--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _______
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
-------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11360 LAKEFIELD DRIVE, DULUTH, GEORGIA 30097
-------------------------------------- -----
(Address of principal executive offices) Zip Code
(770) 283-1000
---------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at October 31, 2001 was 64,971,834 shares.
--------------------------------------------------------------------------------
Glenayre Technologies, Inc. and Subsidiaries
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INDEX
Part I - Financial Information:
Item 1. Financial Statements
Page
----
Independent Accountants' Review Report .............................. 3
Condensed Consolidated Balance Sheets as of
September 30, 2001 (Unaudited) and December 31, 2000 ........... 4
Condensed Consolidated Statements of Operations for the
three months ended September 30, 2001 and 2000 (Unaudited) ..... 5
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2001 and 2000 (Unaudited) ........... 6
Condensed Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 2001 (Unaudited) ........... 7
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 (Unaudited) ........... 8
Notes to Condensed Consolidated Financial Statements (Unaudited) .... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......... 20
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K ................................... 21
-------------------------------------------------------------------------------
2
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Independent Accountants' Review Report
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of September 30, 2001, and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2001 and 2000, the condensed consolidated
statement of stockholders' equity for the nine-month period ended September 30,
2001 and the condensed consolidated statements of cash flows for the nine-month
periods ended September 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Glenayre
Technologies, Inc. as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein) and in our report dated February 5, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Charlotte, North Carolina
October 18, 2001
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3
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
(dollars in thousands)
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................................ $ 84,890 $ 71,866
Restricted cash ...................................................... 4,489 16,893
Accounts receivable, net ............................................. 15,069 34,838
Accounts receivable discontinued operations, net ..................... 285 58,405
Notes receivable discontinued operations, net ........................ -- 4,312
Inventories, net ..................................................... 12,384 14,117
Inventories discontinued operations, net ............................. 236 25,987
Deferred income taxes ................................................ -- 19,140
Prepaid expenses and other current assets ............................ 4,035 8,033
--------- ---------
Total current assets ............................................ 121,388 253,591
Notes receivable discontinued operations, net ............................ -- 6,921
Property, plant and equipment, net ....................................... 40,925 40,875
Property, plant and equipment discontinued operations, net ............... 17,038 48,180
Goodwill ................................................................. -- 45,311
Deferred income taxes .................................................... -- 34,917
Other assets 2,793 16,291
--------- ---------
TOTAL ASSETS ............................................................. $ 182,144 $ 446,086
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ..................................................... $ 6,094 $ 25,150
Accrued liabilities .................................................. 30,563 43,365
Accrued liabilities discontinued operations 28,013 --
--------- ---------
Total current liabilities ....................................... 64,670 68,515
Other liabilities ........................................................ 7,474 6,644
Accrued liabilities discontinued operations-noncurrent ................... 14,918 --
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding........................ -- --
Common stock, $.02 par value; authorized: 200,000,000
shares; outstanding: September 30, 2001 - 64,996,811
shares; December 31, 2000 - 64,446,012 shares ...................... 1,299 1,288
Contributed capital .................................................. 361,026 359,181
Retained earnings (deficit) (268,002) 3,235
Accumulated other comprehensive income 759 7,223
--------- ---------
Total stockholders' equity 95,082 370,927
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 182,144 $ 446,086
========= =========
Note: The balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
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4
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended
September 30,
--------------------------------
2001 2000
--------------- -------------
NET SALES ................................................................ $ 22,642 $ 34,519
-------- --------
COSTS AND EXPENSES:
Cost of sales ...................................................... 8,529 13,434
Selling, general and administrative expense ........................ 8,741 10,958
Provision for doubtful receivables ................................. 838 977
Research and development expense ................................... 4,350 5,343
Depreciation expense ............................................... 2,117 2,359
Restructuring expense .............................................. 1,388 --
-------- --------
Total Costs and Expenses ..................................... 25,963 33,071
-------- --------
INCOME (LOSS) FROM OPERATIONS ............................................ (3,321) 1,448
-------- --------
OTHER INCOME (EXPENSES):
Interest income (expense), net ..................................... 770 1,660
Gain (loss) on disposal of assets, net ............................. 13 75
Realized gain (loss) on available-for-sale securities, net ......... 636 --
Escrow settlement .................................................. -- 10,857
Other, net ......................................................... (410) (114)
-------- --------
Total Other Income (Expenses), net .......................... 1,009 12,478
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................................................ (2,312) 13,926
PROVISION (BENEFIT) FOR INCOME TAXES ..................................... (491) 988
-------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................. (1,821) 12,938
INCOME FROM DISCONTINUED OPERATIONS (net of income tax) .................. 1,084 501
-------- --------
NET INCOME (LOSS) ........................................................ $ (737) $ 13,439
======== ========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations .............................................. $ (0.03) $ 0.20
Discontinued Operations ............................................ 0.02 0.01
-------- --------
$ (0.01) $ 0.21
======== ========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations .............................................. $ (0.03) $ 0.19
Discontinued Operations ............................................ 0.02 0.01
-------- --------
$ (0.01) $ 0.20
======== ========
See notes to condensed consolidated financial statements.
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5
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Nine Months Ended
September 30,
-----------------------------------------------
2001 2000
--------------------- ----------------------
NET SALES ..................................................................... $ 76,074 $ 91,610
--------- ---------
COSTS AND EXPENSES:
Cost of sales ............................................................... 31,853 34,057
Selling, general and administrative expense ................................. 31,878 30,780
Provision for doubtful receivables .......................................... 1,576 1,322
Research and development expense ............................................ 15,693 12,416
Depreciation expense ........................................................ 6,836 6,946
Restructuring expense ....................................................... 10,793 --
Adjustment to loss on sale of business ...................................... (94) (524)
--------- ---------
Total Costs and Expenses ................................................. 98,535 84,997
--------- ---------
INCOME (LOSS) FROM OPERATIONS ................................................. (22,461) 6,613
--------- ---------
OTHER INCOME (EXPENSES):
Interest income (expense), net .............................................. 3,273 4,642
Gain (loss) on disposal of assets, net (including
impairment loss of $(1,760) in 2001) ....................................... (1,754) 378
Realized gain (loss) on available-for-sale securities, net .................. 11,656 --
Escrow settlement ........................................................... -- 10,857
Other, net .................................................................. (876) (412)
--------- ---------
Total Other Income (Expenses), net ....................................... 12,299 15,465
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ..................................................... (10,162) 22,078
PROVISION FOR INCOME TAXES .................................................... 27,614 3,928
--------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ...................................... (37,776) 18,150
LOSS FROM DISCONTINUED OPERATIONS (net of
income tax) ................................................................. (233,461) (2,096)
--------- ---------
NET INCOME (LOSS) ............................................................. $(271,237) $ 16,054
========= =========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:
Continuing Operations ....................................................... $ (0.58) $ 0.28
Discontinued Operations ..................................................... (3.61) (0.03)
--------- ---------
$ (4.19) $ 0.25
========= =========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations ....................................................... $ (0.58) $ 0.27
Discontinued Operations ..................................................... (3.61) (0.03)
--------- ---------
$ (4.19) $ 0.24
========= =========
See notes to condensed consolidated financial statements.
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6
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
(unaudited)
Accumulated
Common Stock Other Total
-------------------- Contributed Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
---------- --------- ------------ -------------- -------------- ----------
Balances, December 31, 2000 ....... 64,446 $1,288 $359,181 $ 3,235 $ 7,223 $ 370,927
Net loss .......................... (271,237) (271,237)
Other Comprehensive Loss:
Adjustment to unrealized gain on
securities available for sale, net
of tax ............................ (6,464) (6,464)
---------
Comprehensive loss ................ (277,701)
Stock options exercised ........... 633 13 1,250 1,263
Repurchase of common stock ........ (82) (2) (68) (70)
Stock compensation expense ........ 663 663
----- ------ -------- ---------- ------- ---------
Balances, September 30, 2001 ...... 64,997 $1,299 $361,026 $(268,002) $ 759 $ 95,082
====== ====== ======== ========== ======= =========
See notes to condensed consolidated financial statements.
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7
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
Nine Months Ended September 30,
---------------------------------
2001 2000
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,467 $ 12,390
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ........................... (18,584) (9,103)
Proceeds from sale of equipment ...................................... 217 249
Investment in available-for-sale securities .......................... -- (2,650)
Proceeds from sale of available-for-sale securities .................. 14,745 --
-------- --------
Net cash used in investing activities ............................. (3,622) (11,504)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities ......................................... (14) (33)
Issuance of common stock ............................................. 1,263 14,105
Repurchase of common stock ........................................... (70) --
-------- --------
Net cash provided by financing activities ......................... 1,179 14,072
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................. 13,024 14,958
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................................................ 71,866 73,513
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 84,890 $ 88,471
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 97 $ 49
Income taxes ......................................................... $ 1,484 $ 2,180
See notes to condensed consolidated financial statements.
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8
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Glenayre Technologies, Inc. and subsidiaries ("the Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain reclassifications have been made
to the prior period's financial information to conform with the presentations
used in 2001. Operating results for the three and nine months ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. Glenayre's financial results in any quarter
are highly dependent upon various factors, including the timing and size of
customer orders and the shipment of products for large orders. Large orders from
customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 2000.
2. Restructuring
In connection with the Company's decisions to phase out the prepaid product line
and relocate the Corporate headquarters from Charlotte, North Carolina to
Atlanta, Georgia, during the second quarter 2001, the Company recorded pre-tax
restructuring charges of approximately $11.2 million. As a result of these
restructuring activities, the Company anticipated a reduction of approximately
160 positions impacting several functional areas of the Company and expensed
approximately $3.8 million for employee severance and outplacement services,
approximately $2.1 million for consolidation and exit costs from its Charlotte,
North Carolina, Atlanta, Georgia and Amsterdam, Netherlands facilities and
approximately $3.5 million to accrue business exit costs and to reserve for
excess inventories and customer receivables associated with the Company's
decision to abandon its prepaid product line. In addition, the Company recorded
a $1.8 million charge associated with the impairment of long-lived assets. The
impairment charge is classified as loss on disposal of assets in the Company's
Condensed Consolidated Statement of Operations for the nine months ended
September 30, 2001.
Additionally, during the third quarter 2001, the Company recorded restructuring
expenses of approximately $1.1 million for employee severance and outplacement
services resulting from a further reduction of 60 positions. The Company also
expensed approximately $330,000 for retention bonuses earned primarily related
to the positions eliminated during the second quarter 2001.
The consolidation and exit process for all of these above facilities is expected
to be completed by the end of the fourth quarter 2001. Payments related to
severance, retention bonuses and outplacement services, and consolidation and
exit costs were approximately $1.7 million and $600,000, respectively, as of
September 30, 2001. The reserve balance for this restructuring was approximately
$10 million at September 30, 2001. Management believes the remaining reserves
for this business restructuring will be adequate to complete this plan.
During the first quarter 2001, the Company made cash payments of approximately
$175,000 of accrued severance benefits in conclusion of its third quarter 1999
restructuring.
--------------------------------------------------------------------------------
9
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
The following is a summary of activity for the nine month period ended September
30, 2001 for the 2001 and 1999 restructuring reserves.
Business Exit,
Severance Lease Cancellation
and Benefits and Other Costs Total
------------ ------------------ -------
Balance at December 31, 2000........ $ 175 --- $ 175
Expense accrued..................... 5,325 7,225 12,550
Charges............................. (1,835) (870) (2,705)
------- ------ -------
Balance at September 30, 2001....... $ 3,665 $6,355 $10,020
======= ====== =======
3. Discontinued Operations
In May 2001, the Company began exiting its Wireless Messaging (Paging) business
and refocusing all of its strategic efforts on the Enhanced Services
Platform/Unified Communication systems business segment based in Atlanta,
Georgia. As a result, the Wireless Messaging (Paging) segment was reported as a
disposal of a segment of business in the second quarter 2001. Accordingly, the
operating results of the Wireless Messaging (Paging) segment have been
classified as a discontinued operation for all periods presented in the
Company's consolidated statements of operations. Additionally, the Company has
reported all of the Wireless Messaging (Paging) segment assets at their
estimated net realizable value in the Company's condensed consolidated balance
sheet as of September 30, 2001. The Company believes all business transactions
related to the Wireless Messaging (Paging) segment, with the exception of
existing contractual obligations, will cease by May 2002.
Results for discontinued operations consist of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
2001 2000 2001 2000
------ ------- --------- -------
Net sales......................................... $6,318 $34,128 $ 29,411 $92,365
Loss from discontinued operations:
Income (loss) from operations before
income taxes..................................... 1,667 1,133 (46,807) (2,139)
Benefit (provision) for income taxes.............. (583) (632) (583) 43
------ ------- ---------- -------
Net income (loss) from operations................. 1,084 501 (47,390) (2,096)
Loss on disposal before income taxes.............. --- --- (156,800) ---
Provision for income taxes........................ --- --- (29,271) ---
------ ------- ---------- -------
Net loss on disposal of discontinued operations... --- --- (186,071) ---
------ ------- ---------- -------
Net income (loss) from discontinued operations.... $1,084 $ 501 $ (233,461) $(2,096)
====== ======= ========== =======
The loss from discontinued operations consists of (i) operating losses incurr
in the Wireless Messaging (Paging) segment for the three and nine months ended
September 30, 2001 and 2000 adjusted in the third quarter 2001 for cash received
from wireless messaging (paging) trade receivables previously reserved and (ii)
an estimated loss on disposal of the segment for the three and nine months ended
September 30, 2001 which includes charges for the following: (i) the write-off
of goodwill and other intangibles, (ii) reserves
--------------------------------------------------------------------------------
10
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
on property, plant and equipment, (iii) customer accounts and notes receivable
settlement costs, (iv) employee termination costs, (v) inventory and
non-inventory purchase commitments, (vi) anticipated losses from operations
during a no more than twelve month transition period, (vii) facility exit and
lease termination costs, (viii) expenses to be incurred to fulfill contractual
obligations existing prior to the formal disposal date and (ix) a valuation
allowance for related deferred tax assets.
4. Restricted Cash
Restricted cash at September 30, 2001 consisted of term deposits pledged as
collateral to secure letters of credit substantially all of which expire in less
than one year.
5. Accounts Receivable
Accounts receivable related to continuing operations consist of:
September 30, December 31,
2001 2000
------------- ------------
Trade receivables........................ $ 19,175 $ 38,477
Less: allowance for doubtful accounts.... (4,106) (3,639)
------------ ------------
$ 15,069 $ 34,838
============ ============
6. Inventories
Inventories related to continuing operations consist of:
September 30, December 31,
2001 2000
------------- ------------
Raw materials.......................... $ 6,509 $ 8,550
Work-in-process........................ 2,006 4,120
Finished goods......................... 3,869 1,447
----------- ------------
$ 12,384 $ 14,117
=========== ============
7. Other Assets and Comprehensive Income (Loss)
Included in Other Assets related to continuing operations is the Company's
remaining investment in Western Multiplex Corporation ("MUX"), a former
subsidiary, of which the Company sold 95% of the equity in November 1999. During
the three and nine months ended September 30, 2001, the Company sold 420,700 and
1,636,200 shares of MUX stock at a pre-tax gain of $1.6 million and $13.5
million respectively. As of September 30, 2001, the Company had approximately
260,000 shares remaining in its investment in MUX. As of September 30, 2001, the
market value of the Company's remaining interest in MUX has appreciated.
Accordingly, as of September 30, 2001, the Company recorded in comprehensive
income a cumulative unrealized holding gain of approximately $760,000 on the
remaining shares of this available-for-sale security.
During the first quarter of 2001, the Company recorded a pre-tax impairment
charge of approximately $900,000 related to the decline in value deemed to be
other than temporary on an additional available-for-sale security held by the
Company. During the third quarter 2001, the Company recorded a permanent
impairment charge of approximately $1.0 million on its available-for-sale
securities. Comprehensive loss was $(2.7) million and $(277.7) million,
respectively, for the three and nine months ended September 30, 2001.
--------------------------------------------------------------------------------
11
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
Available-For-Sale Securities
-----------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Marketable equity securities as of
September 30, 2001...................... $470 $759 $--- $1,229
Further, through October 17, 2001, the Company has sold an additional 30,400
shares of Western Multiplex securities at a pre-tax gain of approximately
$85,000. The estimated fair value of the Company's remaining available-for-sale
marketable equity securities at October 17, 2001 totaled approximately $850,000.
8. Income Taxes
The Company's consolidated income tax provision (benefit) was different from the
amount computed using the U.S. statutory income tax rate for the following
reasons:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2001 2000 2001 2000
--------- -------- -------- ---------
Income tax provision (benefit) at U.S. statutory rate..... $ (809) $ 4,874 $(3,558) $ 7,727
Change in valuation allowance............................. 263 50 31,137 100
Foreign taxes at rates other than U.S. statutory rate..... --- 90 --- 258
U.S. Research and Experimentation Credit.................. --- (50) --- (100)
Provision (benefit) from foreign sales corporation........ 50 --- --- (150)
Acquired subsidiary purchase price adjustment
resulting from escrow settlement....................... --- (4,010) --- (4,010)
Other..................................................... 5 34 35 103
------- -------- ------- -------
Income tax provision (benefit) ........................... $ (491) $ 988 $27,614 $ 3,928
======= ======== ======= =======
9. Income (Loss) from Continuing Operations per Common Share
The following table sets forth the computation of income (loss) from continuing
operations per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
----------- -------- ---------- --------
Numerator:
Net income (loss) from continuing operations....... $ (1,821) $12,938 $ (37,776) $ 18,150
Denominator:
Denominator for basic income (loss) from
continuing operations per share -
weighted average shares.......................... 64,957 64,424 64,785 63,979
Effect of dilutive securities:
stock options...................................... --- 2,660 --- 3,111
--------- ------- --------- --------
Denominator for diluted income (loss) from
continuing operations per share-adjusted
weighted average shares and assumed conversions.... 64,957 67,084 64,785 67,090
========= ======= ========= ========
Income (loss) from continuing operations
per weighted average common share.................. $ (0.03) $ 0.20 $ (0.58) $ 0.28
========= ======= ========= ========
Income (loss) from continuing operations
per common share-assuming dilution................. $ (0.03) $ 0.19 $ (0.58) $ 0.27
========= ======= ========= ========
--------------------------------------------------------------------------------
12
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONDOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
10. Segment Reporting
As a result of the Company's decision to dispose of its Wireless Messaging
(Paging) segment, (See Note 3), the Company operates in one segment as of
September 30, 2001. The Enhanced Services Platform/Unified Communications
product segment consists of a Modular Voice Processing system which enables
cellular, personal communication service, wireline and wireless messaging
(paging) network operators to offer their subscribers value-added services that
enhance and complement their core communication products.
11. Contingent Liability
On November 1, 1999 the Company sold 95% of the equity in its microwave radio
business, MUX. The Company is contingently liable for MUX's building lease
payments through June 2006. The maximum contingent liability as of September 30,
2001 for these obligations is approximately $3.0 million.
12. Escrow Settlement
In November 1997, the Company acquired Wireless Access, Inc. ("WAI"), a
developer of two-way paging devices. During the third quarter 2000, the Company
entered into an escrow settlement with the former WAI shareholders. The
Acquisition Agreement ("the Agreement") between the Company and the former WAI
shareholders provided that $12 million of the purchase price would be placed in
escrow for the purpose of satisfying any claims of indemnity that the Company
might make. The Agreement contained representations and warranties by the former
shareholders of WAI that its AccessMate and AccessLink II pager products, which
at the time of the acquisition were under development, would be manufactured in
specified quantities and by dates set forth in the Agreement. The Agreement
further provided that the WAI shareholders would indemnify the Company in the
event that these pager products did not comply with the manufacture dates and
products specifications. In February 1999, the Company made an indemnity claim
against the former WAI shareholders for the entire amount of the escrow on the
ground that WAI failed to comply with or was late in complying with the
manufacture dates and product specifications. In August of 2000, the Company and
the former shareholders entered into a settlement agreement that disbursed $11.5
million of the escrow funds, including accrued interest, to the Company. As part
of this settlement the former WAI shareholders were disbursed $2.1 million of
the funds, including accrued interest. The Company incurred approximately
$600,000 of costs which have been netted against the proceeds received. As all
of the goodwill and other intangibles related to the WAI acquisition were
determined to be impaired and were written off in the third quarter 1999, the
net proceeds from the escrow settlement of $10.9 million are included in the
Company's condensed statements of operations for both the three months and nine
months ended September 30, 2000.
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Glenayre Technologies, Inc. and Subsidiaries
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
For almost 40 years, the Company has developed and provided carrier-grade
communications systems for the global market. These products offer enhanced
services platforms and unified communications solutions that allow wireless and
fixed service providers to support next generation messaging through traditional
and internet protocol telephony networks. The Company's product portfolio
leverages open Application Programming Interfaces, allowing service providers to
offer leading-edge unified communications services that integrate voice mail,
fax and e-mail messaging capabilities with features such as voice activated
services and find me/follow-me services to generate new revenue streams.
Results of Discontinued Operations
In May 2001, the Company began exiting its Wireless Messaging (Paging) business
and refocusing all of its strategic efforts on the Enhanced Services
Platform/Unified Communication systems business segment based in Atlanta,
Georgia. The Company's decision to abandon its Wireless Messaging (Paging)
segment was due to a rapid decline in both the paging infrastructure market and
certain paging carriers' financial health, as well as concerns about the impact
of the ongoing ReFLEX operator consolidation on channels for the device market.
The Company's paging infrastructure revenue declined over 27% in 2000 from 1999
and the Company anticipates 2001 paging infrastructure revenue to decline over
70% from 2000 levels due to a dramatic market contraction. Wireless Messaging
(Paging) revenues for 2001 are expected to be approximately $35 million. The
decision to abandon the Wireless Messaging (Paging) segment was based on the
Company's inability to continue funding the investments required to position
itself for the future of the wireless messaging (paging) market.
In the second quarter 2001, the Wireless Messaging (Paging) segment began being
reported as a disposal of a segment of business. Accordingly, the operating
results of the Wireless Messaging (Paging) segment have been classified as a
discontinued operation for all periods presented in the Company's consolidated
statements of operations. Additionally, the Company has reported all of the
Wireless Messaging (Paging) segment assets at their estimated net realizable
value in the Company's condensed consolidated balance sheet as of September 30,
2001. The Company believes all business transactions related to the Wireless
Messaging (Paging) segment, with the exception of existing contractual
obligations, will cease by May 2002.
Results for discontinued operations are set out in Note 3 to the Condensed
Consolidated Financial Statements in Item 1 above.
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Results of Continuing Operations
The following table sets forth for the periods indicated the percentage of net
sales of continuing operations represented by certain line items from Glenayre's
consolidated statements of operations:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------
2001 2000 2001 2000
------------ ------------ ----------- -----------
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................. 37.7 38.9 41.9 37.2
----- ----- ------ ----
Gross profit .............................. 62.3 61.1 58.1 62.8
Operating expenses:
Selling, general and administrative ....... 38.6 31.7 41.9 33.6
Provision for doubtful receivables ........ 3.7 2.8 2.0 1.4
Research and development .................. 19.2 15.5 20.6 13.6
Depreciation expense ...................... 9.4 6.8 8.9 7.6
Restructuring expense ..................... 6.1 --- 14.2 ---
Adjustment to loss on sale of business .... --- --- * (0.6)
----- ----- ------ -----
Total operating expenses .............. 114.7 95.8 129.5 55.6
----- ----- ------ -----
Income (loss) from operations ................. (14.7) 4.2 (29.5) 7.2
Interest, net ................................. 3.4 4.8 4.3 5.1
Gain (loss) on disposal of assets ............. * * (2.3) *
Realized gain (loss) on available-for-sale
securities, net ............................ 2.8 --- 15.3 ---
Escrow settlement ............................. --- 31.5 --- 12.9
Other, net .................................... (1.7) * (1.2) *
----- ----- ------ -----
Income (loss) from continuing operations before
income taxes .............................. (10.2) 40.3 (13.4) 24.1
Provision (benefit) for income taxes .......... (2.2) 2.9 36.3 4.3
----- ----- ------ -----
Income (loss) from continuing operations ...... (8.0)% 37.5% (49.7)% 19.8%
===== ===== ====== =====
---------------------------
* less than 0.5
Three and Nine Months Ended September 30, 2001 and 2000
Net Sales. Net sales for the three months ended September 30, 2001 decreased 34%
to $22.6 million as compared to $34.5 million for the three months ended
September 30, 2000. Net sales decreased 17% and were $76.1 million and $91.6
million for the nine months ended September 30, 2001 and 2000, respectively.
International sales (sales outside the United States) were approximately $5
million for the three months ended September 30, 2001 as compared to
approximately $7 million for the three months ended September 30, 2000 and
accounted for 22% and 20% of net sales for the three months ended September 30,
2001 and 2000, respectively. International sales were approximately $12 million
for the nine months ended September 30, 2001 as compared to approximately $28.1
million for the nine months ended September 30, 2000 and accounted for 16% and
31% of net sales for the nine months ended September 30, 2001 and 2000,
respectively.
The decrease in net sales for the three months and nine months ended September
30, 2001 as compared to the same periods in 2000 is primarily due to the decline
in North American carrier spending and decreased revenues from the Company's
abandoned prepaid product line which was eliminated as part of the Company's
second quarter 2001 restructuring. The Company anticipates fourth quarter 2001
revenues will remain approximately flat as compared to the third quarter 2001,
while expecting moderate revenue growth to resume in the second half of 2002.
These are forward-looking statements that are
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Glenayre Technologies, Inc. and Subsidiaries
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subject to the factors discussed in the cautionary statement attached as Exhibit
99 to this Form 10-Q. There can be no assurance that the Company's sales levels
or growth will remain at, reach or exceed historical levels in any future
period.
There were three customers who individually accounted for 25%, 14% and 13% and
30%, 13% and 14% of net sales for the three and nine months ended September 30,
2001, respectively. One other customer accounted for approximately 11% of net
sales for the three months ended September 30, 2001. There were two customers
who individually accounted for approximately 18% and 17% and 16% and 14% of net
sales for the three and nine months ended September 30, 2000, respectively. Two
other customers individually accounted for approximately 13% of net sales for
the three months ended September 30, 2000.
Gross Profit. Gross profit margins remained consistent at 62% and 61% for the
three months ended September 30, 2001 and 2000, respectively. Gross profit
margins were 58% and 63% for the nine months ended September 30, 2001 and 2000,
respectively. The decline is primarily a result of inventory obsolescence
charges recorded in the first quarter 2001 relating to the Company's prepaid
product lines as a result of lower sales forecasts partially offset by higher
mix of software upgrades which generally have higher margins. 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) changes in material
costs and other components of cost of sales.
Selling, General and Administrative Expense. Selling, general and administrative
expenses were $8.7 million and $11.0 million for the three months ended
September 30, 2001 and 2000, respectively. The decrease is primarily due to the
reduced cost structure associated with the 2001 restructuring activities and
reversal of employee incentive bonus expense recorded during the first and
second quarters of 2001. Selling, general and administrative expenses were $31.9
million and $30.8 million for the nine months ended September 30, 2001 and 2000,
respectively. The increase in the nine months ended 2001 is primarily
attributable to increased employee related costs in the first quarter of 2001 in
the Company's quality, technical operations and marketing functions partially
offset by the reduced expenses from the third quarter of 2001 associated with
the recent restructuring and the reversal of employee incentive bonus expenses.
Research and Development Expense. Research and development expenses were $4.4
million and $5.3 million for the three months ended September 30, 2001 and 2000,
respectively. The decrease is primarily due to lower employee incentive bonus
expenses and reduced subcontracting expenses. Research and development expenses
were $15.6 million and $12.4 million for the nine months ended September 30,
2001 and 2000, respectively. The increase is due to increased employee related
cost associated with additional headcount. The Company relies on its research
and development programs for new products and the improvement of existing
products for the growth in net sales. Research and development costs are
expensed as incurred.
Provision for Doubtful Receivables. The provision for doubtful receivables
remained relatively unchanged at $838,000 and $977,000 for the three months
ended September 30, 2001 and 2000, respectively and $1.6 million and $1.3
million for the nine months ended September 30, 2001 and 2000, respectively.
Depreciation. Depreciation expense remained relatively flat at $2.1 million and
$2.4 million for the three months ended September 30, 2001 and 2000,
respectively, and $6.8 million and $6.9 million for the nine months ended
September 30, 2001 and 2000, respectively.
Restructuring Expense. In connection with the phase out of the Company's prepaid
product line and the relocation of the Corporate headquarters from Charlotte,
North Carolina to Atlanta, Georgia, the Company recorded during the second and
third quarter 2001 pre-tax restructuring charges of
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Glenayre Technologies, Inc. and Subsidiaries
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approximately $11.2 million and $1.4 million, respectively. Information about
restructuring expense is set out in Note 2 to the Condensed Consolidated
Financial Statements in Item 1 above.
Interest Income, Net. Interest income, net was $770,000 and $1.7 million for the
three months ended September 30, 2001 and 2000, respectively, and $3.3 million
and $4.6 million for the nine months ended September 30, 2001 and 2000,
respectively. Interest earned for the three and nine months ended September 30,
2001 is lower primarily due to decreased cash and cash equivalent investment
balances and lower yields on investment instruments during 2001 offset partially
by interest earned through May 2001 on the Company's one remaining customer
financing commitment.
Escrow Settlement. In November 1997, the Company acquired Wireless Access, Inc.
("WAI"), a developer of two-way paging devices. During the third quarter 2000,
the Company entered into an escrow settlement with the former WAI shareholders.
The Acquisition Agreement ("the Agreement") between the Company and the former
WAI shareholders provided that $12 million of the purchase price would be placed
in escrow for the purpose of satisfying any claims of indemnity that the Company
might make. The Agreement contained representations and warranties by the former
shareholders of WAI that its AccessMate and AccessLink II pager products, which
at the time of the acquisition were under development, would be manufactured in
specified quantities and by dates set forth in the Agreement. The Agreement
further provided that the WAI shareholders would indemnify the Company in the
event that these pager products did not comply with the manufacture dates and
products specifications. In February 1999, the Company made an indemnity claim
against the former WAI shareholders for the entire amount of the escrow on the
ground that WAI failed to comply with or was late in complying with the
manufacture dates and product specifications. In August of 2000, the Company and
the former shareholders entered into a settlement agreement that disbursed $11.5
million of the escrow funds, including accrued interest, to the Company. As part
of this settlement the former WAI shareholders were disbursed $2.1 million of
the funds, including accrued interest. The Company incurred approximately
$600,000 of costs which have been netted against the proceeds received. As all
of the goodwill and other intangibles related to the WAI acquisition were
determined to be impaired and were written off in the third quarter 1999, the
net proceeds from the escrow settlement of $10.9 million are included in the
Company's condensed statements of operations for both the three months and nine
months ended September 30, 2000.
Provision for Income Taxes. The effective tax rates for the three and nine
months ended September 30, 2001 and 2000 differed from the combined U.S. federal
and state statutory tax rate of approximately 40% due primarily to (i) the
change in the valuation allowance, (ii) nondeductible goodwill amortization,
(iii) higher tax rates on earnings indefinitely reinvested in certain non-U.S.
jurisdictions and (iv) the non-taxable purchase price adjustment resulting from
an acquired subsidiary escrow settlement.
Financial Condition and Liquidity
Liquidity and Capital Resources. At September 30, 2001 the Company had cash and
cash equivalents and restricted cash totaling $89.4 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit,
substantially all of which expire in less than one year. At September 30, 2001,
Glenayre's principal source of liquidity is $84.9 million of cash and cash
equivalents. The Company's cash generally consists of money market demand
deposits and the Company's cash equivalents generally consist of high-grade
commercial paper, bank certificates of deposit, treasury bills, notes or agency
securities guaranteed by the U.S. government, and repurchase agreements backed
by U.S. government securities with original maturities of three months or less.
The Company expects to use its cash and cash equivalents for working capital and
other general corporate purposes, including the expansion and development of its
existing products and markets and the expansion into complementary
businesses.
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Included in the Company's loss on disposal of discontinued operations (See
Results of Discontinued Operations) for the three and nine months ended
September 30, 2001 are cash charges totaling approximately $49 million for
employee termination benefits, equipment and facility lease termination costs,
inventory and non-inventory purchase commitments, anticipated losses from
operations during a transition period no longer than twelve months and expenses
to be incurred to fulfill contractual obligations existing prior to the formal
disposal date. The Company expects all of the cash payments to be completed by
December 31, 2002 with the exception of contractual obligations and lease
termination costs which could extend through 2006. The Company's discontinued
operations transition team is currently working on opportunities that may reduce
the length of time cash payments are required for these obligations. As of
September 30, 2001, the Company has paid approximately $17 million of
discontinued operations obligations.
Included in the Company's three and nine months ended September 30, 2001 losses
from continuing operations are cash restructuring charges (See Note 2 to the
Company's Condensed Consolidated Financial Statements) totaling approximately
$9.1 million for employee termination benefits, prepaid product contractual
obligations and consolidation and facility exit costs. The Company anticipates
all of the cash payments for this restructuring charge will be made within the
next nine months with the exception of lease termination costs which could
require cash payments through 2005 if a sublessee is not obtained. As of
September 30, 2001, the Company has paid out approximately $2.3 million of the
restructuring obligations.
Accounts receivable decreased $19.7 million to $15.1 million at September 30,
2001 from $34.8 million at December 31, 2000. Average days sales outstanding at
September 30, 2001 were approximately 71 days as compared to 110 days at
December 31, 2000. The decrease in accounts receivable is primarily due to the
decline in sales in the third quarter of 2001 as compared to the second quarter
of 2001 and the Company's continued effort to focus on its cash collection
efforts as exemplified by the sharp reduction in average days sales outstanding.
Accounts payable decreased $19.1 million to $6.1 million at September 30, 2001
compared to $25.2 million at December 31, 2000 primarily as a result of
decreased inventory purchases. Accrued liabilities at September 30, 2001
increased from December 31, 2000 primarily due to reserves recorded for the loss
on discontinued operations and restructuring charges offset partially by a
reduction in long term international project accruals and employee incentive
accruals as a result of payments made in 2001 for bonuses earned in 2000.
In December 2000, the Board of Directors of the Company rescinded its dormant
stock repurchase program authorized in September 1996 and authorized the
repurchase of up to 3 million shares of the Company's common stock. As of
December 31, 2000, the Company had repurchased 12,500 shares at a total cost of
approximately $40,000. During the nine months ended September 30, 2001, the
Company purchased an additional 81,500 shares at a total cost of approximately
$70,000.
In 1999, the Company consolidated its manufacturing activities in Quincy,
Illinois and ceased manufacturing activities in its Vancouver, B.C. facility but
continued to utilize the Vancouver facility for engineering, product management
and customer service functions. Further, the Company continued its expansion of
an office tower in Vancouver with the intention of a subsequent sale of all of
its Vancouver facilities and partial lease back of the new office tower to meet
its ongoing operational needs. However, as a result of the Company's decision to
exit its Wireless Messaging (Paging) segment in the second quarter of 2001, it
no longer has significant operational requirements for its Vancouver facilities
and no longer plans to lease back a portion of these facilities. In 2000, the
Company spent approximately $8 million related to the Vancouver new office tower
development. During the nine months ended September 30, 2001, the Company spent
approximately $7 million related to the office tower development. The Company
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Glenayre Technologies, Inc. and Subsidiaries
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believes it may need to spend an additional $2.5 million to prepare the office
tower for its anticipated sale. The Company owns its facilities in Vancouver,
Singapore, Quincy and Atlanta and is continuing its efforts to divest its real
estate holdings which may generate up to approximately $30 million in additional
cash.
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 its discontinued operations and (ii) to repurchase
common stock as discussed above. Company management believes that, if needed, it
can establish borrowing arrangements with lending institutions.
Income Tax Matters. Glenayre's recent cash outlays for taxes have been limited
primarily to foreign income taxes due to current losses. The Company's cash
outlay for taxes is not expected to be significant in the fourth quarter of 2001
or 2002 due to current losses and net operating loss carryforwards.
During the second quarter 2001, management assessed the realizability of the
Company's net deferred tax asset of $117.1 million and determined that a
valuation allowance of $117.1 million was necessary as of June 30, 2001.
Management reached this conclusion based on the fact that the Company has
incurred cumulative losses in recent years, including a significant loss in the
quarter ended June 30, 2001, and that its remaining restructured business does
not provide a historical basis for projecting future taxable income.
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Glenayre Technologies, Inc. and Subsidiaries
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk arising from adverse changes in interest
rates and foreign currency exchange rates. The Company's investment policy
requires investment of surplus cash in high-grade commercial paper, bank
certificates of deposits, Treasury bills, notes or agency securities guaranteed
by the U.S. Government and repurchase agreements backed by U.S Government
securities. The Company typically invests its surplus cash in these types of
securities for periods of relatively short duration. Although the Company is
exposed to market risk related to changes in short-term interest rates on these
investments, the Company manages these risks by closely monitoring market
interest rates and the duration of its investments. Due to the short-term
duration and the limited dollar amounts exposed to market interest rates,
management believes that fluctuations in short-term interest rates will not have
a material adverse effect on the Company's results of operations. Although a
substantial portion of the Company's annual sales are negotiated in United
States dollars, certain contracts in the normal course of business are
negotiated in a foreign currency. When appropriate, the Company may seek to
mitigate its currency exchange fluctuation risk by entering into currency
hedging transactions. Due to the limited amount of such hedging transactions,
management believes that fluctuations in currency exchange rates will not have a
material adverse effect on the Company's results of operations. The Company does
not enter into financial investments for speculation or trading purposes and is
not a party to any financial or commodity derivatives.
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20
PART II - OTHER INFORMATION
ITEMS 1 through 5 are inapplicable and have been omitted.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 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), William W. Edwards (dated February 3,
2000), Kenneth R. Berger (dated February 3, 2000),
Wayne G. Chester (dated September 1, 2000) and Debra
Ziola (dated August 1, 2001) are identical, in all
material respects, with the Ellison Agreement and
are not filed as exhibits.*
Exhibit 15 Letter regarding unaudited interim financial
information.
Exhibit 99 Cautionary statement under safe harbor provisions of
the Private Securities Litigation Reform Act of
1995.
_______________________
*Management contract.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Glenayre Technologies, Inc.
--------------------------------
(Registrant)
/s/ Debra Ziola
--------------------------------
Debra Ziola
Senior Vice President and
Interim Chief Financial Officer
(Principal Financial Officer)
Date: November 2, 2001
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22