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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, 2001
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 98-0085742
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11360 LAKEFIELD DRIVE, DULUTH, GEORGIA 30097
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(Address of principal executive offices) Zip Code
(770) 283-1000
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(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
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COMMON STOCK, $.02 PAR VALUE
RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, $.01 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 27, 2002 was approximately $131.6 million. The number of
shares of the Registrant's common stock outstanding on March 27, 2002 was
65,280,821.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Location in Form 10-K
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Proxy Statement for 2001 Annual Meeting of Stockholders Part III
PART I
ITEM 1. BUSINESS
OVERVIEW
Glenayre Technologies, Inc. was incorporated in Delaware on September 21, 1987,
and is the successor to a corporation organized on April 7, 1945. During 2001,
the Company moved its headquarters from Charlotte, North Carolina to its
existing offices in the Atlanta, Georgia area. The principal executive offices
are located at 11360 Lakefield Drive, Duluth, Georgia, 30097. The Company's
telephone number is (770) 283-1000. The term "Glenayre" or the "Company" as used
hereinafter means Glenayre Technologies, Inc. and its subsidiaries.
With its roots in the paging infrastructure market and over a decade of
experience in voice messaging solutions, the Company is an established provider
of communications messaging systems consisting of Enhanced Services and Unified
Communications solutions and products for communications service providers
(CSPs), including wireless, traditional and broadband carriers. The Company's
solutions make it possible for CSPs to provide network-based messaging services
to large numbers of customers.. The Company's Enhanced Services and Unified
Communications platforms include a broad range of integrated messaging and
personal communications applications, such as call answering, voice messaging,
fax messaging and unified communications. The Company's Unified Communications
platform allows CSPs to provide their subscribers access to voice, fax and
e-mail messages in a single mailbox which can be accessed with a web browser, a
wireless personal digital assistant ("PDA") or any mobile, wireless or wireline
telephone. Subscribers can create, send and receive messages, and they can be
notified that they have received voice, fax and e-mail messages.
In May 2001, the Company decided to exit its Wireless Messaging (Paging)
business, which was focused on selling paging infrastructure equipment, two-way
messaging devices and applications to paging carriers. As a result, the Wireless
Messaging (Paging) segment was reported as a disposal of a segment of business
in the second quarter 2001 and 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
consolidated balance sheet as of December 31, 2001. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Discontinued
Operations".
Prior to May 2001, the Company was primarily focused on its Wireless Messaging
(Paging) business and was categorized as a telecommunications equipment
manufacturer. With the Company's new strategy to focus entirely on its Enhanced
Services and Unified Communications platforms, the Company now participates in
the communications software industry.
The Company's market for Enhanced Services and Unified Communications solutions
consists of wireless carriers, fixed network operators and providers of
broadband services that deliver services to individual subscribers and
enterprise customers, generally through a monthly service fee or on a
pay-per-usage basis. The Company emphasizes speech recognition and
text-to-speech capabilities that allow subscribers to use spoken commands,
rather than a touch-tone keypad, to interact with their messaging services, and
makes it possible to listen to e-mail messages that are converted to speech. The
Company believes demand for these voice-enabled services is increasing
worldwide, driven by the growth of wireless services and the need for "hands
free" applications.
The Company employs a direct sales force with 9 offices around the world to
market its Enhanced Services and Unified Communications platforms. The Company
also sells its products in cooperation with international vendors of
telecommunications infrastructure equipment such as Nortel and Motorola.
The Company believes that it is third in global market-share among providers of
large capacity messaging systems for wireless and fixed network communications
service providers. More than 200 service providers in over 60 countries have
deployed Glenayre messaging solutions for voice, fax and e-mail messaging,
including one-number services, voice navigation and voice dialing, mailbox
out-dialing and one-touch call return. Major service providers using the
Company's systems include Nextel Communications ("Nextel"), Voice Stream,
Verizon Wireless ("Verizon"), Alltel, US Cellular, Cricket Communications
("Cricket"), KPN Telecom ("KPN"), Cosmote, Smart and Starhub.
2
The Company's focus is on supplying carrier grade large-capacity Enhanced
Services systems. These service providers benefit from the ability to offer
their customers, often on a subscription or pay-per-use basis, a variety of
revenue-generating services provided by the Company's systems, such as automated
call answering, voice and fax messaging, Unified Communications (voice, fax and
e-mail in a single mailbox, media conversion such as converting an e-mail from
text to voice and visual mailbox presentation), personal number service, one-key
call return, and voice-controlled services, such as voice-controlled dialing and
voice-controlled messaging. The Company believes that the market for stand alone
voicemail services is maturing and that, increasingly, voicemail services will
be provided as a feature on multi-purpose products, which includes such services
as unified communications, voice services and multimedia capabilities.
VERSERA(TM) SOLUTIONS
The Company's products and applications are packaged and delivered in product
portfolios under the VERSERA(TM) brand family. The Company provides multiple
interfaces to enables access to its applications in a number of ways, including
an Internet-based Graphical User Interface (GUIs), Wireless Application Protocol
(WAP), Short Message Service (SMS), and automated Voice User Interfaces (VUIs)
using speech recognition technology. Glenayre's recently introduced systems are
designed on open platforms with a standards-based architecture supporting both
Internet Protocol (IP) and circuit-switched telephony networks.
Current offerings include the following platforms and applications:
ENHANCED SERVICES PRODUCTS
The Company's carrier grade Enhanced Services systems and software have been
designed and packaged to meet the capacity, reliability, availability,
scalability, maintainability, network and OMAP (Operations, Maintenance,
Administration, and Provisioning) interfaces and physical requirements of large
telecommunications network operators. The systems are offered in a variety of
sizes and configurations and can be clustered for larger capacity installations.
The systems also offer redundancy of critical systems and components to meet
carrier grade reliability requirements.
- - MVP(R)SYSTEM. The Modular Voice Processing (MVP(R)) system is the
Company's core messaging platform for circuit-switched telephony
networks. The MVP(R) system provides network operators with the
enhanced services needed to increase revenues from the current customer
base and to acquire new subscribers.
- - LARGE SOLUTION PLATFORM
The Large Solution platform ("LSp"), which was commercially released in
the fourth quarter of 2001, is designed to enable very large
installations for service providers. Because the LSp is an evolution of
the MVP system, it utilizes virtually all of its components. LSp allows
carriers to grow their systems to support over 5 million subscribers in
a single platform and still protect their capital investment in the MVP
product family.
ENHANCED SERVICES APPLICATIONS
The Versera platform's flexibility allows service providers to choose the number
and combination of Enhanced Services applications to offer subscribers,
including voice, fax, and data messaging, call answering, one-key call return,
voice activated dialing, unified communications, and one number services. These
applications are in great demand by telecommunication carriers as they strive to
differentiate their service offerings and provide value to retain subscribers in
an increasingly competitive environment. Messaging solutions allow
communications service providers to generate revenue from monthly service
subscription fees and, for wireless providers, increased usage and a higher
percentage of completed, billable calls.
- - VOICE MESSAGING (or voice mail) allows users to store, send and receive
information over the telephone. The Company's voice messaging systems
provide call answering, call routing, paging, short message delivery,
dictation and automated attendant features.
- - FAX MESSAGING permits faxes to be sent directly to a subscriber's
mailbox where it is received and stored. The fax can be forwarded to
any fax machine or to other subscribers as part of a fax broadcast or
distribution list.
3
- - CONSTANT TOUCH SERVICE is Glenayre's one number application.
Subscribers combine all personal and business telephone numbers
(messaging device, home, office, cellular and fax) into a single number
that will reach them on any of their numbers while allowing call
screening.
- - CALL OUT(R) ONE TOUCH CALL RETURN feature allows the subscriber to
return calls during a messaging session. After the call is completed,
the subscriber is returned to their mailbox where they can continue
listening to or managing their messages.
- - MY LANGUAGE application enables subscribers to select their preferred
language from a list of available languages when subscribers initialize
their mailbox. This service is vital for service providers operating in
markets with multilingual populations and diverse cultures.
- - INTEGRATED SHORT MESSAGE SERVICE gives service providers the ability to
deliver message waiting notification messages via short text messages
without an external Short Messaging Service Center (SMSC) using an MVP.
- - DIAL BY VOICE allows voice activated dialing enabling subscribers to
place calls using spoken commands, such as saying a name from their
address book, rather than the touch-tone keypad on the telephone. The
use of Dial by Voice addresses safety concerns and regulatory issues
driving hands free legislation around the world.
- - VOICE CONTROL of the Personal Address Book, also known as My Contacts,
allows subscribers to create, edit and delete contacts in their address
book using spoken commands.
- - VOICE NAVIGATION is a service that allows subscribers to navigate their
mailbox using voice commands to manage voice and fax messaging, e-mail
and Unified Communications applications.
VERSERA(TM) UNIFIED COMMUNICATIONS
UNIFIED COMMUNICATIONS allow subscribers to access voice, fax and e-mail
messages from a single mailbox. Subscribers can create, send, receive and be
notified of voice, fax and e-mail messages with a web browser, a wireless
personal digital assistant ("PDA") or any mobile, wireless or wireline
telephone.
- - MY SERVICES is the service configuration manager associated with the
Company's Unified Communications applications.
- - MY MAILBOX is the integrated inbox provided to subscribers of Unified
Communications services.
- - MY CONTACTS is the personal address book provided to subscribers of
unified communications services enabling them to add, delete or edit
contacts.
PROFESSIONAL SERVICES
The Company offers an array of professional services such as:
- - THE STRATEGIST PROGRAM. The Company provides its customers, through its
marketing Strategist program, with support services including marketing
consultation, seminars and materials designed to assist them in
marketing enhanced telecommunications services, and also undertakes an
ongoing supporting role in their business and market planning
processes.
- - GLENAYRE CARE. The Company offers extended warranty and support service
for its products and services to customers as Glenayre Care.
- - GLENAYRE TECHNICAL TRAINING. Through the Technical Training program,
the Company provides a variety of technical training courses for
customers, including education on system maintenance, management and
configuration.
- - OTHER SERVICES. The Company offers a variety of other specialized
services to its customers including installation, project management
and customization.
4
MARKETS, SALES AND MARKETING
The Company's products and services are marketed globally through the Company's
direct sales force and a number of leading international vendors of
telecommunications infrastructure equipment. The Company estimates that it is
currently third in global market share for large capacity messaging systems for
wireless and fixed network operators around the world.
More than 200 service providers in over 60 countries have deployed Glenayre
messaging solutions for voice, fax and e-mail messaging, including one-number
services, voice navigation and voice dialing, mailbox out-dialing and one-touch
call return. Major service providers using the Company's systems include Nextel,
Voice Stream, Verizon, Alltel, US Cellular, Cricket, KPN, Cosmote, Smart and
Starhub.
Glenayre maintains sales offices throughout the United States. The Company has
sales offices located outside the United States in the following foreign
locations:
AMERICAS EUROPE AND MIDDLE EAST ASIA
Mexico City, Mexico Amsterdam, Netherlands Singapore
Sao Paulo, Brazil Milton Keynes, England Manila, Philippines
Dubai, United Arab Emirates Beijing, China
Glenayre has staffed each of these international offices with local,
multilingual personnel. See Note 9 to the Company's Consolidated Financial
Statements for information relating to export sales.
The Company provides its customers, through its marketing Strategist program,
with support services including marketing consultation, seminars and materials
designed to assist them in marketing enhanced telecommunications services, and
also undertakes to play an ongoing supporting role in their business and market
planning processes.
The Company has emphasized its voice recognition capabilities to allow its
systems end users to interact with their systems using only their voices. The
Company believes demand for this functionality is increasing as a result of the
worldwide growth of wireless networks whose subscribers find value in "hands
free" interactive applications.
The Company is also focused on systems marketed to telecommunications service
providers. Such systems are used to provide a variety of automated services to
reduce costs, such as advanced revenue generating calling features, multi-media
portals, voice mail, text messaging, Internet connectivity and voice dialing.
COMPETITION
Competition in the market for Enhanced Services and Unified Communications has
increased significantly in the past year, with more entrants offering broad
ranges of features and capacities including voice messaging, fax messaging,
e-mail and multimedia, as well as voice activated services and voice portals.
The basis for competition in the Company's markets is product-based, with focus
on technology, features and functionality as well as system capacity and
reliability. Service and support are also strong influences in purchase
decisions, as service providers seek suppliers that are easy to do business
with, that can demonstrate a thorough understanding of the issues and concerns
facing the service provider market and that possess the capability to integrate
systems with a variety of central office and cellular switches, IP networks and
other communications systems. Additional competitive drivers are marketing and
distribution capability and price. Glenayre believes that its product offerings
and services meet these criteria and that the Company demonstrates leadership in
innovation, service and support of Enhanced Services and Unified Communications
solutions for the global carrier market.
The Company's traditional competitors are suppliers of messaging and enhanced
services solutions, including, Comverse Technologies, Inc., SS8's Centigram
(acquired from ADC Telecommunication in 2001), Unisys Corporation, the Octel
Messaging division of Lucent Technologies, Inc., OpenWave, Tecnomen and
Schlumberger-Sema. Additional competitors have emerged from the voice portal and
voice services market, including BeVocal, TellMe, HeyAnita and InterVoice-Brite.
Many of the Company's competitors have substantially greater financial,
technical, marketing and distribution resources than Glenayre and Glenayre may
be unable to successfully compete with these companies for the sale of its
Enhanced Services and Unified Communications products.
5
SERVICE AND SUPPORT
Glenayre has a strong commitment to supporting its customers through all phases
of product ownership. The Company's products, which are installed in the service
providers' telecommunications network, are expected to deliver an exceptional
level of system availability and uptime with minimal outages. To ensure that our
customers achieve this high level of carrier-grade functionality, the Company
provides extended warranty and support services for customers on a regular basis
through our Glenayre Care support program. Additional services available to
customers include installation, project management of turnkey systems, training,
and customization.
Glenayre customers come to depend upon the Company not only for installation,
system optimization, warranty and post-warranty services available 24 x 7, but
also for training and marketing support. The Company believes that reliable,
proactive service and education for customers helps solidify customer
relationships so that the Company is considered the vendor of choice as our
customers' businesses grow and expand. The Company provides education for our
customers through Glenayre Technical Training programs and the Strategist
Program. Glenayre also provides services to help customers successfully localize
and customize their service offerings, and to assist with marketing Enhanced
Services and Unified Communications solutions. This support is delivered through
the Company's Strategist Program, for which all customers are eligible.
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. Currently, the Company has 90 service
representatives in 8 locations around the world.
CUSTOMERS
Glenayre sells its products and services both directly to end user customers as
well as through original equipment manufacturer (OEM) partners. Glenayre's
customers include communication service providers (CSPs) worldwide, including
wireless and fixed network telecommunications carriers, Internet service
providers, broadband service providers and cable operators. In the United
States, customers include the regional Bell operating companies, PCS carriers
and cellular carriers. Internationally, customers include public telephone and
telegraph companies, cellular carriers as well as private telecommunication
service providers servicing cellular and PCS carriers.
During 2001, Nextel , Nortel Networks ("Nortel"), an OEM partner, Verizon and
Cricket individually accounted for approximately 24%, 18%, 13% and 8%,
respectively, of the Company's total revenue from continuing operations. Nortel
sells the Company's products to several end user customers including Voice
Stream whose purchases of Glenayre's products from Nortel represented
approximately 14% of the Company's total revenues in 2001. In 2000, Nortel and
Nextel individually accounted for approximately 17% and 14%, respectively, of
the Company's total revenue from continuing operations. Nextel, Nokia
Telecommunications ("Nokia"), an OEM partner, and KPN each individually
accounted for approximately 11% of the Company's total revenue from continuing
operations in 1999. Nokia sells the Company's products to several end user
customers. There can be no assurance that these significant customers will
continue to purchase systems and services from the Company at current levels in
the future, and the loss of one or more of these significant customers could
have a material adverse effect on the Company's business, financial condition or
results of operations.
RESEARCH AND DEVELOPMENT
Glenayre has consistently developed innovative products and solutions for the
communications industry, and has often been the first to bring such products to
market. The Company recognizes that the pace of technological change within the
communications industry makes continuing its tradition of innovation and
sustaining its ability to develop competitive products through its research and
development efforts essential elements of the Company's future success. The
Company maintains its strong commitment to research and development and expects
to continue to make significant investments in product development to drive
introductions of new products and enhancements to existing products at
competitive prices within the appropriate market windows, to provide
opportunities for future growth into new market segments and expand the
Company's addressable market.
The Company's research and development efforts include identifying and
responding to emerging technological trends, developing competitive products,
enhancing existing products with added features and functionality and
differentiating those products from our competitors. Key components of the
Company's development strategy include the promotion
6
of a close internal relationship between its product development staff,
manufacturing and marketing personnel, and building external relationships with
Glenayre's customers and alliance partners. During 2001, the principal new
products and enhancements developed and offered by the Company included the
introduction of the Large Solution platform, Unified Communication Solution and
the next Enhanced Services core software release X.9.
Glenayre's research and development group is located in Atlanta, Georgia. Total
research and development costs for the Company were $19.7 million, $18.5 million
and $14.1 million or 20%, 15% and 17% of total revenues for 2001, 2000 and 1999,
respectively. 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. In addition, many of our
competitors have greater financial and technical resources and, accordingly,
make larger investments in research and development.
INTERNATIONAL SALES
International business represents an important component of Glenayre's sales. In
2001, approximately 19% of total revenues from continuing operations 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 and, to a
lesser extent, exchange rate fluctuations. Although a substantial portion of
2001 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.
Accordingly, the Company may seek 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 Enhanced Services and Unified Communications
products at the Company's facility in Quincy, Illinois. In January 2002, the
Company sold the Quincy facility and entered into a five-year lease for a
portion of the facility. (See Item 2. Properties). With the exit of the wireless
messaging business, the Company no longer utilized the full manufacturing
capacity of the Quincy facility. The Company believes that the portion of the
Quincy facility currently under lease is adequate for current and immediate
future manufacturing needs.
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 (i) electronic
components such as resistors, capacitors, transistors and semiconductors such as
field programmable gate arrays, digital signal processors and microprocessors,
(ii) mechanical materials such as cabinets in which the systems are housed, and
(iii) 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 that the products comply with the
customer's specifications prior to shipment to the customer. The Company
utilizes Materials Resource Planning ("MRP") systems for production planning in
its manufacturing operations.
The Company believes in setting high standards of quality throughout all of its
operations. The Company has certification to the ISO 9001 international standard
for quality assurance in areas including design, manufacture, assembly and
service for both the Quincy, Illinois and Atlanta, Georgia facilities.
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.
7
INTELLECTUAL PROPERTY
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 (collectively referred to as its "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 and physical security
measures.
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 trademarks include
"GLENAYRE(R) ", "CONSTANT TOUCH(R)" one number service and "MVP(R)". In
addition, Glenayre has applied for registrations for "Versera", Glenayre's next
generation solutions family and other registered trademarks.
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.
The Company believes its technology does not infringe any third party rights,
however, there can be no assurance that third 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.
BACKLOG
The Company's firm backlog from continuing operations at December 31, 2001 and
2000 was approximately $11.8 million and $17.0 million, respectively. The
Company expects to commence shipment on substantially all of the orders in the
backlog within twelve months of their respective backlog dates. Substantially
all orders on hand as of December 31, 2001 are expected to be shipped during
2002. This is a forward-looking estimate that is subject to substantial change
based on the timing of sales and installation of systems by the Company.
GOVERNMENT REGULATION
Many of Glenayre's products connect to public telecommunications networks.
National, regional and local governments regulate telecommunications networks,
as well as the operations of telecommunication service providers in most
domestic and international markets. In some instances, regulatory requirements
give the Company an opportunity to supply additional product solutions to our
customers. However, in introducing products to a market, there is no assurance
that the Company or its customers will obtain regulatory approval. In addition,
it is always possible that a new regulation, changing political climates, or a
change in the interpretation of existing 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, 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, 2001, the Company and its subsidiaries employed 583 persons,
including 497 in continuing operations and 86 in discontinued operations. The
continuing operations consist of 419 employees based in the United States and 78
employees based in international locations. None of the Company's employees is
represented by collective bargaining agreements and the Company has never
experienced a work stoppage. The Company believes its employee relations to be
good.
8
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
principal facilities used in its continuing operations:
Size Owned Or Lease
Location (Square Feet) Leased Expiration Date Uses
-------- ------------- ------ --------------- ----
Atlanta, Georgia 100,000 75,000 owned Corporate headquarters,
25,000 leased 2005 legal services, information
services, accounting,
finance, sales, service,
marketing, research and
development, and training
facilities.
Quincy, Illinois (1) 154,256(1) 131,334 leased(1) 2006 Manufacturing, service,
accounting, purchasing and
training facilities.
In addition to its sales offices listed above, Glenayre also maintains sales
offices throughout the United States and internationally. See
"Business--Marketing and Sales."
- -------------------
(1) In January 2002, the Company sold its Quincy, Illinois manufacturing
facility and entered into a five-year lease agreement, whereby 131,334 square
feet of the facility were leased for January - May 2002 and 65,656 square feet
for the remainder of the lease term.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in legal proceedings in connection
with its business operations. The Company is not aware of any current claims or
disputes for which an adverse result would have a material effect on the
Company's financial position or future results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
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.
Price Range of
Common Stock
------------
High Low
---- ----
Year Ended December 31, 2001
First Quarter...................................................... $6.000 $1.938
Second Quarter..................................................... 3.150 1.230
Third Quarter...................................................... 1.350 0.530
Fourth Quarter..................................................... 1.720 0.550
Year Ended December 31, 2000
First Quarter...................................................... $30.000 $9.438
Second Quarter..................................................... 17.375 7.281
Third Quarter...................................................... 13.750 8.375
Fourth Quarter..................................................... 11.125 2.563
At March 25, 2002 there were approximately 2,075 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.
10
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, 2001 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 wireless messaging
devices on November 3, 1997. WAI was part of the Wireless Messaging segment that
was discontinued in May, 2001. The results of the acquired companies are
included from the dates of acquisition by the Company except for MUX and WAI,
which are shown as discontinued operations in years 1997-1999 and 1997-2001,
respectively. The Selected Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto,
"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)
Year Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ----------- -----------
OPERATING DATA (1):
Total revenues from continuing operations ........... $ 97,501 $ 122,362 $ 84,176 $ 67,724 $ 70,611
Income (loss) from continuing operations before
change in accounting principle .................... (38,008) 5,503 (5,763) (68,437) (32,573)
Discontinued operations ............................. (232,478) 8,599 (122,765) 28,667 39,512
Change in accounting principle ...................... -- -- -- -- (688)
Net income (loss) ................................... (270,486) 14,102 (128,528) (39,770) 6,251
PER SHARE DATA
Per Weighted Average Common Share:
Income (loss) from continuing operations before .....
change in accounting principle .................... (0.59) 0.09 (0.09) (1.11) (0.54)
Net income (loss) ................................... (4.17) 0.22 (2.07) (0.65) 0.10
Per Common Share-Assuming Dilution:
Income (loss) from continuing operations before
change in accounting principle .................... (0.59) 0.08 (0.09) (1.11) (0.54)
Net income (loss) ................................... (4.17) 0.21 (2.07) (0.65) 0.10
At December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- ----------
BALANCE SHEET DATA:
Working capital .................................... $ 66,156 $ 190,105 $ 158,035 $ 154,472 $ 161,454
Total assets ....................................... 179,262 446,086 413,558 561,795 590,161
Long-term debt, including current portion .......... -- -- 669 823 3,747
Stockholders' equity ............................... 95,690 370,927 335,478 462,153 492,359
- --------------
(1) The results for 2001 were impacted by $11.5 million in restructuring charges
and asset impairment charges related to the Company's phase out of its prepaid
product line and the relocation of its headquarters from Charlotte, North
Carolina to Atlanta, Georgia. The results for 2000 were impacted by $10.9
million in net proceeds received from the WAI escrow settlement agreement which
are included in discontinued operations. See Note 13 to the Company's
Consolidated Financial Statements. 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.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. The reader can identify such forward-looking statements by
the use of words such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "intend(s)," "potential,"
"continue," or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing statements.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under "Risk Factors That May Affect Future Results." All forward-looking
statements included in this Report on Form 10-K are based on information
available to the Company on the date hereof. The Company assumes no obligation
to update any forward-looking statements.
OVERVIEW
Glenayre is a global provider of communications messaging systems including
Enhanced Services and Unified Communications solutions and products for service
providers including wireless, fixed network, ISP and broadband. The Company
designs, manufactures, markets and services its products principally under the
Glenayre name. The Company's Enhanced Services and Unified Communications
products include a broad range of integrated messaging and personal
communications services, such as call answering, voice messaging, fax messaging
and unified communications. The Company's Unified Communications platform allows
service providers to provide their subscribers access to voice, fax and e-mail
messages from a single mailbox. Subscribers can create, send, receive and be
notified of voice, fax and e-mail messages with a web browser, a wireless
personal digital assistant ("PDA") or any mobile, wireless or wireline
telephone.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General. The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to customer programs
and incentives, bad debts, inventories, investments, income taxes, warranty
obligations, restructuring and contractual obligations associated with its
discontinued Wireless Messaging (Paging) business. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company believes
the following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Revenue Recognition. The Company recognizes revenues in accordance with the
guidance of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," and with Statement of Position 97-2, "Software Revenue
Recognition," and related interpretations. The Company recognizes revenue for
products sold at the time delivery occurs and collection of the resulting
receivable is deemed probable by the Company. The Company recognizes service
revenues from installation and repair services when such services are provided
to customers. Revenues derived from contractual post-contract support services
are recognized ratably over the contract support period. The Company records
estimated reductions to revenue for customer programs and incentive offerings
including special pricing agreements and other volume-based incentives. If
market conditions were to decline, the Company may take actions to increase
customer incentive offerings possibly resulting in an incremental reduction of
revenue at the time the incentive is offered.
12
The Company's revenue recognition policy is significant because our revenue is a
key component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses, such as commissions and royalties.
The Company follows very specific and detailed guidelines in measuring revenue,
however, certain judgments affect the application of its revenue policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter to quarter and could result in future operating losses.
Bad Debt. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Warranties. The Company provides for the estimated cost of product warranties at
the time revenue is recognized. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from the Company's estimates
revisions to the estimated warranty liability would be required.
Inventory. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Investment in Equity Securities. The Company holds investments in equity
securities, some of which are publicly traded and have highly volatile share
prices. The Company records an impairment charge when it believes an investment
has experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future.
Accrued Restructuring and Wind-Down Cost. During fiscal year 2001, the Company
recorded significant estimated liabilities in connection with the discontinuance
of its Wireless Messaging (Paging) business and the restructuring program
related to its continuing operations. These liabilities include estimates
pertaining to employee separation costs and the settlements of contractual
obligations resulting from these activities. Although the Company does not
anticipate significant changes, the actual costs may differ from these
estimates.
Deferred Taxes. The Company records a valuation allowance to reduce its deferred
tax assets to the amount that is more likely than not to be realized. At
December 31, 2001, the Company's net deferred tax asset of $132.1 million was
fully reserved. The Company has assessed the realizability of the net deferred
asset at December 31, 2001 and determined due to the significant net operating
losses, primarily relating to the Company's discontinued Wireless Messaging
(Paging) business, and that its remaining restructured business does not provide
a historical basis for projecting future taxable income that the entire amount
should be reserved. While the Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event the Company were to determine that it
would be able to realize its deferred tax assets in the future an adjustment to
the deferred tax asset would increase income in the period such determination
was made.
13
DISCONTINUED OPERATIONS
In May 2001, as a result of the rapid decline in both the paging infrastructure
and device market and certain paging carriers' financial health, the Company
adopted a plan to exit the Wireless Messaging (Paging) business. Wireless
messaging products included switches, transmitters, receivers, controllers and
related software and two-way messaging devices. 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
consolidated balance sheet as of December 31, 2001. See Note 2 to the Company's
consolidated financial statements.
During 2001, the Company recorded a loss from discontinued operations of
approximately $232.5 million related to the discontinuance of the Wireless
Messaging (Paging) segment. This loss consists of (i) operating losses of
approximately $46.8 million incurred in the Wireless Messaging (Paging) segment
and (ii) an estimated loss on disposal of the segment of approximately $185.7
million which includes charges for the following: (i) the write-off of goodwill
and other intangibles, (ii) reserves 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 existing contractual obligations and (ix) a valuation
allowance for related deferred tax assets.
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. As of December 31, 2001, the Company reported net realizable
assets of approximately $13 million related to the discontinued operations that
consisted primarily of facilities in Vancouver, Canada and in Singapore that are
currently being marketed for sale. The Company has classified these assets as
non-current due to the uncertainty in the current real estate markets that could
delay disposal of these facilities beyond 2002. The Company reported current
liabilities and non-current liabilities of $27 million and $14 million,
respectively, at December 31, 2001, related to the discontinued Wireless
Messaging (Paging) segment. Approximately $7 million of these liabilities relate
to warranty expense and other operational activities recorded prior to the
discontinuance of the segment. Approximately $34 million of these liabilities
relate to one time charges recorded in the second quarter of 2001 and consist of
i) employee termination costs; ii) lease commitment costs; iii) estimated
operating costs during the wind down period; and iv) other estimated business
exit costs related to meeting customer contractual commitments. The Company
estimates that approximately $20 million of these one time charges will be
disbursed in 2002 and the remaining $14 million in 2003 and beyond. A management
team focused solely on the wind down of the Wireless Messaging (Paging) segment
was put in place during 2001. This team's mandate includes exploring potential
technology sales, liquidating assets, managing contractual commitments with
customers and vendors, and directing the wind down of the operations of the
Wireless Messaging (Paging) activities. Numerous estimates and assumptions were
made in determining the net realizable value related to the discontinued assets
and various obligations noted above. Management will continue to monitor the
progress of the wind down activities, including the current real estate market
conditions, in order to assess the current carrying values of the assets and
liabilities associated with the discontinued operations. These estimates are
subject to adjustment as a result of future changes in real estate market
conditions or in estimates related to the wind down plan.
14
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain line items from Glenayre's consolidated
statements of operations from continuing operations:
Year Ended December 31,
------------------------------------
2001 2000 1999
------- ------ ------
Product sales ............................................................. 84% 90% 88%
Service revenues .......................................................... 16 10 12
------- ------ ------
Total revenues ......................................................... 100 100 100
Cost of sales (exclusive of depreciation and amortization
shown separately below) ................................................ 29 29 33
Cost of services (exclusive of depreciation and amortization
shown separately below) ................................................ 11 10 10
------- ------ ------
Total cost of sales and services (exclusive of depreciation
and amortization shown separately below) ............................. 40 39 43
------- ------ ------
Gross margin (exclusive of depreciation and amortization
shown separately below) .............................................. 60 61 57
Operating expenses:
Selling, general and administrative ....................................... 41 35 46
Provision for doubtful receivables ........................................ 2 1 1
Research and development .................................................. 20 15 17
Restructuring expense ..................................................... 10 -- 1
Depreciation and amortization ............................................. 10 8 9
Adjustment to loss on sale of business .................................... * * (1)
------- ------ ------
Total operating expenses ............................................... 83 59 73
------- ------ ------
Income (loss) from operations ............................................. (23) 2 (16)
Interest income, net ...................................................... 4 5 6
Gain (loss) on disposal of assets ......................................... (3) * (2)
Escrow Settlement ......................................................... -- * --
Realized gain on sale of available-for-sale securities, net ............... 12 1 --
Other, net ................................................................ (1) * *
------- ------ ------
Income (loss) from continuing operations before
income taxes ........................................................... (11) 8 (12)
Provision (benefit) for income taxes ...................................... 28 4 (5)
------- ------ ------
Income (loss) from continuing operations .................................. (39)% 4% (7)%
======= ====== ======
(*) less than 0.5%
YEAR ENDED DECEMBER 31, 2001 COMPARED TO 2000
Revenues. Product sales for 2001 decreased 26% to $81.4 million as compared to
$109.7 million in 2000. Service revenues for 2001 increased 27% to $16.1 million
as compared to $12.7 million in 2000. International sales decreased to $18.4
million in 2001 as compared to $35.3 million in 2000 and accounted for 19% and
29% of total net sales for 2001 and 2000, respectively.
The decrease in product sales in 2001 was due primarily to a decline in the
capital spending of North American carriers 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 increase in net service
revenues was due to the increase in installed base of messaging systems, which
resulted in increased extended warranty services revenues.
The Company currently anticipates a return to sales growth in 2002, from the
fourth quarter 2001 level, driven by the recent introduction of its large-scale
platform voice messaging system and by the planned launch of several new
products in 2002. The timing of these product introductions and their overall
market acceptance is critical to achieving the anticipated revenue growth for
2002. 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.
15
During 2001, three customers individually accounted for approximately 24%, 18%
and 13% respectively, of the Company's total revenue from continuing operations.
In 2000, two customers individually accounted for 17% and 14% respectively, of
the Company's total revenue from continuing operations. There can be no
assurance that these significant customers will continue to purchase systems and
services from the Company at current levels in the future, and the loss of these
significant customers could have a materially adverse affect on the Company's
business, financial condition or results of operations.
Profit Margins on Product Sales and Services (exclusive of depreciation and
amortization). Profit margin on products sold, exclusive of depreciation and
amortization, (product margin), was 65% in 2001 compared to 68% in 2000. Profit
margin on services, exclusive of depreciation and amortization, (service
margin), was 30% in 2001 compared to a negative (1)% in 2000. The decline in the
product margin is primarily a result of inventory obsolescence charges recorded
in the first quarter of 2001 relating to the Company's prepaid product lines as
a result of lower sales forecasts. This decline was partially offset by a higher
mix of messaging products software features and upgrades, which generally have
higher margins. Service margins increased in 2001 as a result of the Company's
restructuring activities, including the abandonment of the prepaid product line,
which contributed disproportionately to the cost of services in the prior year.
Glenayre's margins may be affected by several factors including (i) the mix of
products sold and services provided (ii) the price of products sold and provided
and (iii) changes in material costs and other components of cost of sales. The
Company expects that increased competition in its industry may adversely affect
its margins in the future.
Selling, General and Administrative Expense. Selling, general and administrative
expenses decreased 6% to $40.1 million in 2001 from $42.7 million in 2000. The
decrease in 2001 is primarily attributable to a net decrease in employee related
costs and facility costs primarily due to the reduced cost structure resulting
from the 2001 restructuring activities as well as no provision in 2001 for
employee incentive bonuses. The Company anticipates that 2002 selling, general
and administrative expenses should be approximately 20% lower than 2001, as a
result of a full year benefit from the 2001 restructuring activities. See Note 8
to the Company's Consolidated Financial Statements.
Provision for Doubtful Receivables. The provision for doubtful receivables
remained relatively unchanged at $1.8 million in 2001 and $2.0 million in 2000.
This expense is due primarily to the risk inherent in the Company's portfolio of
receivables due to financial difficulties experienced by some of the Company's
customers. The discontinuance of operations of one customer accounted for
approximately $1.4 million of the expense in 2001. The provision was lower in
2001 versus 2000 primarily due to the revenue decline in 2001 and the reduction
in average days sales outstanding. See Financial Condition and Liquidity -
Operating Activities.
Research and Development Expense. Research and development expenses increased to
$19.7 million in 2001 compared to $18.5 million in 2000. The increase in 2001 is
primarily attributable to increased employee related costs associated with
additional headcount and higher subcontracting expenses incurred for the
development of the Company's Enhanced Services products. Research and
development costs are expensed as incurred. Research and development expenses as
a percentage of net sales increased to 20% in 2001 from 15% in 2000. Glenayre
expects spending for research and development in 2002 to remain consistent with
2001 in terms of absolute dollar levels. The Company relies on its research and
development programs related to new products and the improvement of existing
products for the continued growth in net sales. Critical to the Company's future
success is its ability to continue to develop and effectively bring to market
new competitive products.
Restructuring Expense. In connection with the Company's decision to phase out
its prepaid product line and relocate the Corporate headquarters from Charlotte,
North Carolina to Atlanta, Georgia during 2001, the Company recorded pre-tax
restructuring charges of approximately $9.8 million. As a result of these
restructuring activities, the Company eliminated approximately 220 positions
impacting several functional areas of the Company and expensed approximately
$5.4 million for employee severance, retention bonuses 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 $2.2 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 impairment of long-lived assets.
The impairment charge is classified as loss on disposal of assets in the
Company's Consolidated Statement of Operations for the year ended December 31,
2001.
16
The consolidation and exit process for all of these above facilities was
substantially completed during the fourth quarter 2001. Payments related to
severance, retention bonuses and outplacement services, and consolidation and
exit costs were approximately $3.0 million and $2.3 million, respectively, as of
December 31, 2001. The reserve balance for this restructuring was approximately
$6.3 million at December 31, 2001. Management believes the remaining reserves
for this business restructuring will be adequate to complete this plan.
Depreciation and Amortization Expense. Depreciation and amortization expense was
$8.9 million in 2001 compared to $9.5 million in 2000. The decrease in expense
for 2001 is a result of older assets becoming fully depreciated in 2001 and $1.8
million in impairment charges for capital assets associated with the phase-out
of the prepaid product line recorded in the second quarter 2001 restructuring.
The Company spent $21.2 million and $19.3 million in 2001 and 2000,
respectively, in order to provide the equipment and capacity necessary to meet
the Company's business operations. Of the $21.2 million invested in 2001,
approximately $12.8 million related to the Company's continuing operations. The
Company anticipates property, plant and equipment purchases in 2002 to be
approximately $5 million related to its continuing operations and expects
depreciation expense to increase proportionally.
Adjustment to Loss on Sale of Business. In December 1998, Glenayre sold its
network management business, which it had been operating since January 1997. For
the year ended December 31, 1998, a loss on disposal of $7.9 million was
reported in loss from operations before income taxes in connection with the
sale. The loss on sale consists of the write-offs of assets, facility closing
costs, severance payments to employees, certain transition costs associated with
training employees of the buyer and other charges related to the sale. During
2001 and 2000, the Company reversed approximately $94,000 and $520,000,
respectively, of accrued expenses previously included in the $7.9 million loss
on sale of the Company's network management business. See Note 12 to the
Company's Consolidated Financial Statements.
Interest Income, Net. Interest income, net was $3.8 million and $6.4 million for
the years ended December 31, 2001 and 2000, respectively. Interest earned in
2001 was lower primarily due to reduced rates of return on investments.
Gain (Loss) on Disposal of Assets. The Company recorded a loss on disposal of
assets of $3.0 million for 2001 and a gain of $366,000 for 2000. The $3.0
million net loss in 2001 includes $2.9 million in impairment charges for capital
assets. During the second quarter of 2001, the Company recorded a $1,760,000
charge related to assets associated with the phase out of the prepaid product
line. See Note 8 to the Company's Consolidated Financial Statements. During the
fourth quarter of 2001, the Company recorded an impairment charge of $525,000
related to the write-down to fair value less cost to sell of its held for sale
building in Quincy, Illinois. The facility was sold in January 2002. See Note 18
to the Company's Consolidated Financial Statements. The Company also recorded an
impairment charge of $640,000 related to certain capital assets that were deemed
to have no future economic benefit. The $366,000 net gain in 2000 is related
primarily to a reversal of approximately $180,000 of asset impairment charges
related to the Company's third quarter 1999 restructuring (see Note 8 to the
Company's Consolidated Financial Statements) and proceeds received in excess of
book value on the sale or trade-in of manufacturing, research and development
and computer equipment.
Escrow Settlement. On October 15, 1997, the Company completed the acquisition of
Open Development Corporation ("ODC") located in Norwood, Massachusetts. ODC was
a developer of database management platforms and products for telecommunications
providers. The ODC Acquisition Agreement ("ODC Agreement") between the Company
and the former ODC shareholders provided that approximately $5 million of the
purchase price would be placed in escrow for the purpose of satisfying any
claims of indemnity that the Company might make. In December 2000, the Company
entered into an escrow settlement with the former ODC shareholders concerning
the disbursement of the remaining funds held in escrow since the acquisition in
October 1997. In this settlement the Company received approximately $320,000 for
certain third party software licensing infringements existing prior to the
acquisition.
Realized Gain on Sale of Available- for-Sale Securities, Net. On November 1,
1999 the Company sold 95% of the equity interest in its microwave radio
business, Western Multiplex Corporation ("MUX") and received cash of
approximately $37 million. In August 2000, MUX completed its initial public
offering. In November 2000, the Company became eligible to sell its shares of
MUX and immediately began selling its shares of MUX. During 2001 and 2000, the
Company sold approximately 1.8 million and 152,000 shares of MUX and realized
pre-tax gains of
17
approximately $14.0 million and $1.1 million, respectively. The realized gain on
the sales of MUX during 2001 was partially offset by permanent impairment
charges of approximately $2.0 million primarily related to the Company's
investment in Multi-Link Telecommunications, Inc. ("Multi-Link"). During 2001,
the Company deemed that its investment in Multi-Link was permanently impaired
and realized a holding loss of approximately $2.0 million on this
available-for-sale security.
Provision for Income Taxes. The 2001 effective tax rate differed from the
combined US federal and state statutory tax rate of approximately 40% due
primarily to the increase in the valuation allowance and higher tax rates on
earnings indefinitely reinvested in certain non-US jurisdictions. During 2001,
the Company increased the valuation allowance associated with its net deferred
tax assets by $116 million of which approximately $33.2 million related to its
continuing operations. At December 31, 2001, the Company's net deferred tax
asset of $132.1 million is fully reserved. The Company has assessed the
realizability of the net deferred asset at December 31, 2001 and determined due
to the significant net operating losses that the entire amount should be
reserved. The increase in the valuation allowance in 2001 relates primarily to
the Company's discontinuance of its Wireless Messaging (Paging) business and
that its remaining restructured business does not provide a historical basis for
projecting future taxable income. Should the Company become profitable in the
future, a portion of the valuation allowance will be reversed and partially
offset future provisions for US federal and state income taxes. The 2000
effective tax rate differed from the combined US federal and state statutory tax
rate of approximately 40% due primarily to (i) the change in valuation
allowance, (ii) taxation of a deemed dividend from a foreign subsidiary, (iii)
nondeductible goodwill amortization, (iv) higher tax rates on earnings
indefinitely reinvested in certain non-US jurisdictions, and (v) the receipt of
previously escrowed funds related to the 1997 acquisition of Wireless Access
that is treated as a purchase price adjustment for tax purposes. See Note 7 to
the Company's Consolidated Financial Statements.
At December 31, 2001, the Company has net operating loss carryforwards ("NOLs")
of $208 million. Included in the Company's NOLs at December 31, 2001, are
approximately $33 million of NOLs related to the acquisition of WAI and ODC
completed in 1997 (collectively referred to as "acquired NOLs"). These acquired
NOLs will begin to expire in 2005 and the potential benefit associated with
WAI's acquired NOLs are limited to approximately $22.5 million.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO 1999
Revenues. Total revenues for 2000 increased 45% to $122.4 million as compared to
$84.2 million in 1999. Product sales for 2000 increased 49% to $109.7 million as
compared to $73.7 million in 1999. Service revenues for 2000 increased 21% to
$12.7 million as compared to $10.4 million in 1999. International sales
decreased to $35.3 million in 2000 as compared to $39.6 million in 1999 and
accounted for 29% and 47% of total revenues for 2000 and 1999, respectively.
The increase in product sales in 2000 was primarily due to robust market demand
for the Company's Enhanced Services platform MVPTM product. North American
carriers were experiencing strong subscriber growth and as a result carrier
capital spending increased to meet their increasing subscriber demands. The
increase in service revenue was due to the increase in installed base of
messaging systems which results in increased Glenayre Care extended warranty
services revenues.
Profit Margin on Product Sales and Services (exclusive of depreciation and
amortization). Profit margin on products sold, exclusive of depreciation and
amortization, (product margins), was 68% in 2000 compared to 63% in 1999. Profit
margin on services, exclusive of depreciation and amortization, (service
margin), was a negative (1)% in 2000 compared to 18% in 1999. The increase in
product margins in 2000 is primarily a result of cost reductions realized in the
manufacture of the Company's products due to the consolidation of its Vancouver
and Quincy facilities and higher sales mix of MVP(TM) products in 2000, which
generally have higher margins than the prepaid product line. The decrease in
service margins was mainly due to higher costs associated with the extended
warranty service program related to the prepaid product line.
Selling, General and Administrative Expense. Selling, general and administrative
expenses were $42.7 million and $38.8 million for 2000 and 1999, respectively.
The increase in 2000 is partially due to higher marketing related expenses as
the Company began to implement programs in 2000 to develop and enhance the
Company's strategic market position, marketing focus and channel management. In
addition, in 2000 incentive bonuses were paid to both the employees of the
Enhanced Services business and the corporate office personnel, while in 1999
only the direct employees of the Enhanced Services business received incentive
bonuses.
18
Provision for Doubtful Receivables. The provision for doubtful receivables was
$2.0 million and $1.1 million in 2000 and 1999, respectively. This increase in
2000 compared to 1999 was due primarily to the risk inherent in the Company's
portfolio of receivables.
Research and Development Expense. Research and development expenses increased to
$18.5 million in 2000 compared to $14.1 million in 1999. The increase in 2000 is
primarily attributable to higher employee incentive bonuses accrued as a result
of meeting incentive plan targets in 2000 as well as higher subcontracting
expenses incurred for both the Company's Enhanced Service and prepaid products
platforms. Research and development expenses as a percentage of net sales
decreased to 15% in 2000 from 17% in 1999.
Restructuring Expense. During 1999 the Company recorded a pre-tax charge of
approximately $1.1 million related to a 27% reduction in the Company's
workforce. The continuing operations portion of this reduction was related to
the corporate office staff in Charlotte, North Carolina. Furthermore, the
Company recorded a pre-tax charge of $761,000 related to the sale of the
Charlotte corporate office and the write-off of certain related assets.
Additionally, during 1999, the Company reversed approximately $60,000 of accrued
severance benefits related to this reduction of the Company's workforce.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $9.5 million in 2000 compared to $7.4 million in 1999. The increase
in expense for 2000 is a result of the depreciation on the increased capital
investment for research and development equipment and for improvements to the
Atlanta facility and Charlotte leaseholds. The Company spent $19.3 million and
$10.9 million in 2000 and 1999, respectively, in order to provide the equipment
and capacity necessary to meet the Company's ongoing operations.
Adjustment to Loss on Sale of Business. In December 1998, Glenayre sold its
network management business, which it had been operating since January 1997. For
the year ended December 31, 1998, a loss on disposal of $7.9 million was
reported in loss from operations before income taxes in connection with the
sale. The loss on sale consists of the write-offs of assets, facility closing
costs, severance payments to employees, certain transition costs associated with
training employees of the buyer and other charges related to the sale. During
2000 and 1999, the Company reversed approximately $520,000 and $550,000,
respectively, of expenses previously included in the $7.9 million loss on sale
of the Company's network management business. See Note 12 to the Company's
Consolidated Financial Statements.
Interest Income, Net. Interest income, net was $6.4 million and $5.3 million for
the years ended December 31, 2000 and 1999, respectively. Interest earned in
2000 was higher due to an increase in cash and cash equivalents generating
short-term investment income.
Gain (Loss) on Disposal of Assets. The Company recorded a gain on disposal of
$366,000 for 2000 and a loss on disposal of assets of $1.3 million for 1999. The
$366,000 net gain is related primarily to a reversal of approximately $180,000
of asset impairment charges related to the Company's third quarter 1999
restructuring (See Note 8 to the Company's Consolidated Financial Statements)
and proceeds received in excess of book value on the sale or trade-in of
manufacturing, research and development and computer equipment. In 1999, the
Company incurred significant charges primarily attributable to asset write-offs
and impairment charges associated with the third quarter 1999 restructuring.
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.
Provision (Benefit) for Income Taxes. The 2000 effective tax rate differed from
the combined U.S. federal and state statutory tax rate of approximately 40% due
primarily to (i) the change in valuation allowance, (ii) taxation of a deemed
dividend from a foreign subsidiary, (iii) nondeductible goodwill amortization,
(iv) higher tax rates on earnings indefinitely reinvested in certain non-US
jurisdictions, and (v) the receipt of previously escrowed funds related to the
1997 acquisition of Wireless Access that is treated as a purchase price
adjustment for tax purposes. The difference between the 1999 effective tax rates
and the combined U.S. federal and state statutory rate is due primarily to (i)
nondeductible goodwill amortization, (ii) the write-off of the goodwill related
to the companies acquired in 1997 and (iii) 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
19
primarily due to changes in operating results, nondeductible goodwill
amortization and the write-off of the goodwill related to the companies acquired
in 1997. See Note 7 to the Company's Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
Overview. At December 31, 2001, the Company had cash and cash equivalents and
restricted cash totaling $94.4 million. The restricted cash of $5.2 million
consists of time deposits pledged as collateral to secure letters of credit
substantially all of which expire during 2002. At December 31, 2001, Glenayre's
principal source of liquidity is its $89.1 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 business. The
Company has no off-balance sheet arrangements including special purpose
entities.
Included in the Company's loss on disposal of discontinued operations (see
Discontinued Operations) for years ended December 31, 2001 were 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. As of December 31, 2001, the Company has paid approximately $15 million of
discontinued operations obligations. Of the remaining $34 million in estimated
cash charges, the Company anticipates disbursements of approximately $20 million
in 2002 and $14 million in 2003 and beyond.
Included in the Company's year ended December 31, 2001 losses from continuing
operations are cash restructuring charges totaling approximately $9.8 million
for employee termination benefits, prepaid product contractual obligations and
consolidation and facility exit costs (see Note 8 to the Company's Consolidated
Financial Statements). The Company anticipates all of the cash payments for this
restructuring charge will be made within the next six months with the exception
of lease termination costs, which could require cash payments through 2005 if a
sub-lessee is not obtained. As of December 31, 2001, the Company has paid out
approximately $4.1 million of these restructuring obligations.
Operating Activities. Cash provided by operating activities, including both
continuing and discontinued operations, was $21.8 million in 2001 and $5.2
million in 2000.
Restricted cash decreased $11.7 million to $5.2 million at December 31, 2001
from $16.9 million at December 31, 2000. This decrease was primarily due to the
expiration of time deposits pledged as collateral to secure letters of credit
during 2001.
Accounts receivable related to continuing operations decreased $17.6 million to
$17.2 million at December 31, 2001 from $34.8 million at December 31, 2000.
Average days sales outstanding decreased to approximately 82 days at December
31, 2001 from approximately 108 days at December 31, 2000. The decrease in
accounts receivable related to continuing operations is primarily related to
decreased sales for the fourth quarter of 2001 as compared to the fourth quarter
of 2000 of approximately $9.3 million and the Company's continued effort to
focus on cash collection efforts.
Inventories related to continuing operations decreased $5.9 million to $8.2
million at December 31, 2001 from $14.1 million at December 31, 2000. The
decrease in inventories is primarily due to the Company's efforts to reduce
purchases and thus quantities on-hand and the phase out of the Company's prepaid
product line in the second quarter of 2001. As of December 31, 2001, the Company
has outstanding purchase commitments for inventory of approximately $1.8
million.
Accounts payable decreased $18.5 million to $6.7 million at December 31, 2001
from $25.2 million primarily as a result of decreased inventory purchases.
Accrued liabilities related to continuing operations decreased $14.7 million to
$28.7 million at December 31, 2001 from $43.4 million at December 31, 2000. The
decrease in accrued liabilities primarily relates to the significant decline in
payroll related accruals resulting from employee terminations related to
20
the Company's exiting of its Wireless Messaging (Paging) operations and the
prepaid product line of its continuing operations.
Investing Activities. 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 on the Vancouver new office tower development. During
2001, the Company spent approximately $7 million on the office tower
development. At December 31, 2001 the Company had outstanding contractual
commitments to spend an additional $1.8 million to prepare the office tower for
its anticipated sale. In January 2002, the Company sold its manufacturing
facility in Quincy, Illinois for cash proceeds of approximately $4.4 million. In
addition to the Vancouver facility, the Company owns its facilities in Singapore
and Atlanta, Georgia and is continuing its efforts to divest these facilities.
The Company anticipates that the future sales of this real estate could generate
approximately $20 to $25 million of cash proceeds. During 2001, the Company also
invested approximately $6.5 million in the development of a customer relations
management ("CRM") software application. The CRM application is expected to
increase the level of customer satisfaction by improving the effectiveness of
customer service, sales opportunity management and quote to cash business
functionality throughout the Company's worldwide organization. The Company
anticipates the CRM application to be fully implemented during the first quarter
of 2002.
On November 1, 1999 the Company sold 95% of the equity interest in its microwave
radio business, Western Multiplex Corporation ("MUX") and received cash of
approximately $37 million. MUX marketed products for use in point-to-point
microwave communication systems and was acquired by the Company in April 1995.
The transaction was recorded as the disposal of a segment of business in the
forth quarter 1999. Accordingly, the operating results of MUX have been included
in the discontinued operations for the year ended December 31, 1999 in the
consolidated statements of operations. Additionally, the Company is contingently
liable for MUX's building lease payments, The maximum contingent liability as of
December 31, 2001 for these obligations is approximately $2.8 million. In August
2000, MUX completed an initial public offering. In November 2000, the Company
became eligible to sell its shares of MUX and immediately began selling it
shares of MUX. During 2001 and 2000, the Company sold 1.8 million and 152,000
shares of MUX for cash proceeds of approximately $15.3 million and $707,000,
respectively.
During 2000, the Company purchased approximately 264,439 shares of Multi-Link
Telecommunications, Inc, ("Multi-Link"), for approximately $2.1 million (see
Note 5 to the Consolidated Financial Statements). During 2001, the market value
of the Multi-Link securities declined significantly. The Company deemed the
decline in market value to be other than temporary and recorded a permanent
impairment charge of $2.0 million in 2001.
Financing Activities. During 2001 and 2002, the Company received proceeds from
the sale of Company common stock of $1.3 million and $14.2 million,
respectively, upon the exercise of stock options and sales of common stock to
employees in the Employee Stock Purchase Plan.
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. In September
2001, the stock repurchase program was amended to authorize management to
repurchase up to 5% of the Company's outstanding common stock, or approximately
3.3 million shares based on shares outstanding as of December 31, 2001. During
2000, the Company repurchased 12,500 shares of its common stock at a total cost
of approximately $40,000. During 2001, the Company purchased an additional
105,900 shares of its common stock at a total cost of approximately $85,000.
Income Tax Matters. For 2001 and 2000, The Company's actual cash outlay for
taxes was limited to foreign income taxes primarily due to current losses and
foreign sales corporation benefits.
As described in Note 7 to the Company's Consolidated Financial Statements, at
December 31, 2001, the Company has U.S. NOL's aggregating approximately $208
million, of which approximately $75 million was generated in 2001, $51 million
generated in 2000 and $49 million generated prior to 2000. The remaining $33
million related to the 1997 acquisitions of Open Development Corporation,
("ODC), and Wireless Access, Inc. ("WAI"). However, the ability to
21
utilize WAI's acquired NOL's of $22 million to offset future income is subject
to restrictions and there can be no assurance that they will be utilized in 2002
or future periods. Additionally, should the volume of international sales grow,
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
2002 as compared to 2001 and recent years.
The Company accounts for income taxes under the liability method in accordance
with SFAS 109, Accounting for Income Taxes. The Company has recorded a deferred
tax asset of $132 million that is fully reserved by a valuation allowance, at
December 31, 2001. 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 as offsets to the Company's future taxable income. As a
result of the Company's restructuring during 2001, management determined it was
necessary to fully reserve the deferred tax asset due to the inability to
project future income on the historical basis of the restructured business.
Inflation. For the three fiscal years ended December 31, 2001, the Company does
not believe inflation has had a material effect on its results of operations.
Summary. 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.
OUTLOOK
New applications that provide the Company's customers with revenue generating
opportunities as well as reduce consumer churn will further enhance its
competitive position. Glenayre believes that the communications messaging
systems market will return to growth during the latter part of 2002,
particularly in the number of wireless subscribers worldwide and the demand for
Unified Communications solutions. The Company believes that the introduction of
"always-on" packet based wireless networks (GPRS/CDMA/1XRTT) will enhance the
value of unified communications solutions. Providers of communications services
for enterprises and consumers will continue to seek to differentiate themselves
in increasingly competitive markets by offering high-demand solutions. Glenayre
believes that we are well positioned to provide these solutions. Additionally,
new products and solutions currently under development by the Company should
expand the uses and applications in this growing market. Nevertheless,
macroeconomic conditions and CSP's access to capital markets may negatively
impact this outlook.
This Outlook section contains forward-looking statements that are subject to the
risks described under the Risk Factors That May Affect Future Results
immediately below.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's prospects are subject to certain risks and uncertainties as
follows:
Competition
Competition in the market for Enhanced Services and Unified Communications
systems has increased significantly in the past year, with more entrants
offering a broad range of features and capacities. The Company's traditional
competitors are suppliers of messaging and enhanced services solutions,
including, Comverse Technologies, Inc., SS8's Centigram (acquired from ADC
Telecommunication in 2001), Unisys Corporation, the Octel Messaging division of
Lucent Technologies, Inc., OpenWave, Tecnomen and Schlumberger-Sema. Additional
competitors have emerged from the voice portal and voice services market,
including BeVocal, TellMe, HeyAnita and InterVoice-Brite. Many of the Company's
competitors have substantially greater financial, technical, marketing and
distribution resources than Glenayre and Glenayre may be unable to successfully
compete with these companies for the sale of its Enhanced Services and Unified
Communications platforms and products. In addition, given the recent increased
competition in the Company's markets, competitive pricing pressures exist which
may have an adverse effect on the Company's profit margins in the future.
22
Variability of Quarterly Results and Dependence on Key Customers
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. During 2001, Nextel , Nortel , an OEM partner,
Verizon and Cricket individually accounted for approximately 24%, 18%, 13% and
8%, respectively, of the Company's total revenue from continuing operations.
Nortel sells the Company's products to several end user customers including
Voice Stream whose purchases of Glenayre's products from Nortel represented
approximately 14% of the Company's total revenues in 2001. In 2000, Nortel and
Nextel individually accounted for approximately 17% and 14%, respectively, of
the Company's total revenue from continuing operations. Nextel, Nokia , an OEM
partner, and KPN each individually accounted for approximately 11% of the
Company's total revenue from continuing operations in 1999. Nokia sells the
Company's products to several end user customers. There can be no assurance that
these significant customers will continue to purchase systems and services from
the Company at current levels in the future, and the loss of one or more of
these significant customers could have a material adverse effect on the
Company's business, financial condition or results of operations. Beyond 2001,
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 the Company'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 subsequent quarterly periods.
Effective Convergence of Technologies
During 2001, the market for the Company's products has contracted as a result of
reduced North American carrier spending. Glenayre is dependent on the continued
growth of its markets as well as the effective and successful convergence of
technologies for its Enhanced Services and Unified Communications platform 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 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 could have a material adverse effect
on the Company'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 develop.
Potential Market Changes Resulting from Rapid Technological Advances
Glenayre's business is primarily focused on the wireless telecommunications
industry. The wireless telecommunications industry is characterized by rapid
technological change. In addition, Glenayre has been focusing its efforts on
growing its Enhanced Services and Unified Communications platform products, such
as the Modular Voice Processing system and Versera products, and Enhanced
Services solutions such as voice, fax and data messaging, short message
services, one touch call return, continuous calling, voice activated dialing,
unified messaging and CONSTANT TOUCH(TM). Demand for these products and services
may be affected by changes in technology as the development of substitute
products and services by competitors. If changing technology negatively affects
demand for Glenayre's Enhanced Services and Unified Communications platform
products, it could have a material adverse effect on Glenayre's business.
Volatility of Stock Price
The market price of the Company's common stock is volatile. The market price of
its common stock could be subject to significant fluctuations in response to
variations in quarterly operating results and other factors such as
announcements of technological developments or new products by the Company,
developments in 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.
23
Proprietary Technology
The Company owns or licenses numerous patents used in its operations. Glenayre
believes that while these patents are useful to the Company, 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, trademark and copyright 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 connect to public telecommunications networks. While
many of Glenayre's current Enhanced Services and Unified Communications platform
solutions are not directly subject to regulation, national, regional and local
governments regulate public telecommunications networks, as well as the
operations of telecommunication service providers in most domestic and
international markets. In introducing products to a market, there is no
assurance that the Company's customers will obtain regulatory approval. In
addition, it is always possible that a new regulation, changing political
climates, or a change in the interpretation of existing regulations could
adversely affect the Company's ability to sell products in that market.
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.
International Business Risks
Approximately 19% of 2001 total revenues from continuing operations 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 2001 was negotiated in United States
dollars, Glenayre may not be able to maintain such a high percentage of United
States dollar denominated international sales. Should the amount of sales
denominated in local currencies of foreign countries increase, the Company may
seek 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.
Continuation and Expansion of Third Party Agreements
Glenayre has entered into numerous strategic agreements with third parties that
provide both development services and products that are integrated into the
Company's products. Additionally, Glenayre has entered into several Original
Equipment Manufacturer agreements with companies that market and distribute
Glenayre's products and Glenayre intends to enter into service reseller
arrangements. Glenayre is dependent upon these third parties to augment its
research and development efforts as well as to distribute Glenayre's products
and services. If these third parties are not successful or the agreements are
terminated, it may have a material adverse effect on Glenayre's business.
Glenayre intends to continue entering into third party agreements; however,
there can be no assurance that additional arrangements with suitable vendors and
distributors on acceptable terms will be available. The inability of Glenayre to
24
enter into agreements with additional strategic vendors and distributors on
acceptable terms may have a material adverse effect on Glenayre's business.
Ability to Attract and Retain Key Personnel
The Company's continued growth and success depends to a significant extent on
the continued service of senior management and other key employees, the
development of additional management personnel and the hiring of new qualified
employees. Competition for highly skilled personnel is intense in the high
technology industry. There can be no assurance that the Company will be
successful in continuously recruiting new personnel or in retaining existing
personnel. The loss of one or more key or other employees or Glenayre's
inability to attract additional qualified employees or retain other employees
could have a material adverse effect on Glenayre's business, results of
operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk arising from adverse changes in interest
rates, foreign exchange and stock market volatility. The Company does not enter
into financial investments for speculation or trading purposes and is not a
party to any financial or commodity derivatives.
Investments
At December 31, 2001, the Company maintains an investment portfolio primarily
consisting of equity investments in two publicly traded companies and one
privately held company. Marketable equity securities are classified as available
for sale and, consequently, are recorded on the balance sheet at fair value with
unrealized gains and losses reported as a separate component of accumulated
comprehensive income. Marketable equity securities are subject to market price
volatility. Marketable equity securities are included in "Other assets" in the
accompanying December 31, 2001 balance sheet. The Company also has an investment
in a privately held company of $500,000 which is included in "Other assets" in
the accompanying December 31, 2001 balance sheet. Investments in privately held
companies are monitored for impairment by reference to valuation of publicly
traded companies in similar sectors and other factors such as the status of the
investee's technology and financial condition. If it is determined that an
investment in marketable equity securities has suffered an other than temporary
decline in value, this decline is reported in other income and expense in the
period the determination is made. During 2001, the Company recorded
approximately $2.0 million in permanent impairment charges related to its
investments in marketable equity securities. Investments in private technology
companies are inherently risky as the market for the technologies or products
they have under development may never materialize and the Company could lose the
entire initial investment in this company.
The following analysis presents the hypothetical changes in fair values of
public equity investments that are sensitive to changes in the stock market.
These equity securities are held for purposes other than trading. The modeling
techniques used measures the hypothetical change in fair values arising from
selected hypothetical changes in each stock's price. The following table
estimates the fair value of publicly traded corporate equities at a 12-month
horizon (in thousands):
At Dec. 31,
(50%) (30%) (15%) 2001 15% 30% 50%
Corporate Equities............ $408 $571 $693 $815 $937 $1,060 $1,223
Our equity portfolio consists of securities with characteristics that closely
match companies traded on the NASDAQ National Market. The NASDAQ Composite Index
had at least 15% movement in each of the last three years and has had at least a
30% and 50% movement in at least one of the last three years.
Interest Rate Risk
The Company's exposure to market rate risk for a change in interest rates
relates primarily to our investment portfolio. 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 changes in
25
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.
Foreign Currency Exchange
The Company operates internationally and is exposed to movements in foreign
currency exchange rates primarily as it relates to demand deposits denominated
in non-functional currencies. At December 31, 2001, approximately U.S.$2.5
million or 2.6% of the Company's cash balances were denominated in foreign
currencies. In the aggregate, if the value of the dollar against the foreign
denominated currency strengthens by 10%, the Company would record an exchange
loss of approximately $250,000. Conversely, if the value of the dollar declines
by 10%, the Company would record an exchange gain of approximately $250,000. The
Company seeks to mitigate the risk associated with foreign currency deposits by
monitoring and limiting the total cash deposits held at each of its
subsidiaries. Additionally, the Company may seek to mitigate the risk by
entering into currency hedging transactions. The Company was not a party to any
hedge transactions as of December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements of the Company and its subsidiaries as of
December 31, 2001, 2000 and 1999 and for each of the three years in the period
ended December 31, 2001, 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.................................................. 27
Consolidated Balance Sheets at December 31, 2001 and 2000......................................... 28
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999........ 29
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999..................................................................................... 30
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999........ 31
Notes to Consolidated Financial Statements....................................................... 32
(ii) Supplemental Schedule:
(For the years ended December 31, 2001, 2000 and 1999)
Schedule II - Valuation and Qualifying Accounts .................................................. 53
All other schedules are omitted because they are not applicable or not required.
26
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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. 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 audit
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, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, 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.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 5, 2002
27
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
December 31,
--------- --------
2001 2000
--------- --------
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 89,149 $ 71,866
Restricted cash ................................................. 5,227 16,893
Accounts receivable, net ........................................ 17,153 34,838
Accounts receivable, discontinued operations, net ............... -- 58,405
Notes receivable, discontinued operations, net .................. -- 4,312
Inventories, net ................................................ 8,168 14,117
Inventories, discontinued operations, net ....................... 282 25,987
Deferred income taxes ........................................... -- 19,140
Assets held for sale ............................................ 4,350 5,029
Prepaid expenses and other current assets ....................... 3,846 8,033
--------- --------
Total current assets .......................................... 128,175 258,620
Notes receivable, discontinued operations, net ..................... 252 6,921
Property, plant and equipment, net ................................. 35,588 35,846
Property, plant and equipment, discontinued operations, net ........ 13,020 48,180
Goodwill, net ...................................................... -- 45,311
Deferred income taxes .............................................. -- 34,917
Other assets ....................................................... 2,227 16,291
--------- --------
TOTAL ASSETS ....................................................... $ 179,262 $446,086
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ................................................. $ 6,729 $ 25,150
Accrued liabilities .............................................. 28,666 43,365
Accrued liabilities, discontinued operations ..................... 26,624 --
--------- --------
Total current liabilities ...................................... 62,019 68,515
Other liabilities .................................................. 7,669 6,644
Accrued liabilities, discontinued operations - noncurrent .......... 13,884 --
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: 2001-64,971,834 shares; 2000-64,446,012 shares ... 1,299 1,288
Contributed capital .............................................. 361,011 359,181
Retained earnings (deficit) ...................................... (267,251) 3,235
Accumulated other comprehensive income ........................... 631 7,223
--------- --------
Total stockholders' equity ....................................... 95,690 370,927
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 179,262 $446,086
========= ========
See notes to consolidated financial statements.
28
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
REVENUES
Product sales ............................................................ $ 81,440 $ 109,697 $ 73,741
Service revenues ......................................................... 16,061 12,665 10,435
--------- --------- ---------
Total revenues ....................................................... 97,501 122,362 84,176
--------- --------- ---------
COST OF REVENUES (exclusive of depreciation and amortization
shown separately below):
Cost of sales ............................................................ 28,177 35,190 27,426
Cost of services ......................................................... 11,210 12,839 8,527
--------- --------- ---------
Total cost of revenues ............................................... 39,387 48,029 35,953
--------- --------- ---------
GROSS MARGIN (exclusive of depreciation and amortization shown
separately below) ........................................................ 58,114 74,333 48,223
OPERATING EXPENSES
Selling, general and administrative expense .............................. 40,101 42,658 38,765
Provision for doubtful receivables ....................................... 1,786 2,008 1,134
Research and development expense ......................................... 19,658 18,533 14,074
Restructuring expense .................................................... 9,794 -- 1,058
Depreciation and amortization expense .................................... 8,942 9,476 7,412
Adjustment to loss on sale of business ................................... (94) (524) (554)
--------- --------- ---------
Total operating expenses ............................................. 80,187 72,151 61,889
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS .............................................. (22,073) 2,182 (13,666)
--------- --------- ---------
OTHER INCOME (EXPENSES):
Interest income, net ..................................................... 3,768 6,444 5,302
Gain (loss) on disposal of assets, net (including impairment loss of
$2,925 in 2001) ...................................................... (2,998) 366 (1,341)
Escrow settlement ........................................................ -- 320 --
Realized gain on sale of available-for-sale securities, net .............. 11,894 1,142 --
Other, net ............................................................... (901) (509) (19)
--------- --------- ---------
Total other income ........,,,,....................................... 11,763 7,763 3,942
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ................................................... (10,310) 9,945 (9,724)
PROVISION (BENEFIT) FOR INCOME TAXES ....................................... 27,698 4,442 (3,961)
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................... (38,008) 5,503 (5,763)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of income tax) ............. (232,478) 8,599 (122,765)
--------- --------- ---------
NET INCOME (LOSS) .......................................................... $(270,486) $ 14,102 $(128,528)
========= ========= =========
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE:
Income (loss) from continuing operations ................................... $ (0.59) $ 0.09 $ (0.09)
Discontinued operations .................................................... (3.58) 0.13 (1.98)
--------- --------- ---------
Net income (loss) per weighted average common share ........................ $ (4.17) $ 0.22 $ (2.07)
========= ========= =========
INCOME (LOSS) PER COMMON SHARE--ASSUMING DILUTION:
Income (loss) from continuing operations ................................... $ (0.59) $ 0.08 $ (0.09)
Discontinued operations .................................................... (3.58) 0.13 (1.98)
--------- --------- ---------
Net income (loss) per common share--assuming dilution ...................... $ (4.17) $ 0.21 $ (2.07)
========= ========= =========
See notes to consolidated financial statements.
29
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Accumulated
Common Stock Retained Other Total
------------------- Contributed Earnings Comprehensive Stockholders'
Shares Amount Capital (Deficit) Income Equity
------ ------ ----------- --------- ------------- -------------
Balances, January 1, 1999 ................ 62,064 $1,241 $343,251 $ 117,661 $ -- $ 462,153
Net loss ................................. (128,528) (128,528)
Shares issued for ESP Plan and option
exercises .............................. 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
Net income ............................... 14,102 14,102
Other Comprehensive Income:
Net unrealized gain on
securities available-for-sale,
net of tax ............................. 7,223 7,223
---------
Comprehensive Income ..................... 21,325
Shares issued for ESP Plan and option
exercises .............................. 2,028 40 14,124 14,164
Repurchase of common stock ............... (12) -- (40) (40)
------ ------ -------- --------- ------- ---------
Balances, December 31, 2000 .............. 64,446 1,288 359,181 3,235 7,223 370,927
Net loss ................................. (270,486) (270,486)
Other Comprehensive Loss:
Adjustment to unrealized gain on
securities available-for-sale,
net of tax .......................... (6,592) (6,592)
---------
Comprehensive loss ....................... (277,078)
Shares issued for ESP Plan and option
exercises .............................. 632 13 1,250 1,263
Repurchase of common stock ............... (106) (2) (83) (85)
Stock compensation expense ............... 663 663
------ ------ -------- --------- ------- ---------
Balances, December 31, 2001 .............. 64,972 $1,299 $361,011 $(267,251) $ 631 $ 95,690
====== ====== ======== ========= ======= =========
See notes to consolidated financial statements.
30
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $(270,486) $ 14,102 $(128,528)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................ 11,579 20,461 30,948
Changes in deferred income taxes ......................... 57,435 3,118 (36,757)
Net realizable value adjustment and (gain) loss on
disposal of property, plant and equipment ............. 45,188 (275) 3,473
Loss on disposal of microwave communication business ..... -- -- 3,235
Adjustment to loss on sale of network management
business .............................................. (94) (524) (554)
Write-off of goodwill and other intangibles .............. 45,311 -- 50,919
Tax benefit of stock options exercised ................... -- -- 129
Write-off of uncollectible subordinated notes ............ -- -- 8,172
Gain on sale of available-for-sale securities ............ (13,961) (1,142) --
Permanent impairment of available-for-sale securities .... 2,067 -- --
Stock compensation expense ............................... 663 -- --
Changes in operating assets and liabilities, net of
effects of business dispositions and acquisitions:
Restricted cash ....................................... 11,666 (6,538) (10,355)
Accounts receivable ................................... 76,090 (5,751) 58,295
Notes receivable ...................................... 10,981 131 59,744
Inventories ........................................... 31,654 (11,974) 14,174
Prepaids and other current assets ..................... 4,187 (1,928) 1,492
Other assets .......................................... 1,077 (3,277) 885
Accounts payable ...................................... (18,421) 7,036 (11,681)
Accrued liabilities ................................... 25,809 (7,542) (17,591)
Other liabilities ..................................... 1,025 (672) 180
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 21,770 5,225 26,180
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................. (21,163) (19,303) (10,872)
Proceeds from sale of building and equipment ............... 237 250 6,210
Proceeds from subordinated notes ........................... -- -- 2,145
Investments in available-for-sale securities ............... -- (2,650) --
Proceeds from sale of available-for-sale securities ........ 15,261 707 --
Net proceeds from sale of microwave communication
business ............................................... -- -- 35,843
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES .......... (5,665) (20,996) 33,326
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ..................................... 1,263 14,164 1,724
Purchase of treasury stock ................................... (85) (40) --
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 1,178 14,124 1,724
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 17,283 (1,647) 61,230
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 71,866 73,513 12,283
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $89,149 $71,866 $73,513
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................... $ 131 $ 61 $ 388
Income taxes ............................................... 1,665 2,922 3,824
See notes to consolidated financial statements.
31
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Glenayre Technologies, Inc. and subsidiaries ("Glenayre or the Company") is a
provider of Enhanced Services and Unified Communications solutions for service
providers including wireless, fixed network, ISP and broadband. Glenayre systems
allow users to manage voice, fax and e-mail messages in a single, centralized
mailbox and are designed on open platforms with a standards-based architecture
supporting IP and traditional telephony networks for the evolution from 2G to
2.5G and 3G services. Glenayre is headquartered in Atlanta, Georgia.
Prior to June 2001, the Company's operations also included its Wireless
Messaging (Paging) business. In May 2001, the Company began exiting the Wireless
Messaging/Paging business and as a result the Wireless Messaging (Paging)
segment was reported as a disposal of a segment of business in the second
quarter of 2001. The operating results of the Wireless Messaging (Paging)
segment are reported as discontinued operations in the accompanying financial
statements (see "Note 2").
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.
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 deposit,
Treasury bills, notes or agency securities guaranteed by the U.S. Government and
repurchase agreements backed by U.S. Government securities.
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, 2001 consisted of time deposits pledged as
collateral to secure letters of credit, substantially all of which expire in
less than one year.
Accounts Receivable
Accounts receivable are presented net of an allowance for doubtful accounts of
$2.5 million and $3.6 million at December 31, 2001 and 2000, respectively.
Inventories
Inventories are valued at the lower of average cost or market.
32
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Property, Plant and Equipment
Property, plant and equipment, including internally developed software, 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; internally developed software, 5-10 years).
Goodwill
Goodwill represents the excess of cost over assigned fair market value of net
assets acquired. Goodwill at December 31, 2000, net of accumulated amortization
of $21.9 million, was associated with the Wireless Messaging/Paging segment and
was written-off in 2001 in the loss on disposal of the segment (see "Note 2").
Available-for-Sale Securities
The Company's marketable securities are classified as available-for-sale and
recorded at current market value. Net unrealized gains and losses on marketable
securities available-for-sale are recorded to stockholders' equity as a
component of Other Comprehensive Income, net of tax. Any realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included as a separate component of Other
Income (Expense) in the Company's Consolidated Statement of Operations. The cost
of securities sold is based on the specific identification method.
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 in accordance with the guidance of Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," and with Statement of Position 97-2, "Software Revenue
Recognition," and related interpretations. The Company recognizes revenue for
products sold at the time delivery occurs and collection of the resulting
receivable is deemed probable by the Company. Certain products sold by the
Company, have operating software imbedded in the configuration of the system.
This operating software is incidental to the product as a whole. Existing
customers may purchase product enhancements and upgrades after such enhancements
or upgrades are developed by the Company based on a standard price list in
effect at the time such product enhancements and upgrades are purchased. The
Company has no significant performance obligations to customers after the date
products, product enhancements and upgrades are delivered, except for product
warranties (see Estimated Warranty Costs below).
The Company recognizes service revenues from installation and repair services
based on a standard price list in effect when such services are provided to
customers. Installation is not essential to the functionality of the products
sold and is inconsequential or perfunctory to the sale of the products. Revenues
derived from contractual postcontract support services are recognized ratably
over the contract support period.
Significant Customers
During 2001, Nextel Communications("Nextel"), Nortel Networks ("Nortel"), an OEM
partner, Verizon Wireless and Cricket Communications individually accounted for
approximately 24%, 18%, 13% and 8%, respectively, of the Company's total revenue
from continuing operations. Nortel sells the Company's products to several end
user customers including Voice Stream whose purchases of Glenayre's products
from Nortel represented approximately 14% of the Company's total revenues in
2001. In 2000, Nortel and Nextel individually accounted for approximately 17%
and 14%, respectively, of the Company's total revenue from continuing
operations. Nextel, Nokia Telecommunications ("Nokia"), an OEM partner, and KPN
Telecom each individually accounted for approximately 11% of the Company's total
revenue
33
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
from continuing operations in 1999. Nokia sells the Company's products to
several end user customers. There can be no assurance that these significant
customers will continue to purchase systems and services from the Company at
current levels in the future, and the loss of one or more of these significant
customers could have a material adverse effect on the Company's business,
financial condition or results of operations.
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.
Internal Use Software Development Costs
The Company capitalizes the cost associated with the internal development of
major business process application software in accordance with Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal use. The Company expenses preliminary project assessment,
research and development, re-engineering and application maintenance costs.
Estimated Warranty Costs
The Company generally warrants its products for one year after sale and
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 15 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 approximate their
respective fair values.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which as
required, was adopted by the Company effective January 1, 2001. Because of the
Company's minimal use of derivatives, the adoption of this new Statement did not
affect earnings or the financial position of the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(FAS 144), which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a disposal of a segment of a business. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, with earlier
application encouraged. The Company expects to adopt SFAS No.
34
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
144 as of January 1, 2002 and it does not expect that the adoption of the
Statement will have a significant impact on the Company's financial position and
results of operations.
Reclassifications
Certain items in the prior year consolidated financial statements have been
reclassified to conform to the current presentation.
2. 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
and Unified Communications 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 consolidated balance sheet as of December 31, 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.
On November 1, 1999 the Company sold 95% of the equity interest in its microwave
radio business, Western Multiplex Corporation ("MUX") and received cash of
approximately $37 million. MUX marketed products for use in point-to-point
microwave communication systems and was acquired by the Company in April 1995.
The transaction was recorded as the disposal of a segment of business in the
fourth quarter 1999. Accordingly, the operating results of MUX have been
included in the discontinued operations for the year ended December 31, 1999 in
the consolidated statements of operations. Additionally, the Company is
contingently liable for MUX's building lease payments. The maximum contingent
liability as of December 31, 2001 for these obligations is approximately $2.8
million. In August 2000, MUX completed its initial public offering. In November
2000, the Company became eligible to sell its shares of MUX and immediately
began selling its shares of MUX (see Note 5).
Results for discontinued operations consist of the following:
2001 2000 1999
--------- --------- ---------
Net sales ........................................ $ 43,723 $ 129,223 $ 153,913
Loss from discontinued operations:
Gain (loss) from operations before income taxes .. (46,232) 8,830 (164,771)
Benefit (provision) for income taxes ............. (583) (231) 42,006
--------- --------- ---------
Net income (loss) from operations ................ (46,815) 8,599 (122,765)
Loss on disposal before income taxes ............. (156,392) -- --
Provision for income taxes ....................... (29,271) -- --
--------- --------- ---------
Net loss on disposal of discontinued operations .. (185,663) -- --
--------- --------- ---------
Net income (loss) from discontinued operations ... $(232,478) $ 8,599 $(122,765)
========= ========= =========
The loss from discontinued operations consists of (i) operating losses incurred
in the Wireless Messaging (Paging) segment for the years ended December 31,
2001, 2000 and 1999 adjusted for cash received from Wireless Messaging (Paging)
trade receivables previously reserved and (ii) an estimated loss on disposal of
the segment which includes charges for the following: (i) the write-off of
goodwill and other intangibles, (ii) reserves 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.
The results for 2000 were impacted by $10.9 million in net proceeds received
from a WAI escrow settlement agreement (see Note 13).
35
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
At December 31, 2001 a detailed review was performed of the estimated asset
values and liabilities and future commitments related to the discontinued
operations. The adjustments to the original estimates made at May 23, 2001 were
additional write-downs of the Vancouver and Singapore facilities offset by
better than anticipated revenues, favorable negotiation of inventory purchase
commitments and sale of intellectual property for a net reduction in the loss on
disposal of $408,000.
3. INVENTORIES
Inventories related to the Company's continuing operations at December 31, 2001
and 2000 consist of:
2001 2000
------- -------
Raw materials ................ $ 5,094 $ 8,550
Work in process .............. 1,627 4,120
Finished goods ............... 1,447 1,447
------- -------
$ 8,168 $14,117
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment related to the Company's continuing operations at
December 31, 2001 and 2000 consist of:
2001 2000
-------- --------
Land ................................... $ 676 $ 976
Buildings .............................. 6,184 9,059
Equipment .............................. 62,804 55,519
Leasehold improvements ................. 424 1,142
-------- --------
70,088 66,696
Less: Accumulated depreciation ......... (34,500) (30,850)
-------- --------
$ 35,588 $ 35,846
======== ========
During 2001, the Company recorded $2.9 million in impairment charges of
long-lived assets. During the second quarter of 2001, the Company recorded a
$1,760,000 charge related to assets associated with the phase out of the prepaid
product line (see Note 8). During the fourth quarter of 2001, the Company
recorded an impairment charge of $525,000 related to the write-down to fair
value less cost to sell of its held for sale building in Quincy, Illinois. The
facility was sold in January 2002 (see Note 18). The Company also recorded an
impairment charge of $640,000 related to certain capital assets that were deemed
to have no future economic benefit.
5. OTHER ASSETS
Included in Other Assets is the Company's remaining investment in MUX (see Note
2). During the third quarter of 2000, MUX successfully completed its initial
public offering. During 2001 and 2000, the Company sold 1.8 million and 152,000
shares of MUX for pre-tax gains of $14.0 million and $1.1 million, respectively.
As of December 31, 2001, the market value of the Company's remaining interest in
MUX has appreciated. Accordingly, the Company has recorded an unrealized holding
gain of approximately $631,000 in 2001 on this available-for-sale security.
36
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
On June 30, 2000 as part of the Company's strategy to expand into new markets
for its Enhanced Services platform business the Company entered into a stock
purchase agreement with Multi-Link Telecommunications, Inc. ("Multi-Link"), a
Colorado corporation, and a shareholder, to acquire in the aggregate 264,439
shares of common stock for $2.1 million representing approximately 6.5%
ownership in Multi-Link. The Company also acquired warrants to purchase 100,000
shares of Multi-Link common stock. The Company recorded the purchase, which
occurred on July 3, 2000, as an investment in available-for-sale securities. As
of December 31, 2000, the market value of Multi-Link common stock had decreased.
As a result, the Company recorded an unrealized holding loss of approximately
$600,000, net of a tax benefit of $370,000. As of December 31, 2001, the Company
has deemed this security permanently impaired and has recorded a realized
holding loss of approximately $2.0 million on this available-for-sale security.
Available-For-Sale Securities
------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------ ---------- ---------- ----------
Marketable equity securities as of December 31, 2001 ... $ 184 $ 631 $ -- $ 815
Marketable equity securities as of December 31, 2000 ... $3,634 $11,578 $976 $14,236
6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2001 and 2000 consist of:
2001 2000
-------- --------
Accrued project costs ........ $ -- $ 4,362
Accrued warranty costs ........ 2.383 4,237
Accrued payroll costs ......... 6,319 13,601
Accrued restructuring costs ... 4,539 180
Accrued income taxes .......... 6,772 6,596
Other accruals ................ 8,653 14,389
-------- --------
$ 28,666 $ 43,365
======== ========
7. INCOME TAXES
The Company's income tax provision for continuing operations consists of the
following:
2001 2000 1999
------- ------ -------
Current provision:
United States Federal ........................................ $ -- $ -- $ --
Charge equivalent to tax benefit of stock option exercises ... -- -- 11
Foreign ...................................................... (48) 447 719
State and local .............................................. -- -- --
------- ------ -------
Total current .............................................. (48) 447 730
------- ------ -------
Deferred:
Primarily United States federal and state .................... (5,435) 3,315 (4,603)
Adjustment to federal net operating loss carryforward ........ -- -- --
Adjustment to state net operating loss carryforward .......... -- -- --
Adjustment to valuation allowance ............................ 33,181 680 (88)
------- ------ -------
Total deferred ............................................. 27,746 3,995 (4,691)
------- ------ -------
Total provision (benefit) ....................................... $27,698 $4,442 $(3,961)
======= ====== =======
37
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The sources of income (loss) from continuing operations before income taxes are
presented as follows:
2001 2000 1999
-------- ------- --------
United States ...... $(15,792) $ 8,931 $(12,562)
Foreign ............ 5,482 1,014 2,838
-------- ------- --------
$(10,310) $ 9,945 $ (9,724)
======== ======= ========
The consolidated income tax provision was different from the amount computed
using the U.S. statutory income tax rate for the following reasons:
2001 2000 1999
-------- ------- -------
Income tax provision at U.S. statutory rate ................... $ (3,609) $ 3,481 $(3,403)
Increase (reduction) in valuation allowance ................... 33,181 680 (88)
Deemed dividend of foreign earnings ........................... -- 100 --
Repatriation of foreign earnings of merged subsidiary ......... -- -- 270
Foreign taxes at rates other than U.S. statutory rate ......... (1,967) (35) (274)
U.S. research and experimentation credits ..................... -- (329) (165)
State taxes (net of federal benefit) .......................... -- 310 (346)
Other non-deductibles ......................................... 93 235 45
-------- ------- -------
Income tax provision (benefit) ................................ $ 27,698 $ 4,442 $(3,961)
======== ======= =======
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, 2001 and 2000 are as follows:
2001 2000
-------- --------
Assets:
U.S. net operating loss carryforwards .... $ 73,018 $ 40,262
State net operating loss carryforwards ... 11,877 7,201
Other .................................... 58,142 36,882
-------- --------
143,037 84,345
Less: Valuation allowance ................ (132,051) (16,067)
-------- --------
10,986 68,278
Liabilities ................................ (10,986) (14,221)
-------- --------
Deferred tax asset, net .................... $ -- $ 54,057
======== ========
At December 31, 2001, the Company has a net deferred tax asset of $132.1 million
that is fully reserved by a valuation allowance. Components of the net deferred
tax asset include other deferred tax assets for 2001 and 2000 that primarily
38
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
reflect reserves not yet deducted for tax purposes of $46 million and $27
million, respectively, and research and experimentation credit carry-forwards of
$6 million. Deferred tax liabilities for 2001 and 2000 are mainly comprised of
accelerated depreciation of $10 million and $7.9 million, respectively, and
unrealized gains from available-for-sale investments of $0.2 million at December
31, 2001 and $3.4 million at December 31, 2000.
The increase in the valuation allowance of $116.0 million during the year ended
December 31, 2001 is related primarily to the Company's restructuring and that
its remaining restructured business does not provide a historical basis for
projecting future taxable income. The Company has assessed the realizability of
the net deferred asset at December 31, 2001 and determined due to the
significant net operating losses that the entire amount should be reserved.
At December 31, 2001 and December 31, 2000, the Company has U.S. NOLs of $208
million and $133 million, respectively, which expire beginning in 2005. At
December 31, 2001, of the $208 million of U.S. NOLs, $75 million were generated
in 2001, $51 million were generated in 2000, and $49 million were generated
prior to 2000. The remaining $33 million of U.S. NOLs at both December 31, 2001
and December 31, 2000, 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 in the United States Internal Revenue Code of 1986 as
amended (the "Code"). These restrictions limit the Company's future use of the
NOLs.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $2.8 million at December 31, 2001. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided. 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 carry-forwards would be available to reduce some portion of the U.S.
liability. Withholding taxes of approximately $200,000 would be payable upon
remittance of all previously unremitted earnings at December 31, 2001.
8. BUSINESS RESTRUCTURING OF CONTINUING OPERATIONS
In connection with the Company's decisions to phase out its 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 $4.0 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 $3.3 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 impairment of long-lived assets. The
impairment charge is classified as loss on disposal of assets in the Company's
Consolidated Statements of Operations for the year ended December 31, 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. During the fourth
quarter 2001, the Company received payment of $1.1 million related to a trade
receivable previously reserved during the second quarter 2001.
The consolidation and exit process for all of these above facilities was
substantially completed during the fourth quarter 2001. Payments related to
severance, retention bonuses and outplacement services, and consolidation and
exit costs were approximately $3.0 million and $2.3 million, respectively, as of
December 31, 2001. The reserve balance for this restructuring was approximately
$6.3 million at December 31, 2001. Management believes the remaining reserves
for this business restructuring will be adequate to complete this plan.
39
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
During 1999 the Company recorded a pre-tax charge of approximately $1.1 million
related to a 27% reduction in the Company's workforce. The continuing operations
portion of this reduction was related to the corporate office staff in
Charlotte, North Carolina. Furthermore, the Company recorded a pre-tax charge of
$761,000 related to the sale of the Charlotte corporate office and the write-off
of certain related assets. Additionally, during 1999, the Company reversed
approximately $60,000 of accrued severance benefits related to this reduction of
the Company's workforce.
The following is a summary of activity in the 2001, 2000 and 1999 restructuring
reserves:
Severance and Lease Cancellation
Benefits and Other Exit Costs Total
-------------- -------------------- ---------
Balance at January 1, 1999 ............. $ -- $ -- $ --
Expense accrued ........................ 1,417 761 2,178
Expenditures ........................... (313) (466) (779)
Change in estimate ..................... (60) (295) (355)
-------- -------- ---------
Balance at December 31, 1999 ........... 1,044 -- 1,044
Expense accrued ........................ 6 -- 6
Expenditures ........................... (1,018) -- (1,018)
-------- -------- ---------
Balance at December 31, 2000 ........... 32 -- 32
Expense accrued ........................ 5,447 6,099 11,546
Expenditures ........................... (2,979) (2,282) (5,261)
-------- -------- ---------
Balance at December 31, 2001 ........... $ 2,500 $ 3,817 $ 6,317
======== ======== =========
9. SEGMENT REPORTING
In May 2001, the Company began exiting its Wireless Messaging (Paging) business
segment. As a result of the discontinuance of the Wireless Messaging (Paging)
segment, the Company currently operates in one business segment, the Enhanced
Services and Unified Communications segment, its "Continuing Operations."
The following geographic area data represents property, plant and equipment by
location and total revenues based on product shipment destination related to the
Company's continuing operations.
As of December 31,
----------------------------
PROPERTY, PLANT AND EQUIPMENT: 2001 2000
- ------------------------------ -------- --------
United States .......................... $ 33,435 $ 32,204
Canada ................................. 755 906
Asia ................................... 441 631
China .................................. 316 1,125
Europe, Middle East and Africa ......... 413 609
Latin America .......................... 228 371
-------- --------
Total .................................. $ 35,588 $ 35,846
======== ========
For the years ended
--------------------------------------------------
TOTAL REVENUES 2001 2000 1999
- --------------- -------- -------- ---------
United States .......................... $ 79,106 $ 87,074 $ 44,565
Canada ................................. 679 6,058 2,652
Asia ................................... 2,252 7,825 2,846
China .................................. 396 1,120 3,228
Europe, Middle East and Africa ......... 8,234 12,646 23,388
Latin America .......................... 6,834 7,639 7,497
-------- -------- ---------
Total .................................. $ 97,501 $122,362 $ 84,176
======== ======== =========
40
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
10. OPERATING LEASE COMMITMENTS
The Company leases office facilities and various equipment under non-cancelable
operating leases. Future minimum lease payments under non-cancelable operating
leases (with minimum or remaining lease terms in excess of one year) related to
its continuing operations for calendar years subsequent to December 31, 2001 are
as follows:
2002............................. $2,515
2003............................. 1,809
2004............................. 1,241
2005............................. 889
2006............................. 765
Thereafter....................... --
Rent expense for continuing operations amounted to approximately $1.0 million,
$1.2 million and $1.1 million for the years ended December 31, 2001, 2000 and
1999, respectively.
11. 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.
The actuarial present value of accumulated postretirement benefit obligations at
December 31, 2001 and 2000 is as follows:
2001 2000
-------- --------
Retirees ............................................................. $ 1,006 $ 1,259
Fully eligible plan participants ..................................... 23 192
Other active plan participants ....................................... 166 1,123
-------- --------
Accumulated postretirement benefit obligation ........................ 1,195 2,574
Unrecognized loss (gain) ............................................. 1,478 (226)
Unrecognized transition obligation ................................... (560) (611)
-------- --------
Postretirement benefit liability recognized in balance sheet ......... $ 2,113 $ 1,737
======== ========
The change in Accumulated Postretirement Benefit Obligation ("APBO") from year
to year is as follows:
2001 2000
-------- --------
APBO at the beginning of the year .................................... $ 2,574 $ 2,179
Service cost ......................................................... 269 229
Interest cost ........................................................ 195 165
Actuarial (gain) loss ................................................ (1,704) 185
Plan participants contributions ...................................... 62 48
Benefits paid ........................................................ (201) (232)
-------- --------
APBO at the end of the year .......................................... $ 1,195 $ 2,574
======== ========
41
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net postretirement benefit costs for the years ended December 31, 2001, 2000 and
1999 consist of the following components:
2001 2000 1999
------ ------ ------
Service cost .................................................... $ 269 $ 229 $ 261
Interest cost on APBO ........................................... 195 165 143
Amortization of transition obligation ........................... 51 51 51
Curtailment gain ................................................ -- -- (352)
------ ------ ------
$ 515 $ 445 $ 103
====== ====== ======
The curtailment gain of $352,000 in 1999 was a result of the sale of Western
Multiplex. The assumed discount rate utilized was 7.0%. The assumed health care
trend rate in measuring the accumulated postretirement benefit obligation as of
December 31, 2001 was varied between non-Medicare and Medicare eligible
retirees. For non-Medicare eligible retirees the 2001 trend rate is 12.5%,
decreasing linearly to 4.5% in 2012, after which it remains constant. For
Medicare retirees, the 2001 trend rate is 14.0% decreasing linearly to 4.5% in
2014, after which it remains constant. 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, 2001 and the 2001 aggregate
interest and service cost by approximately 7.3% and 15.7%, 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, 2001 and the 2001 aggregate interest and service cost by
approximately 6.6% and 13.1%, respectively. The assumed discount rate used in
determining the APBO at December 31, 2001 and 2000 was 7.00% and 7.75%,
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 the
Company's continuing operations amounted to approximately $1.2 million, $1.0
million and $917,000 during the years ended December 31, 2001, 2000 and 1999,
respectively.
12. LOSS (ADJUSTMENT TO LOSS) ON SALE OF BUSINESS
On January 9, 1997, the Company completed the acquisition of CNET, Inc.
("CNET"), located in Plano, Texas. CNET developed and provided integrated
operational support systems, network management, traffic analysis, and radio
frequency propagation software products and services for the global wireless
communications industry. In December 1998, in response to significant adverse
changes in the market size for CNET's existing products, the Company sold its
network management business. 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 continuing operations before income
taxes in connection with the sale for the year ended December 31, 1998. Included
in the loss on sale were accrued 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 2001, 2000 and 1999, the
Company reversed approximately $94,000, $524,000 and $554,000, respectively, of
these accrued expenses previously included in the $7.9 million loss on sale of
the Company's network management business. These changes in estimates were
primarily related to specific transition costs in the sale agreement and
facility closing costs, which will not be incurred by the Company.
42
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
13. WRITE-OFF OF GOODWILL AND OTHER INTANGIBLES AND ESCROW SETTLEMENTS
(a) Open Development Corporation
On October 15, 1997, the Company completed the acquisition of Open Development
Corporation ("ODC") located in Norwood, Massachusetts. ODC was a developer of
database management platforms and products for telecommunications providers.
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 these markets. Management believed that its future concentration for
the ODC products would continue to be primarily in the prepaid wireless market.
Given this strategic change, the Company concluded that the future forecasted
results for the ODC products would be significantly less than had been
anticipated at the time of the Company's acquisition of ODC. After making this
change, 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 in 1998 to their fair value. Fair
value was based on estimated future discounted cash flows to be generated by
ODC. 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.
The ODC Acquisition Agreement ("ODC Agreement") between the Company and the
former ODC shareholders provided that approximately $5 million of the purchase
price would be placed in escrow for the purpose of satisfying any claims of
indemnity that the Company might make. In December 2000, the Company entered
into an escrow settlement with the former ODC shareholders concerning the
disbursement of the remaining funds held in escrow since the acquisition in
October 1997. In this settlement the Company received $300,000 for certain third
party software licensing infringements existing prior to the acquisition.
Additionally, the settlement agreement released all claims by both parties to
the Agreement.
(b) Wireless Access, Inc.
On November 3, 1997, the Company completed the acquisition of Wireless Access,
Inc. ("WAI"), located in Santa Clara, California. WAI developed and marketed
two-way wireless messaging devices.
The purchase price was negotiated based on projections of revenues from sales of
the wireless messaging 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 wireless messaging 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 wireless messaging market had 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.
Management made this strategic change due to the following reasons which were
not readily apparent during the acquisition process: (i) performance issues with
the wireless messaging 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 wireless messaging 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 concluded that the future forecasted
results for the acquired WAI products would 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
43
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
engineering development were expected to be contracted from elsewhere within the
Company. After making these changes, the Company evaluated the ongoing value of
the non-current assets of WAI. Based on this evaluation, the Company determined
that assets, principally goodwill and other intangibles, with a carrying value
of approximately $51 million at September 30, 1999 were impaired and wrote them
down by the remaining balance. Fair value was based on estimates of discounted
future cash flows to be generated by the acquired WAI products.
During the third quarter 2000, the Company entered into an escrow settlement
with the former WAI shareholders. The Acquisition Agreement ("the Agreement")
between the Company and the former WAI shareholders provided that $12 million of
the purchase price would be placed in escrow for the purpose of satisfying any
indemnity and representation and warranty claims that the Company might have.
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 to
certain specifications 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 product specifications. In February 1999, the Company
made a claim against the former WAI shareholders for the entire amount of the
escrow on the ground that WAI failed to comply with or was late in complying
with the manufacture dates and product specifications. In January 2000, the
representative of the former shareholders of WAI filed an answering statement to
this claim denying the allegations of the Company and asserting that the former
shareholders of WAI were entitled to all funds accumulated in the escrow. In
August 2000, the Company and the former shareholders entered into a settlement
agreement that disbursed $11.5 million of the escrow funds to the Company. As
part of this settlement the former WAI shareholders were disbursed $2.1 million
of the funds. The Company incurred approximately $600,000 of costs which have
been netted against the proceeds received. As all of the goodwill and other
intangibles related to the WAI acquisition were determined to be impaired and
were written off in the third quarter 1999, the net proceeds from the escrow
settlement of $10.9 million are included in the Company's discontinued
operations for the year ended December 31, 2000 (see Note 2). Additionally, the
settlement agreement released all claims by both parties to the Agreement.
14. STOCKHOLDERS' EQUITY
(a) 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 "Plan Committee") and are utilized to promote the
long-term financial interests and growth of the Company. The 1996 and 1991
Plans, as amended, authorize the grant of up to 7,650,000 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.
In April 2001, the Plan Committee extended the expiration date of 796,875 vested
options held by the Chairman of the Company from May 14, 2001 to May 14, 2006.
In connection with the extension, the Company recognized compensation expense of
$663,000.
Activity and price information regarding the Company's stock option plans is
summarized as follows:
Weighted Average
Shares Price Range Price
------- ------------- ----------------
Outstanding, January 1, 1999 ..................... 7,362 $0.17--43.59
Granted .......................................... 2,093 2.94--15.25
Exercised ........................................ (366) 0.17--10.82
Canceled ......................................... (2,008) 1.13--35.83
--------
Outstanding, December 31, 1999 ................... 7,081 0.40--43.59
Granted .......................................... 2,434 3.54--19.88
Exercised ........................................ (1,667) 0.40--17.13
Canceled ......................................... (933) 1.27--43.59
--------
Outstanding, December 31, 2000 ................... 6,915 1.13--43.59 $8.32
Granted .......................................... 3,098 0.61--4.56 1.30
Exercised ........................................ (88) 1.27--3.44 1.44
Canceled ......................................... (2,905) 0.80--19.88 8.61
--------
Outstanding, December 31, 2001 ................... 7,020 0.61--43.59 5.19
========
44
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Of the outstanding options under the Company's stock option plans at December
31, 2001, approximately 3,682,000 are currently exercisable. Approximately 1.2
million shares (all under the 1996 Plan) are available for grant as of December
31, 2001. The weighted-average exercise price for the currently exercisable
options at December 31, 2001 is $7.40. The weighted average remaining
contractual life of options outstanding is approximately 7.2 years.
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Ranges of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- ------------------------- ------ ---------------- ---------------- ------ -----------------
$0.61 to $0.80 ............... 2,173 9.6 $ 0.79 50 $ 0.80
$1.13 to $2.02 ............... 1,245 4.1 $ 1.27 1,116 $ 1.27
$2.16 to $8.25 ............... 2,018 7.8 $ 4.37 1,156 $ 4.04
$9.00 to $14.75 .............. 814 5.5 $ 9.79 697 $ 9.60
$15.25 to $43.59 ............. 770 6.2 $21.17 663 $21.76
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 2001, 2000 and 1999 was $0.84, $6.94 and
$1.71, respectively. As a result of the significant number of employee
terminations resulting from the 2001 restructuring activities, a credit to the
stock based compensation expense was included in the 2001 expense incurred
related to these employees in prior years. The compensation before adjustments
is $0.10 per share.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
2001 2000 1999
------------ ------------ ------------
Expected Life in Years ........................... 1 to 4 1 to 4 1 to 4
Risk Free Interest Rate .......................... 2.2% to 5.1% 5.8% to 6.1% 5.8% to 6.1%
Volatility ....................................... 1.15 1.03 .72
Dividend Yield ................................... -- -- --
45
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 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:
2001 2000 1999
-------- ------- ---------
Pro forma loss from continuing operations................... $(39,622) $(2,149) $(130,451)
Pro forma loss from continuing operations per share:
Loss per weighted average common share.................. (0.61) (0.04) (2.10)
Loss per common share - assuming dilution............... (0.61) (0.04) (2.10)
Contributed capital was increased $129,000 in 1999 which represents the income
tax benefits the Company realized in 1999 from stock options exercised.
(b) 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 February 1 and
August 1. The price for common stock to be offered under the ESP Plan for all
six-month periods prior to August 1, 2001 was 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. Effective August 1, 2001, for six-month periods beginning
August 1, 2001 and subsequent, the calculation of the price for common stock was
amended by the Company's board of directors to be 85% of the lower of the
closing price on the first day of the period, February 1 or August 1, or last
day of the period, July 31 or January 31. For the February 1, 2002 to July 31,
2002 period, the stock purchase price will be the lower of $1.45 or 85% of the
closing market price of the common stock on July 31, 2002. As of December 31,
2001, 1,307,560 shares had been issued at a purchase prices ranging from $0.80
to $37.94 with 698,690 shares reserved under the ESP Plan.
46
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(c) Income (Loss) from Continuing Operations per Common Share
The following table sets forth the computation of income (loss) from continuing
operations per share:
2001 2000 1999
--------- --------- --------
Numerator:
Income (loss) from continuing operations ................... $ (38,008) $ 5,503 $ (5,763)
Denominator:
Denominator for basic income (loss) per share -
weighted average shares .................................. 64,802 64,087 62,182
Effect of dilutive securities:
stock options ............................................ -- 2,879 --
--------- --------- --------
Denominator for diluted income (loss) per share-adjusted
weighted average shares and assumed conversions .......... 64,802 66,966 62,182
========= ========= ========
Income (loss) from continuing operations per weighted
average common share........................................ $ (0.59) $ 0.09 $ (0.09)
========= ========= ========
Income (loss) from continuing operations per common share -
assuming dilution ......................................... $ (0.59) $ 0.08 $ (0.09)
========= ========= ========
(d) Stock Repurchase Programs
In December 2000, the Board of Directors rescinded its 1996 stock repurchase
program and authorized the repurchase of up to 3.0 million shares of the
Company's common stock. In September 2001, the stock repurchase program was
amended to authorize management the ability to repurchase up to 5% of the
Company's outstanding common stock, or approximately 3.3 million shares based on
shares outstanding as of December 31, 2001. For the years ended December 31,
2001 and 2000, the Company repurchased 105,900 and 12,500 shares at a total cost
of approximately $85,000 and $40,000, respectively.
(e) 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
and June 2, 2000 (the "Amendments") 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 Amendments 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
47
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
The Amendments provide that, instead of the 15% beneficial ownership level
described above, SWIB's beneficial ownership level will be 20% through June 15,
2001 and, after that date, will be reduced to (i) 16% if SWIB does not
beneficially own 16% or more of Glenayre's outstanding common stock on June 15,
2001 or (ii) if SWIB beneficially owns 16% or more of Glenayre's outstanding
common stock at the close of business on June 15, 2001, 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
December 31, 2001, SWIB owned approximately 19.5%.
The Rights will expire on May 21, 2007, unless redeemed earlier.
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company issues bid and performance letters
of credit which in the aggregate amounted to approximately $5.2 million and
$16.3 million as of December 31, 2001 and 2000, respectively. 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.
At December 31, 2001, the Company has approximately $1.8 million of outstanding
purchase commitments mainly to its suppliers of inventories and has an
outstanding contractual commitment to spend an additional $1.8 million to
prepare its Vancouver, British Columbia office tower for its anticipated sale.
The Company is, from time to time, involved in various disputes and legal
actions related to its business operations. In the opinion of the Company, an
adverse resolution of any currently identified claims or actions would not have
a material effect on the Company's financial position, future results of
operations or cash flows.
16. INTERIM FINANCIAL DATA--UNAUDITED
Quarters Ended
-----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
2001 (a)
Total revenues ........................................ $ 26,927 $ 26,505 $ 22,642 $ 21,427
Gross profit (exclusive of depreciation and
amortization) ......................................... 15,968 14,140 14,113 13,893
Income (loss) from continuing operations ............ 1,166 (37,121) (1,821) (232)
Income (loss) from continuing operations per
weighted average common share ....................... 0.02 (0.57) (0.03) 0.00
Income (loss) from continuing operations per common
share-assuming dilution ............................. 0.02 (0.57) (0.03) 0.00
2000 (b)
Total revenues ........................................ $ 28,165 $ 28,925 $ 34,519 $ 30,753
Gross profit (exclusive of depreciation and
amortization) ......................................... 16,930 19,536 21,086 16,781
Income (loss) from continuing operations .............. 2,106 3,107 2,079 (1,789)
Income (loss) from continuing operations per weighted
average common share ................................ .03 .05 .04 (.03)
Income (loss) from continuing operations per common
share-assuming dilution ............................. .03 .04 .04 (.03)
48
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(a) The results for the second, third and fourth quarters of 2001
included $11.2 million, $1.1 million and $(1.1) million of
restructuring expenses (credits), respectively, in connection with
the Company's decision to phase out the prepaid product line and
relocate the corporate headquarters from Charlotte, North Carolina
to Atlanta, Georgia (see Note 8).
(b) The results for the fourth quarter of 2000 were impacted by net
proceeds of $320,000 received from an escrow settlement between
the Company and former ODC shareholders (see Note 13). The results
for the third quarter of 2000 reflect a revised presentation as
Discontinued Operations of the net proceeds related to $10.9
million received from an escrow settlement between the Company and
former WAI shareholders (see Note 13). The amount was reflected as
Continuing Operations, "Other Income--Escrow Settlement" in the
Company's Form 10-Q for the quarter ended September 30, 2001 for
the three and nine month periods ended September 30, 2000.
17. RELATED PARTY TRANSACTIONS
In September 2001, in connection with the relocation of its President and Chief
Executive Officer, the Company loaned the executive $350,000. The promissory
note bears interest at 6.75% and requires 11 monthly payments of $2,500 and the
balance to be paid on September 25, 2002. The promissory note is secured by the
executive's primary residence.
18. SUBSEQUENT EVENTS
In January 2002, the Company sold its held for sale building located in Quincy,
Illinois for cash proceeds of approximately $4.4 million. The Company has
entered into a five-year lease with the purchaser for approximately 66,000
square feet of the building. The Company recognized an impairment loss of
$525,000 in the fourth quarter of 2001 upon writing the building down to its
fair value less cost to sell.
49
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 16, 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
A. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
(i) Financial Statements
Page
----
Report of Ernst & Young LLP Independent Auditors............................................. 27
Consolidated Balance Sheets at December 31, 2001 and 2000.................................... 28
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999... 29
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999............................................................................. 30
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999... 31
Notes to Consolidated Financial Statements................................................... 32
(ii) Supplemental Schedule:
(For the years ended December 31, 2001, 2000 and 1999)
Schedule II - Valuation and Qualifying Accounts............................................. 53
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, 2001, the Company did not file any
current reports on Form 8-K.
50
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 Multiplex 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 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.
4.4 Second Amendment dated June 2, 2000 to the Preferred Shares Rights Agreement dated May 21, 1997 incorporated herein by
reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated June 2, 2000.
10.1 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.*
10.2 Agreement dated October 1, 1999 between the Company and Clarke H. Bailey was filed as Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference.*
10.3 Employment Agreement dated July 31, 2001 between the Company and Eric L. Doggett was filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001 and is incorporated herein by reference.*
10.4 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.*
51
10.5 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.*
10.6 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 Debra Ziola (dated August 1, 2001), 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.*
10.7 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.*
10.8 Glenayre Technologies, Inc. Incentive Plan for the year ended December 31, 2000 was filed as Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference.*
10.9 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.*
10.10 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.*
10.11 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.*
21.1 Subsidiaries of the Company is filed herewith.
23.1 Consent of Ernst & Young LLP is filed herewith.
- ---------------
*Management Contract
52
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)
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
----------- ----------- ---------- ---------- ----------- ---------
ACCOUNTS RECEIVABLE - ALLOWANCE FOR
DOUBTFUL ACCOUNTS :
Year ended December 31, 2001 ........ $ 3,639 $ 1,935 $ -- $ 3,046 $ 2,528
Year ended December 31, 2000 ........ 1,655 2,008 -- 24 3,639
Year ended December 31, 1999 ........ 913 1,134 -- 392 1,655
NOTES RECEIVABLE - ALLOWANCE FOR
DOUBTFUL ACCOUNTS:
Year ended December 31, 2001 ........ $ 93 $ 220 $ -- $ (231) $ 82
Year ended December 31, 2000 ........ 107 (14) -- -- 93
Year ended December 31, 1999 ........ 29 78 -- -- 107
VALUATION ALLOWANCE ON
INVENTORIES:
Year ended December 31, 2001......... $ 1,218 $ 4,248 $ (243) $ 1,211 $ 4,012
Year ended December 31, 2000 ........ 909 555 (147) 99 1,218
Year ended December 31, 1999 ........ 1,799 882 (447) 1,325 909
53
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 28, 2002.
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 28, 2002:
/s/ Clarke H. Bailey /s/ Ramon D. Ardizzone
- -------------------------- ----------------------
Clarke H. Bailey Ramon D. Ardizzone
Chairman of the Board Director
/s/ Donald S. Bates
/s/ Eric L. Doggett -------------------------
- -------------------------- Donald S. Bates
Eric L. Doggett Director
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Matthew J. Desch
-------------------------
Matthew J. Desch
/s/ Debra Ziola Director
- --------------------------
Debra Ziola
Senior Vice President, /s/ Peter W. Gilson
Chief Accounting Officer and Interim Chief -------------------------
Financial Officer (Principal Financial Officer Peter W. Gilson
and Principal Accounting Officer) Director
/s/ John J. Hurley
-------------------------
John J. Hurley
Director
/s/ Stephen P. Kelbley
-------------------------
Stephen P. Kelbley
Director
/s/ Horace H. Sibley
-------------------------
Horace H. Sibley
Director
/s/ Howard W. Speaks, Jr.
-------------------------
Howard W. Speaks, Jr.
Director
54
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 Multiplex 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 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.
4.4 Second Amendment dated June 2, 2000 to the Preferred Shares Rights Agreement dated May 21, 1997 incorporated herein by
reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated June 2, 2000.
10.1 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.*
10.2 Agreement dated October 1, 1999 between the Company and Clarke H. Bailey was filed as Exhibit 10.3 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference.*
10.3 Employment Agreement dated July 31, 2001 between the Company and Eric L. Doggett was filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001 and is incorporated herein by reference.*
10.4 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.*
10.5 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.*
10.6 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 Debra Ziola (dated August 1, 2001), 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.*
10.7 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.*
10.8 Glenayre Technologies, Inc. Incentive Plan for the year ended December 31, 2000 was filed as Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and is incorporated herein by reference.*
10.9 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.*
10.10 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.*
10.11 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.*
21.1 Subsidiaries of the Company is filed herewith.
23.1 Consent of Ernst & Young LLP is filed herewith.
- ---------------
*Management Contract