-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P2DqSeSCb3MgaPxrgNby7jNwqkUBz9SYH0GdbM15/eDbXMhIqpsduACQOtBUhnjN p8cSlEJdI0K4HmnNk7PvKA== 0000950168-99-000842.txt : 19990326 0000950168-99-000842.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950168-99-000842 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENAYRE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000808918 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 980085742 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-15761 FILM NUMBER: 99572976 BUSINESS ADDRESS: STREET 1: 5935 CARNEGIE BOULEVARD CITY: CHARLOTTE STATE: NC ZIP: 28209 BUSINESS PHONE: 7045530038 FORMER COMPANY: FORMER CONFORMED NAME: N W GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP INC DATE OF NAME CHANGE: 19880221 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP LTD DATE OF NAME CHANGE: 19871126 10-K/A 1 GLENAYRE TECHNOLOGIES, INC. 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A NO. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1997 ----------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission File Number 0-15761 GLENAYRE TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) DELAWARE 98-0085742 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5935 CARNEGIE BOULEVARD, CHARLOTTE, NORTH CAROLINA 28209 - -------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code (704) 553-0038 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Title of Class ---------------------------- COMMON STOCK, $.02 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 6, 1998 was approximately $670 million. The number of shares of the Registrant's common stock outstanding on March 6, 1998 was 61,008,517. DOCUMENTS INCORPORATED BY REFERENCE: Document Location in Form 10-K -------- --------------------- Proxy Statement for 1998 Annual Meeting of Stockholders Part III This Annual Report on Form 10-K/A No. 1 amends the Items set forth below in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 previously filed on March 27, 1998 (the "Form 10-K"). As more particularly set forth below, the following financial and related information has been updated in connection with the restatement of the financial statements included herein. PART II Page Number Description In Report - -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA......................................... 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 4 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 13 2 ITEM 6. SELECTED FINANCIAL DATA The following Selected Consolidated Financial Data of Glenayre presented below for each of the five years in the period ended December 31, 1997 has been derived from the Company's audited Consolidated Financial Statements. The Company has been in the telecommunications equipment and related software business since November 10, 1992 and previously was engaged in the real estate development business and in oil and gas pipeline construction. The Company acquired Western Multiplex Corporation ("MUX"), a manufacturer of microwave radio systems, on April 25, 1995. The Company made three acquisitions in 1997: (i) CNET, Inc., a developer of software including network management tools on January 9, 1997, (ii) Open Development Corporation ("ODC"), a developer of data management systems including applications for calling cards on October 15, 1997, and (iii) Wireless Access, Inc. ("WAI"), a developer and marketer of two-way paging devices on November 3, 1997. The results of the acquired companies are included from the dates of acquisition by the Company. The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the other financial data included elsewhere herein. (In thousands, except per share data)
Year Ended December 31, ---------------------------------------------- 1997 (1) 1996 1995 1994 1993 ----- ---- ---- ---- ---- OPERATING DATA: Net sales ......................... $451,679 $390,246 $ 321,404 $172,107 $136,139 Income before change in accounting principle and extraordinary item 34,794 70,444 76,448 33,095 23,700 Discontinued operations(2) ........ -- -- -- 388 100 Extraordinary item ................ -- -- -- -- (1,695) Change in accounting principle .... (688) -- -- -- -- Net income ........................ 6,251 70,444 76,448 33,483 22,105 PER SHARE DATA(3): Per Weighted Average Common Share: Income before accounting change and extraordinary items ......... 0.11 1.16 1.31 0.60 0.52 Net income ........................ 0.10 1.16 1.31 0.61 0.49 Per Common Share-Assuming Dilution: Income before accounting change and extraordinary items ......... 0.11 1.11 1.22 0.56 0.48 Net income ........................ 0.10 1.11 1.22 0.57 0.45 At December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital ................................ $161,454 $279,031 $223,487 $135,209 $ 94,898 Total assets ................................... 590,161 521,210 447,580 284,961 228,244 Long-term debt, including current portion ...... 3,747 879 2,147 2,019 3,451 Stockholders' equity............................ 492,359 455,861 390,694 245,435 198,708
- -------------------------------------------------------------------------------- (1) The results for 1997 were impacted by a $38.7 million charge for purchased research and development related to the ODC and WAI acquisitions and a $5.2 million write-off of goodwill related to the CNET acquisition. See Note 1 to the Consolidated Financial Statements. (2) Effective December 31, 1992 and July 6, 1993, the Company adopted formal plans to dispose of its oil and gas pipeline construction and real estate operations, respectively. These operations are accounted for as discontinued for all periods presented. (3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE ("SFAS 128"). For further discussion of earnings per share and the impact of SFAS 128, see the Note 2 to the Consolidated Financial Statements. 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Glenayre designs, manufactures, markets and services telecommunications equipment and software used in wireless personal communication systems throughout the world specifically focused in three primary marketing areas: (i) paging products including infrastructure equipment from the Wireless Messaging Group ("WMG") and Wireless Access two-way paging devices, (ii) mobile and fixed network products from the Integrated Network Group ("ING") including voice mail systems, software applications for network management and data management systems including applications for calling cards, and (iii) microwave communications products from the Western Multiplex Group. Glenayre acquired three companies in the year ended December 31, 1997. In November 1997, the Company acquired Wireless Access, Inc., a developer and marketer of two-way paging devices. Glenayre acquired Open Development Corporation, a developer of database management products including applications for calling cards in October 1997. In January 1997, the Company acquired CNET, Inc., a developer of software including network management tools. The operating results of the three acquired companies are included in the consolidated results of Glenayre since the acquisition dates. The ODC and WAI acquisitions were accounted for under the purchase method of accounting and, as a result, the Company has recorded the assets and liabilities of these businesses at their estimated fair values, with the excess of the purchase price over these amounts being recorded as goodwill. In connection with the allocation of purchase price for ODC and WAI, valuations of all identified intangible assets of ODC and WAI were made. The intangible assets of these businesses included in-process technology projects, among other assets, which were related to research and development that had not reached technological feasibility and for which there was no alternative future use. The amounts allocated to purchased research and development for ODC and WAI were based on adjusted after-tax cash flows and were determined through established valuation techniques in the high-tech communications industry. Pursuant to applicable accounting pronouncements, the amounts of the purchase price allocated to these projects were expensed. In previously issued financial statements, the Company recorded charges for acquired in-process technology of $125.2 million in 1997 in connection with the acquisition of ODC and WAI. After communication with the Staff of the Securities and Exchange Commission (the "Staff"), the Company has reduced the amount of the charges for acquired in-process technology to $38.7 million in 1997 giving explicit consideration to the Staff's views on in-process research and development as set forth in its September 15, 1998 letter to the American Institute of Certified Public Accountants. These reductions have been reallocated to goodwill and the Company's consolidated financial statements have been restated to reflect such adjustments as described below and in Note 2 of the Notes to Consolidated Financial Statements. See "ACQUIRED IN-PROCESS TECHNOLOGY." In September 1997, the Company announced plans to consider divesting Western Multiplex Corporation ("MUX") allowing Glenayre to focus on its core markets of paging and enhanced messaging. MUX markets products for use in point-to-point microwave communication systems and was acquired by Glenayre in April 1995. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of net sales represented by certain line items from Glenayre's consolidated statements of operations: Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- Net sales ...................................... 100% 100% 100% Cost of sales .................................. 48 46 43 --- --- --- Gross profit ................................ 52 54 57 Operating expenses Selling, general and administrative.......... 22 21 18 Research and development .................... 9 7 7 Charge for purchased research and development 9 -- -- Depreciation and amortization ............... 5 4 3 4 Write-off of goodwill ....................... 1 -- -- --- --- --- Total operating expenses ................ 46 32 28 --- --- --- Operating income ............................... 6 22 29 Interest, net .................................. 2 3 3 Other, net ..................................... * * * --- --- --- Income before income taxes and Accounting change ........................... 7 25 32 Provision for income taxes ..................... 6 7 8 --- --- --- Income before accounting change ................ 2 18 24 Accounting change (net of income tax benefit)... * -- -- --- --- --- Net income ..................................... 1% 18% 24% === === === - ----------------- *less than 0.5% The following table sets forth for the periods indicated net sales represented by the Company's primary marketing areas : Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- (DOLLARS IN THOUSANDS) Paging products .......................... $348,789 $337,091 $284,805 Mobile and fixed network products ........ 70,619 24,911 23,592 Microwave communication and rural radio .. 32,271 28,244 13,007 --------- -------- -------- $451,679 $390,246 $321,404 ======== ======== ======== (PERCENTAGE OF NET SALES) Paging products .......................... 77% 87% 89% Mobile and fixed network products ........ 16 6 7 Microwave communication and rural radio .. 7 7 4 ---- ---- ---- 100% 100% 100% ==== ==== ==== YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 NET SALES. Net sales for 1997 increased 16% to $451.7 million as compared to $390.2 million in 1996, which increased 21% from $321.4 million in 1995. International sales (sales outside the United States) increased to $227.2 million in 1997 as compared to $154.3 million in 1996 and $113.9 million in 1995 and accounted for 50%, 40%, and 35% of net sales for 1997, 1996, and 1995, respectively. Due to the existing capacity of paging providers to serve their subscribers coupled with constrained financing markets, 1997 shipments to the United States market of the Company's one-way paging infrastructure products were below 1996 levels. The same had caused a slower growth rate in the domestic market for these products in 1996 compared to 1995. However, significant investments made by the Company in the international arena have resulted in continued strong international sales growth in 1997 and 1996 of its paging products offsetting declines in the domestic market. The increase in the Company's 1997 net sales compared to 1996 was primarily due to the increased delivery of Glenayre's voice mail system, the MVP, to both the domestic and international markets. The 1997 implementation of a more aggressive international strategy helped reverse the significant decrease in the MVP product line growth rate experienced in 1996 compared to 1995. The growth in the Company's 1996 net sales compared to 1995 came from both paging products and microwave communication. The increase in paging products was primarily due to (i) the continued expansion and upgrading of existing systems within the installed customer base, (ii) the expansion into international markets, and (iii) the delivery of newly introduced two-way paging products. The increase in microwave communication product sales in 1996 was due to (i) increased demand for these products and (ii) the inclusion of MUX operations only since its April 1995 acquisition. 5 As a result of significant investments made by the Company in international markets, continued growth of international sales of its paging products and mobile and fixed network products is anticipated. However, there can be no assurance that the Company's sales levels or growth will remain at or exceed historical levels in any future period. GROSS PROFIT. Gross profit was 52% for 1997 compared to 54% in 1996 and 57% in 1995. The declines in gross profit percentages in 1997 and 1996 were affected by (i) increased revenue from international turn-key projects with lower margins, (ii) changes in the mix of sales of the Company's products, and (iii) increased customer support costs. The 1996 decline was also impacted by an increase in fixed costs resulting from additional capacity brought on line during the latter half of 1995 in anticipation of two-way paging commercial product shipments which did not reach expected 1996 levels due to customer delays. The Company anticipates its gross profit percentage to be approximately 50% to 52% in 1998. However, Glenayre's gross profit margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold, (iii) increases in material costs and other components of cost of sales, and (iv) the inclusion for the full year of sales from companies acquired in 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses were $100.6 million, $80.4 million, and $56.6 million for 1997, 1996, and 1995, respectively. These increases were primarily due to (i) the addition of sales, marketing, technical support, and administrative personnel and other expenses ( including travel, telephone, and new office openings) to support the increases in international sales volume, (ii) the inclusion of CNET, ODC, and WAI operating expenses since the dates of the acquisitions in 1997, and (iii) general increases in employee costs and purchased services. Glenayre expects that spending for selling, general and administrative expenses will increase in absolute dollars in 1998 but should approximate 1997 and 1996 percentages of net sales. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses increased to $40.4 million in 1997 compared to $29.0 million in 1996 and $24.0 million in 1995. These increases were primarily due to the addition of engineering personnel and additional purchased research materials. The 1997 increase was also affected by the research and development activities of CNET, ODC, and WAI since the dates of the acquisitions in 1997. The Company relies on its research and development programs related to new products and the improvement of existing products for the continued growth in net sales. Research and development costs are expensed as incurred. Research and development expenses as a percentage of net sales increased to 9% in 1997 from 7% in 1996 and 1995. Glenayre expects spending for research and development in 1998 to increase as a percentage of net sales to approximately 10% to 11% with absolute dollars changing in relation to net sales reflecting the Company's continued focus on the development and timely introduction of new products. CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. Purchased research and development costs of $38.7 million were expensed in 1997. These costs include $16.4 million and $22.3 million for the purchase of technology under development associated with ODC's database management products and with WAI's two-way paging expertise, respectively. The ODC acquisition provides the technology for Glenayre to further strengthen its position as a worldwide provider in the enhanced service platform market. The WAI acquisition gives Glenayre the expertise in advanced pagers and integrated circuit design positioning the Company to offer some of the most advanced, complete paging systems available. See "ACQUIRED IN-PROCESS TECHNOLOGY." DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased to $22.4 million in 1997 compared to $13.5 million in 1996 and $8.6 million in 1995. The Company has spent $32.9 million, $43.0 million, and $34.6 million in 1997, 1996, and 1995, respectively, in order to provide the equipment and capacity necessary to meet the growth of its business. Additionally, goodwill and other intangibles acquired through the businesses purchased amounted to $113.2 million and $22.0 million in 1997 and 1995, respectively. The increases in depreciation and amortization expense were due to these significant fixed and intangible asset purchases. Glenayre anticipates equipment purchases in 1998 to be at approximately the 1997 levels which is expected to increase depreciation and amortization expense in 1998 compared to 1997. WRITE-OFF OF GOODWILL. At December 31, 1997, the Company wrote off $5.2 million of the goodwill balance related to the January 1997 acquisition of CNET. Revised projected results over the remaining goodwill amortization period of six years for the acquired operations were not sufficient to support the remaining goodwill and, in accordance with the Company's policy, the short-fall was written off. The write-off will reduce the CNET goodwill amortization expense in 1998 as compared to 1997 by approximately $850,000. INTEREST INCOME, NET. Interest income, net increased to $10.4 million in 1997 compared to $9.7 million in 1996 and $8.3 million in 1995. The increase in 1997 compared to 1996 was primarily due to higher balances in notes receivable along with 6 higher average interest rates earned. The increase in 1996 compared to 1995 was attributable to higher average balances in cash, cash equivalents and short-term investments. The Company expects that the level of interest income, net in 1998 will vary in accordance with the level of secured debt financing commitments exercised by Glenayre's customers. OTHER, NET. The increase in expense for 1997 as compared to 1996 and 1995 was primarily due to expenses related to a realignment of certain domestic sales, management, and engineering personnel in order to enhance organizational efficiencies. Additionally, in 1997, the significant decline in relation to the U.S. dollar of currencies of certain countries, including Canada, Singapore and Taiwan, created unrealized translation expense as a result of the remeasurement of the net assets of the Company's foreign operations from the local denominated currency to the functional currency for consolidation. The translational loss or gain recorded is expected to vary in 1998 depending on the amount of net assets in a foreign country and the change in the relation of the foreign country's currency to the U.S. dollar. In the first quarter of 1998, Glenayre announced that, in order to improve operational efficiencies, the paging infrastructure research and development function would be consolidated at the Vancouver, British Columbia facility. As a result of this decision, the Company expects to incur restructuring and other related expenses amounting to approximately $1.5 to 2.0 million in 1998. PROVISION FOR INCOME TAXES. The 1997 effective tax rate differed from the combined U.S. federal and state statutory tax rate of approximately 40% due primarily to nondeductible goodwill amortization. The difference between effective tax rates of 27% and 25% for 1996 and 1995, respectively, and the combined U.S. federal and state statutory tax rate of approximately 40% is primarily the result of (i) the utilization of the Company's net operating losses ("NOLs"), (ii) lower tax rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and (iii) the application of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, ("SFAS 109"), in computing the Company's tax provision. The difference between the effective tax rates in each of the years is primarily the result of an increase in nondeductible goodwill amortization as well as a variance between the adjustments in each year for realization of tax benefits of net operating loss carryforwards for financial statement purposes in accordance with SFAS 109. These adjustments are primarily due to revisions during each year to the estimated future taxable income during the Company's loss carryforward period. See Note 8 to the Company's Consolidated Financial Statements. Glenayre had a significantly lower book tax rate as compared with the statutory tax rate in 1996 and 1995 as a result of reductions in the valuation allowance attributable to the Company's NOLs established prior to 1988 ("prior NOLs"). The prior NOLs had a balance of $70 million as of December 31, 1996 and were fully utilized during 1997. The remainder of these prior NOLs were utilized during 1997. At December 31, 1997, the Company had approximately $34 million of NOLs related to companies acquired during 1997("acquired NOLs"). However, due to certain restrictions limiting the Company's future use of the acquired NOLs, the potential benefit of the acquired NOLs has been fully reserved. As a result of the final usage of the prior NOLs and uncertainty as to the usage of the acquired NOLS, the book tax rate is expected to increase in 1998. However, the actual book tax rate may be different from the Company's estimate due to various issues including (i) future tax legislation, (ii) the changes in the amount of international business by the Company, (iii) the utilization of U.S. Research and Development tax credits, (iv) changes in federal, state or international tax rates, (v) the availability of foreign sales corporation benefits and (vi) the actual utilization of the acquired NOLs. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company changed its accounting policy in 1997 pursuant to Emerging Issues Task Force No. 97-13 ("EITF No. 97-13") for the project to implement a new business operating system that Glenayre began in 1996 and expects to complete in the second quarter of 1998. Previously all direct costs relating to the project were capitalized, including the portion related to business process reengineering. In accordance with EITF No. 97-13, the unamortized balance of these reengineering costs as of November 1997 of approximately $1.1 million, or $688,000 after tax benefit was written off. ACQUIRED IN-PROCESS TECHNOLOGY In connection with the 1997 purchases of Wireless Access, Inc. and Open Development Corporation, the Company made allocations of the purchase price to acquired in-process technology. These amounts were expensed on the respective acquisition dates of the acquired businesses because the acquired in-process technology had not yet reached technological feasibility and had no future alternative uses. In previously issued financial statements, the Company recorded charges for acquired in-process technology of $125.2 million in 1997 in connection with the WAI and ODC acquisitions. Subsequent to these charges, the Staff of the Securities and Exchange Commission ("Staff") issued a letter to the American Institute of 7 Certified Public Accountants dated September 15, 1998 ("AICPA Letter") stating certain Staff views on in-process research and development. Additionally, the Staff, in its review of the Form 10-K for the year ended December 31, 1997 filed by the Company in March 1998, commented on the valuation of the in-process research and development costs for the WAI and ODC acquisitions. After consideration of the views of the Staff set forth in the AICPA Letter and communication with the Staff, the Company requested a recalculation of the independent valuation analysis for the acquired in-process technology. As a result of the recalculation, the Company has reduced the amount of the charges for acquired in-process technology to $38.7 million in 1997 in connection with the WAI and ODC acquisitions. These reductions have been reallocated to goodwill to reflect such adjustments as set forth below. Since the respective dates of acquisition, the Company has used the acquired in-process technology to develop new advanced two-way messaging devices and a system platform for the prepaid wireless market, which have become part of the Company's suite of products. The nature of the efforts required to develop the acquired in-process technology into commercially viable products principally relate to the completion of all planning, designing and testing activities that are necessary to establish that each product can be produced to meet its design requirements, including functions, features and technical performance requirements. There can be no assurance that commercial viability of these products will be achieved. Furthermore, future developments in the wireless communications industry, changes in other product and service offerings or other developments could cause the Company to alter or abandon these plans. Failure to complete the development of these projects in their entirety, or in a timely manner, could have a material adverse impact on the Company's operating results, financial condition and results of operations. A description of the acquired in-process technology and the estimates made by the Company for each of (i) WAI and (ii) ODC is set forth below. (i) WAI The in-process technology acquired in the November 1997 WAI acquisition consisted of one significant research and development project. The project's primary goals were focused on improving the technical features of two-way messaging devices while reducing their overall size. After acquiring WAI, the Company continued the development of this in-process project. At the time of the WAI acquisition, the Company assigned a value of $80.9 million to the WAI in-process technology with the assistance of an independent valuation prepared at such time. The recalculation described above indicated a value of $22.3 million. In arriving at this value, the Company considered the previously-obtained independent appraisal, the Staff's views on in-process research and development as set forth in the AICPA Letter and the Staff's comments to the Company, including: (i) the stage of completion of the in-process technology at the date of acquisition, (ii) the complexity of the work completed to date, (iii) the difficulty of completing development within a period of time, (iv) technological uncertainties and (v) the estimated total project costs of the in-process research and development in arriving at the valuation amount. Major assumptions used in valuing the acquired in-process technology included: Revenue: Significant growth percentage increases in each of years 1998 and 1999 due to the early life cycle-stage of two-way messaging in the market place, a decline in absolute revenue dollars in year 2000 and an insignificant amount of sales in year 2001 with sales ceasing as more advanced devices introduced by Glenayre replace the AccessMate and AccessLink-II; Profit margin percentage: Expected to improve in 1998 and 1999 along with revenue growth then constant over the remaining life of the products; Selling, General, and Administrative expenses: Expected to remain constant as a percentage of revenue through the life of the products in order to sustain growth; Expense reductions/synergies: None were anticipated utilizing WAI as a stand-alone operation; and Discount rates: Due to the nature and characteristics of in-process technology, a discount rate of 25% was utilized considering a range of venture capital rates of return. The Company estimated the WAI in-process project, which was completed in the second quarter of 1998, was approximately 60% complete at the date of the WAI acquisition. The project consisted of the development of two new paging devices. 8 AccessMate. This product is an entry-level two-way wireless data-messaging device. Utilizing a newly developed integrated circuit chipset technology, the Company is able to decrease the size of its devices while reducing the consumer price and power consumption. The AccessMate allows a service provider to offer guaranteed message receipt by storing and resending a message when the recipient's device is turned off or out of the service area. AccessLink-II. In addition to allowing a service provider to offer guaranteed message receipt, the AccessLink-II provides users with the ability to send standard replies, create custom replies and originate messages to another pager or to an e-mail address. At the time of the WAI valuation, the expected total cost of the development project was approximately $21 million, including costs incurred by WAI prior to its acquisition. As of December 31, 1998, approximately $6 million had been incurred since the date of the WAI acquisition for this project, which approximated the anticipated amount to be incurred at the acquisition date. No significant additional expected costs will be incurred subsequent to December 31, 1998 to complete the research and development project acquired from WAI. The actual 1998 revenue and profit margin results related to the valued WAI in-process technology were significantly lower than projections used which significantly impacted the Company's 1998 results. The lower results were primarily related to start-up delays in the production of the devices and performance design issues. The Company anticipates that revenues and profit margins in 1999 for the AccessMate and the AccessLink-II will be significantly lower than that estimated for use in the valuation projections at the date of the WAI acquisition primarily as a result of lower market expectations for such devices. (ii) ODC The in-process technology acquired in the October 1997 ODC acquisition consisted primarily of a project related to ODC's Service Creation Platform (SCP) and Service Creation Environment (SCE). This platform enables service providers to offer subscribers features such as: (i) prepaid wireless calling services with voice activated dialing, (ii) prepaid wireline calling card services, (iii) postpaid calling services, (iv) interactive voice response sessions scripted in foreign languages and (v) account management. Additionally, the platform's advanced, open architecture allows scalability. The Company estimates this project, which was completed during the fourth quarter of 1998, was approximately 50% complete at the date of the ODC acquisition. At the time of the ODC acquisition, the Company assigned a value of $44.3 million to the ODC in-process technology with the assistance of an independent valuation prepared at such time. The recalculation described above indicated a value of $16.4 million. In arriving at this value, the Company considered the previously-obtained independent appraisal, the Staff's views on in-process research and development as set forth in the AICPA Letter and the Staff's comments to the Company, including: (i) the stage of completion of the in-process technology at the date of acquisition, (ii) complexity of the work completed to date, (iii) the difficulty of completing development within a period of time, (iv) technological uncertainties and (v) the estimated total project costs of the in-process research and development in arriving at the valuation amount. Major assumptions used in valuing the ODC acquired in-process technology included: Revenue: Significant growth rate percentages in each of years 1998 and 1999 due to the early life-cycle stage of the ODC products in the market place, a modest growth rate percentage in year 2000, and a decline in absolute revenue dollars in year 2001 through 2003 with sales ceasing thereafter as technological advances replace the SCP/SCE platform; Profit margin percentages: Expected to improve approximately 2% per year from 1997 through 2000 along with the revenue growth then remaining constant over the remaining life of the products; Selling, General, and Administrative expenses: Expected to decrease as a percentage of revenues from 1997 to 1998 due to low 1997 sales and then remain constant as a percentage of revenue through the life of the products in order to sustain growth; 9 Expense reductions/synergies: No expense reductions/synergies were anticipated; and Discount rates: Due to the nature and characteristics of the ODC in-process technology, a discount rate of 20% was utilized considering a range of venture capital rates of return. At the time of the ODC valuation, the expected total cost of the development project was approximately $8 million, including costs incurred by ODC prior to the acquisition. As of December 31, 1998, approximately $4 million had been incurred since the date of the ODC acquisition for this project, which approximated the anticipated amount to be incurred at the acquisition date. No significant additional expected costs will be incurred subsequent to December 31, 1998 to complete the research and development project acquired from ODC. The actual 1998 revenue and profit margin results related to the valued ODC in-process technology products were significantly lower than projections used which significantly impacted the Company's 1998 results. The lower results were primarily related to a change in management strategy during 1998 toward the target markets for the SCE/SCP products. This strategic change was from a multiple market approach for the prepaid wireless, prepaid wireline, and postpaid calling markets to a single market approach focused solely on the prepaid wireless market, thus eliminating two markets in which the SCE/SCP products were expected to be sold. The projections used in the acquired in-process technology valuation included revenue related to all three of these markets. Management believes that its future concentration related to this technology should continue to be primarily in the prepaid wireless market. Given this strategic change, the Company anticipates that the revenue and profit margins for 1999 for the SCE/SCP products will be significantly lower than that estimated for use in the valuation projections at the date of ODC acquisition. FINANCIAL CONDITION AND LIQUIDITY LIQUIDITY AND CAPITAL RESOURCES. At December 31, 1997, Glenayre's principal sources of liquidity included $21 million of cash and cash equivalents and a $50 million bank line of credit that expires in October 1998. There were no borrowings under the line of credit in 1997. The decrease in cash, cash equivalents and short-term investments of $111 million for 1997 is principally due to (i) $124 million of funds (net of cash acquired) used to purchase CNET, ODC, and WAI and (ii) purchases of plant and equipment amounting to $33 million, offset by $45 million of funds provided by operations. The cash provided by operating activities was primarily due to net income (before certain non-cash charges including the charge for purchased research and development and the write-off of goodwill) offset by significant increases in accounts and notes receivables. Accounts receivable increased primarily due to (i) higher levels of international turnkey projects with longer payment terms and (ii) increased levels of customer contracts with non-standard terms. Notes receivable increased $38 million for 1997 due to additional requests from customers for financing primarily related to the sales of paging and voice mail products. Approximately 72% of the notes receivable balance as of December 31, 1997 consists of receivables from two customers, one of which accounts for $24.8 million, has a limited operating history and is engaged in the buildout of a major narrowband personal communications services network in the newly introduced market of advanced voice and text paging. Deferred income taxes decreased $15 million in 1997 primarily as result of the utilization of the Company's NOLs. Other assets increased $15 million principally due to intangible assets (other than goodwill) acquired in the purchase of ODC and WAI. Accounts payable and accrued liabilities increased $28 million in 1997 primarily related to the three acquisitions and increased levels of international turnkey projects. In 1996, the Board of Directors of the Company authorized a repurchase program to buy back 2.5 million shares of the Company's common stock. No shares were repurchased under this program in 1996 or 1997. Additionally, in 1996, the Company began the implementation of a new operating business system. This business system is expected to be operational by the second quarter of 1998 at a total capitalized cost of approximately $16 million. Of this total, approximately $14 million, including $10 million of cost incurred in 1997, has been paid and included in fixed assets as of December 31, 1997. The Company's cash and cash equivalents generally consist of high-grade commercial paper, bank certificates of deposit, Treasury bills, notes or agency securities guaranteed by the U.S. Government, and repurchase agreements backed by U.S. Government securities with original maturities of three months or less. The Company expects to use its cash and cash equivalents and bank line of credit for working capital and other general corporate purposes, including the expansion and development of its existing products and markets and the expansion into complementary businesses. Additionally, the competitive telecommunications market often requires customer financing commitments. These commitments may be in the form of guarantees, secured debt or lease financing. At December 31, 1997, the Company had agreements to finance and arrange financing for approximately $92 million of paging and voice mail products. Further, at December 31, 1997, the Company had committed, subject to customers meeting certain conditions and requirements, to finance approximately $6 million for similar 10 systems. The Company cannot currently predict the extent to which these commitments will be utilized, since certain customers may be able to obtain more favorable terms using traditional financing sources. From time to time, the Company also arranges for third-party investors to assume a portion of its commitments. If exercised, the financing arrangements will be secured by the equipment sold by Glenayre. During 1997 Glenayre began the pre-construction phase for a 110,000 square foot expansion of its Vancouver facility to be used primarily for research and development and service. The total cost of the expansion is expected to be approximately $19 million and to be paid throughout the construction period in 1998 and 1999. Approximately $900,000 paid toward architect and engineering fees related to the new expansion is included in capital expenditures for the year ended December 31, 1997. During the first quarter of 1998 Glenayre negotiated a contract to expend up to $15 million for the construction phase of the expansion. The Company believes that funds generated from continuing operations, together with its current cash reserves and bank line of credit, will be sufficient to (i) support the short-term and long-term liquidity requirements for current operations (including annual capital expenditures and customer financing commitments) and (ii) to repurchase shares as discussed above. Company management believes that, if needed, it can establish additional borrowing arrangements with lending institutions. INCOME TAX MATTERS. In 1997 and recent years, the Company has had a favorable income tax position principally because of the existence of a significant amount of U.S. tax net operating loss carryforwards established prior to 1988. These tax loss carryforwards were available to shelter U.S. taxable income generated by the Company. Under the Company's operating and business structure, the majority of the worldwide taxable income was earned in the United States. Therefore, the Company's actual cash outlay for income taxes in 1997 and recent years was limited to U.S. alternative minimum tax and foreign and state income taxes. The remainder of prior NOLs were utilized in 1997. As described in Note 8 to the Company's Consolidated Financial Statements, the Company at December 31, 1997 had U.S. NOLs aggregating $34 million related to 1997 acquisitions of CNET, ODC, and WAI. However, the ability to utilize the acquired NOLs to offset future income is subject to restrictions and there can be no assurance that they will be utilized in 1998 or future periods. Additionally, as the volume of international sales is expected to grow, the percentage of worldwide income taxable in international jurisdictions may increase in the future. As a result, the Company expects that its cash tax rate will be significantly higher in 1998 compared to 1997 and recent years. The Company has recorded a deferred tax asset of $15 million, net of a valuation allowance of $19 million, at December 31, 1997, in accordance with SFAS 109. This amount represents management's best estimate of the amount of NOLs and other future deductions that are more likely than not to be realized as offsets to future taxable income. The factors that affect the amount of U.S. taxable income in the future, in relation to reported income before income taxes, include primarily the amount of employee stock options exercised and the portion of such income taxable in jurisdictions outside the U.S., both of which reduce the amount of income subject to U.S. tax, and therefore reduce the utilization of existing net operating loss carryforwards. IMPACT OF YEAR 2000. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have a time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. Initial investigations indicate that modifications, to the Company's products in order to resolve any year 2000 issues appear to be insignificant. Based on preliminary reviews from presently available information, the current installation of a new business operating system (as described above in "Liquidity and Capital Resources") and the significant capital equipment purchases in recent years to upgrade technological capabilities, the costs of addressing potential problems are not currently expected to have a material adverse impact on the Company's financial position, results of operations, or cash flows in future periods. However, if the Company, its large customers, or significant suppliers are unable to resolve such processing issues in a timely manner, it could have a material impact on the operations of the Company. Accordingly, the Company plans to devote the necessary resources to resolve all significant year 2000 issues in a timely manner. INFLATION. For the three fiscal years ended December 31, 1997, the Company does not believe inflation has had a material effect on its results of operations. 11 FACTORS AFFECTING FUTURE OPERATING RESULTS This Form 10-K/A, the Form 10-K, the Company's Summary Annual Report to Stockholders, any Form 10-Q or any Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company include forward-looking statements reflecting the Company's current views with respect to future events and financial performance. Although certain cautionary statements have been made in the 10-K/A and the Form 10-K related to factors which may affect future operating results, a more detailed discussion of these factors is set forth in Exhibit 99 to the Form 10-K as originally filed. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries as of December 31, 1997, 1996 and 1995 and for each of the three years in the period ended December 31, 1997, as well as the report of independent auditors thereon, are set forth on the following pages. The index to such financial statements and required financial statement schedules is set forth below and at Item 14(a) of this Annual Report on Form 10-K/A No. 1. The Registrant has restated certain of its historical fiscal year end audited financial statements and the related financial statement schedule to reflect a change in the methods used to value acquired in-process technology recorded and written off in connection with the Registrant's 1997 acquisitions of Open Development Corporation and Wireless Access, Inc. (i) Financial Statements:
Report of Ernst & Young LLP Independent Auditors ................................................... 14 Consolidated Balance Sheets at December 31, 1997 and 1996 .......................................... 15 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ......... 16 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 17 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ......... 18 Notes to Consolidated Financial Statements ......................................................... 20 (ii) Supplemental Schedules: Schedule II - Valuation and Qualifying Accounts ............................................... 39
All other schedules are omitted because they are not applicable or not required. 13 REPORT OF INDEPENDENT AUDITORS Stockholders Glenayre Technologies, Inc. We have audited the consolidated balance sheets of Glenayre Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index of Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Glenayre Technologies, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed more fully in Note 2, the Company has modified the methods used to value acquired in-process technology recorded and written off in connection with the Company's 1997 acquisitions of Open Development Corporation and Wireless Access, Inc. and accordingly, has restated the consolidated financial statements for the year ended December 31, 1997, to reflect this change. ERNST & YOUNG LLP Charlotte, North Carolina January 30, 1998, except for the restatement related to acquired in-process technology referred to in Note 2, as to which the date is February 15, 1999. 14 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, ------------------- 1997 1996 ---- ---- (Restated- See Note 2) ASSETS Current Assets: Cash and cash equivalents ................................... $ 21,076 $ 53,785 Short-term investments ..................................... -- 78,016 Accounts receivable, net .................................... 152,231 119,851 Notes receivable ........................................... 8,684 10,236 Inventories ................................................... 49,302 50,460 Deferred income taxes ....................................... 13,943 19,291 Prepaid expenses and other current assets ................... 6,810 7,957 -------- -------- Total current assets ...................................... 252,046 339,596 Notes receivable, net ......................................... 53,050 13,085 Property, plant and equipment, net ............................ 103,641 80,501 Goodwill ...................................................... 164,080 76,818 Deferred income taxes ......................................... 1,088 10,372 Other assets .................................................. 16,256 838 -------- -------- TOTAL ASSETS .................................................. $590,161 $521,210 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable ............................................ $ 27,133 $ 19,614 Accrued liabilities ......................................... 61,358 40,781 Other current liabilities ................................... 2,101 170 -------- -------- Total current liabilities ................................. 90,592 60,565 Other liabilities ............................................. 7,210 4,784 Stockholders' Equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding .............. -- -- Common stock, $.02 par value; authorized: 200,000,000 shares; outstanding: 1997-60,650,761 shares; 1996-59,868,202 shares .. 1,213 1,197 Contributed capital ......................................... 333,715 301,771 Retained earnings ........................................... 157,431 152,893 -------- -------- Total stockholders' equity ................................ 492,359 455,861 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $590,161 $521,210 ======== ========
See notes to consolidated financial statements. 15 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, ---------------------------------- 1997 1996 1995 ---- ---- ---- (Restated- See Note 2) NET SALES ............................................. $ 451,679 $ 390,246 $ 321,404 --------- --------- --------- COSTS AND EXPENSES: Cost of sales .................................... 217,793 180,468 138,773 Selling, general and administrative expense ...... 100,619 80,428 56,579 Research and development expense ................. 40,425 28,983 23,968 Charge for purchased research and development .... 38,700 -- -- Depreciation and amortization expense ............ 22,368 13,482 8,571 Write-off of goodwill ............................ 5,183 -- -- --------- --------- --------- Total costs and expenses ......................... 425,088 303,361 227,891 --------- --------- --------- INCOME FROM OPERATIONS ................................ 26,591 86,885 93,513 --------- --------- --------- OTHER INCOME (EXPENSES): Interest income .................................. 10,577 9,805 8,457 Interest expense ................................. (227) (151) (190) Other, net ....................................... (2,147) 112 (35) --------- --------- --------- Total other income ............................... 8,203 9,766 8,232 --------- --------- --------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .......................................... 34,794 96,651 101,745 PROVISION FOR INCOME TAXES ............................ 27,855 26,207 25,297 --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ...................... 6,939 70,444 76,448 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF INCOME TAX BENEFIT OF $362) ....... (688) -- -- --------- --------- --------- NET INCOME ............................................ $ 6,251 $ 70,444 $ 76,448 --------- --------- --------- INCOME PER WEIGHTED AVERAGE COMMON SHARE: Income before cumulative effect of change in Accounting principle ........................................... $ 0.11 $ 1.16 $ 1.31 Cumulative effect of change in accounting principle .. (.01) -- -- --------- --------- --------- Net income per weighted average common share .......... $ 0.10 $ 1.16 $ 1.31 --------- --------- --------- INCOME PER COMMON SHARE--ASSUMING DILUTION: Income before cumulative effect of change in Accounting principle ................................ $ 0.11 $ 1.11 $ 1.22 Cumulative effect of change in accounting principle ... (.01) -- -- --------- --------- --------- Net income per common share--assuming dilution ........ $ 0.10 $ 1.11 $ 1.22 ========= ========= =========
See notes to consolidated financial statements. 16 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
Common Stock Total ----------------- Contributed Retained Stockholders' Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------ Balances, December 31, 1994 ............. 55,991 $1,120 $215,862 $28,453 $245,435 Net income .............................. 76,448 76,448 Stock options exercised ................. 2,899 58 16,090 16,148 Shares issued and options assumed in connection with business acquisition 1,185 24 27,244 27,268 Utilization of net operating loss carryforwards ......................... 12,425 (12,425) --- Tax benefit of stock options exercised .. 26,433 26,433 Repurchase of common stock .............. (30) (1) (1,037) (1,038) ------ ------ -------- -------- -------- Balances, December 31, 1995 ............. 60,045 1,201 297,017 92,476 390,694 Net income .............................. 70,444 70,444 Stock options exercised ................. 1,393 28 14,061 14,089 Utilization of net operating loss Carryforwards ......................... 10,027 (10,027) --- Tax benefit of stock options exercised .. 16,947 16,947 Repurchase of common stock .............. (1,570) (32) (36,281) (36,313) ------ ------ -------- -------- -------- Balances, December 31, 1996 ............. 59,868 1,197 301,771 152,893 455,861 Net income .............................. 6,251 6,251 Stock options exercised ................. 470 10 2,516 2,526 Shares issued and options assumed in connection with business acquisitions .......................... 313 6 26,461 26,467 Utilization of net operating loss carryforwards.......................... 1,713 (1,713) --- Tax benefit of stock options exercised .. 1,254 1,254 ------ ------ -------- -------- -------- Balances, December 31, 1997 (Restated - See Note 2) ............... 60,651 $1,213 $333,715 $157,431 $492,359 ====== ====== ======== ======== ========
See notes to consolidated financial statements. 17 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
Year Ended December 31, ----------------------- 1997 1996 1995 ---------- ---------- ---------- (Restated- See Note 2) CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................. $ 6,251 $ 70,444 $ 76,448 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................ 22,368 13,482 8,571 Changes in deferred income taxes ..................... 18,164 5,392 (4,998) Loss on disposal of equipment ........................ 254 82 203 Charge for purchased research & development .......... 38,700 -- -- Write-off of goodwill ................................ 5,183 -- -- Tax benefit of stock options exercised ............... 1,254 16,947 26,433 Stock compensation expense ........................... -- -- 169 Other noncash expenses ............................... -- 121 73 Changes in operating assets and liabilities, net of effects of business acquisitions: Accounts receivable ............................... (27,922) (30,586) (54,222) Notes receivable .................................. (38,084) (388) (1,637) Inventories ....................................... 7,083 (415) (23,152) Prepaids and other current assets ................. 2,172 (768) 227 Other assets ...................................... (1,127) (559) (3,384) Accounts payable .................................. 1,168 3,905 5,406 Accrued liabilities ............................... 8,532 4,619 8,811 Other liabilities ................................. 720 1,207 93 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............................................ 44,716 83,483 39,041 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ............. (32,889) (43,017) (34,638) Proceeds from sale of equipment ........................ 46 123 26 Net proceeds from sale of interest in oil and gas pipeline construction business ....................... -- -- 3,600 Maturities of short-term investments ................... 164,103 171,812 122,679 Purchases of short-term investments .................... (86,087) (205,774) (127,271) Acquisitions, net of cash acquired ..................... (123,646) -- 396 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES .................. (78,473) (76,856) (35,208) --------- --------- ---------
18 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
Year Ended December 31, ----------------------- 1997 1996 1995 ---------- ---------- ---------- (Restated- See Note 2) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term borrowings ................ (1,478) (1,279) (325) Issuance of common stock .......................... 2,526 14,150 16,087 Common stock repurchases .......................... -- (36,313) (1,038) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,048 (23,442) 14,724 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ (32,709) (16,815) 18,557 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .... 53,785 70,600 52,043 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $ 21,076 $ 53,785 $ 70,600 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ........................................ $ 114 $ 140 $ 85 Income taxes .................................... 6,290 6,183 1,843
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES: On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with this acquisition the Company paid $1,194,000 (including $194,000 in acquisition costs) and issued common stock valued at $6,541,000 for assets with a fair value of $11,853,000 and assumed liabilities of $4,118,000. On October 15, 1997, the Company acquired Open Development Corporation ("ODC"). In connection with this acquisition the Company paid $44,742,000 (including $1,355,000 in acquisition costs) and assumed options to purchase common stock valued at $3,289,000 for assets and in-process research and development with a fair value of $59,040,000 and assumed liabilities of $11,009,000. On November 3, 1997, the Company acquired Wireless Access, Inc. ("WAI"). In connection with this acquisition the Company paid $83,779,000 (including $1,939,000 in acquisition costs) and assumed options to purchase common stock valued at $16,636,000 for assets and in-process research and development with a fair value of $108,801,000 and assumed liabilities of $8,386,000. On April 25, 1995, the Company acquired Western Multiplex Corporation ("MUX"). In connection with this acquisition, the Company paid $1,323,000 in acquisition costs and issued common stock and assumed options to purchase common stock valued at $27,260,000 for assets with a fair value of $31,769,000 and assumed liabilities of $3,186,000. See notes to consolidated financial statements. 19 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. BUSINESS ACQUISITIONS (A) CNET, INC. ACQUISITION On January 9, 1997, the Company completed the acquisition of CNET, Inc. ("CNET"), located in Plano, Texas. CNET develops and provides integrated operational support systems, network management, traffic analysis, and radio frequency propagation software products and services for the global wireless communications industry. CNET licenses its products to cellular, paging and personal communications services operators and wireless equipment manufacturers worldwide. The purchase price of $7.7 million consisted of 369,983 shares of the Company's common stock (including 56,620 shares issuable upon exercise of stock options) valued at $6.5 million, $1.0 million in cash and $194,000 in acquisition costs. The Company's consolidated financial statements for the year ended December 31, 1997 include the operating results of CNET for the period January 9, 1997 to December 31, 1997. The acquisition was accounted for as a purchase business combination with the purchase price allocated, as follows: Current assets.......................... $1,752 Equipment............................... 412 Goodwill................................ 9,343 Other non-current assets................ 346 Liabilities assumed..................... (4,118) ------ $7,735 ====== In the fourth quarter of 1997, Company management identified significant adverse changes in the market size for CNET's existing products. These changes were primarily due to fewer than anticipated end uses of the network management tool and significant on-going development costs of the radio frequency propagation software. These conditions led to operating results and forecasted future results that were substantially less than had been anticipated at the time of the Company's acquisition of CNET. The Company has revised its projections and has determined that its projected results would not fully support the future amortization of the goodwill balance. In accordance with the Company's policy, management assessed the recoverability of goodwill using an undiscounted cash flow projection based on the remaining amortization period of six years. Based on this projection , the cumulative undiscounted cash flow over the remaining amortization period was insufficient to fully recover the CNET goodwill balance of $8.1 million. At December 31, 1997, the Company wrote off the short-fall of $5.2 million. (B) OPEN DEVELOPMENT CORPORATION ACQUISITION. On October 15, 1997, the Company completed the acquisition of Open Development Corporation ("ODC"), located in Norwood, Massachusetts. ODC is a developer of data management products for telecommunications providers. The purchase price of $48.0 million consisted of 242,066 shares issuable upon exercise of stock options of the Company's common stock valued at $3.3 million, $43.4 million in cash and $1.3 million in acquisition costs. The Company's consolidated financial statements for the year ended December 31, 1997 include the operating results of ODC for the period October 15, 1997 to December 31, 1997. The acquisition was accounted for as a purchase business combination with the purchase price allocated, as follows: Current assets.......................... $2,979 Equipment............................... 3,808 Goodwill................................ 30,581 Purchased research and development charged to operations................. 16,400 Other intangibles....................... 3,700 Deferred tax asset...................... 996 Other non-current assets................ 576 Liabilities assumed..................... (11,009) ------- $48,031 ======= 20 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (C) WIRELESS ACCESS, INC. ACQUISITION. On November 3, 1997, the Company completed the acquisition of Wireless Access, Inc. ("WAI"), located in Santa Clara, California. WAI develops and markets two-way paging devices. The purchase price of $100.4 million consisted of 1,341,916 shares issuable upon exercise of stock options of the Company's common stock valued at $16.6 million, $81.9 million in cash and $1.9 million in acquisition costs. The Company's consolidated financial statements for the year ended December 31, 1997 include the operating results of WAI for the period November 3, 1997 to December 31, 1997. The acquisition was accounted for as a purchase business combination with the purchase price allocated, as follows: Current assets ................... $ 13,076 Equipment ........................ 1,354 Goodwill ......................... 59,500 Purchased research and development charged to operations .......... 22,300 Other intangibles ................ 10,035 Deferred tax asset ............... 2,536 Liabilities assumed .............. (8,386) --------- $ 100,415 ========= (D) WESTERN MULTIPLEX ACQUISITION On April 25, 1995, the Company acquired Western Multiplex Corporation ("MUX"), now located in Sunnyvale, California. MUX designs, manufactures and markets products for use in point-to-point microwave communication systems. The purchase price of $28.6 million consisted of 1,687,432 shares of the Company's common stock (including 502,206 shares issuable upon exercise of stock options) valued at $27.3 million and $1.3 million in acquisition costs. The Company's consolidated financial statements for the year ended December 31, 1995 include the operating results of MUX for the period April 25, 1995 to December 31, 1995. The acquisition was accounted for as a purchase business combination with the purchase price allocated, as follows: Current assets .............. $ 7,886 Property, plant and equipment 1,188 Goodwill .................... 21,991 Deferred tax asset .......... 704 Liabilities assumed ......... (3,186) -------- $ 28,583 ======== Pro forma results of operations assuming the acquisitions of CNET, ODC, and WAI had occurred as of January 1, 1996 and the acquisition of MUX had occurred as of January 1, 1994, have not been presented because their effect on net sales and net income would not be significant. The amounts allocated to purchased research and development for ODC and WAI were determined through established valuation techniques in the high-technology communications industry, were based on adjusted after-tax cash flows that give explicit consideration to the Staff of the Securities and Exchange Commission ("the Staff") views on in-process research and development as set forth in its September 15, 1998 letter to the American Institute of Certified Public Accountants, and were expensed upon acquisition, because technological feasibility had not been established and no future alternative uses existed. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Glenayre is a worldwide provider of telecommunications equipment and related software used in the wireless personal communications service markets including wireless messaging, voice processing, mobile data systems and point-to- 21 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) point wireless interconnection products. The Company designs, manufactures, markets and services its products principally under the Glenayre name. These products include switches, transmitters, receivers, controllers, software, paging devices and other equipment used in personal communications systems (including paging, voice messaging, cellular, and message management and mobile data systems), microwave communication systems and radio telephone systems. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONSOLIDATION The consolidated financial statements include the accounts of Glenayre Technologies, Inc. and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. OPERATING CYCLE Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the consolidated balance sheets, as they will be liquidated in the normal course of contract completion. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. These investments generally consist of high-grade commercial paper, bank certificates of deposits, Treasury bills, notes or agency securities guaranteed by the U.S. Government and repurchase agreements backed by U.S. Government securities. The Company maintains cash and cash equivalents and short-term investments with various financial institutions. These financial institutions are large diversified entities with operations throughout the U.S. and Company policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's investment strategy. INVENTORIES Inventories are valued at the lower of average cost or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally using the straight-line method based on the estimated useful lives of the related assets (buildings, 20-40 years; furniture, fixtures and equipment, 3-7 years). GOODWILL Goodwill represents the excess of cost over assigned fair market value of net assets acquired and is being amortized on a straight-line basis over estimated useful lives ranging from 7 to 30 years. Goodwill is shown net of accumulated amortization of $18.0 million and $12.4 million at December 31, 1997 and 1996, respectively. The carrying amount of goodwill is reviewed if facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the expected future undiscounted cash flow of the entity acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall. In addition, the Company assesses long-lived assets for impairment under FASB Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Under those rules, goodwill associated 22 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. FOREIGN CURRENCY TRANSLATION The accounts of foreign subsidiaries have been translated into U.S. dollars using the current exchange rate in effect at the balance sheet date for monetary assets and liabilities; and for non-monetary items, the exchange rates in effect when acquired. Revenues and expenses are translated into U.S. dollars using average exchange rates, except for depreciation, which is translated at the exchange rate in effect when the related assets were acquired. The resulting gains or losses on currency translations, which are not significant, are included in the consolidated statements of income. REVENUE RECOGNITION The Company recognizes revenues at the time products are shipped (except for certain long-term contracts described below) and collection of the resulting receivable is deemed probable by the Company. Existing customers may purchase product enhancements and upgrades after such enhancements or upgrades are developed by the Company. The Company has no obligations to customers after the date products, product enhancements and upgrades are shipped, except for product warranties as described below. The Company recognizes fees from installation and repair services when such services are provided to customers. Revenues derived from contractual postcontract support services are recognized ratably over the one-year contract period of required support. The Company uses the percentage-of-completion method to recognize revenues on certain long-term telecommunications hardware and installation contracts. Earnings are accrued based on the completion of key contract performance requirements. As long-term contracts extend over one or more years, revisions in cost and profit estimates are reflected in the accounting period in which the facts that require the revision become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss is accrued. SOFTWARE COSTS Product related computer software development costs are expensed as incurred. Such costs are required to be expensed until the point of technological feasibility is established. Costs which may otherwise be capitalized after such point are generally not significant and are therefore expensed as incurred. Pursuant to Emerging Issues Task Force Issue No. 97-13 ("EITF No. 97-13"), issued in November 1997, the Company changed its accounting policy in the fourth quarter of 1997, regarding a project to implement a new business operating system that it began in 1996 and expects to complete in the second quarter of 1998. Previously, substantially all direct costs relating to the project were capitalized, including the portion related to business process reengineering. Under EITF No. 97-13, the unamortized balance of these reengineering costs as of November 20, 1997 of approximately $1,050,000, or $688,000 after tax benefit ($.01 per share), was written off as a one-time, non-cash, cumulative effective adjustment in the fourth quarter of 1997. ESTIMATED WARRANTY COSTS The Company warrants its telecommunications products other than certain transmitters for one year after sale. The majority of the Company's transmitters are warranted for two years after sale. A provision for estimated warranty costs is recorded at the time of sale. STOCK-BASED COMPENSATION The Company grants stock options and issues shares under option plans and an employee stock purchase plan as described in Note 11. The Company accounts for stock option grants and shares sold under the employee stock purchase plan in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and, accordingly, 23 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) records compensation expense for options granted and sales made at prices that are less than fair market value at the date of grant or sale. No compensation expense is recognized for options granted to employees with an exercise price equal to the fair value of the shares at the date of grant. CALCULATION OF INCOME (LOSS) PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. INCOME TAXES Income taxes have been provided using the liability method in accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash equivalents, short-term investments, trade accounts and notes receivable, and other current and long-term liabilities approximates their respective fair values. SEGMENT REPORTING In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131"), which is effective for years beginning after December 15, 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. Management has not completed its review of SFAS 131, but does anticipate that the adoption of this statement may increase the Company's reported segments. RESTATEMENT OF FINANCIAL STATEMENTS RELATED TO ACQUIRED IN-PROCESS TECHNOLOGY During the fourth quarter 1998 and first quarter 1999, the Company and the Staff of the Securities and Exchange Commission had communication with respect to the methods used to value acquired in-process technology recorded and written off at the date of acquisition. As a result, the Company has modified the methods used to value acquired in-process technology in connection with the Company's 1997 acquisitions of Open Development Corporation and Wireless Access, Inc. Initial calculations of value of the acquired in-process technology were based on the cost required to complete each project, the after-tax cash flows attributable to each project, and the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of each project. Revised calculations of the value of the acquired in-process technology are based on adjusted after-tax cash flows that give explicit consideration to the Staff's views on in-process research and development as set forth in its September 15, 1998 letter to the AICPA, and the Staff's comments to the Company to consider (i) the stage of completion of the in-process technology at the dates of acquisition, (ii) complexity of the work completed to date, (iii) the difficulty of completing development within a period of time, (iv) technological uncertainties and (v) the estimated total project costs of the in-process research and development in arriving at the valuation amount. As a result of this modification the Company has decreased the amount of the purchase price allocated to acquired in-process technology in the ODC acquisition from $44.3 million to $16.4 million and in the WAI acquisition from $80.9 million to $22.3 million. As a result, the Company increased goodwill by $87.7 million. 24 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SUMMARY OF EFFECTS OF RESTATEMENTS. The effects of the restatement related to acquired in-process technology resulted in the following impact on the Company's results of operations for the year ended December 31, 1997 and its financial position at December 31, 1997. Year Ended December 31, 1997 ---------------------------- Income (loss) before cumulative effect of change in accounting principle: As previously reported ................................... $ (77,404) Adjustment* .............................................. 84,343 As restated .............................................. 6,939 Net income (loss): As previously reported ................................... (78,092) Adjustment* .............................................. 84,343 As restated .............................................. 6,251 Income (loss) per weighted average common share: Before cumulative effect of change in accounting principle: As previously reported .................................. (1.28) Adjustment* ............................................. 1.39 As restated ............................................. 0.11 Net income (loss): As previously reported .................................. (1.29) Adjustment* ............................................. 1.39 As restated ............................................. 0.10 Income (loss) per common share - assuming dilution: Before cumulative effect of change in accounting principle: As previously reported ................................... (1.28) Adjustment* .............................................. 1.39 As restated .............................................. 0.11 Net income (loss): As previously reported ................................... (1.29) Adjustment* .............................................. 1.39 As restated .............................................. 0.10 December 31, 1997 ----------------- Financial Position Goodwill: As previously reported ................................. $ 78,568 Adjustment* ............................................ 85,512 As restated ............................................ 164,080 Other Assets: As previously reported ................................ 17,425 Adjustment* ........................................... (1,169) As restated ........................................... 16,256 Retained Earnings As previously reported ................................ 73,088 25 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Adjustment* ........................................... 84,343 As restated ........................................... 157,431 *The adjustment results from the decrease in the value assigned to acquired in-process technology and the increased amortization of goodwill and other intangibles. 3. SHORT-TERM INVESTMENTS Short-term investments amounting to $78.0 million at December 31, 1996, generally consist of highly liquid, 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 greater than three months, but not exceeding one year. Short-term investments are stated at cost which approximates fair market value. 4. ACCOUNTS AND NOTES RECEIVABLE Accounts receivable at December 31, 1997 and 1996 consist of: 1997 1996 -------- -------- Trade receivables........................... $151,949 $119,657 Retainage receivables....................... 1,028 1,407 Other....................................... 3,796 3,314 -------- -------- 156,773 124,378 Less: allowance for doubtful accounts...... (4,542) (4,527) -------- -------- $152,231 $119,851 ======== ======== Trade receivables at December 31, 1997 and 1996 included unbilled costs and estimated earnings under contracts in the amount of approximately $8.3 million and $17.9 million, respectively. Unbilled amounts are invoiced upon reaching certain milestones. Notes receivable at December 31, 1997 and 1996 consist of: 1997 1996 ------ ------- Current...................................... $8,684 $10,236 Non-current.................................. 57,092 13,407 ------ ------- 65,776 23,643 Less: reserves.............................. (4,042) (322) ------ ------- $61,734 $23,321 ======= ======= Concentrations of credit risk with respect to accounts receivable are generally limited due to the large number of entities comprising the Company's customer base. However, as of December 31, 1997 principally all of the Company's receivables are concentrated in the telecommunications industry. Further, approximately 72% of notes receivable as of December 31, 1997 consist of receivables from two customers, one of which accounts for $24.8 million, has a limited operating history and is engaged in the buildout of a major narrowband personal communications services network in the newly introduced market of advanced voice and text paging. Approximately 90% of notes receivable are from customers located in the U.S. with the remaining balance predominately from customers located in the Pacific Rim and South America. Generally, all notes receivable are secured by the related equipment. 26 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 5. INVENTORIES Inventories at December 31, 1997 and 1996 consist of: 1997 1996 ------- ------- Raw materials..................................... $25,970 $25,656 Work-in-process: Uncompleted contracts.......................... 299 3,757 Other.......................................... 10,514 7,603 Finished goods.................................... 12,519 13,444 ------- ------- $49,302 $50,460 ======= ======= 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1997 and 1996 consist of: 1997 1996 ------- ------- Land.............................................. $ 3,746 $3,737 Buildings......................................... 41,320 36,987 Equipment......................................... 91,179 58,059 Leasehold improvements............................ 2,586 2,134 ------- ------- 138,831 100,917 Less: Accumulated depreciation.................... (35,190) (20,416) ------- ------- $103,641 $80,501 ======== ======= 7. ACCRUED LIABILITIES Accrued liabilities at December 31, 1997 and 1996 consist of: 1997 1996 ------- ------- Accrued project costs............................. $13,290 $6,811 Accrued warranty costs............................ 3,814 3,742 Accrued sales commissions......................... 2,185 3,474 Accrued compensation and benefits................. 14,103 8,704 Accrued income taxes.............................. 4,134 3,640 Other accruals.................................... 23,832 14,410 ------- ------- $61,358 $40,781 ======= ======= 27 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 8. INCOME TAXES The Company's income tax provision consists of the following: 1997 1996 1995 -------- -------- -------- Current provision: United States Federal ................... $ 25,544 $ 12,978 $ 6,398 Charge equivalent to tax benefit of stock option exercises ...................... 1,254 16,947 26,433 Foreign ................................. 3,802 2,432 2,658 State and local ......................... 2,160 3,032 962 -------- -------- -------- Total current ......................... 32,760 35,389 36,451 -------- -------- -------- Deferred provision (benefit): Before valuation allowance adjustment ... (3,192) 845 1,271 Adjustment to valuation allowance ....... (1,713) (10,027) (12,425) -------- -------- -------- Total deferred benefit ................ (4,905) (9,182) (11,154) -------- -------- -------- Total provision ............................ $ 27,855 $ 26,207 $ 25,297 ======== ======== ======== The sources of income before income taxes are presented as follows: 1997 1996 1995 -------- -------- -------- United States.......................... $ 18,758 $ 84,880 $ 87,919 Foreign ............................... 16,036 11,771 13,826 -------- -------- -------- $ 34,794 $ 96,651 $101,745 ======== ======== ======== The consolidated income tax provision was different from the amount computed using the U.S. statutory income tax rate for the following reasons:
1997 1996 1995 -------- -------- -------- Income tax provision at U.S. statutory rate ......... $ 12,177 $ 33,828 $ 35,611 Reduction in valuation allowance .................... (1,713) (10,027) (12,425) Foreign taxes at rates other than U.S. statutory rate (1,229) (1,201) (2,129) U.S. research and experimentation credits ........... (953) (977) -- State taxes (net of federal benefit) ................ 412 3,474 3,307 Non-deductible charge for purchased research and development ....................................... 14,701 -- -- Non-deductible goodwill ............................. 4,460 1,110 933 -------- -------- -------- Income tax provision ................................ $ 27,855 $ 26,207 $ 25,297 ======== ======== ========
28 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The tax effect of temporary differences and net operating loss carryforwards ("NOLs") that gave rise to the Company's deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows: 1997 1996 ------- ------- Assets: U.S. net operating loss carryforwards........ $12,318 $24,507 State net operating loss carryforwards....... 2,816 1,559 Other........................................ 22,304 13,748 ------- ------- 37,438 39,814 Less: Valuation allowance.................... (18,502) (5,902) ------- ------- 18,936 33,912 Liabilities.................................... (3,905) (4,249) ------- ------- Deferred tax asset, net........................ $15,031 $29,663 ======= ======= The deferred tax asset is broken down between current and noncurrent amounts in the accompanying 1997 consolidated balance sheet according to the classification of the related asset and liability or, in the case of tax loss carryforwards, based on their expected utilization date. The increase in the valuation allowance of $12.6 million during the year ended December 31, 1997 is related primarily to the net operating loss and tax credit carryforwards of acquired companies. The valuation allowance related specifically to all carryforwards, including various credits, of acquired companies is $14.7 million. The Company believes that it is more likely than not that the net deferred tax asset recorded at December 31, 1997 will be fully realized. At December 31, 1997, the Company has U.S. NOLs of $34 million which expire beginning in 2005. All of these NOLs relate to companies acquired during the year ended December 31, 1997. The Company's ability to use the NOLs to offset future income is subject to restrictions enacted in the United States Internal Revenue Code of 1986 as amended (the "Code"). These restrictions limit the Company's future use of the NOLs. As a result, the potential tax benefit of the NOLs has been fully reserved as part of the deferred tax asset valuation allowance. As of December 31, 1996, the Company had net operating loss carryforwards of $70 million. All of these NOLs were utilized during the year ended December 31, 1997. Subsequent to the quasi-reorganization completed on February 1, 1988, as described in Note 11, the benefits derived from the utilization of these tax net operating loss carryforwards are reported in the statement of operations in the year such tax benefits are realized and then reclassified from retained earnings to contributed capital. The Company adopted the accounting method for utilization of these tax net operating loss carryforwards outlined above on February 1, 1988. On September 28, 1989, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the SEC staff's position with respect to this accounting treatment. According to the SEC staff's interpretation of SFAS 96 contained in SAB 86, realized tax benefits should be reported as a direct addition to contributed capital. Subsequently, the Company consulted with SEC staff and determined that the SEC staff would not object to the accounting method outlined above for companies which had adopted such accounting methods prior to the issuance of SAB 86. If the original guidance in SAB 86 had been applied, the Company's net income for the years ended December 31, 1997, 1996 and 1995 would have been reduced by the amount of the benefit from utilization of tax net operating loss carryforwards. Such reduction in net income would have been $1,713,000 ($.03 per share) in 1997, $10,027,000 ($.16 per share) in 1996, and $12,425,000 ($.20 per share) in 1995. Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $30.3 million at December 31, 1997. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability. 29 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Withholding taxes of approximately $1.3 million would be payable upon remittance of all previously unremitted earnings at December 31, 1997. 9. OPERATING LEASE COMMITMENTS The Company leases office facilities and various equipment under noncancellable operating leases. Future minimum lease payments under noncancellable operating leases (with minimum or remaining lease terms in excess of one year) for calendar years subsequent to December 31, 1997 are as follows: 1998........................... $4,632 1999........................... 4,475 2000........................... 3,793 2001........................... 2,544 2002........................... 1,382 Thereafter..................... 2,407 ------- $19,233 ======= Rent expense amounted to $4,302,000, $3,629,000,and $2,184,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 10. EMPLOYEE BENEFIT PLANS (A) POSTRETIREMENT HEALTH CARE BENEFITS The Company provides its U.S. employees with certain health care benefits upon retirement assuming the employees meet minimum age and service requirements. The Company's policy is to fund benefits as they become due. The Company accounts for retiree healthcare benefits in accordance with Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ("SFAS 106"), which requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company's accumulated postretirement benefit liability at December 31, 1997 and 1996 is as follows: 1997 1996 ------ ------ Retirees.............................................. $ 531 $ 527 Fully eligible plan participants...................... 231 227 Other active plan participants........................ 849 666 ------ ------ Accumulated postretirement benefit obligation......... 1,611 1,420 Unrecognized gain..................................... (281) (242) Unrecognized transition obligation.................... 763 814 ------ ------ $1,129 $ 848 ====== ====== Net postretirement benefit costs for the years ended December 31, 1997, 1996 and 1995 consist of the following components:
1997 1996 1995 ---- ---- ---- Service cost ................................................. $ 195 $ 190 $ 105 Interest cost on accumulated postretirement benefit obligation 101 109 84 Amortization of gain ......................................... (14) -- (17) Amortization of transition obligation ........................ 51 51 51 ----- ----- ----- $ 333 $ 350 $ 223 ===== ===== =====
30 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1997 was 9% for 1998, decreasing linearly each successive year until it reaches 4.75% in 2004, after which it remains constant. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 and the 1997 net postretirement health care cost by approximately 15.1% and 19.1%, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1997 and 1996 was 7.25%. (B) DEFINED CONTRIBUTION PLANS The Company has defined contribution plans covering substantially all of its full-time employees. Under the plans, the employees can contribute a certain percentage of their compensation and the Company matches a portion of the employees' contribution. The Company's contributions under these plans amounted to approximately $2,787,000, $2,210,000, and $1,830,000 during the years ended December 31, 1997, 1996 and 1995, respectively. 11. STOCKHOLDERS' EQUITY (A) QUASI-REORGANIZATION On February 1, 1988, the Company completed a quasi-reorganization. After determining that the Company's balance sheet reflected approximate fair value on that date and that revaluation was not necessary, the accumulated deficit and the cumulative translation adjustment were adjusted to zero by reclassifying them to contributed capital. A new retained earnings account was established as of February 1, 1988. (B) STOCKHOLDER RIGHTS AGREEMENT In May 1997, the Company's Board of Directors adopted a Preferred Shares Rights Agreement. Under the Preferred Shares Rights Agreement, the Board of Directors declared a dividend of one Right for each outstanding share of common stock to holders of record as of the close of business on June 12, 1997. Initially, the Rights will automatically trade with the common stock and will not be exercisable. If any person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock, or commences a tender or exchange offer that results in that person or group acquiring such level of beneficial ownership, each Rights holder (other than Rights owned by such person or group, which become void) is entitled to purchase, for an exercise price of $80, 1/100th of a share of Series A Junior Participating Preferred Stock. Each fractional preferred share will have economic and voting terms similar to those of one share of common stock. In the event of such a tender offer or 15% or more stock acquisition, the Rights certificates, after a short period, will trade separately from the common stock and will be exercisable. Each Right, under certain circumstances, entitles the holder to purchase the number of shares of Glenayre common stock (or, at the discretion of the Board of Directors, shares of Series A Junior Participating Preferred Stock) which have an aggregate market value equal to twice the exercise price of $80. Under certain circumstances, the Board of Directors may exchange each outstanding Right for either one share of Glenayre common stock or 1/100th share of Series A Junior Participating Preferred Stock. The Board may also redeem the Rights at a price of $0.01 per Right. In addition, if any person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock and Glenayre either merges with or into another company or Glenayre sells 50% or more of its assets or earning power to another company, each Rights holder (other than Rights owned by such person or group, which become void) is entitled to purchase, for an exercise price of $80, a number of shares of the surviving company which has a market value equal to twice the exercise price. The Rights will expire on May 21, 2007, unless redeemed earlier. 31 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (C) STOCK REPURCHASE PROGRAMS In September 1996, the Board of Directors authorized the purchase of up to 2.5 million shares of the Company's common stock. No shares under this program were repurchased in 1996 or 1997. In December 1994, the Board of Directors authorized the purchase of up to 1.7 million shares of the Company's common stock. The 1994 repurchase program was completed in 1996 with the repurchase of 1,684,375 shares at a total cost of $38.6 million during the term of the program. (D) STOCK OPTION PLANS The Company maintains two stock option plans (the "1996 Plan" and the "1991 Plan") which were approved by the stockholders, are administered by a committee of the Board of Directors (the "Committee") and are utilized to promote the long-term financial interests and growth of the Company. The 1996 and 1991 Plans authorized the grant of up to 2,200,000 and 11,475,000 shares, respectively, of the Company's common stock to directors, officers and key employees. Options granted have an option price of the fair market value of the Company's common stock on the date of grant. Options under the plans expire no later than ten years from the grant date. Activity and price information regarding the Company's stock option plans is summarized as follows: Shares Price Range ------ ----------- Outstanding, December 31, 1994............ 6,025 $ 1.04---$17.26 Granted................................... 1,629 16.72 --- 47.67 Assumed................................... 502 1.84 --- 6.60 Exercised................................. (2,828) 1.17 --- 28.22 Canceled.................................. (21) 12.74 --- 22.44 ------ --------------- Outstanding, December 31, 1995 ........... 5,307 1.04 --- 47.67 Granted................................... 1,247 20.00 --- 48.38 Exercised................................. (1,330) 1.04 --- 44.25 Canceled.................................. (32) 22.44--- 48.38 ------ --------------- Outstanding, December 31, 1996............ 5,192 1.27--- 47.67 Granted................................... 586 9.00 --- 21.63 Assumed................................... 1,641 0.08 --- 23.00 Exercised................................. (470) 0.17 --- 11.11 Canceled.................................. (224) 1.13 --- 44.17 ------ --------------- Outstanding, December 31, 1997............ 6,725 $ 0.08---$43.59 ===== ================ Of the outstanding options under the Company's stock option plans at December 31, 1997, approximately 5,206,000 are currently exercisable. The weighted-average exercise price for the outstanding and currently exercisable options at December 31, 1997 is $7.36 and $7.56, respectively. The weighted-average exercise price for options granted during the year is $13.62. In November 1996, due to a significant decline in the market price of the Company's common stock, the Committee reduced the exercise price to $23.88 per share on options to purchase 632,667 shares which had been awarded originally at various dates during 1996 at $32.50 to $51.38 per share to employees of the Company. In April 1997, as part of a broader market decline of paging industry stocks, the market value of the Company's stock experienced a further significant decline. In an effort to ensure retention of key technical and management employees, the Committee reduced the exercise price to $9.00 per share on options to purchase 3,005,228 shares which had been awarded originally at various dates from May 1994 to March 1997 at $10.63 to $47.67 per share to employees of the Company. The reduced exercise price and the original exercise prices reflected the fair market value of the Company's common stock on the date of modification and the dates of the original awards. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based 32 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Compensation," ("FAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions (i) for 1997: risk-free interest rates of 5.9% to 6.3%; dividend yields of 0%; a volatility factor of the expected market price of the Company's common stock of .56; and an expected life of the option of 2 to 6 years; and (ii) for 1996 and 1995: risk-free interest rates of 5.8% to 6.2%; dividend yields of 0%; a volatility factor of the expected market price of the Company's common stock of .53; and an expected life of the option of 1.3 to 4 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1997 1996 1995 ---- ---- ---- (Restated- See Note 2) Pro forma income (loss) before cumulative effect of change in accounting principle............................ ($3,709) $59,090 $69,526 Pro forma income (loss) before cumulative effect of change in accounting principle per share: Income (loss) per weighted average common share.... (0.06) .98 1.19 Income (loss) per common share - assuming dilution. (0.06) .94 1.12
Because FAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect is not fully reflected until 1997. The 1996 and 1997 award modifications described above resulted in a decrease to 1996 pro forma net income of approximately $906,000 or $.01 per share assuming dilution and an increase to the 1997 pro forma loss before cumulative effect in accounting change of approximately $4.3 million or $.07 per share. Contributed capital was increased $1.3 million, $16.9 million and $26.4 million in 1997, 1996 and 1995, respectively, which represents the income tax benefits the Company realized from stock options exercised during these periods. (E) EMPLOYEE STOCK PURCHASE PLAN Effective July 1, 1993, the Company established the Glenayre Technologies, Inc. Employee Stock Purchase Plan (the "ESP Plan") reserving 506,250 shares of common stock. The purpose of the ESP Plan is to give employees an opportunity to purchase common stock of the Company through payroll deductions, thereby encouraging employees to share in the economic growth and success of the Company. All regular full-time employees of the Company are eligible to enter the ESP Plan as of the first day of each six-month period beginning every January 1 and July 1. The price for common stock offered under the ESP Plan for each six- 33 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) month period is equal to 90% of the average market price of the common stock for the five trading days prior to the first day of the six-month period. For the January 1, 1998 to June 30, 1998 period, the stock purchase price will be $9.00. As of December 31, 1997, 172,587 shares had been issued at a purchase price range of $5.60 to $37.07 with 333,663 shares reserved under the ESP Plan. (F) INCOME PER COMMON SHARE The following table sets forth the computation of income per share:
1997 1996 1995 ---- ---- ---- (Restated- See Note 2) Numerator: Income before cumulative effect of change in accounting principle .......................... $ 6,939 $70,444 $76,448 Denominator: Denominator for basic income (loss) per share - weighted average shares ......................... 60,323 60,597 58,298 Effect of dilutive securities: stock options ................................... 2,995 2,819 4,181 ------- ------- ------- Denominator for diluted income per share-adjusted weighted average shares and assumed conversions . 63,318 63,416 62,479 ====== ====== ====== Income before cumulative effect of change in accounting principle per weighted average common share ......... $ 0.11 $ 1.16 $ 1.31 ======= ======= ======= Income before cumulative effect of change in accounting principle per common share - assuming dilution ...... $ 0.11 $ 1.11 $ 1.22 ======= ======= =======
12. COMMITMENTS AND CONTINGENCIES The Company entered into a $50 million bank line of credit agreement in October 1997, which expires in October 1998. Interest is computed at the (i) higher of the bank's prime rate or the Federal funds rate plus 0.5% or (ii) the Eurodollar rate, at the option of the Company. There is a commitment fee at a per annum rate of 0.175% to 0.225% paid quarterly on the unused portion of the line of credit. The line of credit requires the Company to maintain certain financial ratios and minimum net worth. There were no borrowings under the line of credit agreement during 1997. In the normal course of business, the Company issues bid and performance letters of credit which in the aggregate amounted to approximately $14 million and $20 million as of December 31, 1997 and 1996, respectively. These letters of credit have terms from approximately 2 to 40 months. The fair value of these letters of credit is estimated to be the same as the contract values based on the nature of the fee arrangements with the issuing banks. The competitive telecommunications market often requires customer financing commitments. These commitments may be in the form of guarantees, secured debt or lease financing. At December 31, 1997, the Company had agreements to finance and arrange financing for approximately $92 million of paging and voice mail products. Additionally, at December 31, 1997, the Company had committed, subject to customers meeting certain conditions and requirements, to finance approximately $6 million for similar systems. The Company cannot currently predict the extent to which these commitments will be utilized, since certain customers may be able to obtain more favorable terms using traditional financing sources. From time to time, the Company also arranges for third-party investors to assume a portion of its commitments. If exercised, the financing arrangements will be secured by the equipment sold by Glenayre. 34 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) On January 31, 1997 an amended class action complaint (the "Complaint") was filed in the United States District Court for the Southern District of New York against the Company and certain of its executive officers and directors alleging the Company artificially inflated the value of its common stock during the period February 6, 1996 to September 13, 1996 by making false and misleading statements in its public disclosures. The Complaint was dismissed in November 1997, but the plaintiffs were granted the right to refile. The Complaint was refiled December 19, 1997. The Complaint consolidates two lawsuits filed in the fourth quarter of 1996. The plaintiffs seek unspecified damages based upon the decrease in market value of the Company's stock. On February 20,1997, a shareholder's derivative complaint (the "Shareholder's Complaint") was filed in the United States District Court for the Southern District Court of New York against certain current and former directors and against the Company, as a nominal defendant, alleging that the directors breached their fiduciary obligations to the Company by subjecting the Company to the class action referred to above. The plaintiff seeks unspecified damages on behalf of the Company. Management intends to defend these actions vigorously. Additionally, the Company is currently involved in various other disputes and legal actions related to its business operations. In the opinion of the Company, the ultimate resolution of these actions will not have a material effect on the Company's financial position, or future results of operations or cash flows. 13. LINE OF BUSINESS AND OPERATIONS BY GEOGRAPHIC AREAS The Company's operations involve one business segment: the manufacture, sale and service of telecommunications equipment and related software used by service providers and other wireless personal communications markets. The Company markets and services its products in the United States, Canada and other countries through its own direct sales organization or outside distributors and agents. Sales to one customer amounted to approximately 11%, 15% and 16% of net sales for 1997, 1996 and 1995, respectively. Sales and operating profits by geographical area are measured by the locale of the revenue-producing operations and are as follows:
Net Sales Operating Profit --------------------------------- -------------------------------- Year ended December 31, 1997 1996 1995 1997 1996 1995 - ----------------------- ---- ---- ---- ---- ---- ---- (Restated- See Note 2) United States.................... $447,459 $389,218 $321,184 $ 16,865 $ 80,093 $ 83,245 Canada .......................... 158,758 128,848 82,892 13,252 10,617 13,348 Other countries.................. 26,946 15,424 8,761 2,782 1,271 774 Eliminations..................... (181,484) (143,244) ( 91,433) -- -- -- -------- -------- -------- ------ ------ ------ Geographic totals.............. $451,679 $390,246 $321,404 32,899 91,981 97,367 ======== ======== ======== Corporate, interest and other income (expenses) and eliminations.... 1,895 4,670 4,378 -------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle........ $ 34,794 $ 96,651 $101,745 ======== ======== ========
The 1997 United States results include a $38.7 million charge for purchased research and development and a $5.2 million write-off of goodwill as discussed in Note 1. Assets ------------------------------------- Year ended December 31, 1997 1996 1995 - ----------------------- ---- ---- ---- (Restated- See Note 2) United States .......... $525,011 $330,218 $298,323 Canada ................. 43,794 49,078 39,940 Other countries ........ 11,945 16,607 2,813 -------- -------- -------- Geographic totals .... 580,750 395,903 341,076 General corporate assets 9,411 125,307 106,504 -------- -------- -------- Consolidated totals .... $590,161 $521,210 $447,580 ======== ======== ======== 35 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net sales include product transfers and service revenues between geographic areas and are generally priced to recover cost plus an appropriate markup for profit. These are eliminated in consolidation as follows: Year ended December 31, 1997 1996 1995 - ----------------------- ---- ---- ---- Product transfers - Canada............... $125,139 $101,652 $65,703 Product transfers - United States........ 495 --- --- Service revenues: Canada................................. 33,619 27,196 17,189 Other countries........................ 22,231 14,396 8,541 -------- -------- ------- Total eliminations................... $181,484 $143,244 $91,433 ======== ======== ======= Export sales from the United States by geographic areas to unaffiliated customers are as follows: Year ended December 31, 1997 1996 1995 - ----------------------- ---- ---- ---- Canada................................... $10,578 $16,270 $15,272 Middle East.............................. 3,882 7,617 16,930 Pacific Rim.............................. 151,716 92,109 54,705 Europe................................... 30,667 16,354 17,793 South America............................ 29,523 12,211 5,430 Other.................................... 832 9,718 3,723 -------- -------- -------- Total export sales..................... $227,198 $154,279 $113,853 ======== ======== ======== 14. INTERIM FINANCIAL DATA--UNAUDITED
Quarters Ended --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (Restated-) 1997 (A) See Note 2) Net sales ...................................... $ 105,771 $ 110,172 $ 112,122 $ 123,614 Gross profit ................................... 55,221 59,601 59,684 59,380 Income (loss) before cumulative effect of change in accounting principle: As previously reported ...................... 13,446 14,960 15,034 (120,844) Adjustment (b) .............................. -- -- -- 84,343 As restated ................................. 13,446 14,960 15,034 (36,501) Net income (loss): As previously reported ...................... 13,446 14,960 15,034 (121,532) Adjustment (b) .............................. -- -- -- 84,343 As restated ................................. 13,446 14,960 15,034 (37,189) Income (loss) per weighted average common share: Before cumulative effect of change In accounting principle: As previously reported ..................... 0.22 0.25 0.25 (2.00) Adjustment (b) ............................. -- -- -- 1.40 As restated ................................ 0.22 0.25 0.25 (0.60)
36 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Quarters Ended --------------------------------------------- 14. INTERIM FINANCIAL DATA--UNAUDITED (CONTINUED) March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (Restated- See Note 2) Net income (loss): As previously reported .............................. 0.22 0.25 0.25 (2.01) Adjustment (b) ...................................... -- -- -- 1.40 As restated ......................................... 0.22 0.25 0.25 (0.61) Income (loss) per common share - assuming dilution: Before cumulative effect of change in accounting principle: As previously reported ............................... 0.22 0.24 0.24 (2.00) Adjustment (b) ....................................... -- -- -- 1.40 As restated .......................................... 0.22 0.24 0.24 (0.60) Net income (loss): As previously reported ............................... 0.22 0.24 0.24 (2.01) Adjustment (b) ....................................... -- -- -- 1.40 As restated .......................................... 0.22 0.24 0.24 (0.61) 1996 (A) Net sales ............................................... $ 89,378 105,085 $ 91,572 $ 104,211 Gross profit ............................................ 49,611 59,253 47,742 53,172 Net income .............................................. 17,076 22,863 13,801 16,704 Income per weighted average common share ................ 0.28 0.38 0.23 0.28 Income per common share - assuming dilution ............. 0.27 0.36 0.22 0.27
(a) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS 128. The results for the fourth quarter 1997 were impacted by a $38.7 million charge for purchased research and development and a $5.2 million write-off of goodwill as discussed in Note 1. (b) The adjustment results from the decreases in the value assigned to acquired in-process technology and the increased amortization of goodwill. 37 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE (i) Financial Statements:* The Registrant has restated certain of its historical fiscal year end audited financial statements and the related financial statement schedule to reflect a change in the methods used to value acquired in-process technology recorded and written off in connection with the Registrant's 1997 acquisitions of Open Development Corporation and Wireless Access, Inc. Listed below are the consolidated financial statements, the financial statement schedule and related information which are responsive to Item 8 and Item 14 of Form 10-K.
Report of Ernst & Young LLP Independent Auditors ................................................... 14 Consolidated Balance Sheets at December 31, 1997 and 1996 .......................................... 15 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ......... 16 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 17 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ......... 18 Notes to Consolidated Financial Statements ......................................................... 20 (ii) Schedule II - Valuation and Qualifying Accounts ............................................... 39
All other schedules are omitted because they are not applicable or not required. B. REPORTS ON FORM 8-K During the three months ended December 31, 1997, the Company filed a Current Report on Form 8-K dated November 3, 1997. Under Item 2, the Company reported the acquisition of 100% of the outstanding common and preferred stock of Wireless Access, Inc., a California corporation. C. The following exhibits are being filed herewith as a result of the restatement of the Company's audited financial statements: 23 Consent of Ernst & Young LLP 27 Financial Data Schedule for the year ended December 31, 1997. (Filed in electronic format only. Pursuant to Rule Regulation S-T, this schedule shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.) - ---------- * The financial statements and schedule included herein supercede and replace the financial statements located on pages 25 through 47 and the supplemental financial schedule on page 53 of the Form 10-K. 38 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Additions ------------------------ Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------- --------- -------- -------- ---------- ------ ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS : Year ended December 31, 1997 $4,527 $1,155 $1,192 $2,332 $4,542 Year ended December 31, 1996 4,072 878 5 428 4,527 Year ended December 31, 1995 3,148 505 483 64 4,072 NOTES RECEIVABLE - FAIR MARKET VALUATION ALLOWANCE: Year ended December 31, 1997 322 ---- (318) --- 4 Year ended December 31, 1996 394 (73) --- --- 322 Year ended December 31, 1995 442 (48) --- --- 394 NOTES RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year ended December 31, 1997 --- 120 3,918(1) --- 4,038 VALUATION ALLOWANCE ON INVENTORIES: Year ended December 31, 1997 4,365 2,476 1,037 2,367 5,511 Year ended December 31, 1996 4,705 1,904 --- 2,244 4,365 Year ended December 31, 1995 3,153 2,270 (611) 107 4,705
- -------------- (1) Includes amounts reclassified from previously established accrued liabilities and reserves and collected fee offsets. 39 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 25, 1999. GLENAYRE TECHNOLOGIES, INC. By /s/ Stanley Ciepcielinski ------------------------- Stanley Ciepcielinski EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER,CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) AND DIRECTOR /s/ Billy C. Layton ------------------------- Billy C. Layton VICE PRESIDENT, CONTROLLER AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) 40 EX-23 2 EXHIBIT 23 EXHIBIT 23 Consent of Ernst & Young, LLP We consent to the incorporation by reference in Glenayre Technologies, Inc.'s Registration Statements No. 33-43797 on Form S-8, No. 33-68766 on Form S-8, No. 33-80464 on Form S-8, No. 33-88818 on Form S-4, as amended by Post-Effective Amendment No. 1 on Form S-8, No. 333-04635 on Form S-8, No. 333-15845 on Form S-4, as amended by Post-Effective Amendment No. 1 on Form S-8, Registration Statement No. 333-38169 and Registration Statement No. 333-39717 of our report dated January 30, 1998, except for the restatement related to acquired in-process technology referred to in Note 2, as to which the date is February 15, 1999, with respect to the consolidated financial statements and schedules of Glenayre Technologies, Inc. included in the Annual Report on Form 10-K/A No. 1 for the year ended December 31, 1997. ERNST & YOUNG LLP Charlotte, North Carolina March 23, 1999 41 EX-27 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000808918 GLENAYRE TECHNOLOGIES, INC. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 $21,076 0 222,549 8,584 49,302 252,046 138,831 35,190 590,161 90,592 0 0 0 1,213 491,146 590,161 451,679 451,679 217,793 217,793 207,295 1,275 227 34,794 27,855 6,939 0 0 (688) 6,251 0.10 0.10
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