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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ To ________
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11360 LAKEFIELD DRIVE, DULUTH, GEORGIA 30097
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(770) 283-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at August 13, 2002 was 65,419,472 shares.
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information:
Item 1. Financial Statements
Page
----
Independent Auditors' Review Report................................................. 3
Condensed Consolidated Balance Sheets as of
June 30, 2002 (Unaudited) and December 31, 2001.................................. 4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2002 and 2001 (Unaudited)............................ 5
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2002 and 2001 (Unaudited).............................. 6
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2002 (Unaudited).............................. 7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 (Unaudited)............................. 8
Notes to Condensed Consolidated Financial Statements (Unaudited).................. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................16
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 31
Part II - Other Information:
Item 1. Legal Proceedings................................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders..................................32
Item 6. Exhibits and Reports on Forms 8-K....................................................32
2
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REVIEW REPORT
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Atlanta, Georgia
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of June 30, 2002, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2002 and 2001, the condensed consolidated
statement of stockholders' equity for the six-month period ended June 30, 2002
and the condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Glenayre
Technologies, Inc. as of December 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein) and in our report dated February 5, 2002, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2001, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Atlanta, Georgia
July 22, 2002
3
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 97,384 $ 89,149
Short-term investments 5,000 --
Restricted cash 354 5,227
Accounts receivable, net 13,477 17,153
Inventories, net 8,619 8,168
Inventories, discontinued operations, net -- 282
Assets held for sale -- 4,350
Assets held for sale, discontinued operations, net 10,614 11,154
Prepaid expenses and other current assets 9,381 3,846
--------- ---------
Total Current Assets 144,829 139,329
Property, plant and equipment, net 31,557 35,588
Other assets 1,045 2,479
--------- ---------
TOTAL ASSETS $ 177,431 $ 177,396
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,127 $ 6,729
Accrued liabilities 25,515 28,770
Accrued liabilities, discontinued operations 10,606 24,654
--------- ---------
Total Current Liabilities 40,248 60,153
Other liabilities 7,037 7,669
Accrued liabilities, discontinued operations - noncurrent 19,536 13,884
Stockholders' Equity:
Preferred stock, $.01 par value; authorized: 5,000,000 shares,
no shares issued and outstanding -- --
Common stock, $.02 par value; authorized: 200,000,000 shares,
outstanding: 2002 - 65,282,794 shares; 2001 - 64,971,834 shares 1,305 1,299
Contributed capital 361,332 361,011
Accumulated deficit (252,027) (267,251)
Accumulated other comprehensive income -- 631
--------- ---------
Total Stockholders' Equity 110,610 95,690
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 177,431 $ 177,396
========= =========
See notes to condensed consolidated financial statements.
4
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
------------- ------------
REVENUES:
Product sales $ 13,747 $ 22,204
Service revenues 4,360 4,301
------------ -------------
Total Revenues 18,107 26,505
------------- ------------
COST OF REVENUES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION SHOWN SEPARATELY
BELOW):
Cost of sales 6,149 6,353
Cost of services 2,470 3,171
------------- ------------
Total Cost of Revenues 8,619 9,524
------------- ------------
GROSS MARGIN (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION
SHOWN SEPARATELY BELOW): 9,488 16,981
OPERATING EXPENSES:
Selling, general and administrative expense 7,330 10,784
Provision for doubtful receivables, net of recoveries ( 403) (824)
Research and development expense 4,110 4,972
Restructuring expense 577 9,405
Depreciation and amortization expense 2,280 2,294
------------- ------------
Total Operating Expenses 13,894 26,631
------------- ------------
OPERATING LOSS (4,406) (9,650)
------------- ------------
OTHER INCOME (EXPENSES):
Interest income, net 520 1,061
Gain (loss) on disposal of assets, net 36 (1,755)
Realized gain on securities, net 122 1,149
Other, net 93 (446)
------------- ------------
Total Other Income 771 9
------------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,635) (9,641)
Provision for income taxes - 27,480
------------- ------------
LOSS FROM CONTINUING OPERATIONS (3,635) (37,121)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NET
OF INCOME TAXES) 15,782 (227,725)
------------- ------------
NET INCOME (LOSS) $ 12,147 $ (264,846)
============= ============
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE:
Loss from continuing operations $ (0.06) $ (0.57)
Discontinued operations 0.24 (3.52)
------------- ------------
Net income (loss) per weighted average common share $ 0.19 $ (4.09)
============= ============
INCOME (LOSS) PER COMMON SHARE --- ASSUMING DILUTION:
Loss from continuing operations $ (0.06) $ (0.57)
Discontinued operations 0.24 (3.52)
------------- -------------
Net income (loss) per weighted average common share $ 0.19 $ (4.09)
============= =============
See notes to condensed consolidated financial statements
5
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------------
2002 2001
-------- ---------
REVENUES:
Product sales $ 33,083 $ 45,976
Service revenues 8,458 7,456
-------- ---------
Total Revenues 41,541 53,432
-------- ---------
COST OF REVENUES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION
SHOWN SEPARATELY BELOW):
Cost of sales 12,443 16,746
Cost of services 4,754 6,578
-------- ---------
Total Cost of Revenues 17,197 23,324
-------- ---------
GROSS MARGIN (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION
SHOWN SEPARATELY BELOW): 24,344 30,108
OPERATING EXPENSES:
Selling, general and administrative expense 15,294 23,137
Provision for doubtful receivables, net of recoveries (342) 738
Research and development expense 8,442 11,344
Restructuring expense 368 9,405
Depreciation and amortization expense 4,510 4,719
Adjustment to loss on sale of business -- (94)
-------- ---------
Total Operating Expenses 28,272 49,249
-------- ---------
OPERATING LOSS (3,928) (19,141)
-------- ---------
OTHER INCOME (EXPENSES):
Interest income, net 999 2,503
Gain (loss) on disposal of assets, net 33 (1,767)
Realized gain (loss) on securities, net (250) 11,020
Other, net 99 (465)
-------- ---------
Total Other Income 881 11,291
-------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,047) (7,850)
Provision (benefit) for income taxes (2,413) 28,105
-------- ---------
LOSS FROM CONTINUING OPERATIONS (634) (35,955)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NET
OF INCOME TAXES) 15,858 (234,545)
-------- ---------
NET INCOME (LOSS) $ 15,224 $(270,500)
======== =========
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE:
Loss from continuing operations $ (0.01) $ (0.56)
Discontinued operations 0.24 (3.63)
-------- ---------
Net income (loss) per weighted average common share $ 0.23 $ (4.18)
======== =========
INCOME (LOSS) PER COMMON SHARE --- ASSUMING DILUTION:
Loss from continuing operations $ (0.01) $ (0.56)
Discontinued operations 0.24 (3.63)
-------- ---------
Net income (loss) per weighted average common share $ 0.23 $ (4.18)
======== =========
See notes to condensed consolidated financial statements
6
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMMON STOCK CONTRIBUTED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT INCOME EQUITY
------ ------ ----------- ----------- ------------- -------------
Balances, January 1, 2002 64,972 $1,299 $361,011 $(267,251) $ 631 $ 95,690
Net income 15,224 15,224
Other Comprehensive Income:
Adjustment to unrealized gain on
securities available-for-sale,
net of tax (631) (631)
--------
Comprehensive Income 14,593
Shares issued for ESP Plan and
option exercices 311 6 321 327
------ ------ -------- --------- ----- --------
Balances, June 30, 2002 65,283 $1,305 $361,332 $(252,027) $ -- $110,610
====== ====== ======== ========= ===== ========
See notes to condensed consolidated financial statements.
7
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2002 2001
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 9,435 $(10,573)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,450) (16,906)
Proceeds from sale of property, plant and equipment 4,517 18
Investment in short-term securities (5,000) --
Proceeds from sale of available-for-sale securities 406 13,323
-------- --------
Net cash used in investing activities (1,527) (3,565)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 327 985
Repurchase of common stock -- (15)
-------- --------
Net cash provided by financing activities 327 970
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,235 (13,168)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,149 71,866
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 97,384 $ 58,698
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 24 $ 83
Taxes 165 1,398
See notes to condensed consolidated financial statements.
8
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Glenayre Technologies, Inc. and subsidiaries ("the Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Certain reclassifications have been made
to the prior period's financial information to conform with the presentation
used in 2002. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. Glenayre's financial results in any quarter are highly
dependent upon various factors, including the timing and size of customer orders
and the shipment of products for large orders. Large orders from customers can
account for a significant portion of products shipped in any quarter.
Accordingly, the shipment of products in fulfillment of such large orders can
dramatically affect the results of operations of any single quarter.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 2001.
2. 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 2001, the Company recorded pre-tax restructuring
charges of approximately $11.5 million. As a result of these restructuring
activities, the Company incurred a reduction of approximately 220 positions
impacting several functional areas of the Company and expensed approximately
$5.4 million primarily for employee severance and outplacement services and
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 the impairment of long-lived assets which
was classified as loss on disposal of assets in the Company's Consolidated
Statement of Operations for the year ended December 31, 2001.
During the first quarter 2002, the Company recorded a restructuring credit of
$210,000 primarily related to the collection of accounts receivable previously
reserved for in the 2001 restructuring charge and the change in estimate of
accrued severance benefits related to the reduction of the Company's workforce.
During the second quarter of 2002, the Company recorded a restructuring charge
of $759,000 for severance and outplacement services related to the further
reduction of the Company's workforce by approximately 30 positions.
Additionally, the Company recorded net favorable adjustments to its original
estimates associated with the Company's 2001 restructuring activities of
$182,000 primarily related to a reduction in the prepaid product line warranty
obligation partially offset by additional facility lease expenses.
9
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
The consolidation and exit process for all of these above facilities was
completed by the end of the first quarter 2002. Payments related to severance
and outplacement services, and consolidation and exit costs were approximately
$2.0 million and $1.1 million, respectively, during the six months ended June
30, 2002. The restructuring reserve balance was approximately $3.5 million at
June 30, 2002. Management believes the remaining reserves for this business
restructuring will be adequate to complete this consolidation and exit plan.
The following is a summary of activity for the six months ended June 30, 2002
related to the restructuring reserves:
Business Exit,
Severance Lease Cancellation and
and Benefits Other Costs Total
------------ ---------------------- -------
Balance at December 31, 2001 $ 2,500 $ 3,817 $ 6,317
Expense Accrued 759 -- 759
Credits and changes in estimates (62) (396) (458)
Payments and charges (1,988) (1,095) (3,083)
------- ------- -------
Balance at June 30, 2002 $ 1,209 $ 2,326 $ 3,535
======= ======= =======
3. DISCONTINUED OPERATIONS
In May 2001, the Company began exiting its Wireless Messaging (Paging) business
and refocusing all of its strategic efforts on its communications messaging
systems business consisting of its Enhanced Services Platform and Unified
Communication systems 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 values in the
Company's condensed consolidated balance sheet as of June 30, 2002 in accordance
with Accounting Principles Board Opinion No. 30. All business transactions
related to the Wireless Messaging (Paging) segment, with the exception of those
relating to existing contractual obligations, ceased in May 2002.
10
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Results of discontinued operations consist of the following:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2002(1) 2001 2002(1) 2001
------------ ------------ ---------- ----------
Net sales $ 5,803 $ 4,016 $ 7,962 $ 23,014
Loss from discontinued operations:
Income (loss) from operations before
income taxes 3,371 (38,344) 3,447 (48,474)
Benefit (provision) for income taxes -- (3,310) -- --
-------- --------- -------- ---------
Income (loss) from operations 3,371 (41,654) 3,447 (48,474)
Gain (loss) on disposal before income taxes 7,911 (156,800) 7,911 (156,800)
Provision (benefit) for income taxes (4,500) 29,271 (4,500) 29,271
-------- --------- -------- ---------
Income (loss) on disposal of discontinued
operations 12,411 (186,071) 12,411 (186,071)
-------- --------- -------- ---------
Net income (loss) from discontinued
Operations $ 15,782 $(227,725) $ 15,858 $(234,545)
======== ========= ======== =========
(1) Includes the results of discontinued operations from the beginning of the
period to May 23, 2002, the end of the transition period.
The net loss from discontinued operations consists of (a) operating losses
incurred in the Wireless Messaging (Paging) segment adjusted for cash received
from Wireless Messaging (Paging) trade receivables previously reserved and (b)
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) related net tax
expense, primarily related to a valuation allowance for related deferred tax
assets. Numerous estimates and assumptions were made in determining the net
realizable value related to the discontinued assets and various obligations
noted above. These estimates are subject to adjustment resulting from, but not
limited to, future changes in real estate market conditions or changes in
estimates related to the wind down plan.
In the fourth quarter of 2001, as a result of the Company's review of the
estimated asset values and liabilities and future commitments related to the
discontinued operations, a net reduction in the loss on disposal of $408,000 was
recorded. 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 during the transition period, favorable
negotiation of inventory purchase commitments and the sale of intellectual
property.
11
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
During the second quarter of 2002, the Company recorded an additional reduction
in the loss on disposal of discontinued operations of $15.8 million as a result
of the Company's review of the estimated asset values and liabilities and future
commitments related to the discontinued operations. These further adjustments to
the original estimates made in May 2001 were primarily due to better than
anticipated revenues during the transition period, collections of accounts
receivable previously reserved for, better than expected warranty experience and
reduced income tax liabilities offset by additional write-down of the market
values of the Vancouver and Singapore facilities.
4. SALE OF FACILITY
In January 2002, the Company sold its building held for sale 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
$523,000 in the fourth quarter of 2001 upon writing the building down to its
fair value less cost to sell.
5. RESTRICTED CASH AND SHORT-TERM INVESTMENTS
Restricted cash at June 30, 2002 consists of term deposits pledged as collateral
to secure letters of credit substantially all of which expire in less than one
year. Short-term investments at June 30, 2002 consist of a bank certificate of
deposit with an original maturity of greater than three months.
6. ACCOUNTS RECEIVABLE
Accounts receivable related to continuing operations consist of:
June 30, December 31,
2002 2001
-------- ------------
Trade receivables $ 15,358 $ 19,681
Less: allowance for doubtful accounts (1,881) (2,528)
-------- --------
$ 13,477 $ 17,153
======== ========
7. INVENTORIES
Inventories related to continuing operations consist of:
June 30, December 31,
2002 2001
-------- ------------
Raw materials $5,047 $5,094
Work-in-process 1,680 1,627
Finished goods 1,892 1,447
------ ------
$8,619 $8,168
====== ======
In connection with the introduction of new products and services as well as in
an effort to demonstrate its products to new and existing customers, the
Company, from time to time, delivers new product test systems for demonstration
and testing to customer third-party locations. The Company expenses the cost
associated with new product test equipment upon the shipment from the Company's
facilities.
12
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
8. OTHER ASSETS AND COMPREHENSIVE INCOME
During the second quarter of 2002 the Company sold its remaining investment in
Proxim Corporation ("Proxim") which merged in March 2002 with Western Multiplex
Corporation, a former subsidiary, of which the Company sold 95% of the equity in
November 1999. During the three months ended June 30, 2002 and 2001, the Company
sold 56,700 and 190,000 shares of Proxim stock at a pre-tax gain of $122,000 and
$1.1 million, respectively. During the six months ended June 30, 2002 and 2001,
the Company sold 136,800 and 1.2 million shares of Proxim stock at a pre-tax
gain of $301,000 and $11.9 million, respectively. The Company has fully
liquidated its shares of Proxim as of June 30, 2002 and accordingly, the Company
has realized all previously unrealized holding gains related to this
available-for-sale security.
During the first quarter of 2002, the Company recorded a pre-tax impairment
charge of approximately $77,000 related to the decline in value deemed to be
other than temporary on an additional available-for-sale security held by the
Company. In addition, the Company recorded a pre-tax impairment charge of
approximately $475,000 related to its investment in a privately held company.
This impairment charge was determined based upon management's review of the
valuations of publicly traded companies in similar sectors and other factors
such as the status of the investees' technology, operating performance and
financial condition.
Comprehensive income was $14.6 million for the six months ended June 30, 2002.
9. INCOME TAXES
The Company's consolidated income tax provision (benefit) was different from the
amount computed using the U.S. federal statutory income tax rate for the
following reasons:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
------- -------- ------- --------
Income tax provision at federal U.S. statutory
rate $(1,272) $ (3,374) $(1,067) $ (2,749)
Increase in valuation allowance 1,263 30,874 1,113 30,874
State and foreign taxes, net of federal benefit
and related valuation allowance -- -- -- --
Benefit from foreign sales corporation -- -- -- (50)
Benefit from NOL carryback claim -- -- (2,480) --
Other non deductibles 9 (20) 21 30
------- -------- ------- --------
Income tax provision (benefit) $ -- $ 27,480 $(2,413) $ 28,105
======= ======== ======= ========
In the first quarter the Company posted a one-time benefit for refundable
alternative minimum taxes under the "Job Creation and Worker Assistance Act of
2002" (the Act) of $2.5 million. The Act became effective on March 9, 2002 and
among other things extends the carryback period for net operating losses from
two to five years for taxpayers with net operating losses for any tax year
ending during 2001 or
13
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
2002. The new provision also temporarily suspends the 90% limitation found in
Internal Revenue Code Section 56(d)(1) on the use of net operating loss
carrybacks arising in tax years ending in 2001 and 2002 for alternative minimum
tax purposes. Therefore, taxpayers that have paid alternative minimum tax
because of the 90% limitation on the use of net operating losses to offset
alternative minimum taxable income, can utilize this provision to obtain a
refund.
10. INCOME FROM CONTINUING OPERATIONS PER COMMON SHARE
The following table sets forth the computation of income from continuing
operations per share:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Loss from continuing operations $ (3,635) $(37,121) $ (634) $(35,955)
Denominator:
Denominator for basic and diluted income
from continuing operations per share -
weighted average shares 65,281 64,695 65,245 64,639
-------- -------- -------- --------
Loss from continuing operations
per weighted average basic and diluted
common share $ (0.06) $ (0.57) $ (0.01) $ (0.56)
======== ======== ======== ========
11. 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".
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.
12. CONTINGENT LIABILITY
On November 1, 1999, the Company sold 95% of the equity in its microwave radio
business, Western Multiplex Corporation, which merged with Proxim Corporation in
March 2002. The Company is contingently liable for Proxim's building lease
payments through June 2006. The maximum contingent liability as of June 30, 2002
for this obligation is approximately $2.5 million.
13. RELATED PARTY TRANSACTIONS
In August 2001, in connection with the relocation of its President and Chief
Executive Officer, the Company loaned the executive $350,000, which was fully
secured by his primary residence. In May 2002, the loan was repaid in full. The
promissory note bore interest at 6.75%, required 11 monthly payments of $2,500
and the balance was to be paid on or before August 10, 2002.
14
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
14. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("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 was adopted by the Company
effective January 1, 2002 and the initial adoption did not have a significant
impact on the Company's financial position and results of operations. The
Company has facilities associated with its discontinued paging operations
located in Vancouver, British Columbia and Singapore. These facilities are
currently being actively marketed for sale and are considered held for sale
assets. The Company will continue to monitor the status of the sales activities
and market conditions surrounding these held for sale facilities throughout the
remainder of 2002 and the potential impacts of SFAS No. 144 should these
facilities not be sold on or prior to December 31, 2002.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements Nos. 4,
44, and 62, Amendment of FASB Statement No. 13 and Technical Corrections. For
most companies, SFAS 145 will require gains and losses on extinguishment of debt
to be classified as income or loss from continuing operations rather than as
extraordinary items as previously required under SFAS 4. Extraordinary treatment
will be required for certain extinguishments as provided in APB Opinion No. 30.
The statement also amends SFAS No. 13 for certain sales-leaseback and sublease
accounting. The Company is required to adopt the provisions of SFAS 145
effective January 1, 2003. The Company is currently evaluating the impact of the
adoption of this statement.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
the Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
including Certain Costs Incurred in a Restructuring". SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF 94-3 had recognized the liability
at the commitment date to an exit plan. The Company is required to adopt the
provisions of SFAS 146 effective for exit or disposal activities initiated after
December 31, 2002. The Company is currently evaluating the impact of the
adoption of this statement.
15
ITEM 2. 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, but not
limited to, those set forth under "Risk Factors That May Affect Future Results"
below. All forward-looking statements included in this Report on Form 10-Q 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 voice, fax and e-mail messaging, voice
navigation and voice dialing 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 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
16
incentives, bad debts, inventories, investments, income taxes, warranty
obligations, restructuring as well as 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.
The Company's revenue recognition policy is significant because its revenue is a
key component of the Company's results of operations. In addition, the Company's
revenue recognition determines the timing of certain expenses, such as
commissions and royalties. The Company follows specific 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 the Company's operating
results to vary significantly from quarter to quarter and could result in future
operating losses.
Commitments and Contingencies. During the ordinary course of business
contingencies arise resulting from an existing condition, situation, or set of
circumstances involving uncertainty as to possible gain, a gain contingency, or
loss, a loss contingency, that will ultimately be resolved when one or more
future events occur or fail to occur. Resolution of the uncertainty may confirm
the acquisition of an asset or the reduction of a liability or the loss or
impairment of an asset or the incurrence of a liability. When loss contingencies
exist, such as, but not limited to, pending or threatened litigation, actual or
possible claims and assessments, collectibility of receivables or obligations
related to product warranties and product defects or statutory obligations, the
likelihood of the future event or events occurring generally will confirm the
loss or impairment of an asset or the incurrence of a liability. The Company
accounts for such contingencies in accordance with the provisions of Statement
of Financial Accounting Standards No. 5.
Bad Debt. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
On a monthly basis the Company applies a reserve calculation based on the agings
of its receivables and either increases or decreases its estimate of doubtful
accounts accordingly. 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
17
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. In connection
with the introduction of new products and services as well as in an effort to
demonstrate its products to new and existing customers, the Company, from time
to time, delivers new product test systems for demonstration and test to
customer third-party locations. The Company expenses the cost associated with
new product test equipment upon shipment from the Company's facilities.
Accrued Restructuring and Discontinued Operations. During fiscal year 2001, the
Company recorded significant estimated liabilities in connection with the
discontinuance of its Wireless Messaging (Paging) business and restructurings
related to its continuing operations. These liabilities include, among other
things, estimates pertaining to employee separation costs, and the settlements
of contractual obligations resulting from these activities. Since the actual
costs may differ from these original estimates, the Company performs on-going
evaluations of the original estimates and makes revisions accordingly.
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 June
30, 2002, the Company's net deferred tax asset was fully reserved. The Company
has assessed the realizability of the net deferred asset at June 30, 2002 and
determined due to the significant net operating losses, primarily relating to
the Company's discontinued Wireless Messaging (Paging) business and recent
operating losses incurred by its remaining restructured business, no historical
basis for projecting future taxable income exists and therefore the entire net
deferred tax asset 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.
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 June 30, 2002. See Note 3 to the Company's
Condensed 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 consisted of (a) operating losses of
approximately $46.8 million incurred in the Wireless Messaging (Paging) segment
and (b) 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,
18
(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) net tax expense, primarily
related to 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, were
completed in May 2002. As of June 30, 2002, the Company reported net realizable
assets of approximately $10.6 million related to the discontinued operations
that consisted primarily of facilities in Vancouver, British Columbia and
Singapore that are currently being marketed for sale. The Company has classified
these assets as "Assets held for sale, discontinued operations, net" in the
current assets section of its Condensed Consolidated Balance Sheet. In 2002, the
Company adopted FAS 144, which may impact the accounting for these long-lived
assets held for sale to be classified as held for use in its continuing
operations if certain requirements can not be met and may require adjustment and
reclassifications to its results of continuing operations. The Company reported
current liabilities and non-current liabilities of $10.6 million and $19.5
million, respectively, at June 30, 2002, related to the discontinued Wireless
Messaging (Paging) segment. Approximately $3.6 million of these liabilities
relate to warranty obligations and other obligations recorded prior to the
discontinuance of the segment. Approximately $26.5 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 $5 million of these one-time charges will be
disbursed during the remainder of 2002, approximately $10 million in 2003 and
the remaining in 2004 and beyond. A management team focused solely on the wind
down of the Wireless Messaging (Paging) segment was put in place in 2001. A
portion of this team remains in place and is currently focused on managing the
Company's contractual obligations and commitments which existed prior to the
formal disposal. 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 its future obligations
associated with its pre-existing contractual commitments as well as the real
estate market conditions, in order to assess the current carrying values of the
assets and liabilities associated with the discontinued operations. These
original estimates have been and are subject to further adjustment as a result
of future changes in real estate market conditions or in estimates related to
its future obligations associated with its pre-existing contractual commitments.
See Note 3 to the Company's Condensed Consolidated Financial Statements.
19
RESULTS OF CONTINUING OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales of continuing operations represented by certain line items from Glenayre's
consolidated statements of operations:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Product sales 76% 84% 80% 86%
Service revenues 24 16 20 14
---- ---- ---- ----
Total Revenues 100 100 100 100
---- ---- ---- ----
COST OF REVENUES (EXCLUSIVE OF
DEPRECIATION AND AMORTIZATION SHOWN
SEPARATELY BELOW):
Cost of sales 34 24 30 32
Cost of services 14 12 11 12
---- ---- ---- ----
Total Cost of Revenues 48 36 41 44
---- ---- ---- ----
GROSS MARGIN (EXCLUSIVE OF DEPRECIATION
AND AMORTIZATION SHOWN SEPARATELY BELOW): 52 64 59 56
OPERATING EXPENSES:
Selling, general and administrative expense 40 40 37 43
Provision for doubtful receivables, net of recoveries (2) (3) (1) 1
Research and development expense 23 19 20 21
Restructuring expense adjustment 3 35 1 18
Depreciation and amortization expense 12 9 11 9
Adjustment to loss on sale of business -- -- -- *
---- ---- ---- ----
Total Operating Expenses 76 100 68 92
---- ---- ---- ----
OPERATING LOSS (24) (36) (9) (36)
---- ---- ---- ----
OTHER INCOME (EXPENSES):
Interest income, net 3 4 2 5
Loss on disposal of assets, net * (6) * (3)
Realized and unrealized gain (loss) on
available-for-sale securities, net 1 4 (1) 20
Other, net * (2) * (1)
---- ---- ---- ----
Total Other Income 4 0 1 21
---- ---- ---- ----
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (20) (36) (8) (15)
Provision (benefit) for income taxes -- 104 (6) 52
---- ---- ---- ----
LOSS FROM CONTINUING
OPERATIONS (20)% (140)% (2)% (67)%
==== ==== ==== ====
- ---------------
* less than 0.5
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Revenues. Total revenues for the three months ended June 30, 2002 decreased 32%
to $18.1 million as compared to $26.5 million for the three months ended June
30, 2001. Product sales for the three months ended June 30, 2002 decreased 38%
to $13.7 million as compared to $22.2 million for the three months ended June
30, 2001. The decrease in product sales for the three months ended June 30, 2002
was due
20
primarily to the overall slowing of service provider capital spending and
accelerated customer purchasing in the first quarter of 2002. Service revenues
for the three months ended June 30, 2002 increased to $4.4 million as compared
to $4.3 million for the three months ended June 30, 2001.
International revenues increased to $4.5 million for the three months ended June
30, 2002 as compared to $3.3 million for the three months ended June 30, 2001
and accounted for 25% and 12% of total net sales for the three months ended June
30, 2002 and 2001, respectively. The increase was mainly due to an increase of
approximately $1.1 million of product sales in Latin America.
The Company is cautious about the timing of a market recovery in the
telecommunications sector and is planning for quarterly revenue to remain
consistent with the second quarter levels, ranging between $17 and $19 million
for the remainder of 2002. However, there can be no assurance that the Company's
revenue levels will remain at, reach or exceed historical levels in any future
period.
During the three months ended June 30, 2002, three customers individually
accounted for approximately 17%, 17% and 15%, respectively, of the Company's
total revenue from continuing operations. For the three months ended June 30,
2001, three customers individually accounted for 44%, 14% and 10%, 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 one
or more of these significant customers could have a material 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 product sales and services, exclusive of
depreciation and amortization, was 52% for the three months ended June 30, 2002
compared to 64% for the three months ended June 30, 2001. Profit margin on
products sold, exclusive of depreciation and amortization, (product margin), was
55% for the three months ended June 30, 2002 compared to 71% for the three
months ended June 30, 2001. Profit margin on services, exclusive of depreciation
and amortization, (service margin), was 43% for the three months ended June 30,
2002 compared to a 26% for the three months ended June 30, 2001. The decrease in
the product margin is primarily a result of lower volume of product revenue
combined with more competitive pricing and increased shipments of non-revenue
generating new product test systems. Service margins increased in 2002 as a
result of the Company's restructuring activities, including the abandonment of
its 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. Increased competition in its industry has
adversely affected the Company's margins. At the currently projected revenue
levels for the remainder of 2002, the Company anticipates total gross margins in
the mid-fifty percent range. However, there can be no assurance that the
Company's gross margins will meet these anticipated levels.
Selling, General and Administrative Expense. Selling, general and administrative
expenses were $7.3 million and $10.8 million for the three months ended June 30,
2002 and 2001, respectively. The decrease is primarily due to the reduced cost
structure resulting from the 2001 restructuring activities initiated in June
2001 and employee relocation costs incurred in the second quarter of 2001
related to the closure and transition from the Charlotte office to the Atlanta
office.
Provision for Doubtful Receivables. The provision for doubtful receivables was a
credit of $403,000 for the three months ended June 30, 2002 as compared to a
credit of $824,000 for the three months ended June 30, 2001. The credits were a
result of collections made during the second quarters of 2002 and 2001
21
of older receivables previously reserved as part of the Company's reserve
calculation and adjustments to bad debt expense reflecting the Company's
assessment of its current credit risk.
Research and Development Expense. Research and development expenses were $4.1
million and $5.0 million for the three months ended June 30, 2002 and 2001,
respectively. The decrease is primarily due to the reduced cost structure
resulting from the 2001 restructuring activities, including the elimination of
the prepaid product line's research and development group and reduced
subcontracting expenses. The Company relies on its research and development
programs for new products and the improvement of existing products to grow net
sales. Research and development costs are expensed as incurred.
Restructuring Expense. During the second quarter of 2002, the Company recorded a
restructuring charge of $759,000 for employee severance and outplacement
services related to the reduction of the Company's workforce by approximately 30
positions. Additionally, the Company recorded net favorable reductions to its
original estimates associated with the Company's 2001 restructuring activities,
described below, of $182,000 primarily related to a reduction in the prepaid
product-line warranty obligation partially offset by a decrease in the estimated
recoveries related to subleasing vacated leased facilities. During the second
quarter of 2001, in connection with the phase out of the Company's prepaid
product line and the relocation of the Corporate headquarters from Charlotte,
North Carolina to Atlanta, Georgia, the Company recorded pre-tax restructuring
charges of approximately $9.4 million and approximately $1.8 million in
impairment charges associated with long-lived assets. As a result of these
restructuring activities, the Company incurred a reduction of approximately 160
positions impacting several functional areas of the Company and expensed
approximately $3.8 million for employee severance and outplacement services,
approximately $2.1 million for consolidation and exit costs from its Charlotte,
North Carolina, Atlanta, Georgia and Amsterdam, Netherlands facilities and
approximately $3.5 million to accrue business exit costs and to reserve for
excess inventories and customer receivables associated with the Company's
decision to abandon its prepaid product line. See Note 2 to the Company's
Condensed Consolidated Financial Statements.
Depreciation. Depreciation expense was approximately $2.3 million for each of
the three months ended June 30, 2002 and 2001.
Interest Income, Net. Interest income, net was $520,000 and $1.1 million for the
three months ended June 30, 2002 and 2001, respectively. Interest earned for the
three months ended June 30, 2002 is lower primarily due to lower yields on
investment instruments than during the 2001 comparable period partially offset
by increased cash and cash equivalent and short-term investment balances in
2002.
Realized and Unrealized Gain (Loss) on 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 began selling its shares of MUX. In
March 2002, MUX merged with Proxim Corporation and is referred to hereafter as
"Proxim". During the three months ended June 30, 2002 and 2001, the Company sold
approximately 57,000 and 190,000 shares of Proxim and realized pre-tax gains of
approximately $122,000 and $1.1 million, respectively. As of June 30, 2002, the
Company has fully liquidated its investment in Proxim securities. See Note 8 to
the Company's Condensed Consolidated Financial Statements.
Provision for Income Taxes. Notwithstanding the Company's operating loss during
the second quarter of 2002, due to the significant net operating loss
carryforwards available to the Company, no tax benefit was
22
recognized in the second quarter of 2002. During the second quarter of 2001, a
tax provision of approximately $27.5 million was recognized related to an
increase in the valuation allowance associated with its continuing operations
net deferred tax assets of approximately $30.9 million. The increase in the
valuation allowance in 2001 related primarily to the Company's discontinuance of
its Wireless Messaging (Paging) business and that its remaining restructured
business did 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 second quarter 2002 and 2001 effective
tax rate differed from the combined US federal and state statutory tax rate due
primarily to the change in valuation allowance. See Note 9 to the Company's
Condensed Consolidated Financial Statements.
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Revenues. Total revenues for the six months ended June 30, 2002 decreased 22% to
$41.5 million as compared to $53.4 million for the six months ended June 30,
2001. Product sales for the six months ended June 30, 2002 decreased 28% to
$33.1 million as compared to $46.0 million for the six months ended June 30,
2001. The decrease in product sales for the six months ended June 30, 2002 was
due primarily to the overall slowing of service provider capital spending and no
revenues in 2002 from the Company's prepaid product line which was eliminated as
part of the Company's second quarter 2001 restructuring. Service revenues for
the six months ended June 30, 2002 increased 13% to $8.5 million as compared to
$7.5 million for the six months ended June 30, 2001. 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.
International revenues were $7.3 million for the six months ended June 30, 2002
as compared to $7.6 million for the six months ended June 30, 2001 and accounted
for 17% and 14% of total revenues for the six months ended June 30, 2002 and
2001, respectively.
During the six months ended June 30, 2002, three customers individually
accounted for approximately 24%, 18% and 15%, respectively, of the Company's
total revenue from continuing operations. For the six months ended June 30,
2001, three customers individually accounted for 31%, 14% and 11%, 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 one
or more of these significant customers could have a material 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 product sales and services, exclusive of
depreciation and amortization, was 59% for the six months ended June 30, 2002
compared to 56% for the six months ended June 30, 2001. Profit margin on
products sold, exclusive of depreciation and amortization, (product margin), was
62% for the six months ended June 30, 2002 compared to 64% for the six months
ended June 30, 2001. Profit margin on services, exclusive of depreciation and
amortization, (service margin), was 44% for the six months ended June 30, 2002
compared to 12% for the six months ended June 30, 2001. The decrease in the
product margin is primarily a result of lower volume of product revenue combined
with more competitive pricing and increased shipments of non-revenue generating
new product test systems. Service margins increased in 2002 as a result of the
Company's restructuring activities, including the abandonment of its 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
23
cost of sales. Increased competition in its industry has adversely affected the
Company's margins. At the currently projected revenue levels for the remainder
of 2002, the Company anticipates total gross margins in the mid-fifty percent
range. However, there can be no assurance that the Company's gross margins will
meet these anticipated levels.
Selling, General and Administrative Expense. Selling, general and administrative
expenses were $15.3 million and $23.1 million for the six months ended June 30,
2002 and 2001, respectively. The decrease is primarily due to the reduced cost
structure resulting from the 2001 restructuring activities and reduced
expenditures for trade show and other selling and marketing activities during
the first quarter of 2002.
Provision for Doubtful Receivables. The provision for doubtful receivables was a
credit of $342,000 for the six months ended June 30, 2002 as compared to a
provision of $738,000 for the six months ended June 30, 2001. The credit during
the first six months of 2002 was a result of collections made during the second
quarter of 2002 of older receivables previously reserved as part of the
Company's reserve calculation and adjustments to bad debt expense reflecting the
Company's assessment of its current credit risk. The provision for the first six
months of 2001, included a provision of $1.4 million due to the discontinuance
of operations of one customer which was partially offset by collections made
during the second quarter of 2001 of older receivables previously reserved.
Research and Development Expense. Research and development expenses were $8.4
million and $11.3 million for the six months ended June 30, 2002 and 2001,
respectively. The decrease is primarily due to the reduced cost structure
resulting from the 2001 restructuring activities, including the elimination of
the prepaid product line's research and development group, and reduced
subcontracting expenses during the second quarter of 2002. The Company relies on
its research and development programs for new products and the improvement of
existing products to grow net sales. Research and development costs are expensed
as incurred.
Restructuring Expense. During the second quarter of 2002, the Company recorded a
restructuring charge of $759,000 related to the reduction of the Company's
workforce by approximately 30 positions. Additionally, during the first six
months of 2002, the Company recorded net reductions to its original estimates
associated with the Company's 2001 restructuring activities, described below, of
$392,000 primarily related to the collection of accounts receivable previously
reserved for in the 2001 restructuring charge, reduced accrued severance
benefits related to the reduction of the Company's workforce and the reduction
in the prepaid product-line warranty obligation which were partially offset by a
decrease in the estimated recoveries related to subleasing vacated leased space.
During the second quarter of 2001, in connection with the phase out of the
Company's prepaid product line and the relocation of the Corporate headquarters
from Charlotte, North Carolina to Atlanta, Georgia, the Company recorded pre-tax
restructuring charges of approximately $9.4 million and approximately $1.8
million in impairment charges associated with long-lived assets. As a result of
these restructuring activities, the Company incurred a reduction of
approximately 160 positions impacting several functional areas of the Company
and expensed approximately $3.8 million for employee severance and outplacement
services, approximately $2.1 million for consolidation and exit costs from its
Charlotte, North Carolina, Atlanta, Georgia and Amsterdam, Netherlands
facilities and approximately $3.5 million to accrue business exit costs and to
reserve for excess inventories and customer receivables associated with the
Company's decision to abandon its prepaid product line. See Note 2 to the
Company's Condensed Consolidated Financial Statements.
Depreciation. Depreciation expense remained consistent at $4.5 million and $4.7
million for the six months ended June 30, 2002 and 2001, respectively.
24
Interest Income, Net. Interest income, net was $999,000 and $2.5 million for the
six months ended June 30, 2002 and 2001, respectively. Interest earned for the
six months ended June 30, 2002 is lower primarily due to lower yields on
investment instruments than during the 2001 comparable period partially offset
by increased cash and cash equivalent and short-term investment balances in
2002.
Realized and Unrealized Gain (Loss) on 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 began selling its shares of MUX. In March 2002, MUX merged with Proxim
Corporation and is referred to hereafter as "Proxim". During the six months
ended June 30, 2002 and 2001, the Company sold approximately 137,000 and 1.2
million shares of Proxim and realized pre-tax gains of approximately $301,000
and $11.9 million, respectively. The realized gain on the sales of Proxim
securities during the first six months of 2002 and 2001 was offset by permanent
impairment charges of approximately $77,000 and $877,000, respectively, related
to the Company's investment in Multi-Link Telecommunications, Inc. In addition,
during the first quarter of 2002, the Company recorded a pre-tax impairment
charge of approximately $475,000 related to its investment in a privately held
company. This impairment charge was determined based upon management's review of
the valuations of publicly traded companies in similar sectors and other factors
such as the status of the company's technology, operating performance and
financial condition. See Note 8 to the Company's Condensed Consolidated
Financial Statements.
Provision for Income Taxes. The Company recorded a $2.5 million one-time tax
benefit during the first quarter of 2002 for refundable alternative minimum
taxes under the "Job Creation and Worker Assistance Act of 2002" (the Act). The
Act became effective on March 9, 2002 and among other things extends the
carryback period for net operating losses from two to five years for taxpayers
with net operating losses for any tax year ending during 2001 or 2002. The new
provision also temporarily suspends the 90% limitation found in Internal Revenue
Code Section 56(d)(1) on the use of net operating loss carrybacks arising in tax
years ending in 2001 and 2002 for alternative minimum tax purposes. Therefore,
taxpayers that have paid alternative minimum tax because of the 90% limitation
on the use of net operating losses to offset alternative minimum taxable income
can utilize this provision to obtain a refund. Notwithstanding the Company's
operating loss during the first six months of 2002, due to the significant net
operating loss carryforwards available to the Company, no tax benefit was
recognized in the second quarter of 2002 as a result of this operating loss. The
effective tax rate for the six months ended June 30, 2002 differed from the
combined U.S. federal and state statutory tax rate due primarily to this
one-time tax benefit and the increase in the valuation allowance recorded to
reflect no tax benefit from the operating losses incurred during the first six
months of 2002. The effective tax rate for the six months ended June 30, 2001
differed from the combined U.S. federal and state statutory tax rate due
primarily to the change in valuation allowance.
FINANCIAL CONDITION AND LIQUIDITY
Overview. At June 30, 2002 the Company had cash and cash equivalents, short-term
investments and restricted cash totaling $102.7 million. The restricted cash of
approximately $354,000 at June 30, 2002 consists of time deposits pledged as
collateral to secure letters of credit, substantially all of which expire in
less than one year. At June 30, 2002, Glenayre's principal source of liquidity
is its $97.4 million of cash and cash equivalents and $5.0 million in short-term
investments. 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
25
guaranteed by the U.S. government, and repurchase agreements backed by U.S.
government securities with original maturities of three months or less.
Short-term investments at June 30, 2002 consist of bank certificates of deposit
with an original maturity of greater than three months. The Company expects to
use its cash and cash equivalents and short-term investments for working capital
and other general corporate purposes, including the expansion and development of
its existing products and markets and the expansion into complementary
businesses. 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 the year ended December 31, 2001 were 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
substantially all of the cash payments to be completed by December 31, 2002 with
the exception of contractual obligations, which could extend through 2007, and
lease termination costs. At June 30, 2002, approximately $30 million in
discontinued operations liabilities remain outstanding of which the Company
anticipates disbursements of approximately $5 million during the remainder of
2002, approximately $10 million in 2003 and the remainder in 2004 and beyond.
Included in the Company's year ended December 31, 2001 losses from continuing
operations were restructuring charges totaling approximately $9.8 million for
employee termination benefits, prepaid product contractual obligations and
consolidation and facility exit costs (see Note 2 to the Company's Condensed
Consolidated Financial Statements). The Company expects substantially all of the
cash payments for these restructuring activities to be completed by December 31,
2002 with the exception of lease termination costs which could require cash
payments through 2005 if a sub-lessee is not obtained. As of June 30, 2002, the
Company has paid out approximately $6.7 million of these restructuring
obligations.
Operating Activities. Cash provided by (used in) operating activities, including
both continuing and discontinued operations, was $9.4 million and ($10.6)
million for the six months ended June 30, 2002 and 2001, respectively.
Restricted cash decreased $4.9 million to $354,000 at June 30, 2002 from $5.2
million at December 31, 2001. This decrease was primarily due to the expiration
of time deposits pledged as collateral to secure letters of credit during the
first six months of 2002.
Accounts receivable decreased $3.7 million to $13.5 million at June 30, 2002
from $17.2 million at December 31, 2001. The decrease in accounts receivable is
primarily due to aggressive collection of accounts receivable as well as the
decrease in revenues in the second quarter of 2002 as compared to the fourth
quarter of 2001. Average days sales outstanding at June 30, 2002 were
approximately 59 days as compared to 72 days at December 31, 2001.
Inventories related to continuing operations increased $451,000 to $8.6 million
at June 30, 2002 from $8.2 million at December 31, 2001. The increase in
inventory is primarily due to a January 2002 large volume purchase of circuit
cards used in the manufacture of the Company's messaging systems.
Accounts payable decreased $2.6 million to $4.1 million at June 30, 2002
compared to $6.7 million at December 31, 2001 primarily as a result of timing of
payments at the end of the periods and reduced inventory purchases and operating
cost levels during 2002. Accrued liabilities related to continuing operations at
June 30, 2002 decreased $3.3 million compared to December 31, 2001 primarily due
to the
26
payment of severance and facility costs associated with the Company's 2001
restructuring activities of its continuing operations and reduced employee
related accruals.
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 2001, the Company spent
approximately $7 million related to the Vancouver new office tower development.
During the six months ended June 30, 2002, the Company spent approximately $1.5
million related to the office tower development. At June 30, 2002 the Company
has outstanding contractual commitments to spend an additional $2.1 million to
complete the office tower build-out. At June 30, 2002, the Vancouver facility is
recorded on the balance sheet as an asset held for sale at its fair value net of
selling costs.
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. The
Company is continuing its efforts to divest the Vancouver and Singapore
facilities, however given its current cash position, the Company has postponed
activities related to the sale leaseback of its Atlanta headquarters until real
estate market conditions improve.
During the first six months of 2002, the Company has made approximately $1.5
million in capital expenditures in its continuing operations mainly related to
equipment purchases to support its ongoing research and development efforts.
Income Tax Matters. Glenayre's recent cash outlays for taxes have been limited
primarily to foreign income taxes. As of June 30, 2002, the Company has an
income tax receivable of approximately $6.4 million associated with various tax
filings including, among other things, the Company's $2.5 million carryback
claim of alternative minimum taxes paid and approximately $2.8 million related
to Canadian tax refunds. The Company received refunds of approximately $3.4
million during July and August of 2002 and anticipates that it will receive the
remaining refunds during the fourth quarter of 2002.
Summary. The Company believes that funds generated from continuing operations,
together with its current cash reserves and short-term investments, will be
sufficient to support the short-term and long-term liquidity requirements for
current operations (including annual capital expenditures) and its discontinued
operations. Company management believes that, if needed, it can establish
borrowing arrangements with lending institutions.
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,
27
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.
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 the six months ended June 30, 2002,
three customers individually accounted for approximately 24%, 18% and 15%,
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 one or more of these significant customers may have a material adverse
effect on the Company's business, financial condition or results of operations.
In the future, the customers with whom the Company does the largest amount of
business are expected to vary from quarter to quarter and 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 and the first six months of 2002, 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
28
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 and 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.
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 resolving these claims will have a material
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. When 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
29
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 17% and 19% of the first six months of 2002 and year ended 2001
total revenues from continuing operations, respectively, 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 the first six months of 2002 and the year ended 2001 were
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 initiatives with third parties that provide
development services, products and channels to market that are used to enhance
the Company's business and is continuing to explore additional third party
alternatives. 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
and increase its product offerings. 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 agreements and
initiatives with third parties; 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 enter into agreements with
third parties 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.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk arising from adverse changes in interest
rates and foreign exchange. The Company does not enter into financial
investments for speculation or trading purposes and is not a party to any
financial or commodity derivatives.
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 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 June 30, 2002, approximately U.S. $1.5 million
or 1.5% 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 ($150,000). Conversely, if the value of the dollar declines by
10%, the Company would record an exchange gain of approximately $150,000. 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 June 30, 2002.
31
PART II - OTHER INFORMATION
ITEMS 2, 3 AND 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED.
ITEM 1. LEGAL PROCEEDINGS
In August 2001, the Company filed two lawsuits against Pilot Pacific Properties,
Inc. in Vancouver, British Columbia seeking total damages of over $12 million
(Canadian) for return of $5.3 million (Canadian) held in trust, breach of
contract, breach of fiduciary duties and improper charges paid by the Company in
connection with the development and construction of an office building in
Vancouver. In October 2001, Pilot Pacific filed counterclaims against the
Company for $4.3 million (Canadian) for unpaid invoices and lost profits of $60
to $65 million (Canadian). During the second quarter of 2002, Pilot Pacific and
its chief executive officer issued news releases with unsubstantiated
allegations and claims relating to this project. Based on the investigations
conducted in the lawsuits to date, the Company believes it should prevail on its
claims against Pilot Pacific and in defending all claims alleged by Pilot
Pacific in both the counterclaims and news releases. As a result, the Company
believes that the resolution of these matters will not have a material adverse
effect on the financial position or results of future operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders held on May 16, 2002, the
following matters were submitted to a vote of the stockholders of the Company
and the results were as follows:
(i) The election of three directors each to serve a three-year term
expiring 2005:
Nominees Shares Voted in Favor Shares Withheld
- -------- --------------------- ---------------
Ramone D. Ardizzone 54,660,847 549,702
Eric L. Doggett 54,351,347 859,202
Stephen P. Kelbley 54,794,675 415,874
(ii) The proposal to approve the appointment of Ernst & Young LLP as
independent auditors of the Company was approved by a vote of 54,903,068 in
favor, 217,734 against and 89,747 abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT 10.1 Executive Severance Benefit Agreement, dated May 17, 2002, between the
Company and Rolf Madson is filed herewith.*
EXHIBIT 15.1 Letter regarding unaudited interim financial information.
EXHIBIT 99.1 Certification Statement of Chief Executive Officer.
EXHIBIT 99.2 Certification Statement of Chief Financial Officer.
- ---------------
*Management contract.
(b) Reports on Form 8-K
None.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Glenayre Technologies, Inc.
-----------------------------------------
(Registrant)
/s/ Debra Ziola
-----------------------------------------
Debra Ziola
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2002
33