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, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
-----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11360 Lakefield Drive, Duluth, Georgia 30097
--------------------------------------- --------
(Address of principal executive offices) Zip Code
(770) 283-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at August 9, 2001 was 65,074,311 shares.
Glenayre Technologies, Inc and Subsidiaries
-------------------------------------------
INDEX
Part I - Financial Information:
Item 1. Financial Statements
Page
----
Independent Accountants' Review Report.................................. 3
Condensed Consolidated Balance Sheets as of
June 30, 2001 (Unaudited) and December 31, 2000....................... 4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 2001 and 2000 (Unaudited)................. 5
Condensed Consolidated Statements of Operations for the
six months ended June 30, 2001 and 2000 (Unaudited)................... 6
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2001 (Unaudited).................... 7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 (Unaudited)................... 8
Notes to Condensed Consolidated Financial Statements (Unaudited)........ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 20
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders..................... 21
Item 6. Exhibits and Reports on Forms 8-K....................................... 21
2
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Independent Accountants' Review Report
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of June 30, 2001, and the
related condensed consolidated statements of operations for the three-month and
six-month periods ended June 30, 2001 and 2000, the condensed consolidated
statement of stockholders' equity for the six-month period ended June 30, 2001
and the condensed consolidated statements of cash flows for the six-month
periods ended June 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States,
which will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Glenayre
Technologies, Inc. as of December 31, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented herein) and in our report dated February 5, 2001, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 2000, is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ Ernst & Young LLP
Charlotte, North Carolina
July 31, 2001
3
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET
(dollars in thousands)
June 30, 2001 December 31, 2000
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 58,698 $ 71,866
Restricted cash............................................. 4,762 16,893
Accounts receivable, net.................................... 30,214 36,572
Accounts receivable discontinued operations, net............ 23,425 58,405
Notes receivable, net....................................... 84 122
Notes receivable discontinued operations, net............... --- 4,312
Inventories, net............................................ 14,016 14,117
Inventories discontinued operations, net.................... 1,572 25,987
Deferred income taxes....................................... --- 19,140
Prepaid expenses and other current assets................... 2,530 6,177
--------- --------
Total current assets................................... 135,301 253,591
Notes receivable, net........................................... 12 303
Notes receivable discontinued operations, net................... --- 6,921
Property, plant and equipment, net.............................. 41,215 40,875
Property, plant and equipment discontinued operations, net...... 16,623 48,180
Goodwill........................................................ --- 45,311
Deferred income taxes........................................... --- 34,917
Other assets.................................................... 7,580 15,988
--------- --------
TOTAL ASSETS.................................................... $ 200,731 $446,086
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 7,998 $ 25,150
Accrued liabilities......................................... 38,285 43,299
Accrued liabilities discontinued operations................. 33,854 ---
Other current liabilities................................... 65 66
--------- --------
Total current liabilities.............................. 80,202 68,515
Other liabilities............................................... 7,870 6,644
Accrued liabilities discontinued operations-noncurrent.......... 15,108 ---
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued and outstanding.............. --- ---
Common stock, $.02 par value; authorized: 200,000,000
shares; outstanding: June 30, 2001 - 64,726,031
shares; December 31, 2000 - 64,446,012 shares............. 1,294 1,288
Contributed capital......................................... 360,808 359,181
Retained earnings (deficit)................................. (267,265) 3,235
Accumulated other comprehensive income...................... 2,714 7,223
--------- --------
Total stockholders' equity............................. 97,551 370,927
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $ 200,731 $446,086
========= ========
Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
4
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands)
(unaudited)
Three Months Ended
June 30,
---------------------
2001 2000
---------------------
NET SALES.................................................... $ 26,505 $28,925
--------- -------
COSTS AND EXPENSES:
Cost of sales.......................................... 12,365 9,389
Selling, general and administrative expense............ 15,329 10,076
Provision for doubtful receivables..................... 497 181
Research and development expense....................... 5,670 3,695
Depreciation expense................................... 2,294 2,315
--------- -------
Total Costs and Expenses......................... 36,155 25,656
--------- -------
INCOME (LOSS) FROM OPERATIONS................................ (9,650) 3,269
--------- -------
OTHER INCOME (EXPENSES):
Interest income........................................ 1,079 1,717
Interest expense....................................... (18) (14)
Gain (Loss) on disposal of assets (including impairment
loss of $(1,760))...................................... (1,755) 129
Realized gain on available-for-sale securities, net.... 1,149 ---
Other, net............................................. (446) (129)
--------- -------
Total Other Income (Expenses), net.............. 9 1,703
--------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.................................... (9,641) 4,972
PROVISION FOR INCOME TAXES................................... 27,480 1,865
--------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS..................... (37,121) 3,107
LOSS FROM DISCONTINUED OPERATIONS (net of
income tax)............................................ (227,725) (1,619)
--------- -------
NET LOSS..................................................... $(264,846) $ 1,488
========= =======
NET LOSS PER WEIGHTED AVERAGE
COMMON SHARE:..........................................
Continuing Operations.................................. $ (0.57) $ 0.05
Discontinued Operations................................ (3.52) (0.03)
--------- -------
$ (4.09) $ 0.02
========= =======
NET LOSS PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations.................................. $ (0.57) $ 0.04
Discontinued Operations................................ (3.52) (0.02)
--------- -------
$ (4.09) $ 0.02
========= =======
See notes to condensed consolidated financial statements.
5
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)
Six Months Ended
June 30,
---------------------
2001 2000
---------------------
NET SALES................................................... $ 53,432 $57,090
--------- -------
COSTS AND EXPENSES:
Cost of sales......................................... 26,165 20,624
Selling, general and administrative expense........... 27,682 19,897
Provision for doubtful receivables.................... 2,059 268
Research and development expense...................... 12,042 7,073
Depreciation expense.................................. 4,719 4,587
Adjustment to loss on sale of business................ (94) (524)
--------- -------
Total Costs and Expenses........................ 72,573 51,925
--------- -------
INCOME (LOSS) FROM OPERATIONS............................... (19,141) 5,165
--------- -------
OTHER INCOME (EXPENSES):
Interest income....................................... 2,586 3,010
Interest expense...................................... (83) (29)
Gain (Loss) on disposal of assets (including
impairment loss of $(1,760))......................... (1,767) 303
Realized gain on available-for-sale securities, net... 11,020 ---
Other, net............................................ (465) (296)
--------- -------
Total Other Income (Expenses), net............. 11,291 2,988
--------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................................... (7,850) 8,153
PROVISION FOR INCOME TAXES.................................. 28,105 2,940
--------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS.................... (35,955) 5,213
LOSS FROM DISCONTINUED OPERATIONS (net of
income tax)........................................... (234,545) (2,600)
--------- -------
NET INCOME (LOSS)........................................... $(270,500) $ 2,613
========= =======
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE:.........................................
Continuing Operations................................. $ (0.56) $ 0.08
Discontinued Operations............................... (3.63) (0.04)
--------- -------
$ (4.18) $ 0.04
========= =======
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION:
Continuing Operations................................. $ (0.56) $ 0.08
Discontinued Operations............................... (3.63) (0.04)
--------- -------
$ (4.18) $ 0.04
========= =======
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
Common Stock Other Total
------------------- Contributed Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity
-------- --------- ----------- ------------ ------------- -------------
Balances,
December 31, 2000............................ 64,446 $1,288 $359,181 $ 3,235 $7,223 $ 370,927
Net Loss..................................... (270,500) (270,500)
Other Comprehensive Income:
Adjustment to unrealized gain on
securities available for sale,
net of tax................................. (4,509) (4,509)
---------
Comprehensive Loss........................... (275,009)
Stock options exercised...................... 284 6 979 985
Repurchase of common stock................... (4) -- (15) (15)
Stock Compensation Expense................... 663 663
-------- ---------
Balances, June 30, 2001...................... 64,726 $1,294 $360,808 $(267,265) $2,714 $ 97,551
====== ====== ======== ========= ====== =========
See notes to condensed consolidated financial statements.
7
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
Six Months Ended June 30,
--------------------------
2001 2000
--------------------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES............ $(10,564) $15,132
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (16,906) (5,332)
Proceeds from sale of equipment....................... 18 134
Proceeds from sale of available-for-sale securities... 13,323 ---
-------- -------
Net cash used in investing activities........... (3,565) (5,198)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities.......................... (9) (18)
Issuance of common stock.............................. 985 13,330
Repurchase of common stock............................ (15) ---
-------- -------
Net cash provided by financing activities....... 961 13,312
-------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (13,168) 23,246
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 71,866 73,513
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 58,698 $96,759
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest............................................. $ 83 $ 35
Income taxes......................................... $ 1,398 $ 1,411
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)
The accompanying unaudited condensed consolidated financial statements of
Glenayre ("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. Operating results for the three-month and six-month periods ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2001. Glenayre's financial results in any
quarter are highly dependent upon various factors, including the timing and size
of customer orders and the shipment of products for large orders. Large orders
from customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 2000.
1. Discontinued Operations
In May 2001, the Company announced that it was exiting its Wireless Messaging
business and refocusing all of its strategic efforts on the Enhanced Services
Platform/Unified Communication systems business segment based in Atlanta,
Georgia. As a result, the Wireless Messaging segment is being reported as a
disposal of a segment of business in the second quarter 2001. Accordingly, the
operating results of the Wireless Messaging segment have been classified as a
discontinued operation for all periods presented in the Company's consolidated
statement of operations. Additionally, the Company has reported all of the
Wireless Messaging segment assets at their estimated net realizable value in the
Company's condensed consolidated balance sheet as of June 30, 2001. The Company
believes all business transactions related to the Wireless Messaging segment,
with the exception of contractual obligations existing prior to the Company's
approving a formal plan to dispose of the segment, will cease by May 2002.
Results for discontinued operations consist of the following:
Three months ended Six months ended
June 30, June 30,
------------------- -----------------
2001 2000 2001 2000
------------------- -----------------
Net Sales........................................... $ 4,016 $27,747 $ 23,014 $58,237
Loss from discontinued operations:
Loss from operations before income taxes............ (38,344) (2,129) (48,474) (3,275)
Benefit/(Provision) for income taxes................ (3,310) 510 --- 675
--------- ------- --------- -------
Net loss from operations............................ (41,654) (1,619) (48,474) (2,600)
Loss on disposal before income taxes................ (156,800) --- (156,800) ---
Provision for income taxes.......................... (29,271) --- (29,271) ---
--------- ------- --------- -------
Net loss on disposal of discontinued
operations......................................... (186,071) --- (186,071) ---
--------- ------- --------- -------
Net loss from Discontinued Operations............... $(227,725) $(1,619) $(234,545) $(2,600)
========= ======= ========= =======
9
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continiued)
(tabular amounts in thousands except per share data)
(unaudited)
The loss from discontinued operations consists of (i) operating losses incurred
in the Wireless Messaging segment for the three and six-month periods ended June
30, 2001 and 2000 and (ii) an estimated loss on disposal of the segment for the
three and six-month periods ended June 30, 2001 which includes charges for the
following: (i) the write-off of goodwill and other intangibles, (ii) reserves on
property, plant and equipment, (iii) customer accounts and notes receivable
settlement costs, (iv) employee termination costs, (v) inventory and non-
inventory purchase commitments, (vi) anticipated losses from operations during a
no more than twelve month transition period, (vii) facility exit and lease
termination costs, (viii) expenses to be incurred to fulfill contractual
obligations existing prior to the formal disposal date and (ix) a valuation
allowance for related deferred tax assets.
2. Restricted Cash
Restricted cash at June 30, 2001 consisted of term deposits pledged as
collateral to secure letters of credit substantially all of which expire in less
than one year.
3. Accounts and Notes Receivables
Accounts receivable related to continuing operations consist of:
June 30, December 31,
2001 2000
---------- -------------
Trade receivables................................... $34,460 $38,477
Other............................................... 1,776 1,734
------- -------
36,236 40,211
Less: allowance for doubtful accounts............... (6,022) (3,639)
------- -------
$30,214 $36,572
======= =======
4. Inventories
Inventories related to continuing operations consist of:
June 30, December 31,
2001 2000
--------- ------------
Raw materials.............................. $ 8,110 $ 8,550
Work-in-process............................ 2,108 4,120
Finished goods............................. 3,798 1,447
------- -------
$14,016 $14,117
======= =======
5. Other Assets and Comprehensive Income
Included in Other Assets related to continuing operations is the Company's
remaining investment in Western Multiplex Corporation ("MUX"), a former
subsidiary, of which the Company sold 95% in November 1999. During the three and
six-month periods ended June 30, 2001, the Company sold 190,000 and 1,215,500
shares of MUX stock at a pre-tax gain of $1.1 million and $11.9 million,
respectively. As of June 30, 2001, the Company had approximately 680,000 shares
remaining in its investment in MUX. As of June 30, 2001, the market value of the
Company's remaining interest in MUX has appreciated. Accordingly, as of June 30,
2001, the Company recorded in comprehensive income a cumulative unrealized
holding gain of approximately $2.8 million, net of tax of $1.3 million, on the
10
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continiued)
(tabular amounts in thousands except per share data)
(unaudited)
remaining shares of this available-for-sale security. Comprehensive income
(loss) was $(8,756) and $(275,009), respectively, for the three and six months
periods ended June 30, 2001.
Additionally, during the first quarter 2001, the Company recorded a pre-tax
impairment charge of approximately $900,000 related to the decline in value
deemed to be other than temporary on an additional available-for-sale investment
held by the Company.
Available-for-sale Securities
---------------------------------------------
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------ ---------- ---------- ----------
Marketable equity securities as of June 30, 2001... $1,804 $4,123 $117 $5,810
Further, through July 31, 2001, the Company has sold an additional 300,000
shares of Western Multiplex securities at a pre-tax gain of approximately $1.2
million. The estimated fair value of the Company's remaining available-for-sale
marketable equity securities at July 31, 2001 totaled approximately $2.2
million.
6. Income Taxes
The Company's consolidated income tax provision was different from the amount
computed using the U.S. statutory income tax rate for the following reasons:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 2001 2000
--------- -------- ------- -------
Income tax provision at U.S. statutory rate............ $(3,374) $1,740 $(2,749) $2,854
Change in valuation allowance.......................... 30,874 50 30,874 50
Foreign taxes at rates other than U.S. statutory rate.. --- 168 --- 168
U.S. Research and Experimentation Credit............... --- (50) --- (50)
Benefit from foreign sales corporation................. --- (75) (50) (150)
Other.................................................. (20) 32 30 68
------- ------ ------- ------
Income tax provision .................................. $27,480 $1,865 $28,105 $2,940
======= ====== ======= ======
11
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continiued)
(tabular amounts in thousands except per share data)
(unaudited)
7. Income (Loss) from Continuing Operations per Common Share
The following table sets forth the computation of income (loss) from continuing
operations per share:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
2001 2000 2001 2000
---------- -------- --------- ----------
Numerator:
Net income (loss) from continuing operations.. $(37,121) $ 3,107 $(35,955) $ 5,213
Denominator:
Denominator for basic income (loss) from
continuing operations per share -
weighted average shares....................... 64,695 64,257 64,639 63,737
Effect of dilutive securities:
stock options................................. --- 2,789 --- 3,300
-------- ------- -------- -------
Denominator for diluted income (loss) from
continuing operations per share-adjusted
weighted average shares and assumed
conversions..................................... 64,695 67,046 64,639 67,037
======== ======= ======== =======
Income (loss) from continuing operations
per weighted average common share............. $ (0.57) $ 0.05 $ (0.56) $ 0.08
======== ======= ======= =======
Income (loss) from continuing operations
per common share-assuming dilution............ $ (0.57) $ 0.04 $ (0.56) $ 0.08
======== ======= ======= =======
8. Restructuring
During the second quarter 2001, the Company recorded a pre-tax charge of
approximately $11.2 million related to a reduction of approximately 140
positions related to the Company's continuing operations. This headcount
reduction impacted several functional areas of the Company including positions
associated with relocating Corporate headquarters from Charlotte, North Carolina
to Atlanta, Georgia in addition to phasing out the Company's prepaid product
line. As a result of this restructuring, the Company expensed $3.8 million for
employee severance, outplacement services and retention bonuses earned.
Severance and payments for outplacement services of approximately $630,000 were
paid prior to June 30, 2001.
Additionally during the second quarter 2001, the Company recorded a pre-tax
charge of approximately $2.1 million of which approximately $40,000 was paid
before June 30, 2001, for consolidation and exit costs from its Charlotte, NC,
Atlanta, GA and Amsterdam, Netherlands facilities and a pre-tax charge of
approximately $1.8 million for the impairment of long-lived assets. The
consolidation and exit process for all of these above facilities is expected to
be completed by the end of the fourth quarter 2001. Furthermore, the Company
recorded a pre-tax charge of approximately $3.5 million to reserve excess
inventories, accrue business exit costs and to reserve customer receivables
associated with the Company's decision to abandon its prepaid product line.
For the quarter ended June 30, 2001, the total pre-tax charge for the second
quarter 2001 restructuring and exiting of leased facilities was recorded as
approximately $2.8 million to cost of sales, $700,000 to research and
development, $1.8 million to loss on sale of assets, and $5.9 million to
selling, general and administrative expenses.
12
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share data)
(unaudited)
The reserve balance for this restructuring was approximately $10.1 million at
June 30, 2001.
Additionally, during the first quarter 2001, the Company made cash payments of
approximately $175,000 of accrued severance benefits in conclusion of its third
quarter 1999 restructuring.
The following is a summary of activity for the six-month period ended June 30,
2001 for the 2001 and 1999 restructuring reserves.
Business Exit,
Severance Lease Cancellation
and Benefits and Other Costs Total
-----------------------------------------------
Balance at December 31, 2000........... $ 175 --- $ 175
Expense accrued ....................... 3,820 7,330 11,150
Charges................................ 800 475 1,275
------ ------ -------
Balance at June 30, 2001............... $3,195 $6,855 $10,050
====== ====== =======
On July 31, 2001 the Company announced an additional reduction in workforce of
approximately 60 employees. A restructuring charge of approximately $1 million
related to employee termination costs is anticipated against continuing
operations in the third quarter of 2001. Management believes upon recording this
adjustment in the third quarter 2001 the remaining reserves for this business
restructuring will be adequate to complete this plan.
9. Segment Reporting
As a result of the Company's decision to dispose of its Wireless Messaging
segment, (See Note 1) the Company has only one operating segment remaining as of
June 30, 2001. The Enhanced Services Platform/Unified Communications product
segment consists of a MVP system which enables cellular, personal communication
service, wireline and wireless messaging network operators to offer their
subscribers value-added services that enhance and complement their core
communication products.
10. Contingent Liability
On November 1, 1999 the Company sold 95% of the equity in its microwave radio
business, MUX. The Company is contingently liable for MUX's building lease
payments. The maximum contingent liability as of June 30, 2001 for these
obligations is approximately $3.7 million.
13
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
For almost 40 years, the Company has developed and provided carrier-grade
communications systems for the global market. These products offer enhanced
services platforms and unified communications solutions that allow wireless and
fixed service providers to support next generation messaging through traditional
and IP telephony networks. The Company's @ctiveMessaging portfolio leverages
open APIs, allowing service providers to offer leading-edge unified
communications services that integrate voice mail, fax and e-mail messaging
capabilities with features such as voice activated services and find me/follow-
me services to generate new revenue streams.
Results of Discontinued Operations
In May 2001, the Company announced that it was exiting its Wireless Messaging
business and refocusing all of its strategic efforts on the Enhanced Services
Platform/Unified Communication systems business segment based in Atlanta,
Georgia. The Company's decision to abandon its Wireless Messaging segment was
due to a rapid decline in both the paging infrastructure market and certain
paging carriers' financial health, as well as concerns about the impact of the
ongoing ReFLEX operator consolidation on channels for the device market. The
Company's paging infrastructure revenue declined over 27% in 2000 from 1999 and
the Company anticipates 2001 paging infrastructure revenue to decline over 70%
from 2000 levels due to a dramatic market contraction. Wireless Messaging
revenues for 2001 are expected to be approximately $30 million. The decision to
abandon the Wireless Messaging segment was based on economic reality and the
Company's inability to continue funding the investments required to position
itself for the future of the wireless messaging market.
The Wireless Messaging segment is being reported as a disposal of a segment of
business in the second quarter 2001. Accordingly, the operating results of the
Wireless Messaging 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 segment
assets at their estimated net realizable value in the Company's condensed
consolidated balance sheet as of June 30, 2001. The Company believes all
business transactions related to the Wireless Messaging segment, with the
exception of contractual obligations existing prior to the Company's approving a
formal plan to dispose of the segment, will cease by May 2002.
14
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Results for discontinued operations consist of the following:
Three months ended Six months ended
June 30, June 30,
-------------------------------------------
2001 2000 2001 2000
-------------------------------------------
Net Sales........................................... $ 4,016 $27,747 $ 23,014 $58,237
Loss from discontinued operations:
Loss from operations before income taxes............ (38,344) (2,129) (48,474) (3,275)
Benefit/(Provision) for income taxes................ (3,310) 510 --- 675
--------- ------- --------- -------
Net loss from operations............................ (41,654) (1,619) (48,474) (2,600)
Loss on disposal before income taxes................ (156,800) --- (156,800) ---
Provision for income taxes.......................... (29,271) --- (29,271) ---
--------- ------- --------- -------
Net loss on disposal of discontinued
operations......................................... (186,071) --- (186,071) ---
--------- ------- --------- -------
Net loss from Discontinued Operations............... $(227,725) $(1,619) $(234,545) $(2,600)
========= ======= ========= =======
The loss from discontinued operations consists of (i) operating losses incurred
in the wireless messaging segment for the three and six-month periods ended June
30, 2001 and 2000 and (ii) an estimated loss on disposal of the segment for the
three and six-month periods ended June 30, 2001 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
transition period of no more than twelve months, (vii) facility exit and lease
termination costs, (viii) expenses to be incurred to fulfill contractual
obligations existing prior to the formal disposal date and (ix) a valuation
allowance for related deferred tax assets.
15
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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,
------------------- ------------------
2001 2000 2001 2000
------- ------- ------- ------
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 46.7 32.5 49.0 36.1
------- ----- ----- -----
Gross profit.................................. 53.3 67.5 51.0 63.9
Operating expenses:
Selling, general and administrative........... 57.8 34.8 51.8 34.9
Provision for doubtful receivables............ 1.9 0.6 3.9 *
Research and development...................... 21.4 12.8 22.5 12.4
Depreciation and amortization................. 8.7 8.0 8.8 8.0
Adjustment to loss on sale of business........ --- --- * (0.9)
------- ----- -------- -----
Total operating expenses.................. 89.8 56.2 86.9 54.8
------- ----- ----- -----
Income (loss) from operations..................... (36.4) 11.3 (35.8) 9.0
Interest, net..................................... 4.0 5.9 4.7 5.2
Gain (loss) on disposal of assets................. (6.6) * (3.3) 0.5
Realized gain on available-for-sale securities.... 4.3 --- 20.6 ---
Other, net........................................ (1.7) * (0.8) (0.5)
------- ------ ----- -----
Income (loss) from continuing operations before
income taxes.................................. (36.4) 17.2 (14.7) 14.3
Provision (benefit) for income taxes.............. 103.7 6.4 52.6 5.1
------- ----- ----- -----
Income (loss) from continuing operations.......... (140.1)% 10.7% (67.3)% 9.1%
======= ===== ===== =====
-------------
* less than 0.5
Three-Month and Six-Month Periods Ended June 30, 2001 and 2000
Net Sales. Net sales for the three-month period ended June 30, 2001 decreased
8% to $27 million as compared to $29 million for the three-month period ended
June 30, 2000. Net sales decreased 6% and were $53 million and $57 million for
the six-month periods ended June 30, 2001 and 2000, respectively. International
sales (sales outside the United States) were approximately $3 million for the
three-month period ended June 30, 2001 as compared to approximately $12 million
for the three-month period ended June 30, 2000 and accounted for 12% and 42% of
net sales for the three-month periods ended June 30, 2001 and 2000,
respectively. International sales were approximately $8 million for the six-
month period ended June 30, 2001 as compared to approximately $21 million for
the six-month period ended June 30, 2000 and accounted for 14% and 37% of net
sales for the six-month periods ended June 30, 2001 and 2000, respectively.
The decrease in net sales for the three-month and six-month periods ended June
30, 2001 as compared to those same periods in 2000 is primarily due to decreased
revenues from the Company's abandoned prepaid product line which was eliminated
as part of the Company's second quarter 2001 restructuring. The Company
anticipates for the last half of 2001 quarterly revenues will decline slightly
as compared to the second quarter 2001, while expecting moderate revenue growth
in 2002. These are forward-looking statements that are subject to the factors
discussed in the cautionary statement attached as Exhibit 99 to this Form 10-Q.
There can be no assurance that the Company's sales levels or growth will remain
at, reach or exceed historical levels in any future period.
16
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
There were three separate customers who accounted for 44%, 14% and 10% and 31%,
14% and 11% of net sales for the three and six-month periods ended June 30,
2001, respectively. There was one single customer who accounted for
approximately 11% and 15% of net sales for the three and six-month periods ended
June 30, 2000, respectively. Two additional customers accounted for
approximately 10% and 12% of net sales for the six months ended June 30, 2000.
Gross Profit. Gross profit margins were 53% and 68% for three-month periods
ended June 30, 2001 and 2000, respectively. Gross profit margins were 51% and
64% for the six-month periods ended June 30, 2001 and 2000, respectively. The
decrease in margin percentages for 2001 is primarily attributable to warranty
and obsolescence charges incurred as part of the second quarter 2001
restructuring related to the Company's decision to abandon its prepaid product
line. Additionally, the decline can be attributed to inventory obsolescence
charges incurred on the Company's MVP product line as a result of lower sales
forecasts. Glenayre's gross profit margins may be affected by several factors
including (i) the mix of products sold, (ii) the price of products sold and
(iii) increases in material costs and other components of cost of sales.
Selling, General and Administrative Expense. Selling, general and
administrative expenses were $15 million and $10 million for the three-month
periods ended June 30, 2001 and 2000, respectively and $28 million and $20
million for the six-month periods ended June 30, 2001 and 2000, respectively.
The increase in the three and six-month periods of 2001 is primarily
attributable to employee termination benefits and lease termination costs
associated with the second quarter 2001 restructuring as well as increased
employee related costs in the first quarter of 2001 in the Company's quality,
technical operations and marketing functional areas.
Provision for Doubtful Receivables. The provision for doubtful receivables
was $497,000 and $181,000 for the three-month periods ended June 30, 2001 and
2000, respectively and $2.1 million and $268,000 for the six-month periods ended
June 30, 2001 and 2000, respectively. The increase in bad debt reserves for the
three and six-month periods ended June 30, 2001 is due primarily to specific
reserves taken on the Company's abandoned prepaid product line partially offset
by collections made in the second quarter of 2001 on older receivables
previously reserved as part of the Company's normal recurring reserve
calculation. Further, the provision recorded in the six-month period ended June
30, 2001 increased due to a specific customer experiencing poor financial
condition in the first quarter 2001.
Research and Development Expense. Research and development expenses were $6
million and $4 million for the three-month periods ended June 30, 2001 and 2000,
respectively, and $12 million and $7 million for the six-month periods ended
June 30, 2001 and 2000, respectively. The increase in the three and six-month
periods ended June 30, 2001 is due primarily to restructuring charges incurred
in the second quarter of 2001 for employee termination benefits. Additionally,
the increases in the three-month and six-month periods ended June 30, 2001 are
related to increased employee related costs and subcontracting expenses. The
Company relies on its research and development programs for new products and the
improvement of existing products for the growth in net sales. Research and
development costs are expensed as incurred.
Depreciation. Depreciation expense remained relatively flat at $2.0 million for
both the three-month periods ended June 30, 2001 and 2000 and $5 million for
both the six-month periods ended June 30, 2001 and 2000.
Interest Income, Net. Interest income, net was $1.1 million and $1.7 million
for the three-month periods ended June 30, 2001 and 2000, respectively, and $2.5
million and $3.0 million for the six-month periods ended June 30, 2001 and 2000,
respectively. Interest earned for the three and six-month periods ended June
30, 2001 is lower due to decreased cash and cash equivalent investment balances
offset partially by interest earned through May 2001 on the Company's one
remaining customer financing commitment.
Provision for Income Taxes. The effective tax rates for the three-month and
six-month periods ended June 30, 2001 and 2000 differed from the combined U.S.
federal and state statutory tax rate of
17
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
approximately 40% due primarily to (i) the change in the valuation allowance,
(ii) nondeductible goodwill amortization and (iii) higher tax rates on earnings
indefinitely reinvested in certain non-U.S. jurisdictions. The difference
between the effective tax rates in 2001 compared to 2000 is primarily the result
of the change in the valuation allowance.
Financial Condition and Liquidity
Liquidity and Capital Resources. At June 30, 2001 the Company had cash and cash
equivalents and restricted cash totaling $63 million. The restricted cash
consists of time deposits pledged as collateral to secure letters of credit,
substantially all of which expire in less than one year. At June 30, 2001,
Glenayre's principal source of liquidity is $59 million of cash and cash
equivalents.
Included in the Company's loss on disposal of discontinued operations (See
Results of Discontinued Operations) for the three and six-month periods ended
June 30, 2001 are cash charges totaling approximately $49 million for employee
termination benefits, equipment and facility lease termination costs, inventory
and non-inventory purchase commitments, anticipated losses from operations
during a transition period no longer than twelve months and expenses to be
incurred to fulfill contractual obligations existing prior to the formal
disposal date. The Company expects primarily all of these cash payments to be
completed by no later than December 31, 2002. However, contractual obligations
with customers existing prior to the measurement date and lease termination
costs could extend through 2006. The Company's discontinued operations
transition team is currently working on opportunities that may reduce the length
of time cash payments are required for these obligations.
Included in the Company's three and six-month periods ended June 30, 2001 losses
from continuing operations are cash restructuring charges (See Note 8 of the
Company's Condensed Consolidated Financial Statements) totaling approximately $8
million for employee termination benefits, prepaid product contractual
obligations and consolidation and facility exit costs. The Company anticipates
primarily all of the cash payments for this restructuring charge will be made
within the next twelve months with the exception of lease termination costs
which could require cash payments through 2005 if a sublessee is not obtained.
Accounts payable decreased at June 30, 2001 compared to December 31, 2000
primarily as a result of decreased inventory purchases. Accrued expenses at
June 30, 2001 increased from year-end 2000 primarily due to reserves recorded
for the loss on discontinued operations and restructuring charges offset
partially by a reduction in long term international project accruals and
employee incentive accruals as a result of payments made in 2001 for bonuses
earned in 2000.
In December 2000, the Board of Directors of the Company rescinded its dormant
stock repurchase program authorized in September 1996 and authorized the
repurchase of up to 3 million shares of the Company's common stock. As of
December 31, 2000, the Company had repurchased 12,500 shares at a total cost of
approximately $40,000. In the first quarter of 2001, the Company purchased an
additional 4,000 shares at a total cost of approximately $15,000.
The Company's cash generally consists of money market demand deposits and the
Company's cash equivalents generally consist of high-grade commercial paper,
bank certificates of deposit, treasury bills, notes or agency securities
guaranteed by the U.S. government, and repurchase agreements backed by U.S.
government securities with original maturities of three months or less. The
Company expects to use its cash and cash equivalents for working capital and
other general corporate purposes, including the expansion and development of its
existing products and markets and the expansion into complementary businesses.
During the third quarter 2000, the Company renegotiated its only prior financing
commitment for wireless messaging infrastructure and voicemail products reducing
the commitment from approximately $30 million to approximately $10 million. This
agreement, which expires in 2001, has no remaining
18
Glenayre Technologies, Inc. and Subsidiaries
--------------------------------------------------------------------------------
financing commitment at June 30, 2001. Amounts outstanding under this financing
arrangement as of June 30, 2001 were approximately $9 million. As a result of
the customer filing bankruptcy and the Company's decision to exit its Wireless
Messaging segment, this commitment was fully reserved in the second quarter
2001.
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 segment in the second quarter of 2001, it no
longer has significant operational requirements for its Vancouver facilities. In
2000, the Company spent approximately $8 million related to the Vancouver new
office tower development. During the three and six months ended June 30, 2001,
the Company spent approximately $4 million and $7 million, respectively related
to the office tower development. The Company believes it may need to spend an
additional $4 million in 2001 to complete this office tower.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to (i) support the short-term
and long-term liquidity requirements for current operations (including annual
capital expenditures) and its discontinued operations and (ii) to repurchase
common stock as discussed above. Company management believes that, if needed,
it can establish borrowing arrangements with lending institutions.
Income Tax Matters. For 2000, Glenayre's actual cash outlay for taxes was
limited to foreign income taxes primarily due to current losses and the
availability of foreign sales corporation benefits. The Company's cash outlay
for taxes is not expected to be significant in 2001 due to current losses and
net operating loss carryforwards.
Management has assessed the realizability of the Company's deferred tax asset of
$117.1 million and determined that a valuation allowance of $117.1 million was
necessary as of June 30, 2001. Management reached this conclusion based on the
fact that the Company has incurred cumulative losses in recent years, including
a significant loss in the three month period ended June 30, 2001, and that its
remaining restructured business does not provide a historical basis for
projecting future taxable income.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk arising from adverse changes in interest
rates and foreign currency exchange rates. The Company's investment policy
requires investment of surplus cash in high-grade commercial paper, bank
certificates of deposits, Treasury bills, notes or agency securities guaranteed
by the U.S. Government and repurchase agreements backed by U.S Government
securities. The Company typically invests its surplus cash in these types of
securities for periods of relatively short duration. Although the Company is
exposed to market risk related to changes in short-term interest rates on these
investments, the Company manages these risks by closely monitoring market
interest rates and the duration of its investments. Due to the short-term
duration and the limited dollar amounts exposed to market interest rates,
management believes that fluctuations in short-term interest rates will not have
a material adverse effect on the Company's results of operations. Although a
substantial portion of the Company's annual sales are negotiated in United
States dollars, certain contracts in the normal course of business are
negotiated in a foreign currency. When appropriate, the Company may seek to
mitigate its currency exchange fluctuation risk by entering into currency
hedging transactions. Due to the limited amount of such hedging transactions,
management believes that fluctuations in currency exchange rates will not have a
material adverse effect on the Company's results of operations. The Company does
not enter into financial investments for speculation or trading purposes and is
not a party to any financial or commodity derivatives.
20
PART II - OTHER INFORMATION
ITEMS 1 through 3 and 5 are inapplicable and have been omitted.
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Stockholders held on May 17, 2001,
the following matters were submitted to a vote of the stockholders of
the Company.
The results of the voting were as follows:
(i) The election of four directors each to serve a three-year
term expiring 2004:
Nominees Shares Voted in Favor Shares Withheld
------------------ --------------------- ---------------
John J. Hurley 59,507,774 625,161
Horace H. Sibley 59,508,051 624,884
Howard W. Speaks 59,557,149 575,786
(ii) The proposal to approve the appointment of Ernst & Young LLP as
independent auditors of the Company was approved by a vote of 59,866,589
in favor, 214,070 against and 52,276 abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Amendment, dated April 26, 2001, to the
Stock Option Agreement dated October 3,
1999 between the Company and Clarke H.
Bailey is filed herewith.*
Exhibit 10.2 Amendment, dated July 31, 2001, to the
Employment Agreement dated June 18, 1999
between the Company and Eric L. Doggett is
filed herewith.*
Exhibit 10.3 Letter Agreement, dated May 23, 2001,
between the Company and Bert C. Klein is
filed herewith.*
Exhibit 15 Letter regarding unaudited interim
financial information.
Exhibit 99 Cautionary statement under safe harbor
provisions of the Private Securities
Litigation Reform Act of 1995.
________________
*management contract.
(b) Reports on Form 8-K
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Glenayre Technologies, Inc.
---------------------------
(Registrant)
/s/ Debra Ziola
-------------------------------
Debra Ziola
Senior Vice President and
Interim Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2001
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number 333-
15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated January 30, 1997), Registration Statement Number 333-
38169 on Form S-8 dated October 17, 1997, Registration Statement Number 333-
39717 on Form S-8 dated November 7, 1997, Registration Statement Number 333-
56375 on Form S-8 dated June 9, 1998, Registration Statement number 333-81161 on
Form S-8 dated June 21, 1999 Registration Statement number 333-81155 on Form S-8
dated June 21, 1999 and Registration Statement number 333-37446 on Form S-8
dated May 19, 2000 of our report dated July 31, 2001, relating to the unaudited
condensed consolidated interim financial statements of Glenayre Technologies,
Inc. and subsidiaries which are included in its Form 10-Q for the quarter ended
June 30, 2001.
/s/ Ernst & Young LLP
Charlotte, North Carolina
July 31, 2001
EXHIBIT 99
CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Glenayre Technologies, Inc. ("Glenayre" or the "Company"), from time to time,
makes "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements reflect the expectations of
management of the Company at the time such statements are made. Glenayre is
filing this cautionary statement to identify important factors that could cause
Glenayre's actual results to differ materially from those in any forward-looking
statements made by or on behalf of Glenayre.
Effective Convergence of Technologies
In recent years, the markets for wireless and internet services have grown
significantly. Glenayre is dependent on the continued growth of these markets as
well as the effective and successful convergence of these technologies for its
Enhanced Services platform, such as the Modular Voice Processing system and
Intelligis LSP, and related applications and solutions such as voice, fax and
data messaging, short message services, one touch call return, continuous
calling, voice activated dialing, unified messaging and CONSTANT TOUCH. The
markets for these technologies are still emerging and continued growth in demand
and market acceptance of these converging services is uncertain. If the
commercial market for these services and related bundled or converged
technologies is lower than Glenayre anticipates, or grows more slowly than
Glenayre anticipates, it will have a material adverse effect on Glenayre's
business. There can be no assurance that these technologies will be
successfully integrated or that a significant commercial market for the
integrated services will continue and/or develop.
Potential Market Changes Resulting from Rapid Technological Advances
Glenayre's business is focused on growing its Enhanced Services and Unified
Communication Systems products, such as the Modular Voice Processing system and
Intelligis LSP, and enhanced services solutions such as voice, fax and data
messaging, short message services, one touch call return, continuous calling,
voice activated dialing, unified messaging and CONSTANT TOUCH. Demand for these
products and services may be affected by changes in technology as well as the
development of substitute products and services by competitors. If changing
technology negatively affects demand for Glenayre's Enhanced Services and
Unified Communication systems products, it could have a material adverse effect
on Glenayre's business.
Competition
Glenayre currently faces competition for its Enhanced Services and Unified
Communications Systems from a number of companies, including: Comverse
Technologies, Inc., ADC Telecommunication, InterVoice-Brite, Inc., Openwave,
Lucent/Octel Communications Corporation and Unisys Corporation. 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 Systems.
Variability of Quarterly Results
The Company's financial results in any single quarter are highly dependent upon
the timing and size of customer orders and the shipment of products for large
orders. Large orders from customers can account for a significant portion of
products shipped in any quarter. Two customers accounted for approximately 16%
and 18% of net sales for the year ended December 31, 2000. Three customers
accounted for 11% of net sales for the year ended December 31, 1999. Beyond
2000, the customers with whom the Company
does the largest amount of business are expected to vary from year to year and
quarter to quarter as a result of the timing for the continued expansion into
international markets and changes in the proportion of revenues generated by
Glenayre's newly developed products and services. Furthermore, if a customer
delays or accelerates its delivery requirements or a product's completion is
delayed or accelerated, revenues expected in a given quarter may be deferred or
accelerated into subsequent or earlier quarters. Therefore, annual financial
results are more indicative of the Company's performance than quarterly results,
and results of operations in any quarterly period may not be indicative of
results likely to be realized in the following quarterly periods.
Volatility of Stock Price
The market price of Glenayre Common Stock is volatile. The market price of
Glenayre Common Stock could be subject to significant fluctuations in response
to variations in Glenayre's quarterly operating results and other factors such
as announcements of technological developments or new products by Glenayre,
developments in Glenayre's relationships with its customers, strategic alliances
and partnerships, technological advances by existing and new competitors,
general market conditions in the industry and changes in government regulations.
In addition, in recent years conditions in the stock market in general and
shares of technology companies in particular have experienced significant price
and volume fluctuations that have often been unrelated to the operating
performance of these specific companies.
Proprietary Technology
Glenayre owns or licenses numerous patents used in its operations. Glenayre
believes that while these patents are useful to Glenayre, they are not critical
or valuable on an individual basis. The collective value of the intellectual
property of Glenayre is comprised of its patents, blueprints, specifications,
technical processes and cumulative employee knowledge. Although Glenayre
attempts to protect its proprietary technology through a combination of trade
secrets, patent, trademark and copyright law, nondisclosure agreements and
technical measures, such protection may not preclude competitors from developing
products with features similar to Glenayre's products. The laws of certain
foreign countries in which Glenayre sells or may sell its products, including
The Republic of Korea, The People's Republic of China, Saudi Arabia, Thailand,
Dubai, India and Brazil, do not protect Glenayre's proprietary rights in the
products to the same extent as do the laws of the United States. Though the
Company believes its technology does not infringe any third party rights, the
Company is currently party to certain infringement claims. In addition, there
can be no assurance that other parties will not assert future infringement
claims. An adverse decision in an infringement claim asserted against the
Company could result in the Company being prohibited from using the allegedly
infringing technology. In such an instance, the Company might need to expend
substantial resources to develop alternative technology or to license the
allegedly infringing technology. There can be no assurance that these efforts
would be successful. Regardless, with respect to currently pending claims, the
Company does not believe that an adverse resolution would have a material
adverse effect on the Company.
International Business Risks
Approximately 29% of 2000 fiscal year net sales were generated in markets
outside of the United States. International sales are subject to the customary
risks associated with international transactions, including political risks,
local laws and taxes, the potential imposition of trade or currency exchange
restrictions, tariff increases, transportation delays, difficulties or delays in
collecting accounts receivable, exchange rate fluctuations and the effects of
prolonged currency destabilization in major international markets. Although a
substantial portion of the international sales of Glenayre's products and
services for fiscal year 2000 was negotiated in United States dollars, Glenayre
may not be able to maintain such a high percentage of United States dollar
denominated international sales. The Company seeks to mitigate its currency
exchange fluctuation risk by entering into currency hedging transactions. The
Company also
acts to mitigate certain risks associated with international transactions
through the purchase of political risk insurance and the use of letters of
credit. However, there can be no assurance that these efforts will successfully
limit Glenayre's currency exchange fluctuation risk.
Continuation and Expansion of Original Equipment Manufacturer Agreements
Glenayre has entered into several Original Equipment Manufacturer ("OEM")
agreements with companies that market and distribute Glenayre's products and
Glenayre intends to enter into service reseller arrangements. Glenayre is
dependent upon these OEM agreements to distribute Glenayre's products and
services. If these OEM agreements are not successful or are terminated, it may
have a material adverse effect on Glenayre's business. Glenayre intends to
continue entering into OEM agreements; however, there can be no assurance that
additional arrangements with suitable partners on acceptable terms will be
available. The inability of Glenayre to grow its current OEM agreements or
enter into arrangements with additional partners on acceptable terms may have a
material adverse effect on Glenayre's business.
Glenayre Technologies, Inc.
11360 Lakefield Drive
Duluth, GA 30097
Telephone: (770) 283-1000
Fax: (770) 497-3990
VIA EDGAR
August 14, 2001
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Glenayre Technologies, Inc.
File No. 0-15761
Quarterly Report on Form 10-Q for the Quarter ended June 30, 2001.
Gentlemen:
On behalf of Glenayre Technologies, Inc. (the "Company"), and pursuant to Rule
101 of Regulation S-T, we enclose herewith one conformed copy, with exhibits of
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
Please acknowledge receipt of the attached electronic filing in accordance with
the rules and regulations of EDGAR.
Regards,
Debra Ziola
Senior Vice President and
Interim Chief Financial Officer
Enclosures