-tax cash flows that give
explicit consideration to the Staff of the Securities and Exchange Commission
views on in-process research and development as set forth in its September 15,
1998 letter to the American Institute of Certified Public Accountants, and were
expensed upon acquisition, because technological feasibility had not been
established and no future alternative uses existed.
The purchase price was negotiated based on projections of revenues from sales of
the paging devices and future applications (the "acquired WAI products"). Actual
WAI revenues from November 1997 to September 1999 were considerably less than
the projected sales used in the purchase price calculations. Sales of paging
devices for 1998 were negatively affected by manufacturing start-up problems in
the second quarter 1998. Design issues caused further delays in sales in the
latter part of 1998 and in the first half of 1999. Additionally, the two-way
paging market has not developed as rapidly as expected and the Company's lower
end device began to experience price competition in the second quarter 1999. In
the third quarter 1999, after incurring significant operating losses related to
the WAI business, management decided to restructure the WAI operations. Although
the Company will continue to deliver its full two-way paging device to certain
markets for an appropriate time period, it expects to refocus
38
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
resources to develop a new architecture for other advanced wireless
communication products unrelated to the acquired technology.
Management made this strategic change due to the following reasons which were
not readily apparent during the acquisition process: (i) performance issues with
the paging devices causing delays in timing of product delivery and product
acceptance; (ii) slower than expected development of the two-way messaging
market; (iii) a reduction in the overall expected market size for two-way paging
devices; and (iv) the speed and cost to adapt the product for future
applications has been competitively hindered by the current architecture.
Given this strategic change, the Company anticipates that the future forecasted
results for the acquired WAI products will be significantly less than had been
anticipated at the time of the Company's acquisition of WAI. As a result of this
strategic change, the WAI workforce was significantly decreased and future WAI
requirements for sales and engineering development are expected to be contracted
from elsewhere within the Company. After making these changes, the Company
evaluated the ongoing value of the non-current assets of WAI. Based on this
evaluation, the Company determined that assets, principally goodwill and other
intangibles, with a carrying value of approximately $51 million at September 30,
1999 were impaired and wrote them down by the remaining balance. Fair value was
based on estimates of discounted future cash flows to be generated by the
acquired WAI products.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Glenayre is a worldwide provider of communication solutions for mobile and
active subscribers. The Company designs, manufactures, markets and services its
products principally under the Glenayre name. These products include enhanced
services, unified messaging, advanced messaging services and devices, and
prepaid wireless and card services as well as networking infrastructure used to
deliver these services. Glenayre's products are used in cellular, Personal
Communications Service ("PCS"), wireless, data, paging, and Internet Protocol
("IP") networks.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of Glenayre
Technologies, Inc. and its subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
OPERATING CYCLE
Assets and liabilities related to long-term contracts are included in current
assets and current liabilities in the consolidated balance sheets, as they will
be liquidated in the normal course of contract completion.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. These investments
generally consist of 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.
39
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are large diversified entities with
operations throughout the U.S. and Company policy is designed to limit exposure
to any one institution. The Company performs periodic evaluations of the
relative credit standing of those financial institutions that are considered in
the Company's investment strategy.
Restricted Cash at December 31, 1999 consisted of time deposits pledged as
collateral to secure letters of credit, substantially all of which expire during
2000.
INVENTORIES
Inventories are valued at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally using the straight-line method based on the
estimated useful lives of the related assets (buildings, 20-40 years; furniture,
fixtures and equipment, 3-7 years).
GOODWILL
Goodwill represents the excess of cost over assigned fair market value of net
assets acquired. Goodwill at December 31, 1999 is being amortized on a
straight-line basis over an estimated useful life of 25 years. Goodwill is shown
net of accumulated amortization of $19.2 million and $29.1 million at December
31, 1999 and 1998, respectively. The carrying amount of goodwill is reviewed if
facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
expected future undiscounted cash flow of the entity acquired over the remaining
amortization period, the carrying amount of the goodwill is reduced by the
estimated shortfall. In addition, the Company assesses long-lived assets for
impairment under FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under those
rules, goodwill associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate the carrying amount of those assets may not be recoverable.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries have been translated into U.S. dollars
using the current exchange rate in effect at the balance sheet date for monetary
assets and liabilities; and for non-monetary items, the exchange rates in effect
when acquired. Revenues and expenses are translated into U.S. dollars using
average exchange rates, except for depreciation, which is translated at the
exchange rate in effect when the related assets were acquired. The resulting
gains or losses on currency translations, which are not significant, are
included in the consolidated statements of operations.
REVENUE RECOGNITION
The Company recognizes revenues at the time products are shipped (except for
certain long-term contracts described below) and collection of the resulting
receivable is deemed probable by the Company. Existing customers may purchase
product enhancements and upgrades after such enhancements or upgrades are
developed by the Company. The Company has no obligations to customers after the
date products, product enhancements and upgrades are shipped, except for product
warranties as described below.
40
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The Company recognizes fees from installation and repair services when such
services are provided to customers. Revenues derived from contractual
postcontract support services are recognized ratably over the one-year contract
period of required support.
The Company uses the percentage-of-completion method to recognize revenues on
certain long-term telecommunications hardware and installation contracts.
Earnings are accrued based on the completion of key contract performance
requirements. As long-term contracts extend over one or more years, revisions in
cost and profit estimates are reflected in the accounting period in which the
facts that require the revision become known. At the time a loss on a contract
becomes known, the entire amount of the estimated ultimate loss is accrued.
SOFTWARE COSTS
Product related computer software development costs are expensed as incurred.
Such costs are required to be expensed until the point of technological
feasibility is established. Costs which may otherwise be capitalized after such
point are generally not significant and are therefore expensed as incurred.
Pursuant to Emerging Issues Task Force Issue No. 97-13 ("EITF No. 97-13"),
issued in November 1997, the Company changed its accounting policy in the fourth
quarter of 1997, regarding a project to implement a new business operating
system that it began in 1996 and completed in the second quarter of 1998. Prior
to the fourth quarter of 1997, substantially all direct costs relating to the
project were capitalized, including the portion related to business process
reengineering. Under EITF No. 97-13, the unamortized balance of these
reengineering costs as of November 20, 1997 of approximately $1,050,000, or
$688,000 after tax benefit ($.01 per share), was written off as a one-time,
non-cash, cumulative effective adjustment in the fourth quarter of 1997.
ESTIMATED WARRANTY COSTS
The Company generally warrants its telecommunications products other than
certain transmitters for one year after sale. The majority of the Company's
transmitters and paging devices are warranted for two years after sale. A
provision for estimated warranty costs is recorded at the time of sale.
STOCK-BASED COMPENSATION
The Company grants stock options and issues shares under option plans and an
employee stock purchase plan as described in Note 13 to the Company's
Consolidated Financial Statements. The Company accounts for stock option grants
and shares sold under the employee stock purchase plan in accordance with APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and, accordingly,
records compensation expense for options granted and sales made at prices that
are less than fair market value at the date of grant or sale. No compensation
expense is recognized for options granted to employees with an exercise price
equal to the fair value of the shares at the date of grant.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
SFAS 109, ACCOUNTING FOR INCOME TAXES.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade accounts and notes
receivable, and other current and long-term liabilities approximates their
respective fair values.
41
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been reclassified to
conform with current year financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
4. ACCOUNTS AND NOTES RECEIVABLE
Accounts receivable at December 31, 1999 and 1998 consist of:
1999 1998
--------- --------
Trade receivables............................... $104,206 $154,342
Retainage receivables........................... 319 1,256
Other........................................... 1,883 4,005
--------- --------
106,408 159,603
Less: allowance for doubtful accounts........ (17,672) (5,830)
--------- --------
$ 88,736 $153,773
========= ========
Trade receivables at December 31, 1999 and December 31, 1998 included unbilled
costs and estimated earnings under contracts in the amount of approximately $25
million and $31 million, respectively. Unbilled amounts are invoiced upon
reaching certain milestones.
Notes receivable at December 31, 1999 and 1998 consist of:
1999 1998
-------- --------
Current ................................ $ 7,083 $ 12,810
Non-current ............................ 57,724 62,851
-------- --------
64,807 75,661
Less: reserves ......................... (53,017) (4,127)
-------- --------
$ 11,790 $ 71,534
======== ========
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)
42
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
experienced worsening financial condition. As a result, in 1999 amounts owed on
notes from these customers of approximately $62 million and $61 million at
December 31, 1999 and December 31, 1998, respectively, were considered impaired.
The average amount of impaired notes during the twelve-month period ended
December 31, 1999 was approximately $67 million. The reserves on these notes
were approximately $52 million at December 31, 1999 and $3 million at December
31, 1998. Reserve activity during 1999 included an addition to the reserves of
approximately $51 million and write-offs of approximately $2 million. The net
increase in the allowance of $49 million was recorded as a charge to operations
during 1999. Interest income recorded on these notes was $2.7 million during
1999. Interest receivable from these notes of approximately $2.3 million was
fully reserved as of December 31, 1999. Subsequent to September 30, 1999,
interest income on these notes is recognized only as cash is received.
In addition to the collection issues described above, the Company experienced
pressures from international customers to extend normal trade receivables
payment terms. As a result of all of these occurrences, the Company changed its
estimates used to determine reserves for uncollectible accounts and notes
receivable. These changes in the estimates increased the net loss for the year
ended December 31, 1999 by approximately $42 million ($(0.67) per share).
5. INVENTORIES
Inventories at December 31, 1999 and 1998 consist of:
1999 1998
--------- ---------
Raw materials................................... $14,742 $26,046
Work in process................................. 8,452 11,818
Finished goods.................................. 4,936 8,638
-------- --------
$28,130 $46,502
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 consist of:
1998 1999
------- -------
Land.............................................. $3,493 $3,746
Buildings......................................... 45,008 47,829
Equipment......................................... 94,376 109,370
Leasehold improvements............................ 1,701 2,376
------- -------
144,578 163,321
Less: Accumulated depreciation................... (55,924) (53,660)
------- --------
$ 88,654 $109,661
======== ========
In October 1999, the Company sold its 45,000 square foot facility located in
Charlotte, North Carolina receiving cash of approximately $6 million. In
conjunction with the sale, the Company leased back 15,000 square feet at the
market rate for a five-year lease term.
43
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
7. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accrued project costs .................. $ 9,441 $ 9,805
Accrued warranty costs ................. 5,375 7,951
Accrued payroll costs .................. 11,414 14,170
Accrued restructuring costs ............ 8,259 4,323
Accrued income taxes ................... 4,033 5,090
Other accruals ......................... 14,012 18,919
------- -------
$52,534 $60,258
======= =======
</TABLE>
8. INCOME TAXES
The Company's income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current provision:
United States Federal ............................................... $ -- $ (698) $ 23,286
Charge equivalent to tax benefit of stock
option exercises .................................................. 129 2,208 1,254
Foreign ............................................................. 2,920 4,006 3,802
State and local ..................................................... -- (96) 2,160
-------- -------- --------
Total current ..................................................... 3,049 5,420 30,502
-------- -------- --------
Deferred:
Primarily United States federal and state ........................... (47,438) (3,612) (3,276)
Adjustment to federal net operating loss carryforward ............... -- 664 --
Adjustment to state net operating loss carryforward ................. -- 1,422 --
Adjustment to valuation allowance ................................... (1,578) (2,286) (1,713)
-------- -------- --------
Total deferred .................................................... (49,016) (3,812) (4,989)
-------- -------- --------
Total provision (benefit) .............................................. $(45,967) $ 1,608 $ 25,513
======== ======== ========
</TABLE>
The sources of income (loss) from continuing operations before income taxes are
presented as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States............................... $(185,235) $(51,007) $13,174
Foreign .................................. 11,520 11,891 16,036
--------- -------- ---------
$(173,715) $(39,116) $29,210
======== ======== =========
</TABLE>
44
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The consolidated income tax provision was different from the amount computed
using the U.S. statutory income tax rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income tax provision at U.S. statutory rate ............... $(60,800) $(13,691) $ 10,224
Reduction in valuation allowance .......................... (1,578) (2,286) (1,713)
Repatriation of foreign earnings of merged subsidiary ..... 1,098 -- --
Reduction in federal net operating loss carryforwards
due to sale of business ................................. -- 664 --
Reduction in state net operating loss carryforwards ....... -- 1,422 --
Foreign taxes at rates other than U.S. statutory rate ..... (1,430) 716 (1,229)
U.S. research and experimentation credits ................. (480) (905) (953)
Foreign tax credits ....................................... -- (639) --
State taxes (net of federal benefit) ...................... (6,187) 325 288
Benefit from Foreign Sales Corporation .................... (61) (1,060) --
Non-deductible loss on sale of business .................. -- 1,374 --
Non-deductible charge for purchased research and
development ............................................. -- -- 14,701
Write-off of non-deductible goodwill and other intangibles 19,522 9,141 --
Non-deductible goodwill ................................... 3,949 6,547 4,195
-------- -------- --------
Income tax provision (benefit) ............................ $(45,967) $ 1,608 $ 25,513
======== ======== ========
</TABLE>
The tax effect of temporary differences and net operating loss carryforwards
("NOLs") that gave rise to the Company's deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets:
U.S. net operating loss carryforwards ............ $ 22,713 $ 11,654
State net operating loss carryforwards ........... 3,819 1,393
Other ............................................ 52,854 31,692
-------- --------
79,386 44,739
Less: Valuation allowance ........................ (14,637) (16,216)
-------- --------
64,749 28,523
Liabilities ...................................... (7,574) (6,938)
-------- --------
Deferred tax asset, net .......................... $ 57,175 $ 21,585
======== ========
</TABLE>
The deferred tax asset is broken down between current and noncurrent amounts in
the accompanying 1999 consolidated balance sheet according to the classification
of the related asset and liability or, in the case of tax loss carryforwards,
based on their expected utilization date.
Other deferred tax assets for 1999 and 1998 primarily reflect: reserves not yet
deducted for tax purposes of $43 million and $23 million, respectively, and
research and experimentation credit carryforwards of $5 million and $4.5
million, respectively. Deferred tax liabilities for 1999 and 1998 are mainly
comprised of accelerated depreciation of $3.4 million and $3 million,
respectively.
The decrease in the valuation allowance of $1.6 million during the year ended
December 31, 1999 is related primarily to the Company's reassessment of its
ability to utilize the net operating losses related to Open Development
Corporation ("ODC"). As of December 31, 1998, these had been fully reserved. The
remaining valuation allowance related specifically to all carryforwards,
including various credits of acquired companies, is $11.2 million. The
45
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Company believes that it is more likely than not that the net deferred tax asset
recorded at December 31, 1999 will be fully realized.
At December 31, 1999 and December 31, 1998, the Company has U.S. NOLs of $65
million and $33 million, respectively, which expire beginning in 2005. At
December 31, 1999, of the $65 million of U.S. NOLs, $32 million were generated
during the current year. The remaining $33 million of U.S. NOLs at both December
31, 1999 and December 31, 1998, are related to the 1997 acquisitions of ODC and
WAI. However, the Company's ability to offset future income with WAI's acquired
NOLs is subject to restrictions enacted in the United States Internal Revenue
Code of 1986 as amended (the "Code"). These restrictions limit the Company's
future use of the NOLs. As a result, the potential tax benefit of WAI's acquired
NOLs has been reserved for as part of the deferred tax asset valuation
allowance.
As of December 31, 1996, the Company had net operating loss carryforwards of $70
million. All of these NOLs were utilized during the year ended December 31,
1997. Subsequent to a quasi-reorganization completed on February 1, 1988, the
benefits derived from the utilization of these tax net operating loss
carryforwards are reported in the statement of operations in the year such tax
benefits are realized and then reclassified from retained earnings to
contributed capital. The Company adopted the accounting method for utilization
of these tax net operating loss carryforwards outlined above on February 1,
1988. On September 28, 1989, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the SEC
staff's position with respect to this accounting treatment. According to the SEC
staff's interpretation of SFAS 96 contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with SEC staff and determined that the SEC staff would not
object to the accounting method outlined above for companies which had adopted
such accounting methods prior to the issuance of SAB 86.
If the original guidance in SAB 86 had been applied, the Company's net income
for the year ended December 31, 1997 would have been reduced by the amount of
the benefit from utilization of tax net operating loss carryforwards. Such
reduction in net income would have been $1,713,000 ($.03 per share).
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $38.9 million at December 31, 1999. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability. Withholding taxes of approximately $1.7 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1999.
9. BUSINESS RESTRUCTURING
During the third quarter 1999, the Company recorded a pre-tax charge of
approximately $8.7 million, of which approximately $2.8 million was paid before
December 31, 1999, 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 fourth quarter 1999, the Company
expensed approximately $320,000 for retention performance bonuses earned related
to the third quarter 1999 restructuring, which were earned by employees in the
fourth quarter. The remainder of these retention and performance bonuses will be
expensed as earned in subsequent periods. Additionally, during the fourth
quarter 1999, the Company expensed approximately $280,000 for severance
adjustments related to this reduction of the Company's workforce.
46
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
Additionally, the Company recorded a pre-tax charge of approximately $670,000 of
which approximately $150,000 was paid before December 31, 1999, 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 is expected to be completed by the end of the second quarter 2000.
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 total pre-tax charge for the third quarter 1999 restructuring and exiting of
leased facilities was recorded as approximately $4.9 million to cost of sales,
$1.0 million to research and development, $2.0 million to loss on sale of
assets, and $4.2 million to selling, general and administrative expenses.
The reserve balance for the third quarter 1999 restructuring was approximately
$8.2 million at December 31, 1999.
During the second quarter 1999, the Company recorded a pre-tax charge for
severance of approximately $1.7 million, of which approximately $1.6 million was
paid before December 31, 1999, for a workforce reduction of approximately 200
employees at its Vancouver and Quincy manufacturing facilities. During the third
quarter of 1999 the Company reduced this pre-tax charge by approximately $80,000
for lower than expected actual severance expenses incurred. The reserve balance
is approximately $20,000 for the second quarter 1999 restructuring at December
31, 1999.
During the first quarter 1999, the Company recorded a pre-tax charge of
approximately $1.6 million related to a reduction of the Company's workforce by
approximately 70 employees at the Vancouver, Charlotte, and Quincy facilities,
exiting costs from the Blaine, Washington leased facility and asset impairment
charges for leasehold improvements located at the Blaine, Washington facility
(noncash charge of approximately $170,000). During 1999, the Company paid
approximately $1.3 million of the first quarter 1999 restructuring costs
primarily for employee termination costs and wrote-off approximately $170,000 in
leasehold improvements. Additionally, during the remainder of 1999, the Company
reversed charges of approximately $90,000 for less than anticipated exit costs
and severance costs. The reserve balance at December 31, 1999 is approximately
$40,000.
During the fourth quarter 1998, the Company recorded a pre-tax charge of
approximately $6.8 million related to a 10% reduction of its global workforce,
the exiting of two leased facilities and impairment of associated long-lived
assets, primarily leasehold improvements. At December 31, 1998 the reserve
balance was $4.3 million. During 1999, the Company reduced the fourth quarter
1998 restructuring charges by approximately $620,000 due to lower than
anticipated employee outplacement fees and severance costs at its Norwood,
Massachusetts facility and lower facility exit costs offset partially by more
than anticipated severance costs at other locations. During 1999 the Company
paid a total of approximately $3.7 million of the fourth quarter 1998
restructuring charge primarily for employee termination costs, operating
facility costs and early termination fees for the Norwood, Massachusetts leased
facility. As of December 31, 1999 the Company has approximately $5,000 accrued
for the fourth quarter 1998 restructuring.
Management believes the remaining reserves for business restructuring are
adequate to complete the above plans.
47
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
The following is a summary of activity in the 1999 and 1998 restructuring
reserves:
<TABLE>
<CAPTION>
Severance and Lease Cancellation and
Benefits Other Exit Costs Total
-------- ---------------- -----
<S> <C> <C> <C>
Balance at December 31, 1997 ...... $ -- $ -- $ --
Expense accrued ................... 4,523 2,100 6,623
Expenditures ...................... (2,300) -- (2,300)
-------- -------- --------
Balance at December 31, 1998 ...... 2,223 2,100 4,323
Expense accrued ................... 12,277 3,113 15,390
Expenditures ...................... (7,399) (3,265) (10,664)
Change in estimate ................ (588) (202) (790)
-------- -------- --------
Balance at December 31, 1999 ...... $ 6,513 $ 1,746 $ 8,259
======== ======== ========
</TABLE>
10. SEGMENT REPORTING
Glenayre is a worldwide provider of telecommunications equipment and related
software used in the wireless personal communications service markets including
wireless messaging, voice processing and mobile data systems. There was no one
customer that accounted for 10% or greater of sales during 1999. Sales to one
customer amounted to approximately 11% and 12% of net sales for 1998 and 1997,
respectively in the wireless messaging segment. An additional customer, in the
wireless messaging segment, accounted for 13% of net sales in 1998.
Glenayre has two principal businesses which are managed separately due to
different product market areas: Wireless Messaging and Enhanced Services
Platform. On November 1, 1999 the Company disposed of its microwave
communication business (MUX) which was previously reported as a separate
reporting segment. Accordingly, the operating results of MUX have been
classified as discontinued operations and therefore are excluded from the
business segment financial results below.
Glenayre's Wireless Messaging segment includes switches, transmitters,
receivers, controllers and related software provided by the Company's Wireless
Messaging Group as well as service and support groups for these products. Paging
is a method of wireless telecommunication which uses an assigned radio frequency
to contact a paging subscriber anywhere within a service area. Additionally, the
Wireless Messaging segment includes the Company's two-way paging devices since
the acquisition of WAI in November 1997. The Company designs, develops and
markets innovative, low-power, two-way wireless data messaging devices.
Glenayre's Enhanced Services Platform segment includes products and support
services from the Company's Integrated Network Group. This segment is comprised
of the Company's INTELLIGIS product line including (i) the MVP system, (ii) from
January 1997 to December 1998, network management systems developed by the
Company's Options group (formerly known as CNET), and (iii) since October 1997
data management systems for calling card services developed by ODC.
The Company evaluates performance and allocates resources based on income from
continuing operations before income taxes, which excludes interest income
(expense) and other income (expense). The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies. Segment income (loss) excludes corporate activities and
special charges. Business assets used by each business are allocated to the
segments except that assets used in the manufacturing of the MVP system are
included in the Wireless Messaging segment. However, depreciation expense is
allocated to the appropriate segment using a percentage of manufacturing costs
incurred for the reporting period.
48
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
During 1999, the Company made changes to its expense allocations. These changes
allocate previously classified corporate activities operating expenses
(including depreciation expense) to its Wireless Messaging and Enhanced Services
Platform operating segments. These operating expenses include credit and
collections, legal, and information technology services that after further
review the Company believes are more directly related to the business segments
rather than Corporate activities. Additionally, assets and capital expenditures
for property, plant and equipment previously included under Corporate activities
for information technology services have been reclassified to the Wireless
Messaging operating segment. The amounts below for segment income (loss),
segment assets (and the related depreciation and amortization) and expenditures
for property, plant, and equipment have been restated where applicable and
presented below to include these changes in operating segment reporting.
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
SEGMENT NET SALES
<S> <C> <C> <C>
Wireless Messaging ............................... $ 153,913 $ 299,315 $ 348,959
Enhanced Services Platform ....................... 84,176 67,724 70,611
--------- --------- ---------
Total ............................................ $ 238,089 $ 367,039 $ 419,570
========= ========= =========
SEGMENT INCOME (LOSS) 1999 1998 1997
--------- --------- ---------
Wireless Messaging ............................... $(118,141) $ 26,798 $ 73,060
Enhanced Services Platform ....................... 3,709 (28,936) 2,955
Corporate activities ............................. (10,272) (9,449) (11,161)
Charge for purchased research and development .... -- -- (38,700)
Adjustment to loss (loss) on sale of
business ...................................... 554 (7,858) --
Write-off of goodwill and other intangibles ...... (50,919) (26,705) (5,183)
Interest income (net) ............................ 5,302 8,209 10,386
Other income (expense) ........................... (3,948) (1,175) (2,147)
--------- --------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle .......................... $(173,715) $ (39,116) $ 29,210
========= ========= =========
</TABLE>
The Wireless Messaging segment results for 1999 were impacted by $66.2 million
and $8.3 million, respectively, to adequately reserve for customer trade and
notes receivable and to record an other than temporary loss on a subordinated
note included in other assets during 1999. See Note 4. Additionally, the
Wireless Messaging segment was impacted by $11.8 million for restructuring
charges incurred during 1999. See Note 9.
The Enhanced Services Platform results for 1998 were impacted by $5.1 million in
restructuring charges. See Note 9. Additionally, operating losses of $4.2
million and $3.8 million incurred by the Company's network management business
sold in 1998 are included in results for Enhanced Services Platform for 1998 and
1997, respectively. See Note 1.
SEGMENT ASSETS 1999 1998 1997
- -------------- -------- -------- --------
Wireless Messaging ................... $283,841 $471,743 $457,190
Enhanced Services Platform ........... 13,563 21,577 60,694
Discontinued Operations .............. -- 34,451 35,563
Deferred Income Taxes ................ 57,175 21,585 15,031
Corporate assets ..................... 58,979 12,439 21,683
-------- -------- --------
Total ................................ $413,558 $561,795 $590,161
======== ======== ========
49
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
SEGMENT LONG-LIVED ASSETS
- -------------------------
DEPRECIATION AND AMORTIZATION EXPENSE: 1999 1998 1997
- -------------------------------------- ------- ------- -------
Wireless Messaging ................... $24,308 $27,602 $15,288
Enhanced Services Platform ........... 5,053 10,613 5,080
Corporate activities ................. 499 430 466
------- ------- -------
Total ................................ $29,860 $38,645 $20,834
======= ======= =======
EXPENDITURES FOR PROPERTY, PLANT AND
EQUIPMENT 1999 1998 1997
- -------------------------------------- ------- ------- -------
Wireless Messaging ................... $ 7,596 $23,415 $26,954
Enhanced Services Platform ........... 2,638 4,991 4,311
Discontinued Operations .............. 545 860 901
Corporate activities ................. 93 683 723
------- ------- -------
Total ................................ $10,872 $29,949 $32,889
======= ======= =======
ADDITION OF LONG-LIVED ASSETS THROUGH
BUSINESS ACQUISITIONS: 1999 1998 1997
- -------------------------------------- ----- ------- -------
WIRELESS MESSAGING:
Goodwill ............................. $-- $-- $ 59,500
Other intangibles .................... -- -- 10,035
Equipment ............................ -- -- 1,354
ENHANCED SERVICES PLATFORM:
Goodwill ............................. -- -- 39,924
Other intangibles .................... -- -- 3,700
Equipment ............................ -- -- 4,220
Other non-current assets ............. -- -- 922
--- -------- --------
$-- $-- $119,655
=== ======== ========
The following geographic area data represents property, plant and equipment by
location and trade revenues based on product shipment destination.
PROPERTY, PLANT AND EQUIPMENT: 1999 1998 1997
- -------------------------------------- -------- -------- --------
United States ........................ $ 43,832 $ 63,622 $ 64,781
Canada ............................... 29,568 29,597 23,792
NE Asia .............................. 96 134 216
SE Asia .............................. 12,481 12,987 12,974
China ................................ 1,258 1,226 86
Europe, Middle East and Africa ....... 1,038 1,593 1,175
Latin America ........................ 381 502 617
-------- -------- --------
Total ................................ $ 88,654 $109,661 $103,641
======== ======== ========
50
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
NET SALES 1999 1998 1997
- -------------------------------------- -------- -------- --------
United States ........................ $125,995 $224,136 $197,045
Canada ............................... 9,069 6,457 8,359
NE Asia .............................. 2,073 1,427 18,564
SE Asia .............................. 27,286 25,282 67,537
China ................................ 29,122 67,870 52,054
Europe, Middle East and Africa ....... 27,941 24,578 48,035
Latin America ........................ 16,603 17,173 27,976
Other Countries ...................... -- 117 --
-------- -------- --------
TOTAL ................................ $238,089 $367,039 $419,570
======== ======== ========
11. OPERATING LEASE COMMITMENTS
The Company leases office facilities and various equipment under non-cancellable
operating leases. Future minimum lease payments under non-cancellable operating
leases (with minimum or remaining lease terms in excess of one year) for
calendar years subsequent to December 31, 1999 are as follows:
2000 ......................... $2,560
2001 ......................... 2,139
2002 ......................... 879
2003 ......................... 323
2004 ......................... 298
Thereafter ................... --
Rent expense for continuing operations amounted to approximately $5.2 million,
$6.3 million, and $3.7 million for the years ended December 31, 1999, 1998 and
1997, respectively. Exit costs of approximately $780,000 in the aggregate
related to the closing and consolidation costs incurred for various offices are
included in rent expense for the year ended December 31, 1999. See Note 9. Exit
costs of approximately $2.8 million in the aggregate related to the ODC facility
closing and the sale of the network management business are included in rent
expense for the year ended December 31, 1998.
12. EMPLOYEE BENEFIT PLANS
(A) POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides its U.S. employees with certain health care benefits upon
retirement assuming the employees meet minimum age and service requirements. The
Company's policy is to fund benefits as they become due.
51
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
The actuarial present value of accumulated postretirement benefit obligations at
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Retirees ............................................................ $ 1,252 $ 1,037
Fully eligible plan participants .................................... 111 113
Other active plan participants ...................................... 816 1,045
------- -------
Accumulated postretirement benefit obligation ....................... 2,179 2,195
Unrecognized loss ................................................... (42) (32)
Unrecognized transition obligation .................................. (661) (712)
------- -------
Postretirement benefit liability recognized in balance sheet ........ $ 1,476 $ 1,451
======= =======
</TABLE>
The change in Accumulated Postretirement Benefit Obligation ("APBO") from year
to year is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
APBO at the beginning of the year .................................... $ 2,195 $ 1,611
Service cost ......................................................... 261 222
Interest cost ........................................................ 143 115
Actuarial loss ...................................................... 9 293
Plan participants contributions ...................................... 40 30
Acquisitions ......................................................... -- 4
Curtailment gain ..................................................... (352) --
Benefits paid ........................................................ (117) (80)
------- -------
APBO at end of the year............................................... $ 2,179 $ 2,195
======= =======
</TABLE>
Net postretirement benefit costs for the years ended December 31, 1999, 1998 and
1997 consist of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost ......................................................... $ 261 $ 222 $ 195
Interest cost on APBO ................................................ 143 115 101
Amortization of gain ................................................. -- (15) (14)
Amortization of transition obligation ................................ 51 51 51
Curtailment gain ..................................................... (352) -- --
----- ----- -----
$ 103 $ 373 $ 333
===== ===== =====
</TABLE>
The curtailment gain was a result of the sale of Western Multiplex. The assumed
discount rate utilized was 7.25%.
The assumed health care trend rate in measuring the accumulated postretirement
benefit obligation as of December 31, 1999 was varied between non-Medicare and
Medicare eligible retirees. For non-Medicare eligible retirees the 2000 trend
rate is 10%, decreasing linearly to 5.25% in 2005, after which it remains
constant. For Medicare retirees, the
52
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
2000 trend rate is 13% decreasing linearly to 5.25% in 2009. A one percentage
point increase in the assumed health care cost trend rate for each year would
increase the accumulated postretirement benefit obligation as of December 31,
1999 and the 1999 aggregate interest and service cost by approximately 10.4% and
19.0% respectively. A one percentage point decrease in the assumed health care
cost trend rate for each year would decrease the accumulated postretirement
benefit obligation as of December 31, 1999 and the 1999 aggregate interest and
service cost by approximately 14.4% and 15.4% respectively. The assumed discount
rate used in determining the APBO at December 31, 1999 and 1998 was 7.75% and
6.75%, respectively.
(B) DEFINED CONTRIBUTION PLANS
The Company has defined contribution plans covering substantially all of its
full-time employees. Under the plans, the employees can contribute a certain
percentage of their compensation and the Company matches a portion of the
employees' contribution. The Company's contributions under these plans for
continuing operations amounted to approximately $2,646,000, $3,012,000 and
$2,576,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
13. STOCKHOLDERS' EQUITY
(A) STOCKHOLDERS RIGHTS AGREEMENT
In May 1997, the Company's Board of Directors adopted a Preferred Shares Rights
Agreement. The Preferred Shares Rights Agreement was amended on January 14, 1999
(the "Amendment") to provide special provisions with respect to the State of
Wisconsin Investment Board ("SWIB"). Under the Preferred Shares Rights
Agreement, the Board of Directors declared a dividend of one Right for each
outstanding share of common stock to holders of record as of the close of
business on June 12, 1997. Initially, the Rights will automatically trade with
the common stock and will not be exercisable.
Except as provided in the Amendment with respect to SWIB, if any person or group
acquires beneficial ownership of 15% or more of the Company's outstanding common
stock, or commences a tender or exchange offer that results in that person or
group acquiring such level of beneficial ownership, each Rights holder (other
than Rights owned by such person or group, which become void) is entitled to
purchase, for an exercise price of $80, 1/100th of a share of Series A Junior
Participating Preferred Stock. Each fractional preferred share will have
economic and voting terms similar to those of one share of common stock, except
as provided in the Amendment with respect to SWIB. In the event of such a tender
offer or 15% or more stock acquisition, the Rights certificates, after a short
period, will trade separately from the common stock and will be exercisable.
Each Right, under certain circumstances, entitles the holder to purchase the
number of shares of Glenayre common stock (or, at the discretion of the Board of
Directors, shares of Series A Junior Participating Preferred Stock) which have
an aggregate market value equal to twice the exercise price of $80. Under
certain circumstances, the Board of Directors may exchange each outstanding
Right for either one share of Glenayre common stock or 1/100th share of Series A
Junior Participating Preferred Stock. The Board may also redeem the Rights at a
price of $0.01 per Right.
In addition, except as provided in the Amendment with respect to SWIB, if any
person or group acquires beneficial ownership of 15% or more of the Company's
outstanding common stock and Glenayre either merges with or into another company
or Glenayre sells 50% or more of its assets or earning power to another company,
each Rights holder (other than Rights owned by such person or group, which
become void) is entitled to purchase, for an exercise price of $80, a number of
shares of the surviving company which has a market value equal to twice the
exercise price.
53
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
The Amendment provides that, instead of the 15% beneficial ownership level
described above, SWIB's beneficial ownership level will be 20% through January
14, 2000 and, after that date, will be reduced to (i) 15% if SWIB does not
beneficially own 15% or more of Glenayre's outstanding common stock on January
14, 2000 or (ii) if SWIB beneficially owns 15% or more of Glenayre's outstanding
common stock at the close of business on January 14, 2000, the next highest
whole percentage in excess of the percentage of Glenayre's outstanding common
stock then beneficially owned by SWIB, not exceeding 20%. At the close of
business on January 14, 2000, SWIB owned approximately 15.4%.
The Rights will expire on May 21, 2007, unless redeemed earlier.
(B) STOCK REPURCHASE PROGRAMS
In September 1996, the Board of Directors authorized the purchase of up to 2.5
million shares of the Company's common stock. No shares under this program were
repurchased through December 31, 1999.
(C) STOCK OPTION PLANS
The Company maintains two stock option plans (the "1996 Plan" and the "1991
Plan") which were approved by the stockholders, are administered by a committee
of the Board of Directors (the "Committee") and are utilized to promote the
long-term financial interests and growth of the Company. The 1996 and 1991 Plans
authorize the grant of up to 5,150,000 and 11,475,000 shares, respectively, of
the Company's common stock to directors, officers and key employees. Options
granted have an option price of the fair market value of the Company's common
stock on the date of grant. Options under the plans expire no later than ten
years from the grant date.
Activity and price information regarding the Company's stock option plans is
summarized as follows:
<TABLE>
<CAPTION>
Shares Price Range
------ -----------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... 5,192 $1.27-$47.67
Granted ................................ 586 9.00-21.63
Assumed ................................ 1,641 0.08-23.00
Exercised .............................. (470) 0.17-11.11
Canceled ............................... (224) 1.13-44.17
------ -----------
Outstanding, December 31, 1997 ......... 6,725 0.08-43.59
Granted ................................ 2,392 4.44-16.75
Exercised .............................. (1,183) 0.08-13.57 Weighted Average
Canceled ............................... (572) 1.13-28.22 Price
------ ----------- ----------------
Outstanding, December 31, 1998 ......... 7,362 0.17-43.59 $ 9.51
Granted ................................ 2,093 2.94-15.25 3.51
Exercised .............................. (366) 0.17-10.82 4.72
Canceled ............................... (2,008) 1.13-35.83 10.69
------ ----------- ----------------
Outstanding, December 31, 1999 ......... 7,081 $0.40-$43.59 $ 7.64
====== ============ ================
</TABLE>
Of the outstanding options under the Company's stock option plans at December
31, 1999, approximately 4,562,000 are currently exercisable. Approximately
750,000 shares (all under the 1996 Plan) are available for grant as of December
31, 1999. The weighted-average exercise price for the currently exercisable
options at December 31, 1999 is $8.30. The weighted average remaining
contractual life of options outstanding is approximately 6.1 years.
54
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Ranges of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- ------------------------- ------ ------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
Less than $2.00 ......... 1,456 2.0 $ 1.28 1,455 $ 1.28
2.01 to 5.00 ............ 2,062 8.8 3.28 316 3.03
5.01 to 8.99 ............ 212 7.1 6.69 111 6.40
9.00 .................... 1,805 5.7 9.00 1,805 9.00
9.01 to 15.24 ........... 202 6.7 12.49 112 13.06
15.25 ................... 970 6.8 15.25 428 15.25
$15.26 to $43.59 ........ 344 6.1 $ 29.74 335 $ 30.04
</TABLE>
In April 1997, as part of a market decline of paging industry stocks, the market
value of the Company's stock experienced a broad significant decline. In an
effort to ensure retention of key technical and management employees, the
Committee reduced the exercise price to $9.00 per share on options to purchase
3,005,228 shares which had been awarded originally at various dates from May
1994 to March 1997 at $10.63 to $47.67 per share to employees of the Company.
The reduced exercise price and the original exercise prices reflected the fair
market value of the Company's common stock on the date of modification and the
dates of the original awards.
In December 1998, the Board of Directors amended the 1996 and 1991 Plans to
allow future reductions in option exercise prices only with the prior approval
of the Company's stockholders. Further, any amendment or repeal of this
provision will require prior approval of the Company's stockholders.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, ("FAS 123") requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. Pro forma information regarding
net income and earnings per share is required by FAS 123, which also requires
that the information be determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method of that statement. The weighted average fair value per share of
stock based compensation issued during 1999, 1998, and 1997 was $1.71, $4.85,
and $6.18, respectively. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions:
1999 1998 1997
------------ ------------- -------------
Expected Life in Years 1 to 4 1 to 4 2 to 6
Risk Free Interest Rate 5.8% to 6.1% 5.0% to 5.1% 5.9% to 6.3%
Volatility ............ .72 .59 .56
Dividend Yield ........ -- -- --
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options
55
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Pro forma loss from continuing operations before cumulative effect
of change in accounting principle .............................. $ (130,451) $ (46,206) $ (6,951)
Pro forma loss from continuing operations before cumulative effect
of change in accounting principle per share:
Loss per weighted average common share ........................ (2.10) (0.75) (0.12)
Loss per common share - assuming dilution ..................... (2.10) (0.75) (0.12)
</TABLE>
Award modifications resulted in (i) an increase to the 1997 pro forma loss from
continuing operations before cumulative effect in accounting change of
approximately $4.3 million ($0.08 per weighted average common share and per
common share-assuming dilution); (ii) an increase to the 1998 pro forma loss
from continuing operations of approximately $852,000 ($0.01 per weighted average
common share and per common share-assuming dilution) and (iii) an increase to
the 1999 loss from continuing operations of approximately $84,000 (less than
$0.01 per weighted average common share and per common share-assuming dilution).
Contributed capital was increased $129,000, $2.2 million and $1.3 million in
1999, 1998 and 1997, respectively, which represents the income tax benefits the
Company realized from stock options exercised during these periods.
(D) EMPLOYEE STOCK PURCHASE PLAN
In 1993, the Company established the Glenayre Technologies, Inc., Employee Stock
Purchase Plan (the "ESP Plan"). Under the ESP Plan, 2,006,250 shares of common
stock are authorized for issuance. The purpose of the ESP Plan is to give
employees an opportunity to purchase common stock of the Company through payroll
deductions, thereby encouraging employees to share in the economic growth and
success of the Company.
All regular full-time employees of the Company are eligible to enter the ESP
Plan as of the first day of each six-month period beginning every January 1 and
July 1. The price for common stock to be offered under the ESP Plan for each
six-month period is equal to 85% of the lower of the average market price of the
common stock for (i) the five trading days prior to the first day of the
six-month period or (ii) the last five trading days of the six-month period. For
the January 1, 2000 to June 30, 2000 period, the stock purchase price will be
the lower of (i) $8.19 or 85% of the average market price of the common stock
for the last five trading days of the six-month period. As of December 31, 1999,
403,065 shares had been issued at a purchase price range of $5.60 to $37.07 with
1,603,185 shares reserved under the ESP Plan. Additionally, in January 2000,
287,000 shares at a purchase price of $2.95 were issued.
56
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
(E) 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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations before cumulative effect of
change in accounting principle ...................................... $(127,748) $ (40,724) $ 3,697
Denominator:
Denominator for basic income (loss) per share -
weighted average shares ........................................... 62,182 61,550 60,323
Effect of dilutive securities:
stock options ..................................................... -- -- 2,995
--------- --------- ---------
Denominator for diluted income (loss) per share-adjusted
weighted average shares and assumed conversions ................... 62,182 61,550 63,318
========= ========= =========
Income (loss) from continuing operations before cumulative effect of
change in accounting principle per weighted average common share . $ (2.06) $ (0.66) $ 0.06
========= ========= =========
Income (loss) from continuing operations before cumulative effect of
change in accounting principle per common share -
assuming dilution ................................................... $ (2.06) $ (0.66) $ 0.06
========= ========= =========
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is currently pursuing a secured credit facility. On June 30, 1999,
the Company terminated the $50 million line of credit established in October
1998. During the first quarter of 1999 borrowings under this credit line ranged
from $10 million to $17.5 million. There was no borrowing under the credit line
during the second quarter 1999.
In the normal course of business, the Company issues bid and performance letters
of credit which in the aggregate amounted to approximately $10 million and $15
million as of December 31, 1999 and 1998, respectively. As of December 31, 1999,
these letters of credit have terms from approximately 1 to 33 months. The fair
value of these letters of credit is estimated to be the same as the contract
values based on the nature of the fee arrangements with the issuing banks.
The competitive telecommunications market often requires customer financing
commitments. These commitments may be in the form of guarantees, secured debt or
lease financing. At December 31, 1999, the Company had agreements to finance and
arrange financing for approximately $30 million of paging and voice mail
products. The Company cannot currently predict the extent to which these
commitments will be utilized, since certain customers may be able to obtain more
favorable terms using traditional financing sources. From time to time, the
Company also arranges for third-party investors to assume a portion of its
commitments. If exercised, the financing arrangements will be secured by the
equipment sold by Glenayre.
On January 31, 1997, an amended class action complaint consolidating two
lawsuits filed in the fourth quarter of 1996 (the "Complaint") was filed in the
United States District Court for the Southern District of New York against the
Company and certain of its executive officers and directors. The District Court
dismissed the Complaint in
57
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
November 1997, but granted the plaintiffs the right to amend and refile. The
plaintiffs filed an amended Complaint, which the District Court dismissed in
December 1998, without the right to refile. The plaintiffs appealed the
dismissal to the United States Court of Appeals for the Second Circuit. On
December 16, 1999, the Court of Appeals affirmed the District Court's dismissal.
The Plaintiffs did not appeal this decision. On February 20, 1997, a
shareholder's derivative complaint (the "Shareholder's Complaint") was filed in
the United States District Court for the Southern District Court of New York
against certain current and former directors and against the Company, as a
nominal defendant, alleging that the directors breached their fiduciary
obligations to the Company by subjecting the Company to the class action
referred to above. The Company expects that the plaintiffs will voluntarily
dismiss the Shareholder's Complaint in light of the outcome of the class action
Complaint. Additionally, the Company is currently involved in various other
disputes and legal actions related to its business operations. In the opinion of
the Company, the ultimate resolution of these actions will not have a material
effect on the Company's financial position, or future results of operations or
cash flows.
15. INTERIM FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1999 (A)
Net sales ........................................... $ 61,311 $ 53,477 $ 61,274 $ 62,027
Gross profit ........................................ 28,179 19,568 24,770 29,975
Loss from continuing operations ..................... (1,895) (61,756) (61,998) (2,099)
Loss from continuing operations per weighted average
common share ..................................... (.03) (.99) (1.00) (.03)
Loss from continuing operations per common share -
assuming dilution ................................ (.03) (.99) (1.00) (.03)
1998 (B)
Net sales ........................................... $ 88,279 $ 75,190 $ 117,488 $ 86,082
Gross profit ........................................ 45,826 38,660 58,031 31,836
Income (loss) from continuing operations ............ 63 (3,164) 8,299 (45,922)
Income (loss) from continuing operations per weighted
average common share .............................. 0.00 (.05) .13 (.74)
Income (loss) from continuing operations per common
share - assuming dilution ......................... 0.00 (.05) .13 (.74)
</TABLE>
(a) The results for the second quarter 1999 were impacted by a charge of $64.6
million for additional bad debt provisions recorded to adequately reserve
the Company's trade accounts and notes receivables. See Note 4.
Additionally, the results for the third quarter 1999 were impacted by a
$50.9 million write-off of goodwill and other intangibles. See Note 2.
Further, the Company recorded restructuring charges of $1.2 million, $1.8
million, $11.0 million, and $600,000 for the quarters ended March 31, June
30, September 30, and December 31, 1999, respectively. See Note 9. Also
during the third quarter 1999, the Company sold its microwave
communications business. Accordingly, MUX's sales, income from operations
(net of tax) and loss on disposal of assets (net of tax) are excluded from
the 1999 and 1998 quarters presented above.
(b) The results for the fourth quarter 1998 were impacted by a $26.7 million
write-off of goodwill and other intangibles and a $7.9 million loss on sale
of business. See Note 2.
58
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 10 through 13 are incorporated herein by reference to the sections
captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,"
"EXECUTIVE OFFICERS OF THE REGISTRANT," "ELECTION OF DIRECTORS,"
"COMPENSATION--Compensation of Directors," "COMPENSATION--Executive
Compensation," "COMPENSATION--Employment Agreements,"
"COMPENSATION--Compensation Committee Interlocks and Insider Participation,"
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held May 11, 2000.
59
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
A. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
<TABLE>
<CAPTION>
(i) Financial Statements Page
----
<S> <C>
Report of Ernst & Young LLP Independent Auditors.................................................. 30
Consolidated Balance Sheets at December 31, 1999 and 1998......................................... 31
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997........ 32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997.................................................................................. 33
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997........ 34
Notes to Consolidated Financial Statements........................................................ 36
(ii) Supplemental Schedules:
(For the years ended December 31, 1999, 1998 and 1997)
Schedule II - Valuation and Qualifying Accounts................................................... 64
</TABLE>
All other schedules are omitted because they are not applicable or not
required.
B. REPORTS ON FORM 8-K
During the three months ended December 31, 1999, the company filed the
following current reports on Form 8-K:
(i) Dated October 4, 1999. Under Item 5, the Company reported that
it had signed an agreement for the sale of its microwave radio
business, Western Multiplex Corporation.
(ii) Dated November 1, 1999. Under Item 2, the Company reported that
the sale of approximately 95% of the outstanding capital stock
("stock") of Western Multiplex Corporation had been completed.
The Company retained approximately 5% of the stock.
60
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
C. EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Acquisition Agreement among Glenayre, WAI Acquisition Corp. And
Wireless Access, Inc., dated October 1, 1997 ("WAI Acquisition
Agreement") was filed as Exhibit 2 to the Registrant's Current Report
on Form 8-K filed November 11, 1997 and is incorporated herein by
reference.
2.2 Amended and Restated Acquisition Agreement dated as of September 30,
1999 among GTI Acquisition Corp., the Company, Western Muliplex
Corporation, a California Corporation, Western Multiplex Corporation, a
Delaware Corporation, and WMC Holding Corp. was filed as Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1999 and is incorporated herein by reference.
3.1 Composite Certificate of Incorporation of Glenayre reflecting the
Certificate of Amendment filed December 8, 1995 was filed as Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and is incorporated herein by reference.
3.2 Restated by-laws of Glenayre effective June 7, 1990, as amended
September 21, 1994 was filed as Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and is
incorporated herein by reference.
4.1 Preferred Shares Rights Agreement dated May 21, 1997 between the
Company and American Stock Transfer & Trust Company, incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A, File No. 0-15761.
4.2 Amendment, dated January 14, 1999, to the Preferred Shares Rights
Agreement dated as of May 21, 1997 incorporated herein by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated
January 14, 1999.
4.3 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of the Company filed May
23, 1997 was filed as Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997 and is incorporated
herein by reference.
10.1 Agreement, dated December 31, 1996, which terminates the Employment
Agreement, dated December 3, 1990 between the Company and Clarke H.
Bailey was filed as Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and is incorporated
herein by reference.*
10.2 Services Agreement, dated April 18, 1999, between the Company and
Clarke H. Bailey was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999 and
is incorporated herein by reference.*
10.3 Agreement, dated October 1, 1999 between the Company and Clarke H.
Bailey is filed herewith.*
10.4 Employment Agreement, dated June 18, 1999, between the Company and Eric
L. Doggett was filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1999 and is
incorporated herein by reference.*
10.5 Termination Agreement, dated September 30, 1997, between the Company
and Ramon D. Ardizzone was filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and is incorporated herein by reference.*
10.6 Services Agreement, dated February 15, 1999, between the Company and
Ramon D. Ardizzone was filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999 and
is incorporated herein by reference.*
61
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
10.7 Services Agreement, dated April 18, 1999, between the Company and Ramon
D. Ardizzone was filed as Exhibit 10.1 to the Registrant's Quarterly
report on Form 10-Q for the Quarter ended June 30, 1999 and is
incorporated herein by reference.*
10.8 Resignation Agreement, dated December 21, 1998, between the Company and
Gary B. Smith was filed as Exhibit 10.9 to the Registrant's Annual
report on Form 10-K for the year ended December 31, 1998 and is
incorporated herein by reference.*
10.9 Employment Agreement, dated May 21, 1997 between the Company and
Stanley Ciepcielinski was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and
is incorporated herein by reference.*
10.10 Amendment, dated August 10, 1999, to the Employment Agreement dated May
21, 1997 between the Company and Stanley Ciepcielinski is filed
herewith.*
10.11 Severance Agreement, dated February 15, 1999, between the Company and
Eugene C. Pridgen was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999 and
is incorporated herein by reference. *
10.12 Consulting Services Agreement, dated November 11, 1998, between the
Company and Dan Case was filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998 and is
incorporated herein by reference.*
10.13 Letter Agreement dated May 26, 1998 between the Registrant and Amir
Zoufonoun was filed as Exhibit 10.13 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and is incorporated
herein by reference.*
10.14 Agreement, dated April 16, 1999, between the Company and Amir Zoufonoun
is filed herewith.*
10.15 Executive Severance Benefit Agreement, dated May 21, 1997, between the
Company and Lee M. Ellison (the "Ellison Agreement") was filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.
Executive Severance Benefit Agreements, between the Company and
individually with Beverley W. Cox (dated February 1, 1995, as amended),
Warren K. Neuburger (dated January 14, 1999), Gary P. Hermansen (dated
January 14, 1999), William W. Edwards (dated February 3, 2000), and
Kenneth R. Berger (dated February 3, 2000) are identical, in all
material respects, with the Ellison Agreement and are not filed as
exhibits.*
10.16 Glenayre Electronics, Inc. Deferred Compensation Plan was filed as
exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
10.17 Glenayre Technologies, Inc. Incentive Plan for the year ended December
31, 2000 is filed herewith.*
10.18 Glenayre Technologies Management By Objective Plan- Corporate Plan for
the year ended December 31, 1999 was filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999 and is incorporated herein by reference.*
10.19 Glenayre Technologies Management By Objective Plan- Business Segment
Plan for the year ended December 31, 1999 was filed as Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1999 and is incorporated herein by reference.*
10.20 Glenayre Technologies Management By Objective Plan- Glenayre Western
Multiplex Plan for the year ended December 31, 1999 was filed as
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter ended 1999 and is incorporated herein by reference.*
10.21 Glenayre Technologies Management By Objective Plan for the year ended
December 31, 1998 was filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 and is
incorporated herein by reference.*
62
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
10.22 Glenayre 1996 Incentive Stock Plan, as amended, was filed as Exhibit 4
to the Registrant's Form S-8 filed June 21, 1999 and is incorporated
herein by reference.*
10.23 Glenayre Long-Term Incentive Plan, as amended and restated effective
May 26, 1994, was filed as Exhibit 4 to the Registrant's Form S-8 filed
June 16, 1994 and is incorporated herein by reference.*
10.24 Amendment, dated December 18, 1998, to the Glenayre Long-Term Incentive
Plan was filed as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and is incorporated
herein by reference.*
10.25 Credit Agreement, dated October 30, 1998, between Glenayre Electronics,
Inc. and NationsBank, N.A., as Agent was filed as Exhibit 10.21 to the
Registrant's Annual Report of Form 10-K for the year ended December 31,
1998 and is incorporated herein by reference.
21 Subsidiaries of the Company is filed herewith.
23 Consent of Ernst & Young LLP is filed herewith.
27 Financial Data Schedule for the year ended December 31, 1999. (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.)
99 Cautionary Statement under safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 is filed herewith.
- ----------
*Management Contract
63
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE - ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended December 31, 1999 $ 5,830 $ 14,350 $ 250 $ 2,758 $ 17,672
Year ended December 31, 1998 4,542 1,187 806 705 5,830
Year ended December 31, 1997 4,527 1,155 1,192 2,332 4,542
NOTES RECEIVABLE - FAIR MARKET
VALUATION ALLOWANCE:
Year ended December 31, 1999 332 (72) -- -- 260
Year ended December 31, 1998 4 328 -- -- 332
Year ended December 31, 1997 322 -- (318) -- 4
NOTES RECEIVABLE - ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended December 31, 1999 3,795 50,352 56 1,446 52,757
Year ended December 31, 1998 4,038 (439) 298 102 3,795
Year ended December 31, 1997 -- 120 3,918(2) -- 4,038
VALUATION ALLOWANCE ON
INVENTORIES:
Year ended December 31, 1999 6,843 10,333 (322) 6,737(1) 10,117
Year ended December 31, 1998 5,511 5,701 (292) 4,077 6,843
Year ended December 31, 1997 4,365 2,476 1,037 2,367 5,511
SUBORDINATED NOTES -
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1999 1,350 -- 8,172 -- 9,522
Year ended December 31, 1998 -- 767 583 -- 1,350
INTEREST RECEIVABLES -
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1999 -- 2,369 -- 2,369 --
</TABLE>
- ----------
(1) Includes $1.5 million due to the disposal of discontinued operations.
(2) Includes amounts reclassified from previously established accrued
liabilities and reserves and collected fee offsets.
64
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 20, 2000.
GLENAYRE TECHNOLOGIES, INC.
---------------------------
By /s/ Eric L. Doggett
-------------------------------------
Eric L. Doggett
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 20, 2000:
<TABLE>
<CAPTION>
<S> <C>
/s/ Clarke H. Bailey /s/ Ramon D. Ardizzone
- ------------------------------- ----------------------
Clarke H. Bailey Ramon D. Ardizzone
CHAIRMAN OF THE BOARD DIRECTOR
/s/ Eric L. Doggett /s/ Donald S. Bates
- ------------------------------- ----------------------
Eric L. Doggett Donald S. Bates
PRESIDENT, CHIEF EXECUTIVE OFFICER DIRECTOR
AND DIRECTOR
/s/ Peter W. Gilson
---------------------
Peter W. Gilson
DIRECTOR
/s/ Stanley Ciepcielinski /s/ John J. Hurley
- ------------------------------- ---------------------
Stanley Ciepcielinski John J. Hurley
EXECUTIVE VICE PRESIDENT DIRECTOR
CHIEF FINANCIAL OFFICER, (PRINCIPAL FINANCIAL OFFICER),
TREASURER AND DIRECTOR
/s/ Thomas C. Israel
----------------------
Thomas C. Israel
DIRECTOR
/s/ Billy C. Layton /s/ Stephen P. Kelbley
- ----------------------------------------------------- -----------------------
Billy C. Layton Stephen P. Kelbley
VICE PRESIDENT, CONTROLLER, DIRECTOR
SECRETARY AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
/s/ Anthony N. Pritzker
-----------------------
Anthony N. Pritzker
DIRECTOR
/s/ Horace H. Sibley
-----------------------
Horace H. Sibley
DIRECTOR
</TABLE>
65
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
C. EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Acquisition Agreement among Glenayre, WAI Acquisition Corp. And
Wireless Access, Inc., dated October 1, 1997 ("WAI Acquisition
Agreement") was filed as Exhibit 2 to the Registrant's Current Report
on Form 8-K filed November 11, 1997 and is incorporated herein by
reference.
2.2 Amended and Restated Acquisition Agreement dated as of September 30,
1999 among GTI Acquisition Corp., the Company, Western Muliplex
Corporation, a California Corporation, Western Multiplex Corporation, a
Delaware Corporation, and WMC Holding Corp. was filed as Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1999 and is incorporated herein by reference.
3.1 Composite Certificate of Incorporation of Glenayre reflecting the
Certificate of Amendment filed December 8, 1995 was filed as Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and is incorporated herein by reference.
3.2 Restated by-laws of Glenayre effective June 7, 1990, as amended
September 21, 1994 was filed as Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and is
incorporated herein by reference.
4.1 Preferred Shares Rights Agreement dated May 21, 1997 between the
Company and American Stock Transfer & Trust Company, incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form 8-A, File No. 0-15761.
4.2 Amendment, dated January 14, 1999, to the Preferred Shares Rights
Agreement dated as of May 21, 1997 incorporated herein by reference to
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated
January 14, 1999.
4.3 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of the Company filed May
23, 1997 was filed as Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997 and is incorporated
herein by reference.
10.1 Agreement, dated December 31, 1996, which terminates the Employment
Agreement, dated December 3, 1990 between the Company and Clarke H.
Bailey was filed as Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and is incorporated
herein by reference.*
10.2 Services Agreement, dated April 18, 1999, between the Company and
Clarke H. Bailey was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999 and
is incorporated herein by reference.*
10.3 Agreement, dated October 1, 1999 between the Company and Clarke H.
Bailey is filed herewith.*
10.4 Employment Agreement, dated June 18, 1999, between the Company and Eric
L. Doggett was filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1999 and is
incorporated herein by reference.*
10.5 Termination Agreement, dated September 30, 1997, between the Company
and Ramon D. Ardizzone was filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and is incorporated herein by reference.*
10.6 Services Agreement, dated February 15, 1999, between the Company and
Ramon D. Ardizzone was filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999 and
is incorporated herein by reference.*
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
10.7 Services Agreement, dated April 18, 1999, between the Company and Ramon
D. Ardizzone was filed as Exhibit 10.1 to the Registrant's Quarterly
report on Form 10-Q for the Quarter ended June 30, 1999 and is
incorporated herein by reference.*
10.8 Resignation Agreement, dated December 21, 1998, between the Company and
Gary B. Smith was filed as Exhibit 10.9 to the Registrant's Annual
report on Form 10-K for the year ended December 31, 1998 and is
incorporated herein by reference.*
10.9 Employment Agreement, dated May 21, 1997 between the Company and
Stanley Ciepcielinski was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and
is incorporated herein by reference.*
10.10 Amendment, dated August 10, 1999, to the Employment Agreement dated May
21, 1997 between the Company and Stanley Ciepcielinski is filed
herewith.*
10.11 Severance Agreement, dated February 15, 1999, between the Company and
Eugene C. Pridgen was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999 and
is incorporated herein by reference. *
10.12 Consulting Services Agreement, dated November 11, 1998, between the
Company and Dan Case was filed as Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998 and is
incorporated herein by reference.*
10.13 Letter Agreement dated May 26, 1998 between the Registrant and Amir
Zoufonoun was filed as Exhibit 10.13 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and is incorporated
herein by reference.*
10.14 Agreement, dated April 16, 1999, between the Company and Amir Zoufonoun
is filed herewith.*
10.15 Executive Severance Benefit Agreement, dated May 21, 1997, between the
Company and Lee M. Ellison (the "Ellison Agreement") was filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.
Executive Severance Benefit Agreements, between the Company and
individually with Beverley W. Cox (dated February 1, 1995, as amended),
Warren K. Neuburger (dated January 14, 1999), Gary P. Hermansen (dated
January 14, 1999), William W. Edwards (dated February 3, 2000), and
Kenneth R. Berger (dated February 3, 2000) are identical, in all
material respects, with the Ellison Agreement and are not filed as
exhibits.*
10.16 Glenayre Electronics, Inc. Deferred Compensation Plan was filed as
exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
10.17 Glenayre Technologies, Inc. Incentive Plan for the year ended December
31, 2000 is filed herewith.*
10.18 Glenayre Technologies Management By Objective Plan- Corporate Plan for
the year ended December 31, 1999 was filed as Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999 and is incorporated herein by reference.*
10.19 Glenayre Technologies Management By Objective Plan- Business Segment
Plan for the year ended December 31, 1999 was filed as Exhibit 10.4 to
the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1999 and is incorporated herein by reference.*
10.20 Glenayre Technologies Management By Objective Plan- Glenayre Western
Multiplex Plan for the year ended December 31, 1999 was filed as
Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter ended 1999 and is incorporated herein by reference.*
10.21 Glenayre Technologies Management By Objective Plan for the year ended
December 31, 1998 was filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 and is
incorporated herein by reference.*
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
10.22 Glenayre 1996 Incentive Stock Plan, as amended, was filed as Exhibit 4
to the Registrant's Form S-8 filed June 21, 1999 and is incorporated
herein by reference.*
10.23 Glenayre Long-Term Incentive Plan, as amended and restated effective
May 26, 1994, was filed as Exhibit 4 to the Registrant's Form S-8 filed
June 16, 1994 and is incorporated herein by reference.*
10.24 Amendment, dated December 18, 1998, to the Glenayre Long-Term Incentive
Plan was filed as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and is incorporated
herein by reference.*
10.25 Credit Agreement, dated October 30, 1998, between Glenayre Electronics,
Inc. and NationsBank, N.A., as Agent was filed as Exhibit 10.21 to the
Registrant's Annual Report of Form 10-K for the year ended December 31,
1998 and is incorporated herein by reference.
21 Subsidiaries of the Company is filed herewith.
23 Consent of Ernst & Young LLP is filed herewith.
27 Financial Data Schedule for the year ended December 31, 1999. (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.)
99 Cautionary Statement under safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 is filed herewith.
- ----------
*Management Contract
Exhibit 10.10
October 1, 1999
Mr. Clarke H. Bailey
Hudson River Capital, LLC
667 Madison Avenue, 25th Floor
New York, NY 10021
Dear Clarke:
At the request of the Board of Directors of Glenayre Technologies, Inc.
("Glenayre"), you have agreed to become Chairman of the Board of Directors of
Glenayre for a one-year period from October 1, 1999 through September 30, 2000
(the "Term"), on the following terms and conditions:
1. Beginning October 1, 1999 and for the remainder of the Term
you will be paid a salary at the annual rate of $200,000, payable in
accordance with Glenayre's normal payroll practices. This salary will
be in lieu of any and all other fees paid to members of the Board of
Directors.
2. A recommendation will be made to the Plan Administration
Committee of the Board of Directors of Glenayre that you be awarded
fully vested options on October 1, 1999 to purchase 100,000 shares of
Glenayre common stock at an exercise price equal to the closing sale
price as of such date and on such other terms and conditions as the
Plan Administration Committee shall approve.
3. The letter agreement between Glenayre and you dated April
18, 1999 shall terminate effective as of September 30, 1999, except
that you will continue to be eligible through October 18, 1999 for the
bonus described in Paragraph 2 of such letter agreement.
4. As Chairman of the Board, you will act in the capacity of
an employee of Glenayre and will be entitled to participate in all
employee benefits to the extent you qualify under the eligibility
requirements of the particular benefit plan or program. You will not,
<PAGE>
Mr. Clarke H. Bailey
October 1, 1999
Page 2
however, be eligible to participate in Glenayre's MBO bonus program.
5. Glenayre will reimburse you for all reasonable expenses
incurred personally by you in connection with your duties as Chairman
of the Board.
If the foregoing terms are acceptable to you, please sign in the space
provided below.
GLENAYRE TECHNOLOGIES, INC.
By: /s/ Eric Doggett
-----------------
Name: Eric Doggett
-------------
Title: President and CEO
------------------
Accepted and Agreed to:
/s/ C. H. Bailey
- -----------------
Clarke H. Bailey
Exhibit 10.11
August 10, 1999
Mr. Stan Ciepcielinski
Glenayre Electronics, Inc.
5935 Carnegie Boulevard
Charlotte, NC 28209
Re: Employment Agreement
Dear Stan:
On May 21, 1997, Glenayre Technologies Inc. ("Glenayre") and you
entered into an Employment Agreement (your "Employment Agreement"), pursuant to
which your employment as Executive Vice President, Treasurer and Chief Financial
Officer was continued on the terms and conditions stated therein. Unless
otherwise defined in this letter, the capitalized terms used in this letter
shall have the same meanings as ascribed to them in the Employment Agreement.
Under your Employment Agreement, upon the occurrence of an event which
constitutes "Good Reason", you may terminate your employment and be entitled,
among other payments and benefits, to a severance payment equal to two times
your annual rate of your "Base Salary" (except "Good Reason" which is caused by
a "Change in Control," in which case the payment is two and one-half times the
annual rate of your "Base Salary").
As originally written, "Good Reason" included any material change by
Glenayre in your functions, duties or responsibilities which would cause the
ranking or level, dignity, responsibility, importance or scope of your position
with Glenayre to become less than those of Executive Vice President, Treasurer
and Chief Financial Officer. Effective October 1, 1998, you were elected to the
office of Chief Operating Officer in addition to your other duties and a search
was begun for a new Chief Financial Officer. Although your Employment Agreement
was not formally amended when you assumed this new position, Glenayre
acknowledges that "Good Reason" was intended to include, and does include, any
material change in your responsibilities as Chief Operating Officer.
<PAGE>
Mr. Stan Ciepcielinski
August 10, 1999
Page 2
As you and I have discussed, as part of the reorganization here at
Glenayre, the position of Chief Operating Officer is being eliminated, effective
August 10, 1999, but Glenayre desires that you continue to serve as Executive
Vice President, Treasurer and Chief Financial Officer on the terms contained in
your Employment Agreement. We have agreed, however, that your continuation in
this position should not prejudice your rights under your Employment Agreement.
Therefore, in order to induce you to stay with Glenayre, on behalf of
Glenayre I propose that you continue to serve as Executive Vice President,
Treasurer and Chief Financial Officer of Glenayre with the agreement that at any
time, upon 90 days prior written notice by you to Glenayre, you may terminate
your employment with Glenayre. Such termination will be considered to be "Good
Reason" under the terms of your Employment Agreement and you will be entitled to
all of the benefits and payments due you as a result of a termination for "Good
Reason" (including a severance payment in the amount of two times your annual
"Base Salary"). Specifically:
(1) Paragraph 2(e) of your Employment Agreement will be deemed amended
to include as "Good Reason" any termination by you of your
employment with Glenayre at any time upon 90 days written notice
to Glenayre. Therefore, such a termination of employment would be
deemed to be pursuant to the provisions of Paragraph 2(b)(3) of
your Employment Agreement.
(2) Inasmuch as the termination of your employment as described in
Clause (1) above will be considered "Good Reason", the payments
and benefits described in Paragraphs 3(a)(2), 3(a)(3) and 3(c) of
your Employment Agreement, together with the payments and benefits
otherwise due you under Paragraph 3 of your Employment Agreement,
will be paid and provided to you in the event of such termination.
<PAGE>
Mr. Stan Ciepcielinski
August 10, 1999
Page 3
If you accept these terms, this letter will serve as an amendment to your
Employment Agreement as provided herein, and except as provided in this letter,
your Employment Agreement will continue in full force and effect and apply to
you in the position of Executive Vice President, Treasurer and Chief Financial
Officer. You waive any right you may have to terminate your employment by virtue
of the elimination of your duties as Chief Operating Officer. Please signify
your acceptance by signing where provided below.
Very truly yours,
/s/ Eric L. Doggett
Eric L. Doggett
President & Chief Executive Officer
ACCEPTED AND AGREED TO:
/s/ Stan Ciepcielinski
- -----------------------
Stan Ciepcielinski
Exhibit 10.14
April 16, 1999
CONFIDENTIAL
Mr. Amir Zoufonoun
Glenayre Western Multiplex
1196 Borregas Avenue
Sunnyvale, CA 94089-1302
Dear Amir:
As you know, Glenayre's current strategic intention is to sell Glenayre
Western Multiplex ("Western Multiplex "). We believe that you will play an
important role in insuring that Western Multiplex is refocused on an effective
growth strategy to position Western Multiplex for its future sale and in
supporting Glenayre's efforts to sell Western Multiplex. The purpose of this
agreement is to provide incentives to you to assist Glenayre in accomplishing
these objectives.
1. Your Responsibilities. In addition to fulfilling your current job
responsibilities, you agree to cooperate fully with Glenayre and its investment
bankers, attorneys and accountants in connection with the Sale of Western
Multiplex to any prospective Buyer. You acknowledge that the Buyer may be a
strategic as well as a financial Buyer, and you agree to cooperate fully with,
and support, Glenayre in either case. You agree to meet with prospective Buyers,
work with other Western Multiplex employees to insure their continued loyalty to
a prospective Buyer and generally use your best efforts to insure that the
highest possible sales price is received by Glenayre for the Sale of Western
Multiplex. In the event that you are offered an opportunity to receive an equity
interest in the Buyer or Western Multiplex as part of the Sale of Western
Multiplex, you agree to keep Glenayre advised of your negotiations with the
Buyer.
2. Your Benefits . Contingent upon your full compliance with your
responsibilities under Paragraph 1 above, Glenayre agrees to provide the
following benefits to you (assuming that you remain an employee of Western
Multiplex at the time a Sale of Western Multiplex closes):
(1) Promptly after the closing of the Sale of Western
Multiplex, you will receive an acquisition bonus based on a percentage
of the sales
<PAGE>
price for Western Multiplex (with a minimum bonus of $550,000), as set
forth in more detail on Attachment 1.
(2) I will recommend to the Plan Administration Committee of
the Board of Directors of Glenayre that all of your options for
Glenayre common stock be fully vested as of the closing date of the
Sale of Western Multiplex and that you be permitted to exercise your
options within one year after the closing date.
(3) Glenayre will pay to you a lump sum severance benefit
equal to 100% of your base salary (as in effect at the closing of the
Sale of Western Multiplex ) if a Sale of Western Multiplex occurs and
either (i) you are not offered employment by the Buyer or Western
Multiplex at a position with substantially the same or greater
responsibilities than your current position with Western Multiplex and
at substantially the same or greater compensation and other benefits
and you do not accept another position with the Buyer or Western
Multiplex or (ii) you accept employment with Western Multiplex or the
Buyer but your Termination of Employment occurs within one year after
the Sale of Western Multiplex.
(4) These benefits apply to a Sale of Western Multiplex prior
to October 31, 1999. Prior to October 31, 1999, these benefits will be
reviewed, although it is currently anticipated that a similar program
will be in effect after October 31, 1999 if a sale has not been
completed.
3. Confidentiality. You agree that you will keep strictly confidential
and will not disclose, directly or indirectly, any document or information
(including all proprietary, confidential, or trade secret information of
Glenayre or Western Multiplex that you have had in your possession or of which
you are or become aware) relating to your employment with Western Multiplex or
to the business and operations of Western Multiplex. You further agree that you
will not make any statement nor take any action which might adversely reflect
upon Glenayre or Western Multiplex, or any of their officers, directors or
employees. You also agree that you will keep strictly confidential the terms of
this agreement and will not reveal any of such terms to any other employee of
Western Multiplex.
4. Miscellaneous. This agreement supersedes and replaces the letter
agreements dated May 26, 1998, May 11, 1998 and August 22, 1997, and any and all
other arrangements, between Glenayre and you in regard to the sale of Western
Multiplex. This agreement will not be construed to provide you any right of
continued employment by Western Multiplex. The construction, interpretation and
validity of this agreement shall be determined in accordance with and governed
by the laws of the State of North Carolina. In addition to the terms defined in
this agreement, the other capitalized terms in this agreement
<PAGE>
shall have the meanings set forth in Attachment 2 hereto. No provision of this
agreement shall be deemed to restrict the absolute right of Glenayre at any time
to sell or dispose of Western Multiplex or any part of its business or assets on
such terms as Glenayre considers to be in its best interests.
/s/ Stanley Ciepcielinski
Stanley Ciepcielinski
Chief Operating Officer
ACCEPTED AND AGREED TO:
/s/ Amir Zoufonoun
- -------------------
Amir Zoufonoun
Date: 8/3/99
------------
<PAGE>
ATTACHMENT 1
ACQUISITION BONUS
-----------------
(BONUS AMOUNTS IN 000'S)
-------------------------------------------------------------
MINIMUM ASSUMED SALE PRICE IN CALCULATION (IN MILLIONS)
-------------------------------------------------------------
BONUS UNDER $45 $45. - $49.9 $50 - $54.9
------ --------- ------------ -----------
(amt. @ $44.9)
AMIR ZOUFONOUN $550.0 $673.5 $765.0 TO $848.3 $950.0 TO $1,043.1
BONUS % 1.5% 1.7% 1.9%
-------------------------------------------------------------
----------------------------------------------
ASSUMED SALE PRICE IN CALCULATION (IN MILLIONS)
-------------------------------------------
$55 - $59.9 $60 AND OVER
----------- ------------
$1,155.0 TO $1,257.9 $1,320.0 TO ?
2.1% 2.2%
-------------------------------------------
<PAGE>
ATTACHMENT 2
------------
Definitions
-----------
.
"Buyer" means the acquiror (or any of its subsidiaries) of (i) more
than 50% of the common stock of Western Multiplex or (ii) all or substantially
all of the business and assets of Western Multiplex.
"Cause" means (1) dishonesty or fraud on your part which is intended to
result in your substantial personal enrichment at the expense of Western
Multiplex or the Buyer; (2) a material violation of your responsibilities as an
employee of Western Multiplex or the Buyer which is willful and deliberate; or
(3) your conviction (after the exhaustion of all appeals) of a felony involving
moral turpitude or the entry of a plea of nolo contendere for such a felony;
provided, however, that Western Multiplex or the Buyer must first (i) give
written notice to you specifying the occurrence of a violation described in
clause (2) above and (ii) allow you 30 days from receipt of the written notice
to correct the violation.
"Sale of Western Multiplex" means (i) the sale of more than 50% of
Western Multiplex 's common stock or (ii) the sale of all or substantially all
of the business and assets of Western Multiplex .
"Disability" means your inability, due to the condition of your
physical, mental or emotional health, to regularly and satisfactorily perform
your duties or responsibilities as an employee of Western Multiplex or the Buyer
for a continuous period in excess of 90 days.
"Good Reason" means the occurrence of any of the following without your
consent: (1) a significant change in the nature or the scope of your authority
as in effect immediately prior to a Sale of Western Multiplex; (2) an assignment
to you of duties which are materially inconsistent with your duties or
responsibilities immediately prior to a Sale of Western Multiplex; (3) a
reduction in your base salary; or (4) a requirement that the principal location
where you are required to perform services change by more than 30 miles;
provided, however, that you must first (i) give written notice to Western
Multiplex or the Buyer specifying the occurrence of an event described in clause
(1),(2), (3) or (4) above and (ii) allow the Buyer or Western Multiplex 60 days
from receipt of the written notice to correct the event.
"Termination of Employment" means the termination of your employment
with Western Multiplex or the Buyer for any reason other than (1) your death,
(2) your Disability, (3) the termination of your employment for Cause or (4)
your voluntary termination of employment other than for Good Reason.
GLENAYRE TECHNOLOGIES, INC. INCENTIVE PLAN
2000
Exhibit 10.17
The Glenayre Technologies, Inc. Incentive Plan (the "Plan") was created to
motivate and provide incentive to the employees of Glenayre Technologies, Inc.
and its wholly owned subsidiaries around the world and to maximize company
profits. The Plan is funded as the Company meets its annual Operating Earnings
Target (the "Earnings Target"). The Earnings Target includes a Minimum Earnings
Target and a Stretch Earnings Target. Plan funding occurs as follows: at the
Minimum Earnings Target the Plan is 25% funded; at 100% of the Earnings Target
the Plan is 100% funded; and at the Stretch Earnings Target the Plan is 200%
funded. The Plan Funding Schedule (the "Funding Schedule") is attached as
Exhibit 1. Earnings Targets are established in support of the Company's business
plan.
Your Participation Level is a percentage of your Annual Base Earnings approved
each year by the Chief Executive Officer, and/or Sr. Vice President, Human
Resources, as applicable. In addition, the Board of Directors approves Executive
Officer participation levels each year.
Your Target Plan Bonus is based on Individual Annual Performance Objectives
("Individual Component") which comprise 100% of your bonus opportunity. The
level of achievement of these objectives will be documented and measured on the
annual performance evaluation process.
Target Plan Bonus:
This is your Annual Base Earnings X your Participation Level at 100% of target.
Example:
If your Annual Base Earnings is $25,000 and your Participation Level is 10%,
your Target Plan Bonus would be as follows: Target Plan Bonus = $ 2,500 (Annual
Base Earnings X Target Plan Bonus ($25,000 X 10%))
COMPANY PERFORMANCE
- -------------------
The Company Earnings Target is based on Income from Operations, which is defined
in the Definitions section of this document. If the Earnings Target is achieved,
the Plan will be funded at 100%.
A Minimum Earnings Target has been established for the plan year. This minimum
target must be achieved in order for any bonuses to be paid.
A Mid-Year Earnings Target has been established for the plan year. If this
target is achieved/exceeded as of June 30, a special mid year payment will be
made to all participants. The mid-year payment will be 25% of the annual Target
Plan Bonus for each participant. The final Target Plan Bonus payment will be
offset by the mid-year bonus payment, if any. Any participant who is on a formal
corrective action plan will not be eligible for the mid-year Company Performance
bonus. If the performance situation has been resolved by year-end, the
participant will be eligible to receive all or part of the mid-year payment
based on the company's performance and the level of achievement of individual
performance objectives. If this target is not achieved mid-year, but the Minimum
Earnings Target is achieved or exceeded by year-end, the Target Plan Bonus will
be determined based on the Funding Schedule and the Individual Component.
A Stretch Earnings Target has been established for the plan year. If the annual
Earnings Target is exceeded up to the Stretch Earnings Target, the plan would be
funded in excess of 100%, as per
<PAGE>
the Funding Schedule. For example, if the company achieves 150% of the Earnings
Target the plan will be funded at 150%.
INDIVIDUAL ANNUAL PERFORMANCE OBJECTIVES COMPONENT ("Individual Component")
- ---------------------------------------------------------------------------
At the beginning of each plan year, each manager will set annual performance
objectives for each Plan participant in support of Glenayre's strategy and goals
for the year. Each participant will have 3-5 objectives and /or performance
review measurements, which will make up 100 percent of his/her Target Plan
Bonus. During the course of the year, each manager will be responsible for
meeting with each participant to assess progress and/or to adjust objectives to
ensure they continue to support the overall Company goals. In the event of an
employee transfer or promotion, the review must be completed prior to the
effective date of the change.
At year-end, each manager will assess the level of achievement for each
objective and assign a total performance rating on the annual performance
review. Provided that the actual annual Company Performance is at or above the
Minimum Earnings Target, and the Individual Component is at or above the minimum
performance level, a percentage of the Total Plan Target will be paid based on
the Funding Schedule and the Performance Rating Schedule (See Exhibit 2). The
Individual Component is based on achievement of individual performance
objectives. Participants who fail to meet their objectives will not receive a
bonus. Conversely, participants who exceed their objectives may receive a bonus
in excess of 100% of their eligibility.
EXAMPLE
- -------
If your Annual Base Earnings is $25,000 and your Participation Level is 10%,
your Target Plan Bonus would be as follows: Target Plan Bonus = $ 2,500 (Annual
Base Earnings X Target Plan Bonus ($25,000 X 10%))
Assumptions: The annual Company Performance is 110% of Earnings Target. The
Individual Component Rating is 80% achievement and the mid-year target was
achieved (25% of Target Plan Bonus).
ACTUAL % OF TARGET TARGET BONUS ACTUAL BONUS
Annual Company Performance 110% $2,750
Annual Individual Component 80% $2,750 $2,200
Actual Mid-year bonus paid 100% -625
------
Final Bonus Payment $1,575
DEFINITIONS
- -----------
o Annual Base Earnings - Total base salary earned during the Plan year,
(prior to deductions for contributions to the 401(k) Plan, for health
care coverage, for flexible spending accounts, or for any other Company
sponsored pre-tax or deferred compensation plans) received by a
Participant from the Company while participating in the Plan.
o Company -- Glenayre Technologies, Inc. and its subsidiaries.
o Currency Exchange Rate -- Average internal exchange rate for the Plan
Year.
o Earnings Target - The Operating Earnings Target as approved by the
Board of Directors. The Stretch Earnings Target is established by the
President and CEO and Chief Financial Officer and approved by the Board
of Directors.
<PAGE>
o Eligibility Requirements--
a. An employee must be employed for 90 days before he/she will be
eligible to participate in the Glenayre Incentive Plan (this does
not apply to rehires).
b. Mid-year and annual Plan bonus payments - Participants who are
actively employed through the end of each Plan performance period,
June 30 and December 31, respectively.
c. Participants must maintain a satisfactory level of performance
through the Plan periods.
Periods of paid or unpaid leave of absence in excess of 30 consecutive
days per year will not be considered for Plan eligibility. Annual Base
Earnings will be prorated according to the length of disability.
Payment of earned Plan bonuses will be paid upon return to work from a
leave of absence.
o Income From Operations - Net Sales less Cost of Goods Sold and
Operating Expenses including Depreciation/Amortization. Income From
Operations does not include the impact of interest income or expense,
exchange gain/(loss), other income/(loss), income taxes, investment tax
credits, real estate transaction costs, or business segment disposal or
acquisition costs
o Participant -- A full time, regular employee of the Company who is
approved by the Chief Executive Officer or the SVP Human Resources to
be a Participant in the Plan. Plan participation will be prorated based
on the length of time a Participant is eligible. No employee of the
Company may participate in more than one incentive or commission plan.
o Participant's Participation Level -- The percentage of pay that the
Participant could receive from the Plan if the Earnings Target and the
Individual Annual Performance Objectives are achieved at the 100%
level. If the Company exceeds its Earnings Target, the bonus amount
could increase proportionately. The Plan Level for each Participant is
recommended to and approved by the Chief Executive Officer and/or Sr.
Vice President, Human Resources, as applicable. In addition, the Board
of Directors approves Executive Officer Plan Participation Levels each
year.
o Payment Date - Forty-five (45) days after the performance review or
audit completion by the independent auditors and Board of Directors
approval of the Company's mid-year and year-end financial statements.
Additionally if, by October 30th, the Company has achieved at least 80%
of the annual Earnings Target, and has a forecast of at least 90% of
the annual Earnings Target, a partial payment will be made in December
of the plan year. The partial payment will be 50% of the participant's
annual Target Plan Bonus less any mid year payment. Any participant who
is on a formal corrective action plan will not be eligible for the
early partial payment of the Annual Target Plan Bonus. If the
performance situation has been resolved by year-end, the participant
will be eligible to receive all or part of the partial payment based on
the company's performance and the level of achievement of individual
performance objectives.
Calendar Period Estimated Payment Date
-------------------------------------------------------------------
6/30 August
12/31 February
November 1 Dec 24
<PAGE>
o Payout Percentage - Percentage of Target Plan Bonus when the Company
achieves the defined Earnings Target and Individual objectives are
achieved at 100%: see Exhibit 1 Funding Schedule.
o Plan - Glenayre Technologies, Inc. Incentive Plan (the "Plan")
o Plan Year - January 1 through December 31.
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT 21
SUBSIDIARIES OF GLENAYRE
The following subsidiaries are wholly-owned, directly or indirectly, by Glenayre
as of March 2000
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
Glenayre Electronics, Inc. Colorado, U.S.A.
Glenayre Manufacturing Ltd. Canada
Glenayre Electronics Singapore PTE Ltd. Singapore
Glenayre Electronics (UK) Limited United Kingdom
Glenayre Digital Systems, Inc. North Carolina, U.S.A.
Glenayre Electronics Capital Corporation. North Carolina, U.S.A.
Glenayre de Mexico S.A. de C.V. Mexico
Glenayre Administracion, S.A. de C.V. Mexico
Glenayre Electronics South America Ltda. Brazil
Glenayre Electronics Europe B.V. Netherlands
Glenayre Electronics (Hong Kong) Limited Hong Kong
Glenayre Electronics Philippines, Inc. Philippines
Glenayre Electronics (Korea) Limited Korea
Glenayre Electronics Middle East LLC United Arab Emirates
Glenaye Electronics Export Sales Corporation Barbados
Glenayre (India) Private Limited India
Nihon Glenayre Electronics K.K. Japan
GTI Acquisition Corp. Delaware, U.S.A.
Open Development Corporation Delaware, U.S.A.
Wireless Access, Inc. California, U.S.A.
</TABLE>
- ----------
The names of other subsidiaries have been omitted because, considered in
the aggregate as a single subsidiary, they would not constitute a
significant subsidiary.
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Glenayre Technologies, Inc.'s
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 33-88818 on Form S-4, dated March 24, 1995
(amended by Post-Effective Amendment Number 1 on Form S-8 dated March 25, 1996),
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 February 7, 2000, with respect to the Company's Consolidated
Financial Statements and schedules of Glenayre Technologies, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Charlotte, North Carolina
March 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 83,868
<SECURITIES> 0
<RECEIVABLES> 171,215
<ALLOWANCES> 70,689
<INVENTORY> 28,130
<CURRENT-ASSETS> 228,734
<PP&E> 144,578
<DEPRECIATION> 55,924
<TOTAL-ASSETS> 413,558
<CURRENT-LIABILITIES> 70,699
<BONDS> 0
0
0
<COMMON> 1,248
<OTHER-SE> 334,230
<TOTAL-LIABILITY-AND-EQUITY> 413,558
<SALES> 238,089
<TOTAL-REVENUES> 238,089
<CGS> 135,597
<TOTAL-COSTS> 135,597
<OTHER-EXPENSES> 277,561
<LOSS-PROVISION> 66,999
<INTEREST-EXPENSE> 397
<INCOME-PRETAX> (173,715)
<INCOME-TAX> (45,967)
<INCOME-CONTINUING> (127,748)
<DISCONTINUED> (780)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (128,528)
<EPS-BASIC> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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 focussing its efforts on
growing its Enhanced Services Platform products, such as the Modular Voice
Processing system and Intelligis LSP, and enhanced services solutions such as
voice, fax and data messaging, short message services, one touch call return,
continuous calling, voice activated dialing, unified
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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 focussed
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 does 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 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.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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 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.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
FINANCING CUSTOMER PURCHASES
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. However, many of the Two-Way License Holders
with whom Glenayre has entered into customer financing arrangements have limited
operating histories, significant debt related to the acquisition of their
two-way licenses and start-up expenses, and negative cash flows from operations;
additionally, some have never generated an operating profit and may not have
sufficient resources to maintain the development and operation of their two-way
network. Accordingly, there is a significant 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.
CONTINUATION AND EXPANSION OF STRATEGIC ALLIANCES AND PARTNERSHIPS
Glenayre has entered into several strategic alliances, including alliances with
Loc8.net, InfoWave and Handspring. 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 partnership; 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.
