GLENAYRE TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
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98-0085742 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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825 8th Avenue, 23rd Floor, NY, NY
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10019 |
(Address of Principal Executive Offices)
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(Zip Code) |
(770) 283-1000
(Registrants 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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
Exchange Act) Yes o No þ
The number of shares outstanding of the Registrants common stock, par value $.02 per share, at May
1, 2006 was 68,697,145 shares.
Glenayre Technologies, Inc. and Subsidiaries
INDEX
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Glenayre Technologies, Inc.
We have reviewed the condensed consolidated balance sheet of Glenayre Technologies, Inc. and
Subsidiaries as of March 31, 2006, and the related condensed consolidated statements of operations
for the three month periods ended March 31, 2006 and 2005, and the condensed consolidated
statements of cash flows for the three month periods ended March 31, 2006 and 2005. These financial
statements are the responsibility of the Companys management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of Glenayre Technologies, Inc. and
Subsidiaries as of December 31, 2005, 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 March 15, 2006 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, 2005, 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
May 9, 2006
3
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
|
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2006 |
|
|
2005 |
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|
|
(Unaudited) |
|
|
|
|
|
|
(In thousands, except share amounts) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,865 |
|
|
$ |
78,803 |
|
Restricted cash |
|
|
10,522 |
|
|
|
10,602 |
|
Accounts receivable, net of allowances for doubtful accounts of $468 and $489 at March 31, 2006 and
December 31, 2005 respectively |
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|
34,711 |
|
|
|
29,148 |
|
Current portion of long-term receivable |
|
|
2,021 |
|
|
|
7,530 |
|
Inventories, net |
|
|
15,201 |
|
|
|
15,620 |
|
Prepaid expenses and other current assets |
|
|
12,977 |
|
|
|
12,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets |
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|
147,297 |
|
|
|
153,934 |
|
Restricted cash |
|
|
29,094 |
|
|
|
29,727 |
|
Property, plant and equipment, net |
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|
64,077 |
|
|
|
62,340 |
|
Long-term receivable |
|
|
6,589 |
|
|
|
5,106 |
|
Goodwill and intangible assets |
|
|
60,520 |
|
|
|
59,642 |
|
Other assets |
|
|
4,618 |
|
|
|
6,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
312,195 |
|
|
$ |
317,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
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Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
32,410 |
|
|
$ |
28,990 |
|
Accrued and other liabilities |
|
|
39,264 |
|
|
|
40,395 |
|
Income taxes payable |
|
|
10,108 |
|
|
|
9,489 |
|
Deferred income taxes |
|
|
222 |
|
|
|
215 |
|
Deferred revenue |
|
|
4,573 |
|
|
|
9,003 |
|
Loans from employees |
|
|
1,076 |
|
|
|
1,132 |
|
Current portion of long-term debt |
|
|
14,748 |
|
|
|
14,530 |
|
Accrued liabilities, discontinued operations |
|
|
2,304 |
|
|
|
2,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Current Liabilities |
|
|
104,705 |
|
|
|
105,928 |
|
Other non-current liabilities |
|
|
3,542 |
|
|
|
3,353 |
|
Loans from employees |
|
|
3,218 |
|
|
|
4,113 |
|
Long-term debt |
|
|
62,543 |
|
|
|
61,868 |
|
Pension and other defined benefit obligations |
|
|
30,381 |
|
|
|
29,281 |
|
Deferred income taxes |
|
|
8,340 |
|
|
|
8,462 |
|
Accrued liabilities, discontinued operations |
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
212,729 |
|
|
|
213,066 |
|
Minority interest in subsidiary company |
|
|
886 |
|
|
|
886 |
|
Commitments and contingencies |
|
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Stockholders Equity: |
|
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|
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|
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Preferred stock, $.01 par value; authorized: 5,000,000 shares, no shares issued and outstanding |
|
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|
|
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Common stock, $.02 par value; authorized: 200,000,000 shares, issued and outstanding: 2006 -
68,649,636 shares; 2005 68,063,799 shares |
|
|
1,372 |
|
|
|
1,361 |
|
Contributed capital |
|
|
365,761 |
|
|
|
364,376 |
|
Accumulated deficit |
|
|
(267,796 |
) |
|
|
(260,874 |
) |
Cumulative translation adjustment, net of tax |
|
|
(757 |
) |
|
|
(1,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
98,580 |
|
|
|
103,680 |
|
|
|
|
|
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|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
312,195 |
|
|
$ |
317,632 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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|
Three Months Ended March 31, |
|
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2006 |
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|
2005 |
|
|
|
(In thousands, except per share amounts) |
|
REVENUES: |
|
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|
|
|
|
|
|
Product sales |
|
$ |
60,318 |
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|
$ |
13,658 |
|
Service revenues |
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|
26,128 |
|
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|
4,264 |
|
|
|
|
|
|
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Total Revenues |
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|
86,446 |
|
|
|
17,922 |
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|
|
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|
|
|
|
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|
COST OF REVENUES: |
|
|
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|
|
|
|
|
Cost of sales |
|
|
48,852 |
|
|
|
4,155 |
|
Cost of services |
|
|
18,440 |
|
|
|
2,470 |
|
|
|
|
|
|
|
|
Total Cost of Revenues |
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|
67,292 |
|
|
|
6,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
GROSS MARGIN: |
|
|
19,154 |
|
|
|
11,297 |
|
|
|
|
|
|
|
|
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|
OPERATING EXPENSES: |
|
|
|
|
|
|
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|
Selling, general and administrative expense |
|
|
18,752 |
|
|
|
6,984 |
|
Research and development expense |
|
|
4,575 |
|
|
|
3,034 |
|
Amortization of intangible assets |
|
|
1,755 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
25,082 |
|
|
|
10,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
(5,928 |
) |
|
|
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES): |
|
|
|
|
|
|
|
|
Interest income |
|
|
1,048 |
|
|
|
530 |
|
Interest expense |
|
|
(1,411 |
) |
|
|
(7 |
) |
Loss on disposal of assets, net |
|
|
(53 |
) |
|
|
(1 |
) |
Loss on currency swaps, net |
|
|
(727 |
) |
|
|
|
|
Transaction gain, net |
|
|
356 |
|
|
|
|
|
Other income (expense), net |
|
|
45 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total Other Income (Expenses) |
|
|
(742 |
) |
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
|
|
(6,670 |
) |
|
|
1,809 |
|
Provision for income taxes |
|
|
4 |
|
|
|
29 |
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
|
(6,674 |
) |
|
|
1,780 |
|
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION (BENEFIT) |
|
|
(248 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(6,922 |
) |
|
$ |
1,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE (1): |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
Income (loss) from discontinued operations |
|
|
(0.00 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
Net income (loss) per weighted average common share |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER COMMON SHARE ASSUMING DILUTION (1): |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
Income (loss) from discontinued operations |
|
|
(0.00 |
) |
|
|
0.00 |
|
|
|
|
|
|
|
|
Net income, (loss) per weighted average common share |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income (loss) per weighted average common share amounts are rounded to the nearest $.01;
therefore, such rounding may impact individual amounts presented. |
See Notes to Condensed Consolidated Financial Statements.
5
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributed |
|
|
|
|
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Loss |
|
Balances, December 31, 2005 |
|
|
68,064 |
|
|
$ |
1,361 |
|
|
$ |
364,376 |
|
|
$ |
(260,874 |
) |
|
$ |
(1,183 |
) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,922 |
) |
|
|
|
|
|
$ |
(6,922 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426 |
|
|
|
426 |
|
Shares issued for ESP Plan,
restricted stock units and
option exercises |
|
|
586 |
|
|
|
11 |
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
and related reclass |
|
|
|
|
|
|
|
|
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(6,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2006 |
|
|
68,650 |
|
|
$ |
1,372 |
|
|
$ |
365,761 |
|
|
$ |
(267,796 |
) |
|
$ |
(757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(6,922 |
) |
|
$ |
1,790 |
|
Adjustments to reconcile net income to net cash provided by |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,296 |
|
|
|
472 |
|
Stock compensation expense |
|
|
383 |
|
|
|
|
|
Unrealized loss on currency swap |
|
|
727 |
|
|
|
|
|
Foreign currency transaction gain |
|
|
(394 |
) |
|
|
|
|
Other |
|
|
134 |
|
|
|
12 |
|
Changes in operating assets and liabilities, net of effects of
business dispositions and acquisitions: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
1,159 |
|
|
|
(76 |
) |
Accounts receivable |
|
|
(5,379 |
) |
|
|
(15,834 |
) |
Inventories |
|
|
486 |
|
|
|
(2,231 |
) |
Prepaids and other current assets |
|
|
(606 |
) |
|
|
776 |
|
Long-term receivable |
|
|
4,283 |
|
|
|
|
|
Goodwill and
intangible assets |
|
|
(356 |
) |
|
|
|
|
Other assets |
|
|
(68 |
) |
|
|
(828 |
) |
Accounts payable |
|
|
3,074 |
|
|
|
1,441 |
|
Deferred revenue |
|
|
(4,430 |
) |
|
|
9,086 |
|
Accrued liabilities and income taxes payable |
|
|
(563 |
) |
|
|
1,698 |
|
Other |
|
|
725 |
|
|
|
(51 |
) |
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES: |
|
|
(2,451 |
) |
|
|
(3,745 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(4,866 |
) |
|
|
(273 |
) |
Maturities of short-term securities |
|
|
|
|
|
|
12,124 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
|
|
(4,866 |
) |
|
|
11,851 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from employee loans |
|
|
108 |
|
|
|
|
|
Repayment of employee loans |
|
|
(1,132 |
) |
|
|
|
|
Issuance of common stock |
|
|
945 |
|
|
|
130 |
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(79 |
) |
|
|
130 |
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
(6,938 |
) |
|
|
8,236 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
78,803 |
|
|
|
82,691 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
71,865 |
|
|
$ |
90,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of intangible assets included
in net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation included in cost of sales |
|
$ |
2,721 |
|
|
$ |
46 |
|
Depreciation included in selling, general and administrative expense |
|
|
500 |
|
|
|
108 |
|
Depreciation included in research and development expense |
|
|
320 |
|
|
|
318 |
|
Amortization of intangible assets |
|
|
1,755 |
|
|
|
|
|
SUPPLEMENTAL INFORMATION OF NON-CASH ACTIVITIES:
We are in the process of finalizing the allocation of purchase price to intangible assets and
goodwill. See Note 3. During the three months ended March 31, 2006, we revised the fair value of
spare parts for the EDC U.S. operations. The adjustment was to reduce the balance for spare parts
and increase the balance of goodwill and intangibles by $1.5 million.
See Notes to Condensed Consolidated Financial Statements.
7
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
1. Business and Basis of Presentation
Glenayre Technologies, Inc. and its wholly owned and controlled majority owned subsidiaries (we,
us, our, Glenayre or the Company) is an international company in the communications and
entertainment industries. The Company has two reportable business segments: Glenayre Messaging
(Messaging) and Entertainment Distribution Company (EDC). The EDC Business provides pre-recorded products and distribution services to the entertainment industry. The Companys Messaging business is
an established global provider of network-based messaging and communication systems and software
that enable applications including voice messaging, multimedia messaging and other enhanced
services.
The accompanying unaudited condensed consolidated financial statements are presented in U.S.
dollars in conformity with accounting principles generally accepted in the United States 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. We believe,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
The results for the interim periods are not necessarily indicative of results for the full year.
These interim financial statements should be read in conjunction with the consolidated financial
statements of the Company and accompanying notes included in the Companys Annual report on form
10-K for the year ended December 31, 2005. The financial statements include the accounts of
Glenayre and its wholly owned as well as controlled majority owned subsidiaries and have been
prepared from records maintained by Glenayre and its subsidiaries in their respective countries of
operation. The ownership interest of minority investors is recorded as minority interest.
All significant intercompany accounts and transactions are eliminated in consolidation. The Company
does not have any equity or cost method investments.
Use of Estimates
The preparation of financial statements in conformity with U.S. accounting principles generally
accepted in the United States requires us to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain items in the prior year consolidated financial statements have been reclassified to conform
to the current presentation.
8
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
2. Recently Adopted Accounting Standards
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Accounting Standard (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which is a
revision of SFAS 123. SFAS 123R supersedes Accounting Principals Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees (APB 25) and amends FASB Statement No. 95, Statement of
Cash Flows. SFAS 123R requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair values. The Company adopted SFAS 123R on January 1, 2006. Prior to
adoption of SFAS 123R, the Company accounted for share-based payments to employees using APB 25s
intrinsic value method and consequently recognized no compensation cost for employee stock options.
Had the adoption of SFAS 123R occurred in prior periods, the impact of that standard would have
approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and
earnings per share in Note 13.
On January 1, 2006 the Company adopted SFAS No. 151 Inventory Cost, an amendment of Accounting
Research Bulletin No. 43, Chapter 4 (SFAS 151). SFAS 151 requires abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) to be recognized as current
period charges. In addition, SFAS 151 requires allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. The adoption of the new
standard did not have a material impact on the Companys financial position or results of
operation.
The Company also adopted on January 1, 2006 SFAS No. 154, Accounting Changes and Error Corrections
(SFAS 154). SFAS 154 requires retroactive application of a voluntary change in accounting principle
to prior period financial statements unless it is impracticable. SFAS 154 also requires that a
change in method of depreciation, amortization or depletion for long-lived, non-financial assets be
accounted for as a change in accounting estimate that is affected by a change in accounting
principle. SFAS 154 replaced APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. The adoption of the provisions of SFAS 154 did
not have a material impact on the Companys results of operations or financial condition.
3. EDC Acquisition
On May 31, 2005, EDC completed the acquisition of the U.S. and central European CD and DVD
manufacturing and distribution operations from Universal Music Group (Universal). As a
preliminary result of the EDC acquisition, certain long-term intangible assets were identified and
are recorded at their estimated fair value less accumulated amortization of $5.5 million at March
31, 2006.
These intangibles include the North American and Central European CD and DVD manufacturing and
distribution services agreements between EDC and Universal, which have 10-year terms
and no minimum order requirements. Intangible assets also include two third party distribution
supply agreements with automatic renewal terms and relationships with several central European
customers for CD and DVD manufacturing services. The preliminary fair value assigned to the
agreements was based on the present value of estimated future cash flows and is being amortized
over the ten-year terms beginning in June 2005. The Company is in the process of finalizing
third-party valuations of the various intangible assets. Given the complexities of the Universal
manufacturing and distribution services agreements, the values of the intangibles are based on
preliminary valuations and are subject to adjustment as additional information is obtained. The
amount of goodwill if any, remaining after purchase price allocation is unknown. We have assumed
that the total amount currently allocated to intangible assets for the U.S. operations will be
deductible for U.S. income tax purposes.
9
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
During the first quarter of 2006, in accordance with plans adopted at acquisition date, the Company terminated approximately 8 employees as part of the
EDC acquisition resulting in estimated severance cost of $325,000. The Company paid approximately
$81,000, and the remaining severance cost is recorded in accrued liabilities in the accompanying
unaudited condensed consolidated balance sheet at March 31, 2006. The total termination cost of
$325,000 is an adjustment of the purchase price and consequently increased goodwill and intangible
assets in the accompanying unaudited condensed consolidated balance sheet at March 31, 2006.
The purchase price of approximately $127.0 million (provided in table below), using the May 31,
2005 Euro to U.S. dollar exchange rate of 1.2474 consisted of $81.6 million cash paid at closing,
$39.8 million in deferred payments to Universal and $5.6 million for various contingent payments
and transaction costs. The purchase price is subject to post-closing adjustments. Of the purchase
price paid at closing, $30.5 million was for the U.S. operations, 35.5 million ($44.3 million) was
for the central European operations, and the balance constituted transaction expenses. The purchase
price is being allocated to the related tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective estimated fair values on the acquisition date.
|
|
|
|
|
Preliminary Estimated Fair Value at Acquisition Date |
|
Cash |
|
$ |
38,374 |
|
Accounts receivable |
|
|
5,726 |
|
Other receivables |
|
|
2,229 |
|
Inventories |
|
|
5,295 |
|
Prepaid assets |
|
|
1,782 |
|
Spare parts |
|
|
3,037 |
|
Property, plant & equipment |
|
|
55,549 |
|
Long-term receivable from Universal |
|
|
20,667 |
|
Deferred financing fees |
|
|
1,056 |
|
Intangible assets |
|
|
67,312 |
|
Accounts payable and accrued expenses |
|
|
(28,548 |
) |
Deferred tax liability |
|
|
(9,176 |
) |
Long-term liabilities |
|
|
(36,257 |
) |
|
|
|
|
Total |
|
$ |
127,046 |
|
|
|
|
|
Universal Contingent Purchase Price
Under the terms of the share purchase agreement pursuant to which EDC acquired Universals central
European CD and DVD manufacturing and distribution operations, EDC must pay to Universal 75% of the
profit earned during the first term, and 50% of the profit earned during the first renewal term on
the revenue derived from two third party distribution services agreements assumed as part of the
acquisition. The initial term of the agreement with the first third party expired July 31, 2005 and
was renewed for a one-year term. The initial term of the agreement with the second third party
expired December 31, 2005 and was renewed for a two-year term. The profit is defined as earnings
before interest and taxes. The contingent consideration included in the purchase price totals 4.3
million ($5.3 million) consisting of 2.9 million ($3.6 million) for actual consideration from the
date of purchase through March 31, 2006 and 1.4 million ($1.7 million) for estimated consideration
due for the nine months ended December 31, 2006, using the
May 31, 2005 Euro to U.S. dollar exchange
rate of 1.2474. Additional adjustments to the purchase price will be recorded in future periods
when the amounts become probable and determinable. Included in accrued liabilities in the Companys
unaudited condensed consolidated balance sheet at March 31, 2006 are approximately 813,000
($981,000) for consideration earned but not paid as of March 31, 2006, and 1.4 million ($1.7
million) for the estimated amount payable for the nine months ended December 31, 2006, using the
March 31, 2006 Euro to U.S. dollar exchange rate of 1.2076.
10
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
EDC Profits Interests
Upon the completion of the acquisition of Universals U.S. and central European CD and DVD
manufacturing and distribution operations, EDC issued profits interests to certain key employees,
Universal, and the Companys financial advisor, that will entitle these parties to up to 30% of
EDCs distributed profits after the Company has received a return of its equity capital
contribution and certain internal rate of return hurdles and other profitability conditions have
been met. No payments were required from these parties to acquire the profits interests. These
profits interests do not carry any voting rights.
The estimated fair value of the profits interests at the date of grant is currently being
independently appraised and will represent the probability-weighted present value of estimated
future cash flows to those profits interests. The fair value of the profits interests granted to
Universal and the financial advisor will be included in the acquisition costs of EDC. The profits
interests issued to members of management are accounted for as compensation expense and included,
in selling, general and administrative expense in the Companys unaudited condensed consolidated
statements of operations. These profits interests are amortized over the vesting schedule of
one-third immediately upon grant and two-thirds ratably in each of the two years after grant. At
March 31, 2006 and December 31, 2005, estimated obligations of $1.3 million and $1.1 million,
respectively, were included in other non-current liabilities in the Companys condensed
consolidated balance sheets. Included in EDCs results for three months ended March 31, 2006 were
preliminary charges of $177,000, for the amortization of the unvested portion.
Volume Discount
EDC has a
potential unrecorded liability related to a disagreement
in the interpretation of the definition of the units that are
eligible for the volume discount that is earned by Universal. We
believe we have sufficient evidence to support our
interpretation and estimate that the
additional volume discount, if any, will not have a material impact on our operations, cash flows, or financial position.
Pro Forma Information
The pro forma financial information for the first quarter of 2005 includes the business combination
accounting effect on historical EDC revenues, adjustments to depreciation on acquired property,
amortization expense on intangible assets and acquisition costs reflected in Glenayres and EDCs
historical statements of operations for periods prior to the acquisition. The pro forma financial
information is presented for informational purposes only and is not
indicative of the results of operations that would have been achieved if the acquisition had taken
place on the first day of the applicable period presented. In addition, the pro forma amounts are
not necessarily indicative of operating results in future periods.
The following unaudited pro forma consolidated results of operations of the Company for the three
months ended March 31, 2005 assume that the acquisition of the U.S. and central European CD and
DVD manufacturing and distribution operations of Universal were completed as of January 1, 2005:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Total revenues |
|
$ |
85,015 |
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
589 |
|
Net income from discontinued operations |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
599 |
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.01 |
|
Diluted net income per share |
|
|
0.01 |
|
11
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
4. Currency Rate Swap
The Company entered into a cross-currency rate swap agreement with a commercial bank on May 31,
2005. The Companys objective is to manage foreign currency exposure arising from its loan to its
German subsidiary, acquired in May 2005 and is therefore for purposes other than trading. The loan
is denominated in Euros and repayment is due on demand, or by May 31, 2010. In accordance with SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended, the
currency swap does not qualify for hedge accounting. Consequently, the Company reports the foreign
currency exchange gains or losses attributable to changes in the US$/ exchange rate on the
currency swap in earnings.
5. Inventories
Inventories, net of reserves, related to continuing operations consisted of:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
Raw materials |
|
$ |
10,096 |
|
|
$ |
10,647 |
|
Work in process |
|
|
1,688 |
|
|
|
1,390 |
|
Finished goods |
|
|
3,417 |
|
|
|
3,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,201 |
|
|
$ |
15,620 |
|
|
|
|
|
|
|
|
At
March 31, 2006 and December 31, 2005, reserves were
approximately $2.9 million and $2.5
million, respectively. Charges for obsolescence and slow-moving inventory were approximately
$168,000 and $24,000 during the three month periods ended March 31, 2006 and 2005, respectively.
6. Estimated Warranty Costs and Deferred Revenue
The Company generally warrants Messaging products for one year after sale. Consequently, a
provision for estimated warranty costs is recorded at the time of sale. Factors affecting the
warranty liability include the number of units sold, historical and anticipated rates of warranty
claims and cost per claim.
The following is a summary of activity of the continuing operations warranty obligation for the
first quarter of 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Balance at beginning of period |
|
$ |
423 |
|
|
$ |
573 |
|
Provision for warranty obligations |
|
|
92 |
|
|
|
46 |
|
Other warranty release |
|
|
(105 |
) |
|
|
|
|
Settlements of warranty obligation |
|
|
(8 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
402 |
|
|
$ |
574 |
|
|
|
|
|
|
|
|
Post installation extended warranty and support services, known as Glenayre Care, are
available for Messaging products and services. One year of Glenayre Care is generally included in
the price of the product. A portion of the product revenue (an amount equal to the fair value of
the Glenayre Care) is deferred when the product is sold and ratably recognized into revenues over
the support period. Once this service period expires, customers generally enter into Glenayre Care
agreements of varying terms, which typically require payment in advance of the performance of the
extended warranty service. Revenue derived from post-installation support services is recognized
ratably over the contracted support period.
12
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
Deferred revenue related to support services for new product sales and to the sale of post installation support services was
approximately $3.4 million of the $4.6 million of deferred revenue included in the unaudited condensed
consolidated balance sheet at March 31, 2006.
EDC provides its customers with a fixed credit as compensation for defective products. Revenue for
CD and DVD products are recorded net of the fixed credit.
7. Discontinued Operations
In May 2001, the Company began exiting its Wireless Messaging (Paging) business. As a result, we
recorded the Paging segment as a disposal of a segment of business starting in the second quarter
of 2001 in accordance with APB Opinion No. 30, Reporting the Results of Operations. Accordingly,
the operating results of the Paging segment have been classified as a discontinued operation for
all periods presented in the Companys unaudited condensed consolidated statements of operations.
Additionally, the Company has reported all of the Paging segment assets at their estimated net
realizable value in the Companys unaudited condensed consolidated balance sheet as of March 31,
2006. All business transactions related to the Paging segment, with the exception of existing
contractual obligations, ceased in May 2002, the end of the transition period. Results for
discontinued operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Gain on disposal of segment before income taxes |
|
$ |
45 |
|
|
$ |
63 |
|
Income tax expense |
|
|
(293 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
(Loss) income from discontinued operations |
|
$ |
(248 |
) |
|
$ |
10 |
|
|
|
|
|
|
|
|
In the first quarter of 2006, after reviewing the estimated liabilities and future commitments
related to the discontinued operations, we recorded a net decrease in the loss on disposal of
approximately $45,000. The adjustments to the original estimates related primarily to asset
liquidations and a reduction in estimated contract obligations. The income tax expense is primarily
related to foreign income tax returns under regulatory review.
In the first quarter of 2005 we recorded a net decrease in the loss on disposal of approximately
$63,000. This decrease included income of $74,000 primarily due to settlement payments received
from Pilot Pacific Properties, Inc. and its associated companies. This income was offset by
adjustments to the original estimates, related primarily to international office closures, of
$11,000.
13
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
8. Income Taxes
The Companys consolidated income tax provision from continuing operations was different from the
amount computed using the U.S. federal statutory income tax rate for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Income tax provision (benefit) federal U.S. statutory rate |
|
$ |
(2,335 |
) |
|
$ |
633 |
|
State income tax net of federal benefit |
|
|
(288 |
) |
|
|
(39 |
) |
Increase (decrease) in valuation allowance |
|
|
2,459 |
|
|
|
(624 |
) |
Foreign taxes, net of federal benefit and related valuation allowance |
|
|
4 |
|
|
|
29 |
|
Profits interest awards |
|
|
62 |
|
|
|
|
|
Other non deductibles |
|
|
83 |
|
|
|
30 |
|
Minority interest in losses of subsidiary |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provisions |
|
$ |
4 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
The Company accounts for income taxes under the liability method in accordance with SFAS No.
109, Accounting for Income Taxes (SFAS 109). At March 31, 2006, the Companys net deferred tax
assets were fully reserved by a valuation allowance. Pursuant to SFAS 109, a valuation allowance
should be recognized to reduce the deferred tax assets to the amount that is more likely than not
to be realized as offsets to the Companys future taxable income. The Company assessed whether the
net deferred asset at March 31, 2006 was realizable and determined that the entire amount should be
reserved due to significant U.S. net operating losses and its inability to project future taxable
income. The foreign pretax income (loss) from operations for the three months ended March 31, 2006 and March 31, 2005 were $23,000 and ($66,000), respectively.
The Company has realized U.S. Federal net operating losses (NOLs) of $276.9 million and foreign
NOLs of $45.1 million. At December 31, 2005, of the $276.9 million realized U.S. Federal NOLs,
$243.5 million will begin to expire in 2019. The remaining $33.4 million of U.S. NOLs were related
to the 1997 acquisitions of Open Development Corporation and Wireless Access, Inc., which start
expiring in 2006. However, the Companys ability to offset future income with these acquired NOLs
is subject to restriction in the United States Internal Revenue Code of 1986 as amended.
An unrecorded tax loss contingency arose in 2005 related to overhead costs incurred in the U.S.
that were allocated to certain foreign subsidiaries. It is possible upon audit that the tax
authorities in these foreign jurisdictions will object to the charges. If we are unsuccessful in
defending our position, tax expense could increase by as much as $1.0 million over amounts
currently accrued. We believe that the chance of disallowance is more than remote, but less than
likely.
9. Employee Benefit Plans
Net pension and post-retirement benefit costs consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
228 |
|
|
$ |
15 |
|
Interest cost on APBO |
|
|
280 |
|
|
|
32 |
|
Amortization of prior service costs |
|
|
(64 |
) |
|
|
(64 |
) |
Amortization of actuarial loss |
|
|
8 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
$ |
452 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
14
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
The 2006 figures include pension benefit costs assumed in May 2005 in connection with the EDC
acquisition. The amortization of prior service cost decreases the post-retirement benefit costs due
to an amendment of a Messaging plan that reduced the number of participants by changing eligibility
provisions.
10. Stockholders Equity
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 |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(6,674 |
) |
|
$ |
1,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Denominator for basic income (loss) from
continuing operations per share weighted
average shares |
|
|
68,178 |
|
|
|
66,884 |
|
Effect of dilutive securities: stock options |
|
|
|
|
|
|
1,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) from
continuing operations per share |
|
|
68,178 |
|
|
|
68,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per weighted
average common share (1) |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations per common share -
assuming dilution (1) |
|
$ |
(0.10 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income (loss) per weighted average common share amounts are rounded to the nearest $.01;
therefore, such rounding may impact individual amounts presented. |
There were no shares of potential common stock in the calculation of diluted loss per share for
the three months ended March 31, 2006, as their effect would be anti-dilutive.
11. Commitments and Contingencies
Litigation
EDC is not currently party to any material legal proceedings. In connection with the licensing of
Messagings software products, the Companys standard purchase and license agreements typically
require the Company to defend and indemnify its customers against claims that the Companys
licensed programs infringe or misappropriate the intellectual property rights of third parties.
Under these agreements, the Company agrees to indemnify, defend and hold harmless the customer in
connection with patent, copyright, trade secret or mask works infringement claims made by third
parties with respect to the customers authorized use of our licensed programs. The indemnity
provisions generally provide, subject to various exclusions and conditions, for our control of
defense and settlement and cover costs and damages actually finally awarded against the customer.
The Company retains the right in its discretion or after issuance of a final adverse judgment to
obtain a license for the licensed program in question from the third party, to modify the licensed
program so it is no longer infringing, or to terminate
15
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
the customers license for the licensed program with a pro-rata refund of license fees paid based on a 5-year
straight-line amortization schedule.
Phillip Jackson Beginning in late 2001, Phillip Jackson (Jackson) filed lawsuits against
several of the Companys customers claiming that products sold by the Company and used by these
customers infringed a patent held by Jackson. The Company agreed to indemnify its customers for the
claims in these lawsuits and assumed primary responsibility for defending the claims with respect
to the Companys products. Following completion of the trial and post-trial reduction of damages by
the court, the court entered judgment in the total amount of approximately $2.7 million, plus
interest and costs. During the first quarter of 2004, the Company recorded a charge consisting of
$2.7 million of royalty fee expense (recorded in cost of revenues) and $200,000 of interest
expense, and recorded a reduction of the estimated liability for accrued legal cost associated with
this case of $770,000. The Company paid the $2.7 million award plus interest and costs during the
second quarter of 2004.
On May 14, 2004, Jackson filed a motion with the trial court to set trial on remaining issues of
contributory infringement and inducement to infringe Jacksons patent. On June 29, 2004, the trial
court ruled that there were no issues remaining between the parties and denied Jacksons motion to
set trial on remaining issues. Jackson filed an appeal with respect to this ruling and the appeal
was argued before the United States Court of Appeals for the Federal Circuit on March 11, 2005. On
April 11, 2006, the appellate court ruled on the appeal in Glenayres favor, affirming the trial
courts ruling of June 29, 2004 and dismissing Jacksons claim for a second trial on other issues.
On April 25, 2006, Jackson filed a request for rehearing en banc with the appellate court.
Accordingly, at this time, the appellate court decision has not yet become final and nonappealable,
and no assurance can be given at this time that further appellate proceedings will not ensue in the
case.
Lynnview Ridge, Alberta In November 2002 and April 2003, a total of twenty lawsuits seeking
approximately $22.3 million (Canadian) in damages were filed in the Court of Queens Bench,
Judicial Centre of Calgary, in Alberta, Canada, against the Company and several other defendants,
including Imperial Oil, a major Canadian petroleum company. These lawsuits asserted that the
defendants, including the Company, are liable for negligence, nuisance, and negligent
misrepresentation arising out of the development and sale of homes located in Calgary, Canada
residential development, Lynnview Ridge, that was jointly developed in the early 1980s by a
corporate predecessor of the Company and a wholly owned subsidiary of Imperial Oil.
In March 2004, one of the lawsuits was discontinued by one of the plaintiffs. In April 2004, the
Company made an application for grant of summary judgment in one action that was chosen to be a
representative case for this matter, but the plaintiffs in this representative case discontinued
their lawsuit in October 2004. In April 2005, the Company was notified that Imperial Oil had filed
a notice with the Court that it has settled nine of the lawsuits involving approximately $11.8
million (Canadian) in total damages and that the releases to be made by the plaintiffs in
connection with those settlements would include the Company. Since that time consent judgments and
dismissals covering the Company have been entered in eight of the remaining nine lawsuits, which
had been requesting approximately $6.5 million (Canadian) in total damages. In February 2006, the
plaintiffs in the last of the lawsuits, seeking approximately $145,000 (Canadian) in total damages,
agreed to discontinue their lawsuit. A dismissal covering the Company was filed on March 10, 2006,
and the case was formally dismissed on that date. Based on the foregoing, all of the original
twenty lawsuits have been settled or dismissed and are now closed. The Company has paid no damages
with respect to any of the foregoing settlements or judgments.
In addition to the legal proceedings discussed above, the Company is from time to time, involved in
various disputes and legal actions related to its business operations. While no assurance can be
given regarding the outcome of the matters discussed above, based on information
16
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
currently
available, 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. However, because of the
nature and inherent uncertainties of litigation, should the outcome of these actions be
unfavorable, the Companys business, financial condition, results of operations and cash flows
could be materially adversely affected.
Letters of Credit and Cash Collateral
Certain cash balances totaling $16.5 million are included in restricted cash in the unaudited
condensed consolidated balance sheet at March 31, 2006. These balances are deposited with Wachovia
to collateralize a portion of EDCs credit facility. Restricted cash also includes $731,000 of
customer performance bonds and $30,000 for letters of credit for leased space and a tax bond. None
of these bonds or letters of credit were drawn upon as of March 31, 2006.
Other
At March 31, 2006, there were approximately $17.3 million of outstanding unconditional purchase
commitments mainly to its suppliers of inventories and equipment.
12. Segment Reporting
The Company has two reportable segments: Messaging and EDC. Messaging consists of the Companys
software development operation, producing network-based messaging and communication systems and
software that enable applications including voice messaging, multimedia messaging and other
enhanced services. EDC consists of the Companys CD and DVD manufacturing and distribution
operations. The Companys segments operate in different industries and are managed separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Consolidated |
|
EDC |
|
Messaging |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Revenues |
|
$ |
86,446 |
|
|
$ |
17,922 |
|
|
$ |
70,076 |
|
|
$ |
|
|
|
$ |
16,370 |
|
|
$ |
17,922 |
|
Income (loss) from
continuing
operations before
income taxes |
|
|
(6,670 |
) |
|
|
1,809 |
|
|
|
(4,372 |
) |
|
|
|
|
|
|
(2,298 |
) |
|
|
1,809 |
|
Depreciation &
amortization |
|
|
5,296 |
|
|
|
472 |
|
|
|
4,744 |
|
|
|
|
|
|
|
552 |
|
|
|
472 |
|
13. Stock Compensation Expense
On January 1, 2006, we adopted SFAS 123R, which is a revision of SFAS 123. SFAS 123R supersedes APB
25 and amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. This pronouncement applies to our incentive stock plan,
including stock options and restricted stock units, and our employee stock purchase plan.
We elected the modified prospective method for our transition. Under this method, we recognized
compensation cost beginning on January 1, 2006 (a) based on the requirements of SFAS 123R for all
share-based payments granted after that date and (b) based on the requirements of SFAS 123 for all
awards granted to employees prior to the that date that were unvested. No share-based employee
compensation cost was recognized in the Companys statement of operations for the year ended
December 31, 2005 for options granted that had an exercise price equal to the market value of the
underlying common stock on the date of grant. Additionally, no compensation costs were recognized
for those
17
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
periods for the employee stock purchase plan transactions. Compensation expense was
recorded for the restricted stock units issued to our directors in the two preceding years because the stock is
issued at no cost to the directors.
As a result of adopting SFAS 123R, our net loss from continuing operations before income taxes and
net loss for the three months ended March 31, 2006 is $360,000 greater than if we had continued to
account for share-based compensation under APB 25. Basic and diluted loss per share from
continuing operations for the same period would have been ($0.09) if
we had not adopted SFAS 123R,
compared to reported basic and diluted loss per share from continuing operations of ($0.10).
The grant of equity instruments in exchange for services is a non-cash item and, therefore, is
reflected as a reconciling item from net income to cash flow from operations, when using the
indirect method for presenting the statement of cash flows. Prior to the adoption of SFAS 123R, the
Company presented all tax benefits of deductions resulting from the exercise of stock options as
operating cash flows in the statement of cash flows. SFAS 123R requires the cash flows resulting
from the tax benefits resulting from tax deductions in excess of the compensation cost recognized
for those options (excess tax benefits) to be classified as financing cash flows. During the three
months ended March 31, 2006, we did not record any excess tax benefit and corresponding increase to
contributed capital because the Company has a net operating loss carryforward, and the tax benefit
will not be recognized until the deduction reduces current taxes payable.
The Company grants stock options and issues new shares under stock incentive plans and an employee
stock purchase plan.
The following table illustrates the effect on net income and earnings per share if we had applied
the fair value recognition provision of SFAS 123R to options granted under the Companys stock
option plan in 2005. For purposes of pro forma disclosures, the estimated fair value of the
options is estimated using a Black-Scholes-Merton option pricing formula and amortized to expense
on a straight-line basis over the options vesting period. For the three-month period ended March
31, 2005 pro forma option expense is as follows:
|
|
|
|
|
Income from continuing operations as reported |
|
$ |
1,780 |
|
Pro forma stock option expense |
|
|
(269 |
) |
|
|
|
|
Income from continuing operations pro forma |
|
$ |
1,511 |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share as reported (1) |
|
$ |
0.03 |
|
Pro forma stock option expense (1) |
|
|
|
|
|
|
|
|
Income from continuing operations per common share pro forma (1) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, assuming dilution per common share as reported (1) |
|
$ |
0.03 |
|
Pro forma stock option expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, assuming dilution per common share pro forma (1) |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
(1) |
|
Income per share amounts are rounded to the nearest $0.01; therefore, such rounding may
impact individual amounts presented. |
Both SFAS 123 and SFAS 123R require measurement of fair value using an option-pricing model. The
Company uses the Black-Scholes-Merton model. All awards granted prior to July 1, 2005 maintain
their grant-date value as calculated under SFAS 123. The future compensation cost for the portion
of these awards that are unvested (the service period continues after date of adoption) will be
based on their grant-date
18
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
value adjusted for estimated forfeitures. Prior to adopting SFAS 123R, we
adjusted the pro forma expense for forfeitures only as they occurred. The pro forma expense was
allocated to the service period based on the accelerated attribution method, and all the awards
have graded service vesting. Under the
new standard, the Company may use a straight-line or accelerated attribution method and elected to
use straight line for awards issued after January 1, 2006.
The following table details the compensation expense for options, restricted stock and the employee
stock purchase plan for the three months ended March 31, 2006:
|
|
|
|
|
Employee Stock Purchase Plan |
|
$ |
28 |
|
Options granted subsequent to January 1, 2006 |
|
|
3 |
|
Options granted prior to January 1, 2006 |
|
|
329 |
|
|
|
|
|
|
|
|
|
|
SFAS 123R expense |
|
$ |
360 |
|
Restricted Stock Units |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
Total stock compensation expense |
|
$ |
383 |
|
|
|
|
|
No stock compensation expense was capitalized as part of the cost of any asset during the
three months ended March 31, 2006.
(a) Incentive Stock Plans
The Company maintains two incentive stock plans (the 1996 Plan and the 1991 Plan) that are used
to promote the long-term financial interests and growth of the Company. The 1996 and 1991 Plans as
amended, authorize the grant of up to 9,650,000 and 11,475,000 shares, respectively, of the
Companys common stock for issuance in connection with the grant of stock options, stock
appreciation rights, restricted stock and performance shares. Participation under the 1996 Plan is
limited to non-officer directors, key employees and other key persons. Option awards are generally
granted with an exercise price equal to the market price of the Companys stock at the date of
grant; those option awards generally vest based on 3 years of continuous service and have 10-year
contractual terms. Generally, one-third of the units vest on each of the first, second and third
anniversaries of the grant.
The 1996 Plan also provides for the grant of restricted stock units (RSUs) to non-officer
directors on an annual basis. The granting of RSUs intended to align the interest of directors and
stockholders in enhancing the value of the Companys common stock and to encourage such directors
to remain with and to devote their best efforts to the Company. Beginning in January 2006, each
non-officer director receives a number of RSUs equal to $18,000 divided by the fair market value
of the common stock on the last trading day immediately preceding each Annual Meeting. Prior to
January 2006, non-officer directors received $9,000 annual grants. One-third of the units vest
immediately and the remainder on each of the first and second anniversaries of the grant. On May
17, 2005 each non-officer director was granted 3,285 RSUs with a unit price of $2.74 each, and in
2005 we recognized approximately $57,000 for director fee expense related to RSUs. On January 3,
2006, to cover the increased compensation rate for the period from January 1, 2006 through the
Companys 2006 Annual Meeting, each non-officer director was
granted 1,057 RSUs with a unit price
of $3.31 each, and in the three months ending March 31, 2006 we recognized approximately $23,000
for director fee expense related to RSUs.
19
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
Activity and price information regarding the Companys incentive stock plans are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Shares |
|
|
Average |
|
|
Contractual |
|
|
Aggregate |
|
|
|
(In 000s) |
|
|
Price |
|
|
Term |
|
|
Intrinsic Value |
|
Outstanding December 31, 2004 |
|
|
6,363 |
|
|
$ |
3.96 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1,425 |
|
|
|
2.87 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,106 |
) |
|
|
1.34 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(615 |
) |
|
|
12.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
6,067 |
|
|
|
3.28 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
41 |
|
|
|
4.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(537 |
) |
|
|
1.48 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4 |
) |
|
|
2.28 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(37 |
) |
|
|
32.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2006 |
|
|
5,530 |
|
|
$ |
3.27 |
|
|
6.7 years |
|
$ |
14,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at March 31, 2006 |
|
|
5,378 |
|
|
$ |
3.28 |
|
|
|
|
|
|
$ |
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
3,546 |
|
|
$ |
3.54 |
|
|
5.5 years |
|
$ |
10,004 |
|
The weighted average grant-date fair value of options and RSU-s granted during the three
months ended March 31, 2006 was $88,000. The total intrinsic value of options and RSUs exercised
during the three months ended March 31, 2006 was $1.7 million.
A summary of the status of the Companys nonvested shares as of March 31, 2006 and changes during
the three months ended March 31, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Shares |
|
Average Grant- |
Nonvested Shares |
|
(000s) |
|
Date Fair Value |
Nonvested at December 31, 2005 |
|
|
2,022 |
|
|
$ |
1.43 |
|
Granted |
|
|
41 |
|
|
|
2.16 |
|
Vested |
|
|
(85 |
) |
|
|
0.96 |
|
Forfeited |
|
|
(4 |
) |
|
|
1.22 |
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2006 |
|
|
1,974 |
|
|
|
1.47 |
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, there was $1.4 million of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Plans. That cost is expected to
be recognized over a weighted-average period of 1.07 years. The total fair value of shares vested
during the three months ended March 31, 2006 was $82,000.
20
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Continued
(Tabular Amounts in Thousands, Except per Share Amounts)
(Unaudited)
Prior to adopting SFAS 123R on January 1, 2006, the Company followed APB 25 and related
interpretations in accounting for its employee stock options. Under APB 25, because the exercise
price of the Companys employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. The weighted average fair value of stock
options, calculated using the Black-Scholes-Merton option-pricing model, granted during the year
ended December 31, 2005 was $1.42 per option. The fair value for these options was estimated at the
date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:
|
|
|
|
|
|
|
2005 |
|
Expected Life in Years |
|
|
1 to 4 |
|
Risk Free Interest Rate |
|
|
4.4 to 4.5 |
% |
Volatility |
|
|
0.64 |
|
Dividend Yield |
|
|
|
|
The fair value for each option granted in the three months ended March 31, 2006 is estimated on
the date of grant using the Black-Scholes-Merton option-pricing model using the following
assumptions:
|
|
|
|
|
|
|
2006 |
|
Expected Life in Years |
|
|
3.53 |
|
Risk Free Interest Rate |
|
|
4.35 |
% |
Volatility |
|
|
0.65 |
|
Dividend Yield |
|
|
|
|
The expected life in years was based on the weighted average of historical grants assuming that
outstanding options are exercised at the midpoint of the future remaining term, adjusted for
current demographics. The risk free interest rate was the U.S. Treasury five-year spot rate for
January 2006. Volatility was determined by using (i) the long-term volatility (mean reversion),
(ii) the midpoint of historical rolling 3.53 year volatilities, (iii) the volatility of the most
recent 3.53 year time period, (iv) the volatility of the most recent one-year, (v) the implied
volatility as seen in the open market place on January 3, 2006 (beginning of quarter), (vi) the
range (min/max) of the implied volatility in the last 52 weeks, and (vii) the Companys selection
for volatility in the prior reporting year. The Company has not paid cash dividends since 1982 and
does not anticipate paying cash dividends in the foreseeable future.
(b) Employee Stock Purchase Plan
The Company uses its Employee Stock Purchase Plan (the ESP Plan) to give employees an
opportunity to purchase common stock of the Company through payroll deductions, thereby encouraging
employees to share in the economic growth and success of the Company. All regular full-time
employees of the Company are eligible to enter the ESP Plan as of the first day of each six-month
period beginning every February 1 and August 1. The calculation of the price for common stock is
85% of the lower of the closing price on the first day of the period, February 1 or August 1, or
last day of the period, July 31 or January 31. For the August 1, 2005 to January 31, 2006 period,
the discounted stock purchase price was $3.315. For the February 1, 2006 to July 31, 2006 period,
the discounted stock purchase price will be the lower of $3.315 or 85% of the closing market price
of the common stock on July 31, 2006.
21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We, from time to time, make forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect the expectations of management 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.
These forward-looking statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of various factors including
those set forth in Part II, Item 1A Risk Factors of this quarterly report on Form 10-Q and Part
I, Item 1A Risk Factors of our annual report on Form 10-K for the fiscal year ended December 31,
2005 which factors are specifically incorporated herein by this reference. All forward-looking
statements included in this quarterly report on Form 10-Q are based on information available to us
on the date hereof. We assume no obligation to update any forward-looking statements and do not
intend to do so.
Overview
EDC:
On May 31, 2005, EDC acquired the CD and DVD manufacturing and distribution operations in the
United States and central Europe from Universal Music Group (Universal). The acquisition was a
strategic opportunity for the Company to become an industry leader in providing pre-recorded
products and distribution services to the entertainment industry. As part of the transaction, EDC
entered into 10-year supply agreements with Universal under which it immediately became the
exclusive manufacturer and distributor for approximately 80% of Universals CD and DVD
manufacturing requirements and 100% of distribution requirements for the United States and central
Europe. Under these contracts, EDC will have the opportunity to assume responsibility for
fulfilling the remaining portion of Universals requirements in the United States and central
Europe that are currently outsourced as Universals commitments to third party suppliers expire
over the next three and one half years.
Revenues for the first quarter of 2006 were $70.1 million compared to $67.1 million on a pro forma
basis for 2005 representing an increase of approximately 4%. The increase was due to higher
volumes, offset by lower DVD market pricing.
Messaging:
Messaging provides Communications Service Providers with a complete messaging solution, consisting
of hardware, software, and services that enable a range of related applications that provide
significant value in both wireless, wireline and cable networks. Messaging applications available
in the product group include voice mail, fax mail, video solutions, short message service,
multimedia message service, missed-call notification, and others. Messagings services relate
primarily to the installation or maintenance of Messagings products.
Revenues for the first quarter of 2006 were $16.4 million compared to $17.9 million for the first
quarter of 2005. Sales to three of the Companys largest domestic customers were substantially
below that experienced in the first quarter of 2005. Sales to one of these domestic customers,
Sprint-Nextel, declined by 83% to approximately $800,000 in the first quarter of 2006 versus
the first quarter of 2005 as Sprint-Nextel implemented a purchase freeze while it conducted a formal vendor selection process. In early May
2006, we were notified by Sprint-Nextel that Messaging would no longer be included in their
voicemail vendor selection process.
22
During the second quarter of 2006 Messaging began taking actions to reduce operating expenses
to be in line with a lower level of anticipated sales during the remainder of the year.
Results of Continuing Operations
The following table and discussion present the material changes in the consolidated results of
operations of the Company for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
$ |
70,076 |
|
|
$ |
|
|
|
$ |
70,076 |
|
Messaging |
|
|
16,370 |
|
|
|
17,922 |
|
|
|
(1,552 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
86,446 |
|
|
$ |
17,922 |
|
|
$ |
68,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN |
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
$ |
10,440 |
|
|
$ |
|
|
|
$ |
10,440 |
|
Messaging |
|
|
8,714 |
|
|
|
11,297 |
|
|
|
(2,583 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
19,154 |
|
|
$ |
11,297 |
|
|
$ |
7,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
$ |
(3,002 |
) |
|
$ |
|
|
|
$ |
(3,002 |
) |
Messaging |
|
|
(2,926 |
) |
|
|
1,279 |
|
|
|
(4,205 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(5,928 |
) |
|
$ |
1,279 |
|
|
$ |
(7,207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES |
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
$ |
(4,372 |
) |
|
$ |
|
|
|
$ |
(4,372 |
) |
Messaging |
|
|
(2,298 |
) |
|
|
1,809 |
|
|
|
(4,107 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(6,670 |
) |
|
$ |
1,809 |
|
|
$ |
(8,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING
OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment |
|
$ |
(4,110 |
) |
|
$ |
|
|
|
$ |
(4,110 |
) |
Messaging |
|
|
(2,564 |
) |
|
|
1,780 |
|
|
|
(4,344 |
) |
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
(6,674 |
) |
|
$ |
1,780 |
|
|
$ |
(8,454 |
) |
|
|
|
|
|
|
|
|
|
|
Three months Ended March 31, 2006 and 2005
On a consolidated basis, the increase in revenues is primarily due to $70.1 million revenues from
EDC. The decrease in Messaging revenue was primarily due to decreased product revenue from reduced
volume of system sales. The improvement in gross margin was primarily due to $10.4 million from EDC
offset by Messagings $2.6 million decline resulting primarily from a change in the mix of products
sold, with a higher volume of lower margin products. Operating income declined primarily due to a
loss from EDC and decreased gross margins and increased operating expenses in Messaging.
EDC
Revenues. Product sales for the first quarter of 2006 were $49.7 million, and distribution
services revenues were $20.4 million. International revenues comprised 49% of total revenue for
the quarter. Universal individually accounted for approximately 85% of EDCs revenue. The first
quarter of each calendar year is typically the lowest point in the revenue cycle in the
entertainment industry. The Company expects growth in 2006 to be driven by reversionary business
from Universal and additional third party business.
23
Gross Margins on Product Sales and Services. Gross margin for the first quarter of 2006 on product
revenues was $5.4 million or 11% of product revenues, and service margins were $5.0 million or 25%
of service revenues. EDCs gross margins are impacted by the seasonality of the music business, with lower margins in the first half of the year, and higher margins during the second half of the
year due to leverage on fixed costs during the peak season. The gross margins in the first quarter of 2006 were also impacted by the recording of
approximately $967,000 in volume discounts due to Universal as a
result of an increase in their forecasted volumes. On average, gross margins are expected to be in the 18%
to 20% range on an annual basis.
Operating Income. Operating loss of $3.0 million included $1.8 million of amortization expense on
intangible assets. The intangible assets consist primarily of 10-year manufacturing and
distribution services agreements that EDC entered into with Universal as part of the EDC
acquisition, and agreements with various central European customers. Selling, general and
administration costs increased in the first quarter of 2006 compared to the first quarter of 2005
due to higher selling and marketing costs related to the establishment of a sales function to
solicit new third party business, to higher cost associated with EDCs first year Section 404 of
the Sarbanes-Oxley Act of 2002 compliance activities, to non-recurring recruiting, relocation, and
transition costs related to the restructuring of the operations in the U.S., and to
activities related to potential acquisition activities.
Income from Continuing Operations before Tax. Interest expense of $1.4 million included
approximately $676,000 of interest relating to the term loan with Wachovia Bank, approximately
$576,000 imputed interest relating to the deferred acquisition payments due to Universal and
amortization of debt issue costs.
Income from Continuing Operations. Income tax benefit for the first quarter related to the
international operations.
Messaging
Revenues. Revenues decreased in the first quarter of 2006 primarily due to reduced product sales
partially offset by increased service revenue. Revenues from our domestic customers decreased in
the first quarter of 2006 as compared to the first quarter of 2005. International revenues
increased to $3.3 million from $1.9 million for the first quarter of 2006 and 2005, respectively,
and accounted for 21% and 11% of total net sales in those quarters, respectively. During the first
quarter of 2006, five customers individually accounted for approximately 28%, 17%, 11%, 11% and 11%
of total revenue from continuing operations. During the first quarter of 2005, three customers
individually accounted for 27%, 25% and 12% of total revenue from continuing operations.
Gross Margins on Product Sales and Services. The decrease in gross margin dollars was due primarily
to a change in the mix of products sold. Gross margin on products sold (product margin) was 57%
for the first quarter of 2006 compared to 70% for the same quarter last year. In the first quarter
of 2006, sales of the lower margin ICE products replaced the sales of higher margin legacy products
sold in the same quarter of 2005. The lower margin in the first
quarter of 2006 was offset by revenue of $1.4 million recognized
in the quarter related to undelivered elements of a multi element
contract that had been deferred during 2004 and 2005. During the
first quarter of 2006, the customer provided confirmation that no
additional elements were required, and the Company was able to
recognize this remaining revenue with no associated cost. The gross margin percentage for services (service margin) in the
first quarter of 2006 was 47% compared to 42% in 2005.
Operating Income (Loss). The loss for the first quarter of 2006 was primarily a result of decreased
gross margin dollars and increased operating expenses primarily related to expenses related to an
18% increase in headcount.
Income (Loss) from Continuing Operations before Tax. Income (loss) from continuing operations
decreased over the same quarter last year primarily due to the
decrease in gross margin and increase in operating expenses discussed above.
Income
(Loss) from Continuing Operations. Income (loss) from continuing
operations decreased over the same quarter last year primarily due to
the changes discussed above and to the provision for income taxes
that related to international
operations.
24
Financial Condition and Liquidity
Overview. At March 31, 2006, we had cash, cash equivalents and restricted cash totaling $111.5
million. The restricted cash of $39.6 million consisted primarily of cash pledged as collateral to
secure bank debt and balances held in escrow to fund pension and other debt obligations. Our
principal source of liquidity was our $71.9 million cash and cash equivalents balances. Our cash
generally consists of money market demand deposits and our 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. EDC has a senior credit facility with
Wachovia Bank consisting of a five-year term loan with an outstanding balance of $41.5 million and
a $10.0 million revolving line of credit. At March 31, 2006, no drawings were made against the
$10.0 million line of credit that is available as a source of liquidity, if required.
We expect to use cash and cash equivalents for working capital, investments in capital equipment,
and other general corporate purposes, including the expansion and development of our existing
products and markets, and potential acquisitions.
At March 31, 2006 approximately $2.3 million in discontinued operations liabilities remained
outstanding of which we anticipate approximately $0.2 million to be paid in 2006. The remaining
balance relates to estimated international business tax obligations. The Company is waiting for
tax clearance and expects the process to take more than a year.
Operating Activities. Cash used in operating activities was the net of the first quarters net
loss offset by depreciation and amortization and other cash flow adjustments, including the
significant activity described below:
Cash provided by operating activities included:
|
o |
|
Cash received from Universal related to the long-term receivable established as part of
the EDC acquisition, and |
|
|
o |
|
Increased EDC accounts payable balances related to increased sales volume at the end of
the quarter, partially offset by reductions in Messaging accounts payable due to decreased
sales volume. |
Cash used in operating activities included:
|
o |
|
Increased accounts receivable balances primarily due to increased EDC sales volume in
March of 2006, partially offset by Messaging collections, |
|
|
o |
|
Decreased Messaging deferred revenue resulting from the completion of delivery and
installation of prior quarter invoiced transactions, and |
|
|
o |
|
Payment of the 2005 incentive bonuses. |
Investing Activities. During the three months ended March 31, 2006 we spent $4.9 million on
equipment primarily for EDCs operations. We anticipate that property, plant and equipment
purchases related to our continuing operations for the remainder of 2006 will approximate $17.0 of
which $15.0 million relates to EDC and $2.0 million relates to Messaging.
Financing Activities. During the three months ended March 31, 2006, we issued approximately
$945,000 of common stock in connection with purchases under the Companys Employee Stock Purchase
Plan and as a result of the exercise of options and other awards. Additionally, we increased common
stock and contributed capital by approximately $383,000 related to stock compensation expense.
25
Income Tax Matters. Our recent cash outlays for income taxes have been limited primarily to foreign
income taxes. At December 31, 2005, the Company had U.S. net operating loss carryforwards (NOLs)
aggregating approximately $322.0 million, which may be used to offset future taxable income and
reduce federal income taxes. These NOLs begin to expire during 2006 as noted in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration of NOLS (In millions) |
|
|
|
|
|
|
Unrestricted |
|
|
Restricted |
|
|
|
|
|
|
|
|
|
U.S |
|
|
U.S |
|
|
INTL* |
|
|
TOTAL |
|
2006 |
|
$ |
|
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
0.2 |
|
2007 |
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
1.8 |
|
2008 |
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
3.3 |
|
2009 |
|
|
|
|
|
|
3.8 |
|
|
|
3.7 |
|
|
|
7.5 |
|
2010 |
|
|
|
|
|
|
5.9 |
|
|
|
41.4 |
|
|
|
47.3 |
|
2011 |
|
|
|
|
|
|
9.0 |
|
|
|
|
|
|
|
9.0 |
|
2012 |
|
|
|
|
|
|
9.4 |
|
|
|
|
|
|
|
9.4 |
|
2019 |
|
|
44.3 |
|
|
|
|
|
|
|
|
|
|
|
44.3 |
|
2020 |
|
|
50.6 |
|
|
|
|
|
|
|
|
|
|
|
50.6 |
|
2021 |
|
|
65.0 |
|
|
|
|
|
|
|
|
|
|
|
65.0 |
|
2022 |
|
|
13.4 |
|
|
|
|
|
|
|
|
|
|
|
13.4 |
|
2023 |
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
20.7 |
|
2024 |
|
|
48.4 |
|
|
|
|
|
|
|
|
|
|
|
48.4 |
|
2025 |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
243.5 |
|
|
$ |
33.4 |
|
|
$ |
45.1 |
|
|
$ |
322.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
International NOLs are primarily related to Canada. |
Summary. We believe that our current cash reserves together with our ability to establish borrowing
arrangements will be sufficient to (i) support the short-term and long-term liquidity requirements
for current operations (including annual capital expenditures) and discontinued operations and (ii)
make potential acquisitions and strategic investments.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our
unaudited condensed consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
In Managements Discussion and Analysis of Financial Condition and Results of Operations in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005, we discussed the
critical accounting policies that affect the more significant judgments and estimates used in the
preparation of the Companys consolidated financial statements. Other than the adoption of FAS
123R, we believe that there have been no significant changes to such critical accounting policies
and estimates during the three months ended March 31, 2006.
SFAS 123R requires all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values over the service
period for awards expected to vest. The estimation of stock awards that will ultimately vest
requires judgment, and to the extent actual results or updated estimates differ from our current
estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are
revised. We consider many factors when estimating
26
awards expected to vest including type of awards,
employee class, and our historical experience. Actual results, and future changes in estimates, may
differ substantially from our current estimates.
We use the Black-Scholes-Merton valuation model to determine the fair value of our stock options.
Significant judgment is required in determining the inputs to the model including the expected
volatility, the expected life, and the risk free interest rate. Changes in the input assumptions,
can materially affect the fair value estimate of our stock options.
Other Developments Business
On March 1, 2006, EDC entered into a non-binding Letter of Intent and Exclusivity Agreement to
acquire Australian DVD/CD manufacturer and distributor AAV Regency (AAVR). The Letter of Intent
provides for a 90-day exclusivity period during which AAVR will negotiate exclusively with EDC with
regard to an acquisition. The transaction is subject to customary conditions, including due
diligence, financing, satisfaction of closing conditions and negotiation of a definitive agreement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk arising from adverse changes in interest rates, foreign exchange and
stock market volatility. We do not enter into financial investments for speculation or trading
purposes. The Company is not a party to any financial or commodity derivatives except for a
cross-currency rate swap. The Companys exposure to market risk was discussed in the Quantitative
and Qualitative Disclosures About Market Risk section of the Companys Annual Report on Form 10-K
for the year ended December 31, 2005. There have been no material changes to such exposure during
the first quarter of 2006.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934 (the Exchange Act)) pursuant to Rule 13a-15 of the Exchange
Act. Based on that evaluation, due to the existence of the material weakness in the Companys
internal control over financial reporting discussed below, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
not effective as of March 31, 2006. The Companys Chief Executive Officer and Chief Financial
Officer have certified that, to their knowledge, the Companys consolidated financial statements
included in this quarterly report on Form 10-Q fairly present in all material respects the
financial condition, results of operations and cash flows of the Company for the periods presented.
As discussed in Item 9A of the Companys 2005 annual report on Form 10-K, in assessing the
Companys internal control over financial reporting as of December 31, 2005, management determined
that the Company did not have effective internal control over financial reporting as of December
31, 2005. The Company concluded that its internal controls were ineffective as a result of an
identified material weakness in internal controls over revenue recognition for Messaging. The
internal control weakness primarily related to insufficient staffing resources with the knowledge,
experience and training in the application of generally accepted accounting principles, as applied
to revenue recognition for multi-element contracts, and was attributed primarily to staff turnover
and changes in responsibilities. As discussed below and disclosed in the Companys 2005 Annual
Report, the Company has implemented certain corrective actions to remediate this material weakness.
However, sufficient time has not passed to properly test the effectiveness of the controls
post-remediation.
During the quarter ended March 31, 2006 there were no changes in the Companys internal control
over financial reporting that have materially affected, or are reasonably likely to materially
affect, the
27
Companys internal control over financial reporting except as follows. During the
quarter ended March 31, 2006, the Company initiated certain corrective actions to address the
material weakness related to revenue recognition that was identified, including: (1) hiring
additional personnel trained and experienced in the complex accounting areas of revenue recognition
and revenue accounting including a revenue manager and a director of financial analysis, (2) making
additional training in this complex area mandatory for finance and other key personnel and (3)
enhancing the Companys revenue recognition policies, procedures and controls. In accordance with
guidance promulgated by the Office of the Chief Accountant of the Division of Corporate Finance of
the Securities and Exchange Commission on June 24, 2004, the Company has excluded EDC from its
assessment of changes in internal controls, the operations
of which consist entirely of the CD and DVD manufacturing and distribution operations acquired from
Universal Music Group on May 31, 2005.
PART II OTHER INFORMATION
ITEMS 2, 3, 4 and 5 are inapplicable and have been omitted.
ITEM 1. LEGAL PROCEEDINGS
See Note 11 to the unaudited condensed consolidated financial statements in Part I, Item 1, which
discusses material pending legal proceedings to which the Company is
party and is incorporated herein
by reference.
Item 1A. RISK FACTORS
In addition to the risk factors set forth in Item 1A. Risk Factors in our Form 10-K for the year
ended December 31, 2005, the following risk factors should also be considered.
Potential Restructuring Activities
Messaging continues to assess its business to align resources and achieve its desired cost structure.
These efforts may not be sufficient for Messaging to achieve sustained profitability and meet the changes in industry and market conditions. We will continue to make judgements as to whether reductions
in workforce may be required. These workforce reductions may impair our ability to achieve current or future business objectives. Any decision to further limit investment or exit, or dispose of, businesses may
result in the recording of impairment charges. We will also review long-lived assets for recoverability under FAS 144 which could result in asset write downs based on our forecasts of future business performance and accounting estimates related to the useful life and recoverability
of the net book value of these assets.
Senior Secured Credit Facility
EDCs Senior Secured Credit Facility contains usual and customary restrictive covenants that,
among other things, permit EDC to use the revolver only as a source of liquidity for EDC and its
subsidiaries and place limitations on (i) EDCs ability to incur additional indebtedness; (ii) the
Companys ability to pay dividends or make acquisitions outside its current industries; (iii) EDCs
ability to make any payments to the Company in the form of cash dividends, loans or advances (other
than tax distributions) and (iv) asset dispositions by EDC. It also contains financial covenants
relating to maximum consolidated EDC and subsidiaries leverage, minimum interest coverage and
maximum senior secured leverage as defined therein. EDCs ability to comply with these financial
covenants is dependent on its future performance, which is subject to prevailing economic
conditions and other factors that are beyond our control, including the risk factors described in
Item 1A. Risk Factors in our Form 10-K for the year ended December 31, 2005. Our failure to comply
with any of these restrictions in the senior secured credit facility may result in an event of
default, which, if not cured or waived, would allow the lenders to accelerate the payment of the
loans and/or terminate the commitments to lend or foreclose on collateral (including the Companys
$16.5 million cash collateral) in addition to other legal remedies.
ITEM 6. EXHIBITS
The exhibits required to be filed as a part of this quarterly report on Form 10-Q are listed in the
accompanying Exhibit Index which is hereby incorporated by reference.
28
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 |
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
Date:
May 10, 2006
|
|
(Principal Financial Officer) |
|
|
29
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Composite Certificate of Incorporation of Glenayre reflecting the
Certificate of Amendment filed December 8, 1995 was filed as
Exhibit 3.1 to the Registrants Annual Report on Form 10-K for the
year ended December 31, 1995 and is incorporated herein by
reference. |
|
|
|
3.2
|
|
Restated by-laws of Glenayre effective June 7, 1990, as amended
September 21, 1994 was filed as Exhibit 3.5 to the Registrants
Annual Report on Form 10-K for the year ended December 31, 1994
and is incorporated herein by reference. |
|
|
|
15.1
|
|
Letter regarding unaudited financial information. |
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|
31.1
|
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Certification of Chief Executive Officer pursuant to Rule 13a
14(a)/15d 14(a), Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
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31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a
14(a)/15d 14(a), Section 302 of the Sarbanes-Oxley Act of 2002. |
|
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
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32.2
|
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Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
30