-----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, VXRmOB+vzmL/R/NQoxgwBxXjF69Cr8GdON+5j/1R50H/mwLXVuiqKEwy+iChpodE khhJos/2LEIMRPLD+soCVg== 0000950168-99-001366.txt : 19990503 0000950168-99-001366.hdr.sgml : 19990503 ACCESSION NUMBER: 0000950168-99-001366 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990430 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-Q SEC ACT: SEC FILE NUMBER: 000-15761 FILM NUMBER: 99607992 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-Q 1 GLENAYRE TECHNOLOGIES, INC. 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ------------ Commission File Number 0-15761 GLENAYRE TECHNOLOGIES, INC. --------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 98-0085742 ------------------------------- --------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209 ------------------------------------------------- --------- (Address of principal executive offices) Zip Code (704) 553-0038 ----------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ----------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Registrant's common stock, par value $.02 per share, at April 27, 1999 was 62,161,151 shares. - -------------------------------------------------------------------------------- GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- INDEX
Part I - Financial Information: Item 1. Financial Statements Page Independent Accountants' Review Report......................................3 Condensed Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and December 31, 1998.........................4 Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 (Unaudited)...................5 Condensed Consolidated Statement of Stockholders' Equity for the three months ended March 31, 1999 (Unaudited)....................6 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (Unaudited)...................7 Notes to Condensed Consolidated Financial Statements (Unaudited)............8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................12 Part II - Other Information: Item 6. Exhibits and Reports on Forms 8-K..........................................18
2 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Stockholders of Glenayre Technologies, Inc. Charlotte, North Carolina We have reviewed the accompanying condensed consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of March 31, 1999, and the related condensed consolidated statements of operations for the three-month periods ended March 31, 1999 and 1998, the condensed consolidated statement of stockholders' equity for the three months ended March 31, 1999 and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated February 15, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Ernst & Young LLP Charlotte, North Carolina April 22, 1999 3 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
March 31, 1999 December 31, 1998 -------------------- -------------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents.......................... $23,596 $12,283 Accounts receivable, net........................... 120,140 153,773 Notes receivable................................... 22,210 12,810 Inventories........................................ 39,478 46,502 Deferred income taxes.............................. 17,885 15,906 Prepaid expenses and other current assets.......... 6,210 5,630 -------- -------- Total current assets....................... 229,519 246,904 Notes receivable, net.................................. 58,285 69,041 Property, plant and equipment, net..................... 107,854 109,661 Goodwill............................................... 116,677 119,626 Deferred income taxes.................................. 9,481 5,679 Other assets........................................... 10,494 10,884 -------- --------- TOTAL ASSETS........................................... $532,310 $561,795 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable................................... $15,758 $31,968 Accrued liabilities................................ 48,476 60,258 Other current liabilities.......................... 170 206 -------- --------- Total current liabilities..................... 64,404 92,432 Other liabilities...................................... 7,155 7,210 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: March 31, 1999 - 62,159,403 shares; December 31, 1998 - 62,064,290 shares..... 1,243 1,241 Contributed capital................................. 343,444 343,251 Retained earnings................................... 116,064 117,661 ------- ------- Total stockholders' equity....................... 460,751 462,153 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $532,310 $561,795 ======== ========
Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 4 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three Months Ended March 31, --------------------------------------- 1999 1998 ------------------ ----------------- NET SALES.............................................. $70,021 $94,533 ------- ------- COSTS AND EXPENSES: Cost of sales.................................... 38,081 45,764 Selling, general and administrative expense...... 21,575 25,313 Research and development expense................. 11,663 14,193 Depreciation and amortization expense............ 8,614 9,377 ----- ----- Total Costs and Expenses................... 79,933 94,647 ------ ------ LOSS FROM OPERATIONS................................... (9,912) (114) -------- -------- OTHER INCOME (EXPENSES): Interest income................................. 2,603 2,357 Interest expense................................ (215) (166) Other, net....................................... 37 (96) -------- -------- Total Other Income (Expenses), net........ 2,425 2,095 ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES...................... (7,487) 1,981 PROVISION (BENEFIT) FOR INCOME TAXES.................. (5,890) 1,860 --------- -------- NET INCOME (LOSS)...................................... $ (1,597) $ 121 ========= ========= NET INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE......................................... $ (0.03) $ 0.00 ======== ====== NET INCOME (LOSS) PER COMMON SHARE - ASSUMING DILUTION.................................... $ (0.03) $ 0.00 ======== ======
See notes to condensed consolidated financial statements 5 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS) (UNAUDITED)
Total Common Stock Contributed Retained Stockholders' Shares Amount Capital Earnings Equity -------- -------- ------------ --------- --------------- Balances, December 31, 1998........62,064 $1,241 $343,251 $117,661 $462,153 Net Loss........................... (1,597) (1,597) Stock options exercised............ 95 2 161 163 Tax benefit of stock options exercised....................... 32 32 -------- -------- --------- -------- -------- Balances, March 31, 1999....... 62,159 1,243 $343,444 $116,064 $460,751 ======== ======== ========= ======== ========
See notes to condensed consolidated financial statements 6 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS) (UNAUDITED)
Three Months Ended March 31, --------------------------------- 1999 1998 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................. $14,976 $17,814 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment.......... (3,791) (8,410) Proceeds from sale of equipment..................... 25 149 ------------- ------------- Net cash used in investing activities......... (3,766) (8,261) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in other liabilities........................ (60) (2,638) Issuance of common stock............................ 163 1,649 ------------- ------------- Net cash provided by (used in) financing activities................................................ 103 (989) ------------- ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 11,313 8,564 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................................... 12,283 21,076 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $23,596 $29,640 ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............................................. $ 218 $ 99 Income taxes......................................... 1,392 1,909
See notes to condensed consolidated financial statements 7 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The Company's financial results in any quarter are highly dependent upon various factors, including the timing and size of customer orders and the shipment of products for large orders. Large orders from customers can account for a significant portion of products shipped in any quarter. Accordingly, the shipment of products in fulfillment of such large orders can dramatically affect the results of operations of any single quarter. For further information, refer to the consolidated financial statements and footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on Form 10-K for the year ended December 31, 1998. 1. INVENTORIES March 31, December 31, Inventories consist of: 1999 1998 ------------- -------------- Raw materials......................... $22,326 $26,046 Work-in-process....................... 10,963 11,818 Finished goods........................... 6,189 8,638 ----- ----- $39,478 $46,502 ======= ======= 2. GOODWILL Goodwill is shown net of accumulated amortization of $32.0 million and $29.1 million at March 31, 1999 and December 31, 1998, respectively. 8 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) 3. INCOME TAXES The Company's consolidated income tax provision was different from the amount computed using the U.S. statutory income tax rate for the following reasons: Three Months Ended March 31, ------------------------------- 1999 1998 -------------- ------------- Income tax provision at U.S. statutory rate.. $(2,620) $693 Reduction in valuation allowance of net operating losses of acquired business...... (3,983) --- Foreign taxes at rates other than U.S. statutory rate............................ (133) (175) State taxes (net of federal benefit)......... (239) (195) U.S. Research and Experimentation Credits (80) (84) Benefit from Foreign Sales Corporation....... (40) --- Non-deductible goodwill amortization......... 1,205 1,621 ----- ----- Income tax provision (benefit)............... $(5,890) $1,860 ======== ====== The Company believes that it is more likely than not that the net deferred tax asset recorded at March 31, 1999 will be fully realized. 4. INCOME (LOSS) PER COMMON SHARE The following table sets forth the computation of income per share: Three Months Ended March 31, --------------------- 1999 1998 ---------- -------- Numerator: Net income (loss)............................... $(1,597) $121 Denominator: Denominator for basic income per share - weighted average shares....................... 62,116 60,906 Effect of dilutive securities: stock options................................... ___ 2,364 --------- ----- Denominator for diluted income per share-adjusted weighted average shares and assumed conversions. 62,116 63,270 ========== ========= Net income (loss) per weighted average common share. $ (0.03) $0.00 ========= ========= Net income (loss) per common share - assuming dilution....................................... $ (0.03) $0.00 ========= ========= 9 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) 5. BUSINESS RESTRUCTURING During the first quarter 1999, the Company recorded a pre-tax charge of approximately $1.6 million related to a reduction of the Company's workforce by approximately 70 employees from the Vancouver, B.C., Charlotte, N.C. and Quincy, IL. facilities, exiting costs from the Blaine, WA. leased facility and asset impairment charges for leasehold improvements located at the Blaine, WA. leased facility. Included in the first quarter charge are the following expenses: (i) approximately $1.1 million for severance and outplacement of terminated employees; (ii) approximately $330,000 for costs associated with exiting a leased facility and (iii) approximately $170,000 for the write-off of leasehold improvements. The total pre-tax charge for the first quarter 1999 restructuring and the exiting of the leased facility was recorded as approximately $180,000 to cost of sales and approximately $1.4 million to selling, general and administrative expenses. During the first quarter ended March 31, 1999, the Company paid approximately $800,000 of the first quarter 1999 restructuring charge in cash. The cash payments relate primarily to employee termination costs. Additionally, the Company recorded during the fourth quarter of 1998 a pre-tax charge of approximately $6.8 million related to a 10% reduction of its global workforce, the exiting of two leased facilities and impairment of associated long-lived assets, primarily leasehold improvements. During the first quarter of 1999, the Company reduced the fourth quarter 1998 restructuring charges by approximately $350,000 due to less than anticipated terminated employee outplacement fees and severance costs at its Norwood, Massachusetts facility offset partially by more than anticipated severance costs at other locations. This $350,000 pre-tax credit adjustment for the 1998 restructuring was recorded as approximately $10,000 to cost of sales, $140,000 to selling, general and administrative expenses and $200,000 to research and development expenses. As of March 31, 1999, the Company has paid a total of approximately $3.7 million cash payments related to the fourth quarter 1998 restructuring ($2.6 million in the first quarter of 1999) primarily for employee termination costs and early termination fees for the Norwood, Massachusetts leased facility. Additionally, the Company recorded a non-cash charge of approximately $1.4 million related to an asset write-down and other adjustments in the fourth quarter of 1998. As of March 31, 1999 the Company had approximately $600,000 and $1.4 million accrued related to restructuring costs for the first quarter of 1999 and fourth quarter of 1998, respectively. Management believes the remaining reserves for business restructuring are adequate to complete its plan. 10 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) 6. SEGMENT REPORTING Three Months Ended March 31, ------------------------------- 1999 1998 Segment Net Sales --------- -------- Paging.................................. $45,204 $72,144 Mobile and Fixed Networks............... 16,107 16,135 Microwave Communication................. 8,710 6,254 -------- --------- Total................................... $70,021 $94,533 ======= ======= Three Months Ended March 31, -------------------------------- 1999 1998 Segment Income (loss) --------- --------- Paging.................................. $(4,482) $9,790 Mobile and Fixed Network................ (1,464) (5,776) Microwave Communication................. 590 (66) Corporate activities.................... (4,556) (4,062) Interest Income (Expense), net.......... 2,388 2,191 Other Income (Expense).................. 37 (96) ------- --------- Income (loss) before income taxes....... $(7,487) $1,981 ======== ======= 11 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Glenayre Technologies, Inc. ("Glenayre" or the "Company") 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 its Wireless Messaging Group ("WMG") and Wireless Access two-way paging devices, (ii) mobile and fixed network products from its Integrated Network Group ("ING") including voice mail systems and database management systems providing applications for calling cards, and (iii) microwave communications from its Western Multiplex Group. 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. As of April 1999, an acceptable purchase agreement had not been negotiated. However, the Company expects to pursue divesting this business over time. 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: Three Months Ended March 31, ---------------------- 1999 1998 ---------- -------- Net sales....................................... 100.0% 100.0% Cost of sales................................... 54.4 48.4 ------ -------- Gross profit ............................... 45.6 51.6 Operating expenses: Selling, general and administrative......... 30.8 26.8 Research and development.................... 16.7 15.0 Depreciation and amortization............... 12.3 9.9 --------- --------- Total operating expenses................ 59.2 51.7 ---------- -------- Loss from operations ........................... (14.2) (0.1) Interest, net................................... 3.4 2.3 Other, net...................................... 0.1 0.1 ------- -------- Income (loss) before income taxes............... (10.7) 2.1 Provision (benefit) for income taxes........... (8.4) 2.0 ------- --------- Net income (loss)............................... (2.3)% 0.1% ========== ========= 12 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- The following table sets forth for the periods indicated net sales represented by the Company's primary marketing areas: Three Months Ended March 31, ----------------------- 1999 1998 --------- -------- (IN THOUSANDS) Paging products .......................... $45,204 $72,144 Mobile and fixed network products ........ 16,107 16,135 Microwave communication................... 8,710 6,254 ------- -------- $70,021 $94,533 ========== ========== (PERCENTAGE OF NET SALES) Paging products .......................... 65% 76% Mobile and fixed network products ........ 23 17 Microwave communication................... 12 7 ------- -------- 100% 100% =========== =========== THREE-MONTH PERIOD ENDED MARCH 31, 1999 AND 1998 NET SALES. Net sales for the three months ended March 31, 1999 decreased 25.9% to $70.0 million as compared to $94.5 million for the three months ended March 31, 1998. International sales were approximately $29.9 million for the three months ended March 31, 1999 as compared to approximately $44.6 million for the three months ended March 31, 1998 and accounted for 43% and 47% of net sales for the three months ended March 31 1999 and 1998, respectively. The decline in paging infrastructure sales can be attributed to several factors including the continued weakness in world financial markets (Asian economies and Brazil devaluation) and the Company's major customers reevaluation of their plans to raise capital for paging infrastructure buildout. Sales to separate single customers totaled approximately 10% and 14% of net sales for the three-month periods ended March 31, 1999 and 1998, respectively. The Company believes that the dependence on any one customer is mitigated by the large number of companies in the Company's customer base and the timing for development and expansions of their systems. GROSS PROFIT. Gross profit was 46% and 52% for the three-month periods ended March 31, 1999 and 1998, respectively. The decline in margins for 1999 is primarily due to a lower sales volume of paging infrastructure equipment and significant charges for rework through mid February 1999 on the Company's paging devices produced. Glenayre's gross profit margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold and (iii) increases in material costs and other components of cost of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses were $21.6 million and $25.3 million for the three-month periods ended March 31, 1999 and 1998, respectively. The decline in selling, general and administrative expenses is due primarily to the following: (i) reduction in the accruals for management and employee incentive bonus programs due to less than anticipated operating results in the first quarter of 1999, (ii) reduction in direct employee expenses due to the fourth quarter 1998 restructuring which included a reduction of approximately 140 employees, (iii) reduction in other employee related costs including hiring, moving and travel expenses due to 13 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- reduced headcount and a reduction in the expense level of international travel and (iv) reduction in expenses due to the sale of the Company's network management business in the fourth quarter of 1998. These reductions are being partially offset by restructuring charges incurred in the first quarter of 1999 for additional employee termination benefits, asset impairment charges and exiting costs of a leased facility and integration costs incurred for the transition of operations related to the Company's database management system products to its Atlanta facility. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $11.7 million and $14.2 million for the three months ended March 31, 1999 and 1998, respectively. The decline in research and development expenses is due primarily to restructuring charges recorded in the first quarter of 1998 for the consolidation of the Company's paging research and development efforts into one location, the reduction in management and employee incentive plan bonus program expenses due to less than anticipated operating results in the first quarter of 1999 and a reduction of direct employee related expenses due to the fourth quarter 1998 restructuring reduction of headcount. These decreases are being offset partially by integration costs incurred for the transition of operations related to the Company's database management system products to its Atlanta facility. The Company relies on its research and development programs for new products and the improvement of existing products for the continued growth in net sales. Research and development costs are expensed as incurred. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was $8.6 million and $9.4 million for the three months ended March 31, 1999 and 1998, respectively. The decrease in expenses for the three-month periods ended March 31, 1999 are a result of (i) the sale of the Company's network management business in the fourth quarter of 1998 and (ii) the write-off of goodwill related to the 1997 acquisition of Open Development Corporation and other fixed and intangible assets in the fourth quarter of 1998, partially offset by a new operating business system becoming operational in April 1998. INTEREST INCOME, NET. Interest income, net was $2.4 million and $2.2 million for the three-month periods ended March 31, 1999 and 1998, respectively. The Company expects that the level of interest income, net in 1999 will vary in accordance with the level of secured debt financing commitments issued by Glenayre and used by its customers. PROVISION FOR INCOME TAXES. The effective tax rates for the three months ended March 31, 1999 and 1998 differed from the combined U.S. federal and state statutory tax rate of approximately 40% due primarily to (i) the reduction in the valuation allowance related to net operating losses ("NOLs") of an acquired business, (ii) nondeductible goodwill, (iii) lower tax rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and (iv) 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 1999 compared to 1998 is primarily the result of 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. FINANCIAL CONDITION AND LIQUIDITY LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1999, Glenayre's principal sources of liquidity included $23.6 million of cash and cash equivalents and a $50 million bank line of credit that expires on October 30, 1999. Borrowings under the line of credit during the three months ended March 31, 1999 ranged from $10.0 million to $17.5 million with no borrowings as of March 31, 1999. The Company was not in compliance with certain debt covenants related to the bank line of credit as of March 31, 1999, 14 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- which make the line unavailable at thatdate. The Company is currently requesting, and expects to receive, waivers ofthese events of noncompliance. However, there can be no assurance that thelending banks will grant the waivers. Accounts receivable decreased $33.6 million from year end 1998 primarily due to lower sales volume for the three months ended March 31, 1999. Approximately $49 million or 57% of the gross notes receivable balance of $86 million as of March 31, 1999 consisted of receivables from one customer which has a limited operating history, is highly leveraged 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. This customer is privately owned and is in weak financial condition due to continued operating losses. This customer's ability to complete its network buildout and continue ongoing operations is dependent on continued financing support from its vendors and financial institutions and its ability to access other capital markets. As of March 31, 1999, the principal due dates of the amounts owing from this customer range from March 2000 to December 2002. A March 1999 industry publication article stated that this customer confirmed it had recently conducted a series of layoffs as part of a "strategic refocus". The article further stated that the layoffs have raised questions regarding this customer's financial condition. An estimate of the range of possible losses related to the collectibility of the receivables from this customer cannot currently be made by the Company. Due to the factors cited, it is at least reasonably possible that a change in the estimate of the collectibility of receivables from this customer could occur in the near term which would have a significant impact on the Company's results of operations. Accounts payable decreased at March 31, 1999 compared to December 31, 1998 primarily as a result of payment cycle, timing differences, and decreased inventory purchases. Accrued expenses at March 31, 1999 decreased from year end 1998 primarily due to accrual reductions in (i) customer deposits, (ii) restructuring, (iii) long-term projects, (iv) income taxes payable and (v) employee incentive and management bonus programs. 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. As of March 31, 1999, no shares had been repurchased under the 1996 program. On April 20, 1999, the Company and Motorola Inc. ("Motorola") announced the signing of a Memorandum of Understanding ("MOU") with the intent to enter into a definitive license agreement that would enable Glenayre to manufacture and sell all or part of Motorola's paging infrastructure products. Both companies are expected to contribute to an initial joint development fund of $5 million to promote the global market for two-way paging. This fund is in addition to each company's independent research and development activities. On April 21, 1999, the Company and Solectron Corporation jointly announced the signing of a letter of intent for Solectron to acquire Glenayre's radio frequency ("RF") design and manufacturing assets in Quincy, Illinois, and to assume responsibility for the manufacture of Glenayre's one- and two-way RF paging infrastructure equipment. Terms of the agreement are expected to be negotiated over the next several months. 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 March 31, 1999, the Company had agreements to finance and arrange financing for approximately $82 million of paging and voice mail 15 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- products. Further, at March 31, 1999, 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 used, the financing arrangements will be secured by the equipment sold by Glenayre. During 1997, Glenayre began the 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 was expected to be approximately $19 million and was to be paid throughout the construction period in 1998 and 1999. However, during the first quarter 1999, the Company halted the construction in progress on the facility and revised plans to complete only a parking facility and a 16,000 square foot first level at an estimated total cost of $11.7 million. Approximately $6.3 million and $1.8 million paid toward architecture, engineering and construction costs related to the new expansion are included in capital expenditures for the year ended December 31, 1998 and the period ended March 31, 1999, respectively. Commitments of approximately $1.8 million relating to the termination of the construction contract are included in the estimated $2.7 million total costs to complete. 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. For 1998, Glenayre's actual cash outlay for taxes was limited to U.S. alternative minimum tax and foreign and state income taxes primarily due to the availability of foreign sales corporation benefits and the utilization of research and development tax credits. Additionally, as the volume of international sales grows, the percentage of worldwide income taxable in international jurisdictions may increase in the future. As a result, the cash tax rate may be significantly higher in 1999 compared to 1998 and recent years. As of March 31, 1999, the Company has U.S. tax net operating loss carryforwards ("NOLs") aggregating $33 million related to the 1997 acquisitions of ODC and WAI. However, the ability to utilize WAI's acquired NOLs to offset future taxable income is subject to restrictions and there can be no assurance that it will be utilized in 1999 or future periods. The Company has recorded a deferred tax asset of $27 million, net of a valuation allowance of $13 million, at March 31, 1999, 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. YEAR 2000 COMPLIANCE. Until recently, computer programs were generally written using two digits rather than four to define the applicable year. Accordingly, such programs may be unable to distinguish properly between the Year 1900 and Year 2000. This could result in system failures or data corruption for the Company, its customers or suppliers which could cause disruptions of operations, including, among other things, a temporary inability to process transactions or engage in business activities or to receive information, services, raw materials and supplies, or payment from suppliers, customers or business partners or any other companies with which the Company conducts business. The Company has developed a comprehensive plan intended to address Year 2000 issues. As part of the plan, the Company has selected a team to identify, evaluate and implement remediation efforts aimed at 16 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- making the Company's information technology, non-information technology systems and products Year 2000 ready prior to December 31, 1999. During 1998, the team completed its assessment of the Company's information technology, non-technology systems, and products and established milestones and detailed plans so that the Company's research programs, products and internal infrastructure are reviewed and the necessary changes made. The Company's information technology remediation efforts related to internal operating systems is complete for the Charlotte, Quincy, Vancouver, Atlanta and Santa Clara facilities. The Company has also prioritized and completed the significant steps of its non-information technology systems plan. The Company's remaining remediation efforts relate to non-information technology systems and products which are expected to be completed during fiscal 1999. If the Company's remaining remediation efforts are not completed on a timely basis, the Year 2000 issue could have an adverse effect on the Company's operations and customers. Based upon the remediation efforts completed, the Company does not believe a formal contingency plan will be required. Individual locations or business units will develop informal contingency plans in the event that they do not expect to be fully Year 2000 compliant within the current time estimates. To date, the cost of the Company's Year 2000 assessment and remediation efforts has not been material to the Company's results of operations or liquidity. The total expenditures as of March 31, 1999 to remediate the Company's Year 2000 issues, inclusive of its ongoing systems initiatives is approximately $300,000 and is related primarily to product Year 2000 readiness assessments and minor infrastructure upgrades. 1999 expenditures are not expected to exceed $500,000. The Company is funding the expenditures related to the Year 2000 plan with cash flows from operations. The capitalization or expense of the foregoing expenditures will be determined using current authoritative guidance. The Company is also communicating with its significant suppliers, customers and business partners to coordinate Year 2000 conversion efforts. Currently, the Company is unaware of any material exposures or contingencies in regards to these parties. However, the Company cannot reasonably estimate the potential impact on its financial position, results of operations or cash flows in the event these parties do not become Year 2000 compliant on a timely basis. MARKET RISKS. The Company is subject to market risk from interest rate and foreign currency fluctuation experienced in the normal course of business. However, the Company has determined that its exposure to such market risks is not material. FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's Form 10-K, Annual Report to Stockholders, Form 10-Q's and Form 8-K's and other written or oral statements made by or on behalf of the Company may 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 this Form 10-Q relating to factors which may affect future operating results, a more detailed discussion of these factors is set forth in Exhibit 99 to this Form 10-Q. 17 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION ITEMS 1 THROUGH 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 Services Agreement, dated February 15, 1999, between the Company and Ramon D. Ardizzone. Exhibit 10.2 Severance Agreement, dated February, 15, 1999, between the Company and Eugene C. Pridgen. Exhibit 10.3 Glenayre Technologies Management By Objective Plan - Corporate Plan for the year ending December 31, 1999. Exhibit 10.4 Glenayre Technologies Management By Objective Plan - Business Segment Plan for the year ending December 31, 1999. Exhibit 10.5 Glenayre Technologies Management By Objective Plan - Glenayre Western Multiplex Plan for the year ending December 31, 1999. Exhibit 15 Letter regarding unaudited interim financial information. Exhibit 27 Financial Data Schedule. (Filed in electronic format only. Pursuant to Rule 402 of Regulation S-T, this schedule shall not be deemed filed fo purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.) Exhibit 99 Cautionary statement under safe harbor provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K During the three months ended March 31, 1999, the Company filed a Current Report on Form 8-K dated January 14, 1999. Under Item 5 the Company reported that the Preferred Shares Rights Agreement dated May 21, 1997 (the "Rights Agreement") had been amended to provide special provisions with respect to the State of Wisconsin Investment Board ("SWIB"). This special provision excludes SWIB from the definition of Acquiring Person under the Rights Agreement until such time as SWIB becomes the Beneficial Owner of a percentage of the Common Shares of the Company then outstanding which equals or exceeds 20%. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Glenayre Technologies, Inc. ----------------------------- (Registrant) /s/ Stanley Ciepcielinski ----------------------------- Stanley Ciepcielinski Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) /s/ Billy C. Layton ----------------------------- Billy C. Layton Vice President, Controller, Secretary and Chief Accounting Officer (Principal Accounting Officer) Date: April 30, 1999 EX-10 2 EXHIBIT 10.1 EXHIBIT 10.1 February 15, 1999 Mr. Ramon D. Ardizzone Glenayre Technologies, Inc. 5935 Carnegie Boulevard Charlotte, NC 28209 Dear Ray: At the request of the Board of Directors of Glenayre Technologies, Inc. ("Glenayre"), you have agreed to accept the position of President and Chief Executive Officer, in addition to your current position as Chairman of the Board, of Glenayre, until a new President and Chief Executive Officer can be hired and begin his employment. The Board of Directors believes that it is desirable and in the best interests of Glenayre to provide appropriate incentives to you to initiate or complete the difficult tasks that lie ahead for Glenayre before a new President and Chief Executive Officer can be hired. Accordingly, on behalf of the Board of Directors, I offer you the following: (1) Glenayre and you agree that you will serve as President and Chief Executive Officer of Glenayre, regardless of whether you remain a member of the Board of Directors of Glenayre, until the earlier of (i) December 31, 1999 or (ii) such time as a new President and Chief Executive Officer of Glenayre shall begin his employment as such, except that the Board retains the right to terminate that relationship for "Cause". If a new President and Chief Executive Officer is not employed by December 31, 1999, any extension of your tenure as President and Chief Executive Officer beyond that date will be subject to our mutual agreement. For this purpose, "Cause" is defined in your former Employment Agreement dated June 21, 1995, as amended on December 8, 1995 and December 12, 1996 ("your Former Employment Agreement"). (2) For your services as President and Chief Executive Officer, you will continue to be paid at the rate of $150,000 per year, which is the current pay for your services as Chairman of the Board. This pay shall continue so long as you are either Chairman of the Board or President and Chief Executive Officer and will be unaffected by whether you remain a member of the Board of Directors of Glenayre. Mr. Ramond D. Ardizzone February 15, 1999 Page 2 (3) In order to provide further incentive for you, Glenayre agrees to pay you a lump sum payment of $150,000 at the earlier of (i) December 31, 1999 or (ii) the date that a new President and Chief Executive Officer begins his employment as such. (4) Effective immediately and regardless of whether your services as President and Chief Executive Officer, Chairman of the Board, a member of the Board of Directors or in any other position with Glenayre are terminated for any reason, Glenayre agrees that you (and your spouse) shall be entitled to participate in Glenayre's Retiree Medical Plan, at no cost or expense to you or your spouse, for the remainder of your life and the life of your spouse. This provision amends and modifies Paragraph 3(ii) of your Termination Agreement dated as of September 30, 1997 and Paragraph 2(f)(6) of your Former Employment Agreement. If the foregoing terms are acceptable to you, please sign in the space provided below. GLENAYRE TECHNOLOGIES, INC. By: /s/ Stanly Ciepcielinski ------------------------ Name: Stanly Ciepcielinski Title: EVP & COO ACCEPTED AND AGREED TO: /s/ Ramon D. Ardizzone ---------------------- Ramon D. Ardizzone Ray 7 EX-10 3 EXHIBIT 10.2 EXHIBIT 10.2 February 15, 1999 Mr. Gene Pridgen Glenayre Electronics, Inc. 5935 Carnegie Boulevard Charlotte, NC 28209 Dear Gene: This letter is written confirmation of our discussion regarding your resignation from your position as Executive Vice President - Corporate Development, General Counsel and Secretary to return to Kennedy Covington Lobdell & Hickman. We have agreed that your resignation will be effective February 26, 1999 (the "Resignation Date"), and I am prepared to offer you the following severance package contingent on your acceptance of the terms and conditions of this agreement. 1. Accrued Salary and Benefits. You will be paid all salary and benefits to which you are entitled through the Resignation Date, including your 1998 MBO bonus. (You will not, of course, be eligible for any portion of your 1999 MBO bonus.) You will be paid for your accrued but unused vacation as of such date. You will also be paid your deferred compensation distribution in accordance with the plan document and your Election Deferral Forms. 2. Severance Payments. You will be paid a lump sum severance payment of $100,000 on or about the Resignation Date. The foregoing payment shall be made in accordance with Glenayre's payroll practices and shall be subject to all applicable withholding as an employee. 3. Benefits Following the Resignation Date. a) I will recommend to the Plan Administration Committee of the Board of Directors of Glenayre Technologies, Inc. that all of your options for Glenayre Technologies, Inc. common stock be fully vested, effective February 26, 1999. Additionally, I will recommend that you also be permitted to exercise your options within two years after February 26, 1999. If approved by the Plan Administration Committee, you will receive written confirmation of this accelerated vesting schedule and extended exercise period. b) You will be given, at no cost to you, the large bookcase in your office. Glenayre will pay to move the office furniture which belongs to you, together with the bookcase, to the offices of Kennedy Covington Lobdell& Hickman here in Charlotte. c) After the Resignation Date, if you desire, you may continue your individual and dependent coverage through COBRA at rates which are evaluated annually. d) After the Resignation Date, you shall cease to be covered by all vacation and holiday leave programs, the Employee Stock Purchase Plan, short and long-term disability, and AD&D, and you shall cease to be entitled to any perquisites or benefit rights not expressly covered by this agreement. 4. No Recruitment of Employees. ----------------------------- a) You agree not to recruit, provide information on any personnel of the Glenayre Companies, or assist another employer in the recruitment of any employee of the Glenayre Companies within one year after the Resignation Date. For purposes of this agreement, the term "Glenayre Companies" means Glenayre Technologies, Inc., Glenayre Electronics, Inc., Western Multiplex Corporation and all other subsidiaries and affiliates of, and successors to, the foregoing corporations. 5. Waiver of Employment Rights or Claims. ------------------------------------- a) You acknowledge that there are laws and regulations prohibiting employment practices pursuant to which you may have rights or claims. These include Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, as amended, and as well as other federal and state executive orders, statutes and regulations. You also acknowledge that there are other common law theories, including laws of contract and tort, which may relate to your employment rights. b) You hereby waive and release any rights or claims that you may have arising out of your employment with the Glenayre Companies or the termination of that employment, including those described in Paragraph 5(a), and under any other laws, whether with respect to the Glenayre Companies or any of their employees, officers, directors or agents, provided that you do not waive any rights or claims which may arise after the date you sign this agreement. c) It is agreed and you acknowledge that (i) you have had at least 21 days toconsider the terms and conditions of this agreement; (ii) you have been advisedto consult with an attorney before signing this agreement; (iii) theconsideration provided to you in Paragraphs 2 and 3 above is consideration that you were not entitled to receive before signing 2 this agreement; (iv) you willhave 7 days from the date you sign this agreement and deliver it to me to revokethis agreement by notifying me of such revocation; and (v) this agreement shallnot become effective or enforceable until after the aforesaid 7 days revocationperiod has expired. 6. Confidential Information. You agree that you will keep strictl confidential and will not disclose, directly or indirectly, any document or information (including all proprietary, confidential, or trade secret information of the Glenayre Companies, that you have had in your possession or of which you were/are aware) relating to your employment with Glenayre or to the business and operations of any of the Glenayre Companies. You further agree that you will not make any statement nor take any action which might adversely reflect upon any of the Glenayre Companies, or any of their officers, directors or employees. Likewise, Glenayre and its directors and officers will not make any statement nor take any action which might adversely reflect upon you. 7. Remedies for Breach. You acknowledge and agree that in the event of a breach by you of the provisions of Paragraphs 4 and 6 hereof, Glenayre may, in addition to whatever other rights and remedies it may have at law or in equity, withhold any amounts or benefits otherwise payable or due under Paragraph 2 and 3 of this agreement. 8. Acknowledgement of Understanding and Voluntariness. You acknowledge that you understand completely everything set forth in this agreement, that you have had ample opportunity to review this agreement and all its ramifications with an attorney of your own choosing, and that you have entered into this agreement voluntarily, without any coercion whatsoever, of your own free will, and that you intend legally to be bound by this agreement. 9. Entire Agreement. This agreement constitutes the entire agreement between Glenayre and you with respect to the subject matter hereof and will not be construed as an admission of liability, wrongdoing, or discrimination by any of the Glenayre Companies or any of their officers, directors, employees or agents. 10. Severability. If any provision hereof shall be determined to be unenforceable, such fact shall not invalidate or render unenforceable any other provision hereof. 3 11. Binding Effect. This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, as the case may be. 12. Governing Laws. This agreement shall be deemed to have been made in the State of North Carolina and shall be interpreted, construed, and enforced in accordance with the laws of the State of North Carolina. If the foregoing terms and conditions are acceptable to you, please sign in the space indicated below. Sincerely, Accepted and agreed to: /s/ Ramon D. Ardizzone /s/ Eugene C. Pridgen - ---------------------- ----------------------- Ramon D. Ardizzone Eugene C. Pridgen Chairman of the Board, President and CEO Date: 2/17/99 --------- cc: Beverley Cox Virginia Hall 4 EX-10 4 EXHIBIT 10.3 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN CORPORATE PLAN EXHIBIT 10.3 The Glenayre Technologies, Inc. Management By Objective Plan was created to motivate and provide incentive to the key managers of Glenayre Technologies, Inc. and its wholly-owned subsidiaries around the world and to maximize profits. The plan is based on the Targeted Performance of the Company and on the Participant's Individual Retention component. Your MBO Level is a percentage of your Annual Base Earnings approved each year by the Chief Executive Officer, and/or Sr. Vice President, Human Resources, as applicable. In addition, Executive Officer MBO levels are approved each year by the Board of Directors. Your Target MBO Bonus is comprised of two components: Company Performance and Individual Component. You can achieve up to 200% of your Target MBO Bonus if the Company achieves certain earnings targets. Target MBO Bonus : This is your Annual Base Earnings X your MBO Level at 100% of target for each component. Example: If your Annual Base Earnings is $50,000 and your MBO Level is 20%, your Target MBO Bonus would be as follows: Target MBO Bonus = $10,000 (Annual Base Earnings X Target MBO Bonus ($50,000 X .2)) Target MBO Bonus $10,000 Individual 30% $3,000 (Target MBO Bonus X Individual % ( $10,000 X .3) Company 70% $7,000 (Target MBO Bonus X Company % ($10,000 X .7) Note: There are additional examples following the Individual Retention Component section that illustrate potential MBO bonus payments at various levels of performance for each component. COMPANY PERFORMANCE Company Performance Component = 70% of Target MBO Bonus (except for Participants in the Business Sector MBO Bonus Plan, where it comprises 20% of Target MBO Bonus). Company Performance is based on Income from Operations which is defined below. Annual Company Performance targets are established in support of the Company's business plan. If the actual annual Company Performance is below the Compensation Plan Minimum Target, no bonus will be paid for this component of the plan. If the actual annual Company Performance meets Compensation Plan Minimum Target, an MBO payment will be made proportionate to Company Performance (actual /target) up to the maximum Compensation Plan Stretch Target of the Targeted Earnings Performance. The Company MBO bonus payment is independent of Business Sector Performance results. MBO 1/1/99 1/99 1 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN CORPORATE PLAN Example: Annual Company Target Bonus = $7,000 ( Annual Base Earnings X Target MBO Bonus X Company Performance Portion ( $50,000 X 20% X 70%)). Total Company Performance Portion at 100% of Target = $7,000 If the actual Company performance is proportionate to 110% of your Target MBO Bonus, as a Participant, you will receive 110% of your target Company Performance bonus opportunity. EXAMPLE: Actual % Target Target MBO Actual MBO MBO Bonus Bonus Bonus Performance at Minimum 70% $7,000 $4,900 Performance at target 100% $7,000 $7,000 Performance above target 110% $7,000 $7,700 INDIVIDUAL RETENTION COMPONENT - ------------------------------ Individual Retention Component = 30% At the end of each plan year an individual retention bonus will be paid to all employees who are actively employed on December 31 and have satisfactory performance, (i.e. not on a performance improvement plan). The Individual Retention component of the Plan is paid annually as part of the annual MBO Bonus Plan payment. This MBO bonus payment is independent of the Company Performance bonus unless the Company Performance exceeds the target, in which case the Individual Retention bonus will be paid proportionate to Company Performance. Example: Individual Retention Component Formula: Individual Retention Bonus = Annual Base Earnings X Target MBO Bonus X 30% ( Individual Retention Portion) X Company Performance (if actual Company Performance exceeds target) ($50,000 X .2 X .3)) Individual Retention Component Target Bonus = $3,000 Example: Company Performance Actual % of Target MBO Bonus Amount MBO Bonus 60% 100% $3,000 100% 100% $3,000 125% 125% $3,750 Examples of Annual MBO Bonus Payment at different Performance Levels Annual Earnings $50,000 MBO Level 20% Target MBO Bonus $10,000 MBO 1/1/99 1/99 2 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN CORPORATE PLAN Component Weights Target MBO Bonus Individual 30% $3,000 Company 70% $7,000 Example #1 Actual % of Target MBO Bonus Amount MBO Bonus Individual 110% $3,300 Company 110% $7,700 Total $11,000 Example #2 Actual % of Target MBO Bonus Amount MBO Bonus Individual 100% $3,000 Company 90% $6,300 Total $9,300 Example #3 Actual % of Target MBO Bonus Amount MBO Bonus Individual 100% $3,000 Company 65% $0 Total $3,000 PAYMENTS - --------- 1. Annual bonus payment paid within 45 days of the completion of the year end audit. 2. All MBO payments are made through special payroll check or direct deposit with all applicable taxes and contributions withheld. Participation or eligibility to participate in the Plan is not a guarantee of employment or of continued payment. The Plan is subject to change or revocation at the discretion of the Board of Directors or the Chief Executive Officer of the Company. DEFINITIONS - ------------- o Company -- Glenayre Technologies, Inc. and its subsidiaries. o Currency Exchange Rate -- Average internal exchange rate for the Plan Year. MBO 1/1/99 1/99 3 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN CORPORATE PLAN o Income From Operations -- Income from the operations of the Company less allocations and indirect costs, excluding the impact of interest income or expense, exchange gain/(loss), other income/(loss), income taxes or investment tax credits, any real estate transactions and expenses, and business unit disposal or acquisition costs. o Eligibility Requirements-- a. Annual MBO bonus payment - Participants who remain employed for the Full Plan Year. c. Participants must maintain a satisfactory level of performance through the Plan period. Periods of paid or unpaid leave of absence in excess of 30 days per year will not be considered for MBO eligibility. Annual Base Earnings will be prorated according to the length of disability. Payment of earned MBO bonuses will be paid upon return to work from a leave of absence. o Annual Base Earnings - Total base salary earned during the plan year, (prior to deductions for contributions to the 401(k) Plan, for health care coverage, to flexible spending accounts, or to any other Company sponsored pre-tax or deferred compensation plans) received by a Participant from the Company while participating in the Plan. o Individual Retention Component - Paid based solely on active employment on 12/31 and satisfactory performance. o Participant -- A full time, regular employee of the Company who is approved by the Chief Executive Officer to be a Participant in the Plan. Plan participation will be prorated based on the length of time a Participant is eligible. No employee of the Company may participate in more than one incentive, bonus or commission plan. o Participant's MBO Level -- The percentage of pay that the Participant could receive from the Plan if the targeted Company Performance, Business Sector Performance and Individual Retention requirements are achieved at the 100% level. If the Company exceeds its targeted performance goal, the bonus amount will increase proportionately. The MBO Level for each Participant is recommended to and approved by the Chief Executive Officer and/or Sr. Vice President, Human Resources, as applicable. In addition, Executive Officer MBO levels are approved each year by the Board of Directors. o Payment Date -- Forty-five (45) days after the audit completion by the independent auditors and Board of Directors approval of the Company's fiscal year-end financial statements. o Payout Percentage -- Percentage of Target MBO Bonus for Company and/or Business Unit achieving specific earnings targets. Participants are eligible to receive 70% of their bonus eligibility when the Compensation Plan Minimum Targets for the Company and the Business Units are achieved, and up to 200% of eligibility if Compensation Plan Stretch Targets for the Company and Business Units are achieved. MBO1/1/99 1/99 4 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN CORPORATE PLAN Example of Annual Payment with all components at 100% of goals. Annual Base Earnings = $50,000 MBO Level = 20% Target MBO = $7,000 Individual Retention = $3,000 Total Annual MBO = $10,000 Assume 100% of Goals at year end o Plan -- Glenayre Technologies, Inc. Management By Objective Plan (MBO) o Plan Year -- January 1 through December 31. o Targeted Performance -- The Company Performance Target and Business Sector Performance Target as approved by the Board of Directors. Stretch targets are established by the President and Chief Executive Officer and Chief Financial Officer and approved by the Board of Directors. Targeted Performance comprises 70% of the Participant's Target MBO Bonus. MBO 1/1/99 1/99 5 EX-10 5 EXHIBIT 10.4 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN EXHIBIT 10.4 The Glenayre Technologies, Inc. Management By Objective Plan was created to motivate and provide incentive to the key managers of Glenayre Technologies, Inc. and its wholly-owned subsidiaries around the world and to maximize profits. The plan is based on the Targeted Performance of the Company and each Business Segment and on the Participant's Individual Retention component. Your MBO Level is a percentage of your Annual Base Earnings approved each year by the Chief Executive Officer, and/or Sr. Vice President, Human Resources, as applicable. In addition, Executive Officer MBO levels are approved each year by the Board of Directors. Your Target MBO Bonus is comprised of three components: Business Segment Performance, Company Performance and Individual Component. You can achieve up to 200% of your Target MBO Bonus if your Business Segment and the Company achieve certain earnings targets. Target MBO Bonus : This is your Annual Base Earnings X your MBO Level at 100% of target for each component. Example: If your Annual Base Earnings is $50,000 and your MBO Level is 20%, your Target MBO Bonus would be as follows: Target MBO Bonus = $10,000 (Annual Base Earnings X Target MBO Bonus ($50,000 X .2)) Target MBO Bonus $10,000 Individual 30% $3,000 (Target MBO Bonus X Individual % ( $10,000 X .3) Business Segment 50% $5,000 (Target MBO Bonus X Segment % ($10,000 X .5) Company 20% $2,000 (Target MBO Bonus X Company % ($10,000 X .2) Note: There are additional examples following the Individual Retention Component section that illustrate potential MBO bonus payments at various levels of performance for each component. BUSINESS SEGMENT PERFORMANCE - ---------------------------- Business Segment Performance Component = 50% of Target MBO Bonus (except for Participants in the Corporate MBO Bonus Plan where it is not applicable). Business Segment Performance is based on the Business Segment's Income from Operations, which is defined in the Definitions section of this document. If a Participant transfers from one Business Segment to another, the annual MBO bonus will be calculated based upon which Segment he or she was in for the majority of the plan period. (Majority is defined as greater than 1/2 of the period.) Annual Business Segment Performance targets are established in support of the Company's business plan. MBO 1/1/99 1/99 1 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN If actual annual Business Segment Performance is below the Plan's Minimum Target, no bonus will be paid for this component of the plan. If the actual annual Business Segment Performance meets Compensation Plan Minimum Target, an MBO payment will be made proportionate to Business Segment Performance (actual / target) up to the maximum Compensation Plan Stretch Target of the Targeted Earnings Performance. The Business Segment MBO bonus payment is independent of the Company Performance Bonus. Example: Annual Business Segment Target Bonus = $5,000 ( Annual Base Earnings X Target MBO Bonus X Business Segment Performance Portion ($50,000 X 20% X 50%)). If the actual performance for your Business Segment is proportionate to 110% of your Target MBO Bonus, as a Participant, you will receive 110% of your target Business Segment Performance bonus opportunity. EXAMPLE: Actual % of Target Target MBO Actual MBO MBO Bonus Bonus Bonus Performance above min. 75% $5,000 $3,750 Performance at target 100% $5,000 $5,000 Performance above target 110% $5,000 $5,500 COMPANY PERFORMANCE - ------------------- Company Performance Component = 20% of Target MBO Bonus (except for Participants in the Corporate MBO Bonus Plan, where it comprises 70% of Target MBO Bonus). Company Performance is based on Income from Operations, which is defined in the Definitions section of this document. Annual Company Performance targets are established in support of the Company's business plan. If the actual annual Company Performance is below the Compensation Plan Minimum Target, no bonus will be paid for this component of the plan. If the actual annual Company Performance meets Compensation Plan Minimum Target, an MBO payment will be made proportionate to Company Performance (actual /target) up to the maximum Compensation Plan Stretch Target of the Targeted Earnings Performance. The Company MBO bonus payment is independent of the Business Segment Performance Bonus. MBO 1/1/99 1/99 2 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN Example: Annual Company Target Bonus = $2,000 ( Annual Base Earnings X Target MBO Bonus X Company Performance Portion ( $50,000 X 20% X 20%)). Total Company Performance Portion at 100% of Target = $2,000 If the actual Company performance is proportionate to 110% of your Target MBO Bonus, as a Participant, you will receive 110% of your target Company Performance bonus opportunitty. EXAMPLE: Actual % Target Target MBO Actual MBO MBO Bonus Bonus Bonus Performance at Minimum 70% $2,000 $1,400 Performance at target 100% $2,000 $2,000 Performance above target 110% $2,000 $2,200 INDIVIDUAL RETENTION COMPONENT - ------------------------------- Individual Retention Component = 30% At the end of each plan year an individual retention bonus will be paid to all employees who are actively employed on December 31 and have satisfactory performance (i.e. not on a performance improvement plan). The Individual Retention component of the Plan is paid annually as part of the annual MBO Bonus Plan payment. This MBO bonus payment is independent of the Company Performance bonus unless the Company Performance exceeds the target, in which case the Individual Retention bonus will be paid proportionate to Company Performance. Example: Individual Retention Component Formula: Individual Retention Bonus = Annual Base Earnings X Target MBO Bonus X 30% ( Individual Retention Portion) X Company Performance (if actual Company Performance exceeds target)($50,000 X .2 X .3) Individual Retention Component Target Bonus = $3,000 Example: Company Performance Actual % of Target MBO Bonus Amount MBO Bonus 60% 100% $3,000 100% 100% $3,000 125% 125% $3,750 Examples of Annual MBO Bonus Payment at different Performance Levels Annual Earnings $50,000 MBO Level 20% MBO 1/1/99 1/99 3 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN Target MBO Bonus $10,000 Component Weights Target MBO Bonus Company 20% $2,000 Business Segment 50% $5,000 Individual 30% $3,000 Example #1 Actual % of Target MBO Bonus Amount MBO Bonus Individual 100% $3,000 Business Segment 60% $0 Company 80% $1,600 Total $4,600 Example #2 Actual % of Target MBO Bonus Amount MBO Bonus Individual 100% $3,000 Business Segment 105% $5,250 Company 100% $2,000 Total $10,250 Example #3 Actual % of Target MBO Bonus Amount MBO Bonus Individual 100% $3,000 Business Segment 100% $5,000 Company 65% $0 Total $8,000 PAYMENTS - ---------- 1. Annual bonus payment paid within 45 days of the completion of the year end audit. 2. All MBO payments are made through special payroll check or direct deposit with all applicable taxes and contributions withheld. Participation or eligibility to participate in the Plan is not a guarantee of employment or of continued payment. The Plan is subject to change or revocation at the discretion of the Board of Directors or the Chief Executive Officer of the Company. MBO 1/1/99 1/99 4 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN DEFINITIONS - ------------ o Company -- Glenayre Technologies, Inc. and its subsidiaries. o Currency Exchange Rate -- Average internal exchange rate for the Plan Year. o Income From Operations - Net Sales less Cost of Goods Sold and Operating Expenses including Depreciation/Amortization and Allocated Costs. Income From Operations does not include the impact of interest income or expense, exchange gain/(loss), other income/(loss), income taxes, investment tax credits, real estate transaction costs, or business segment disposal or acquisition costs. o Eligibility Requirements-- a. Annual MBO bonus payment - Participants who remain employed for the Full Plan Year. c. Participants must maintain a satisfactory level of performance through the Plan period. Periods of paid or unpaid leave of absence in excess of 30 days per year will not be considered for MBO eligibility. Annual Base Earnings will be prorated according to the length of disability. Payment of earned MBO bonuses will be paid upon return to work from a leave of absence. o Annual Base Earnings - Total base salary earned during the plan year, (prior to deductions for contributions to the 401(k) Plan, for health care coverage, to flexible spending accounts, or to any other Company sponsored pre-tax or deferred compensation plans) received by a Participant from the Company while participating in the Plan. o Individual Retention Component - Paid based solely on active employment on 12/31 and satisfactory performance. o Participant -- A full time, regular employee of the Company who is approved by the Chief Executive Officer to be a Participant in the Plan. Plan participation will be prorated based on the length of time a Participant is eligible. No employee of the Company may participate in more than one incentive, bonus or commission plan. o Participant's MBO Level -- The percentage of pay that the Participant could receive from the Plan if the targeted Company Performance, Business Segment Performance and Individual Retention requirements are achieved at the 100% level. If the Company exceeds its targeted performance goal, the bonus amount will increase proportionately. The MBO Level for each Participant is recommended to and approved by the Chief Executive Officer and/or Sr. Vice President, Human Resources, as applicable. In addition, Executive Officer MBO levels are approved each year by the Board of Directors. o Payment Date -- Forty-five (45) days after the audit completion by the independent auditors and Board of Directors approval of the Company's fiscal year-end financial statements. o Payout Percentage -- Percentage of Target MBO Bonus for Company and/or Business Segment achieving specific earnings targets. Participants are eligible to receive 70% of their bonus eligibility when the Compensation Plan Minimum Targets for the Company MBO 1/1/99 1/99 5 GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN BUSINESS SEGMENT PLAN and the Business Segments are achieved, and up to 200% of eligibility if Compensation Plan Stretch Targets for the Company and Business Segments are achieved. Example of Annual Payment with all components at 100% of goals. Annual Base Earnings = $50,000 MBO Level = 20% Target MBO = $7,000 Individual Retention = $3,000 Total Annual MBO = $10,000 Assume 100% of Goals at year end o Plan -- Glenayre Technologies, Inc. Management By Objective Plan (MBO) o Plan Year -- January 1 through December 31. o Targeted Performance -- The Company Performance Target and Business Segment Performance Target as approved by the Board of Directors. Stretch targets are established by the President and Chief Executive Officer and Chief Financial Officer and approved by the Board of Directors. Targeted Performance comprises 70% of the Participant's Target MBO Bonus. MBO 1/1/99 1/99 6 EX-10 6 EXHIBIT 10.5 GLENAYRE WESTERN MULTIPLEX 1999 OPERATING BONUS PLAN EXHIBIT 10.5 Purpose - -------- The Glenayre Western Multiplex 1999 Operating Bonus Plan (the "Plan") is intended to motivate employees to maximize the profits of Glenayre Western Multiplex. Calculation of Bonus - -------------------- You will be entitled to receive a cash bonus for 1999 based on your annual base salary and Income of Glenayre Western Multiplex for the 1st, 2nd, 3rd and 4th quarters of 1999. At the Target Income level, your total 1999 bonus will equal: Your Bonus Percentage TIMES your Annual Base Salary For example, if your annual base salary is $30,000 and your Bonus Percentage is 6%, you would be paid a 1999 bonus of $1,800 if Glenayre Western Multiplex achieves the total Target Income for the 1st, 2nd, 3rd and 4th quarters of 1999. If Glenayre Western Multiplex's actual Income is equal or more than the Minimum Income but less than the Target Income, your bonus would be decreased proportionately. If Glenayre Western Multiplex achieves only the Minimum Income level, you would receive 70% of the bonus at the Target Income level. No bonus will be paid if Glenayre Western Multiplex does not achieve at least the Minimum Income. Likewise, if the actual Income is more than the Target Income, your bonus will be increased proportionately (up to the Maximum Income). If Glenayre Western Multiplex achieves the Maximum Income level, you would receive 200% of the bonus at the Target Income level. Income targets (as well as cumulative Income targets) have been set for Glenayre Western Multiplex for the 1st, 2nd, 3rd and 4th quarters. You would receive a bonus for a particular quarter if Glenayre Western Multiplex achieves either the quarterly Target Income or the cumulative Target Income for that quarter. For purposes of this Plan, "Income" is defined as net sales LESS cost of sales, research & development and selling, general and administrative expenses, EXCLUDING deductions for interest expense and income tax and EXCLUDING interest income and other income not from operations (all as determined under Glenayre's normal accounting methods). GLENAYRE WESTERN MULTIPLEX 1999 OPERATING BONUS PLAN Page 2 Payment of Bonus - ---------------- Bonus payments will be made quarterly based on the achievement of the Income targets. You must be a Glenayre Western Multiplex employee on the last day of the applicable quarter to receive a bonus payment for that quarter. All payments are made through a special payroll check with all applicable taxes and contributions withheld. Payment will be made within 45 days after the first, second and third quarters and after the completion of the Glenayre 1999 financial statements for the fourth quarter. Miscellaneous - -------------- You must be a full time regular employee of Glenayre Western Multiplex to participate in this Plan. No employee of Glenayre Western Multiplex who participates in Glenayre Western Multiplex's sales plan is eligible to participate in the Plan also. Participation in the Plan is not a guarantee of employment. The Plan is subject to change or revocation at the discretion of the Board of Directors or the Chief Executive Officer of Glenayre Technologies, Inc. In the event that Glenayre Western Multiplex is sold during 1999, the Plan will be terminated and you will be paid the bonus you earn through the closing date of the sale based on Glenayre Western Multiplex's pro rata Income through that date. EX-15 7 EXHIBIT 15 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- EXHIBIT 15 To the Board of Directors and Stockholders of Glenayre Technologies, Inc. Charlotte, North Carolina We are aware of the incorporation by reference in the Registration Statement Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number 33-88818 on Form S-4, dated March 24, 1995 (amended by Post-Effective Amendment Number 1 on Form S-8 dated March 25, 1996), Registration Statement Number 333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number 333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement Number 333-39717 on Form S-8 dated November 7, 1997 and Registration Statement Number 333-56375 on Form S-8 dated June 9, 1998 of our report dated April 22, 1999 relating to the unaudited condensed consolidated interim financial statements of Glenayre Technologies, Inc. and subsidiaries which are included in its Form 10-Q for the quarter ended March 31, 1999. Ernst & Young LLP Charlotte, North Carolina April 22, 1999 EX-27 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 23,596 0 200,635 0 39,478 229,519 107,854 0 532,310 64,404 0 0 0 1,243 459,508 532,310 70,021 70,021 38,081 38,081 41,852 0 215 (7,487) (5,890) (1,597) 0 0 0 (1,597) (0.03) (0.03)
EX-99 9 EXHIBIT 99 EXHIBIT 99 CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Glenayre Technologies, Inc. ("Glenayre" or the "Company"), from time to time, makes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the expectations of management of the Company at the time such statements are made. Glenayre is filing this cautionary statement to identify important factors that could cause Glenayre's actual results to differ materially from those in any forward-looking statements made by or on behalf of Glenayre. POTENTIAL MARKET CHANGES RESULTING FROM RAPID TECHNOLOGICAL ADVANCES Glenayre's business is primarily focused on paging and is subject to competition from alternative forms of communication. In addition, Glenayre's business is also focused on the wireless telecommunications industry. The wireless telecommunications industry is characterized by rapid technological change, including digital cellular telephone systems, which compete, directly or indirectly, with Glenayre's products or the services provided by the Company's customers. While the introduction of more advanced forms of telecommunication may provide opportunities to Glenayre for the development of new products, these advanced forms of telecommunication may reduce the demand for pagers and thus the type of paging systems and related software designed and sold by Glenayre. ACCEPTANCE OF TWO-WAY PAGING COMMUNICATION PRODUCTS While certain of Glenayre's customers have installed Glenayre's products used to provide two-way communications services, these services are available only in certain areas. The growth and installation of two-way paging systems by Glenayre's paging service provider customers may be delayed depending upon delays in installation, difficulties in initial operation of two-way systems, the availability of financing for its paging service provider customers and the market acceptance of two-way paging by the customers of such paging service providers. The development of the two-way market will also be affected by other technological changes in wireless messaging services, regulatory developments and general economic conditions. COMPETITION The Company currently faces competition from a number of other equipment manufacturers, certain of which are larger and have significantly greater resources than the Company. The Company also faces indirect competition from alternative wireless telecommunications technologies, including cellular telephone services, mobile satellite systems, specialized and private mobile radio systems, digital cellular telephone systems and broadband personal communications services. Although these technologies are generally higher priced than traditional paging services, technological improvements could result in increased capacity and efficiency for wireless two-way communication and could result in increased competition for the Company. VARIABILITY OF QUARTERLY RESULTS The Company's financial results in any single quarter are highly dependent upon the timing and size of customer orders and the shipment of products for large orders. Large orders from customers can account for a significant portion of products shipped in any quarter. Sales to a single customer, which has a significant United States market presence, totaled approximately 10%, 11% and 15% of 1998, 1997 and 1996 fiscal year net sales, respectively. An additional US customer accounted for 12% of net sales in 1998. Beyond 1998, the customers with whom the Company does the largest amount of business are expected to vary from year to year as a result of the timing for development and expansion of customers' paging systems, the expansion into international markets and changes in the proportion of revenues generated by the products and services of Glenayre's newly acquired companies. Furthermore, if a customer delays or accelerates its delivery requirements or a product's completion is delayed or accelerated, revenues expected in a given quarter may be deferred or accelerated into subsequent or earlier quarters. Therefore, annual financial results are more indicative of the Company's performance than quarterly results, and results of operations in any quarterly period may not be indicative of results likely to be realized in the following quarterly periods. VOLATILITY OF STOCK PRICE The market price of Glenayre Common Stock is volatile. The market price of Glenayre Common Stock could be subject to significant fluctuations in response to variations in Glenayre's quarterly operating results and other factors such as announcements of technological developments or new products by Glenayre, developments in Glenayre's relationships with its customers, technological advances by existing and new competitors, general market conditions in the industry and changes in government regulations. In addition, in recent years conditions in the stock market in general and shares of technology companies in particular have experienced significant price and volume fluctuations which have often been unrelated to the operating performance of these specific companies. LIMITS ON PROTECTION OF PROPRIETARY TECHNOLOGY Glenayre owns or licenses numerous patents used in its operations. Glenayre believes that while these patents are useful to Glenayre, they are not critical or valuable on an individual basis. The collective value of the intellectual property of Glenayre is comprised of its patents, blueprints, specifications, technical processes and cumulative employee knowledge. Although Glenayre attempts to protect its proprietary technology through a combination of trade secrets, patent law, nondisclosure agreements and technical measures, such protection may not preclude competitors from developing products with features similar to Glenayre's products. The laws of certain foreign countries in which Glenayre sells or may sell its products, including The Republic of Korea, The People's Republic of China, Saudi Arabia, Thailand, Dubai, India and Brazil, do not protect Glenayre's proprietary rights in the products to the same extent as do the laws of the United States. POTENTIAL CHANGES IN GOVERNMENT REGULATION Many of Glenayre's products operate on radio frequencies. Radio frequency transmissions and emissions, and certain equipment used in connection therewith, are regulated in the United States, Canada and internationally. Regulatory approvals generally must be obtained by Glenayre in connection with the manufacture and sale of its products, and by Glenayre's paging service provider and other wireless customers to operate Glenayre's products. The enactment by federal, state, local or international governments of new laws or regulations or a change in the interpretation of existing regulations could affect the market for Glenayre's products. Although recent deregulation of international telecommunications industries along with recent radio frequency spectrum allocations made by the Federal Communications Commission ("FCC") in the United States have increased the demand for Glenayre's products by providing users of those products with opportunities to establish new paging and other wireless personal communications services, the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded personal communications services may not continue and future regulatory changes may not have a positive impact on Glenayre. The issuance of paging system licenses stimulates demand for the Company's products, however, delays in the issuance of licenses may adversely affect sales and the timing of sales of the Company's products. FINANCING CUSTOMER PURCHASES FOR DEVELOPMENT OF THE TWO-WAY COMMUNICATIONS MARKET The Company finances customer purchases of its products for development of the two-way communications market for the build-out of two-way networks by its customers who acquired two-way licenses auctioned by the FCC (the "Two-Way License Holders"). Many of the Two-Way License Holders with whom the Company has or expects to enter into customer financing arrangements have limited operating histories, significant debt related to the acquisition of their two-way licenses and start-up expenses, negative cash flows from operations and some have never generated an operating profit. The Company generally retains a security interest in equipment for which it provides financing. INTERNATIONAL BUSINESS RISKS Approximately 37% of 1998 fiscal year net sales were generated in markets outside of the United States. International sales are subject to the customary risks associated with international transactions, including political risks, local laws and taxes, the potential imposition of trade or currency exchange restrictions, tariff increases, transportation delays, difficulties or delays in collecting accounts receivable, exchange rate fluctuations and the effects of prolonged currency destabilization in major international markets. Although a substantial portion of the international sales of the Company's products and services for fiscal year 1998 was negotiated in United States dollars, the Company may not be able to maintain such a high percentage of United States dollar denominated international sales. The Company seeks to mitigate its currency exchange fluctuation risk by entering into currency hedging transactions. The Company also acts to mitigate certain risks associated with international transactions through the purchase of political risk insurance and the use of letters of credit. -----END PRIVACY-ENHANCED MESSAGE-----