-----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, NOOb4t2UMD71BBZ7p7m6A7lZ0VvXc5O9CQ9SLZagvQTa1ai7+LadOayk4hZmuvq2 B4wW77C4VFXI5OB+aRcolg== 0000950168-97-001041.txt : 19970424 0000950168-97-001041.hdr.sgml : 19970424 ACCESSION NUMBER: 0000950168-97-001041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970423 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-15761 FILM NUMBER: 97585701 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 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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ -------------- Commission File Number 0-15761 GLENAYRE TECHNOLOGIES, INC. ----------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 98-0085742 ------------------------------------ -------------------------- (State or Other Jurisdiction of (I.R.S. Employer 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 22, 1997 was 60,197,344 shares. Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------ INDEX Part I - Financial Information: Item 1. Financial Statements
Page Independent Accountant's Review Report......................................3 Condensed Consolidated Balance Sheets as of March 31, 1997 (Unaudited) and December 31, 1996.......................4 Condensed Consolidated Statements of Income for the Three months ended March 31, 1997 and 1996 (Unaudited).................5 Condensed Consolidated Statement of Stockholders' Equity For the three months ended March 31, 1997 (Unaudited).................6 Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 1997 and 1996 (Unaudited).................7 Notes to Condensed Consolidated Financial Statements (Unaudited)............8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................11 Part II - Other Information: Item 6. Exhibits and Reports on Forms 8-K..........................................15
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, 1997, and the related condensed consolidated statements of income, the condensed consolidated statement of stockholders' equity and the condensed consolidated statements of cash flows for the three-month periods ended March 31, 1997 and 1996. 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, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 28, 1997, 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, 1996, 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 17, 1997 3 Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
March 31, 1997 December 31, 1996 (Unaudited) ASSETS Current Assets: Cash and cash equivalents.................................... $ 82,032 $53,785 Short-term investments....................................... 48,577 78,016 Accounts receivable, net..................................... 126,455 119,851 Trade notes receivable, current.............................. 11,230 10,236 Inventories ................................................. 51,317 50,460 Deferred income taxes........................................ 15,931 19,291 Prepaid expenses and other current assets.................... 7,383 7,957 ------- ------- Total Current Assets..................................... 342,925 339,596 Trade notes receivable............................................ 22,748 13,085 Property, plant and equipment, net................................. 83,119 80,501 Goodwill........................................................... 85,016 76,818 Deferred income taxes............................................. 8,581 10,372 Other assets...................................................... 1,473 838 --------- --------- TOTAL ASSETS...................................................... $543,862 $521,210 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................. $ 17,866 $ 19,614 Accrued liabilities.......................................... 45,212 40,781 Other current liabilities.................................... 240 170 ------ ------- Total Current Liabilities................................ 63,318 60,565 Other liabilities................................................. 4,587 4,784 Stockholders' Equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding.......................... --- --- Common stock, $.02 par value; authorized 200,000,000 shares; outstanding: March 31, 1997 - 60,197,344 shares; December 31, 1996 - 59,868,202 shares..................... 1,203 1,197 Contributed capital.......................................... 308,656 301,771 Retained earnings............................................ 166,098 152,893 --------- -------- Total stockholders' equity................................ 475,957 455,861 --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $543,862 $521,210 ========= ========
Note: The balance sheet at December 31, 1996 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 INCOME (dollars in thousands, except per share amounts) (unaudited)
Three Months Ended March 31, ------------------------------------- 1997 1996 ------------------------------------- NET SALES ........................................................ $105,771 $89,378 -------- ------- COSTS AND EXPENSES: Costs of sales............................................... 50,550 39,767 Selling, general and administrative expense............... 23,444 18,014 Research and development expense............................. 8,649 6,353 Depreciation and amortization expense........................ 4,535 3,096 -------- ------- Total Costs and Expenses................................. 87,178 67,230 -------- ------- INCOME FROM OPERATIONS............................................ 18,593 22,148 -------- ------- OTHER INCOME (EXPENSES): Interest income.............................................. 2,161 2,279 Interest expense............................................. (14) (53) Other, net................................................... 71 20 -------- ------- Total Other Income (Expenses), net....................... 2,218 2,246 -------- ------- INCOME BEFORE INCOME TAXES........................................ 20,811 24,394 PROVISION FOR INCOME TAXES........................................ 7,365 7,318 ------- ------- NET INCOME........................................................ $13,446 $17,076 ======== ======= NET INCOME PER COMMON SHARE - PRIMARY............................. $ .22 $ .27 ======== ======= NET INCOME PER COMMON SHARE - FULLY DILUTED...................... $ .22 $ .27 ========= ========
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, 1996.......... 59,868 $1,197 $301,771 $152,893 $455,861 Net Income............................ 13,446 13,446 Stock options exercised............... 16 --- 88 88 Shares issued in connection with business acquisition............... 313 6 6,535 6,541 Utilization of net operating loss carryforwards...................... 241 (241) --- Tax benefit of stock options exercised.......................... 21 21 ------- ------ ------- ------- ------ Balances, March 31, 1997........... 60,197 $1,203 $308,656 $166,098 $475,957 ======== ======= ======= ======= ========
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, --------------------------- 1997 1996 ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES .................. $ 6,384 $ 19,416 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ............ (5,639) (4,269) Proceeds from sale of equipment ....................... 24 19 Maturities of short-term investments .................. 53,661 29,394 Purchases of short-term investments ................... (24,223) (39,378) Payments for business acquisition, net of cash acquired (1,122) -- ------- -------- Net cash provided by (used in) investing activities 22,701 (14,234) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in other liabilities .......................... (926) (44) Issuance of common stock .............................. 88 5,360 Common stock repurchases .............................. -- (2,429) ------- -------- Net cash provided by (used in) financing activities (838) 2,887 -------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 28,247 8,069 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................. 53,785 70,600 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 82,032 $ 78,669 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest .............................................. $ 20 $ 41 Income taxes .......................................... 1,072 2,337
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES: On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with this acquisition the Company paid $1,194,000 (including $194,000 in acquisition costs) and issued common stock valued at $6,541,000 for assets with a fair value of $11,853,000 and assumed liabilities of $4,118,000. See notes to condensed consolidated financial statements 7 Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands of dollars) (unaudited) Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------ 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, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. 1. BUSINESS ACQUISITION On January 9, 1997, the Company completed the acquisition of CNET, Inc. ("CNET"), located in Plano, Texas. CNET develops and provides integrated operational support systems, network management, traffic analysis, and radio frequency propagation software products and services for the global wireless communications industry. CNET licenses its products to cellular, paging and personal communications services operators and wireless equipment manufacturers worldwide. The purchase price of $7.7 million consisted of 369,983 shares of the Company's common stock (including 56,620 shares issuable upon exercise of stock options) valued at $6.5 million, $1.0 million in cash and $194,000 in acquisition costs. The acquisition will be accounted for as a purchase business combination and the purchase price was assigned to the net assets acquired based on the fair values of such assets and liabilities at the date of the acquisition, as follows: Current assets.......................... $1,752 Equipment............................... 412 Goodwill................................ 9,343 Other non-current assets................ 346 Liabilities assumed..................... (4,118) -------- $7,735 ======== 2. INVENTORIES March 31, December 31, Inventories consist of: 1997 1996 ------------------ ----------------- Raw materials................. $25,230 $25,656 Work-in-process: Uncompleted contracts...... 4,429 3,757 Other...................... 7,079 7,603 Finished goods................ 14,579 13,444 ------- ------- $51,317 $50,460 ======= ======= 8 Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------- 3. GOODWILL Goodwill is shown net of accumulated amortization of $13.5 million and $12.4 million at March 31, 1997 and December 31, 1996, respectively. 4. 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, -------------------------- 1997 1996 Income tax provision at U.S. statutory rate..... $7,284 $8,538 Reduction in valuation allowance................ (241) (1,842) Foreign taxes at rates other than U.S. statutory rate............................... (560) (238) State taxes (net of federal benefit)............ 479 793 U.S. Research and Experimentation Credits....... --- 300 Non-deductible goodwill amortization.......... . 403 (233) ------ ------ Income tax provision............................ $7,365 $7,318 ====== ======= Subsequent to the quasi-reorganization completed on February 1, 1988, as described in Note 5, the benefits derived from the utilization of tax net operating loss carryforwards are reported in the statement of operations in the year such tax benefits are realized and then reclassified from retained earnings to contributed capital. The Company adopted the accounting method for utilization of these tax net operating loss carryforwards outlined above on February 1, 1988. On September 28, 1989, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the SEC staff's position with respect to this accounting treatment. According to the SEC staff's interpretation of Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes," contained in SAB 86, realized tax benefits should be reported as a direct addition to contributed capital. Subsequently, the Company consulted with the SEC staff and determined that the SEC staff would not object to the accounting method outlined above for companies which had adopted such accounting methods prior to the issuance of SAB 86. If the original guidance in SAB 86 had been applied, the Company's net income for the three-months ended March 31, 1997 and 1996 would have been reduced by the amount of the benefit from utilization of tax net operating loss carryforwards. Such reduction in net income would have been $241,000 (less than $.01 per share) and $1.8 million ($.03 per share) for the three months ended March 31, 1997 and 1996, respectively. The Company believes that it is more likely than not that the net deferred tax asset recorded at March 31, 1997 will be fully realized. 9 Glenayre Technologies, Inc. and Subsidiaries - ---------------------------------------------------------------------------- 5. STOCKHOLDERS' EQUITY (a) Quasi-Reorganization On February 1, 1988, the Company completed a quasi-reorganization. After determining that the Company's balance sheet reflected approximate fair value on that date and that revaluation was not necessary, the accumulated deficit and the cumulative translation adjustment were adjusted to zero by reclassifying them to contributed capital. A new retained earnings account was established as of February 1, 1988. (b) Income per Common Share Primary income per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding plus the shares that would be outstanding assuming exercise of dilutive stock options which are considered to be common stock equivalents. The number of common shares that would be issued from the exercise of stock options has been reduced by the number of common shares that could be purchased from the proceeds at the average market price of the Company's stock during the periods such options were outstanding. The number of shares used to compute primary per share data for the three-month periods ended March 31, 1997 and 1996 was 61,903,081 and 63,727,518, respectively. For purposes of the fully diluted income per share computations, the number of shares that could be issued from the exercise of stock options outstanding at the end of the period has been reduced by the number of shares which could have been purchased from the proceeds at the higher of the market price of the Company's stock on March 31, 1997 and 1996 or the average market prices during the periods such options were outstanding. For those options exercised during the period, the computation for the period prior to exercise is based on the market price when the option was exercised. The number of shares used to compute fully diluted per share data for the three-month periods ended March 31, 1997 and 1996 was 61,901,683 and 63,734,640 respectively. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," ("FASB 128") which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase of less than $.01 to primary earnings per share for the three months ended March 31, 1997 and an increase in primary earnings per share for the three months ended March 31, 1996 of $.01 per share. The impact of FASB 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. (c) Stock Options Subsequent to March 31, 1997, the Plan Administration Committee of the Board of Directors of Glenayre repriced substantially all outstanding stock options held by current employees of Glenayre with exercise prices in excess of $9 per share to the closing market price on the repricing date. This repricing covered outstanding stock options for approximately 3 million shares of the Common Stock of Glenayre. 10 Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures, markets and services telecommunications equipment and software used in wireless personal communications systems throughout the world. The Company's product families are grouped in either (i) Wireless Messaging (including products and services sold into the paging and Narrowband Personal Communication Services ("NPCS") marketplace and the Company's major service and support groups); (ii) Integrated Network (including the Company's MVP(R) Modular Voice Processing system and the network management systems of its newly acquired subsidiary, CNET, Inc.); and (iii) Wireless Interconnect (including products for microwave communications systems and rural radio.) On January 9, 1997 the Company completed the acquisition of CNET, Inc. ("CNET"). The operating results of CNET are included in the operating results of the Company since the acquisition date. The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related Notes and the Cautionary Statement included as Exhibit 99. THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1996 NET SALES The Company's net sales for the three months ended March 31, 1997 increased to $106 million from net sales for the three months ended March 31, 1996 of $89 million, an increase of $16 million, or 18%. The increase in sales was primarily due to increased delivery of the Company's MVP systems and microwave radio products. Net sales of the Wireless Messaging, Integrated Network and Wireless Interconnect groups were approximately $84 million, $13 million and $9 million, respectively, for the three months ended March 31, 1997 compared to approximately $80 million, $4 million, and $5 million, respectively, for the three months ended March 31, 1996. Sales to a single customer, Paging Network, Inc. ("PageNet"), totaled approximately 14% and 17% of sales for the three months ended March 31, 1997 and 1996, respectively. PageNet issued a press release on April 17, 1997 which announced, among other things, that Motorola, Inc. had been selected as PageNet's preferred infrastructure supplier. The Company is unable to determine the impact this development will have on future operating results. 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. The Company continues to anticipate continued growth in 1997 sales of its paging products to the international market. However, due to the current constrained financing market for the U.S. paging industry and existing capacity of paging providers to serve their subscribers, the Company expects 1997 shipments to the domestic market of its one-way paging products to be below 1996 levels. These are forward-looking statements and the Company's actual results could differ materially due to rapid technological advances in the wireless telecommunications industry, delays in the introduction and market acceptance of NPCS products and systems, competition, limits on protection of Glenayre's proprietary technology, changes in governmental regulation and international business risks. 11 GROSS PROFIT Gross profit increased to $55 million, or 52% of net sales, for the three months ended March 31, 1997, from $50 million, or 56% of net sales, for the three months ended March 31, 1996. The decrease in gross margin percentage is primarily the result of: (i) a change in the product mix which included a greater portion of sales of products with lower margins including increased revenue from international turn-key projects; and (ii) additional customer support costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense increased to $23 million, or 22% of net sales, for the three months ended March 31, 1997, from $18 million, or 20% of net sales, for the three months ended March 31, 1996. The increase in expense is primarily due to: (i) the addition of sales, marketing, and administrative personnel and other expenses associated with the Company's higher sales volume; (ii) the inclusion of operating expenses incurred by CNET only since the acquisition date in January 1997; and (iii) general increases in personnel costs and other purchased services. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased to $4.5 million or 4% of net sales, for the three months ended March 31, 1997 from $3.1 million or 3% of net sales for the three months ended March 31, 1996. The increase is primarily attributable to: (i) the significant increase in purchases of equipment during 1996 and (ii) the amortization of goodwill related to the acquisition of CNET in January 1997. RESEARCH AND DEVELOPMENT EXPENSE Research and development costs increased to $8.6 million, or 8% of net sales, for the three months ended March 31, 1997, from $6.4 million, or 7% of net sales, for the three months ended March 31, 1996, an increase of $2.3 million, or 36%. The Company relies on its research and development programs related to new products and the improvement of existing products for the continued growth of its business. The increase in expense is primarily a result of additional expenditures in manpower and materials for these programs and the inclusion of expenditures incurred by CNET only since the acquisition date in January 1997. Research and development costs are expensed as incurred. INTEREST INCOME, NET The Company realized net interest income of $2.1 million for the three months ended March 31, 1997 compared to net interest income realized of $2.2 million for the three months ended March 31, 1996. Higher average balances in cash and cash equivalents, short-term investments and notes receivables were offset by lower average interest rates experienced on cash equivalents and short-term investments in the 1997 period compared to 1996. INCOME TAXES The difference between the combined U.S. federal and state statutory tax rate of approximately 40% and the effective tax rate of 35.4% for the three months ended March 31, 1997 and 30.0% for the three months ended March 31, 1996 is primarily the result of: (i) the utilization of the Company's net 12 operating losses; (ii) lower tax rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and (iii) the application of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS 109"), in computing the Company's tax provision. The difference between the effective tax rate of 35.4% in 1997 and 30.0% in 1996 is primarily the result of a variance between the 1997 and 1996 adjustments for realization of tax benefits of net operating loss carryforwards for financial statement purposes in accordance with SFAS 109 primarily due to revisions during each period to the estimated future taxable income during the Company's loss carryforward period. See Note 4 to the Condensed Consolidated Financial Statements. FINANCIAL CONDITION AND LIQUIDITY The Company's working capital at March 31, 1997 was $280 million, including cash and cash equivalents and short-term investments of $131 million. Accrued liabilities at March 31, 1997 increased from December 31, 1996 primarily as a result of increased operating activities and timing differences. Notes receivables at March 31, 1997 increased from December 31, 1996 due to customer requests for financing in the normal course of business primarily for purchases of the Company's one-way paging and NPCS products. Goodwill at March 31, 1997 increased from December 31, 1996 as a result of the CNET acquisition in January 1997. During the three months ended March 31, 1997, the Company spent $5.6 million for capital expenditures. These expenditures were necessary in order to provide the equipment to meet the growth of the business. The Company's cash and cash equivalents are placed in short-term investments consisting of high-grade commercial paper, bank certificates of deposit, U.S. Treasury bills and notes, and repurchase agreements backed by U.S. Government securities with original maturities of three months or less. The Company's short-term investments are comprised of identical types of investments with the exception that their original maturities are greater than three months, but do not exceed one year. The Company expects to use its cash, cash equivalents, and short-term investments for working capital and other general corporate purposes, including the expansion and development of its existing products and markets, and the possible expansion into complementary businesses. In September 1996, the Board of Directors authorized the purchase of 2,500,000 shares of the Company's common stock. As of March 31, 1997, no shares had been repurchased under the 1996 authorization. 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, 1997, the Company had agreements to finance and arrange financing for approximately $57 million of paging and voice mail products. Further, at March 31, 1997, the Company had committed, subject to customers meeting certain conditions and requirements, to finance approximately $65 million for similar systems. The Company cannot currently predict the extent to which these commitments will be utilized, since certain customers may be able to obtain more favorable terms using traditional financing sources. From time to time, the Company also arranges for third-party investors to assume a portion of its commitments. If exercised, the financing arrangements will be secured by the equipment sold by Glenayre. The Company believes that funds generated from continuing operations, together with its current cash reserves, will be sufficient to support its short-term and long-term liquidity requirements for current operations (including capital expenditures and stock repurchases). Company management believes that, if needed, it can establish appropriate borrowing arrangements with lending institutions. 13 FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's Form 10-K, Annual Report to Stockholders, Form 10-Q or any Form 8-K or any other written or oral statements made by or on behalf of the Company include forward-looking statements reflecting the Company's current views with respect to future events and financial performance. Although certain cautionary statements have been made in this Form 10-Q related to factors which may affect future operating results, a more detailed discussion of these factors is set forth in Exhibit 99 of this Form 10-Q. 14 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 Termination Agreement, dated March 18, 1997 between the Company and Kenneth C.Thompson. Exhibit 11 Computation of earnings per common share for the three-month periods ended March 31, 1997 and 1996. 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 for 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, 1997, the Company filed a Current Report on Form 8-K dated February 26, 1997. Under Item 5, the Company reported that it issued a press release which announced that a shareholder's derivative lawsuit had been filed against certain current and former members of its Board of Directors by one shareholder. 15 Glenayre Technologies, Inc. and Subsidiaries - ------------------------------------------------------------------------------- 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 and Chief Financial Officer (Principal Financial Officer) /s/ Billy C. Layton ------------------------------ Billy C. Layton Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) Date: April 23, 1997 EX-10 2 EXHIBIT 10 EXHIBIT 10 March 18, 1997 Dear Ken, This letter is written confirmation of our discussion regarding your resignation from your position as Executive Vice President Business Operations. We have mutually agreed to terminate your employment, effective no later than March 31, 1997 (the "Termination 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 Termination Date. 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 $10,000 on April 4, 1997. You will also receive severance benefits in the form of bi-weekly payments of $8,076.92 until March 31, 1998. The foregoing payments shall be made in accordance with Glenayre's payroll practices and shall be subject to all applicable withholding as an employee. During 12 month severance period, you agree to provide consulting and related services to Glenayre as may be reasonably requested from time to time by authorized representatives of Glenayre. You may also continue to make contributions to the 401(k) Pension Plan, in accordance with the terms of the plan document, during the severance period. 3. Benefits Following the Termination 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 April 7, 1997. Additionally, I will recommend that you also be permitted to exercise your options within two (2) years after March 31, 1997. If approved by the Plan Administration Committee, you will receive written confirmation of this accelerated vesting schedule and extended exercise period. b) After the Termination Date, should Glenayre achieve or exceed its minimum earnings target for Corporate performance based on the current Management By Objectives Plan, you will receive a pro-rata payment (25% of the 70% Corporate performance portion) for your three months of employment in 1997. c) After the Termination Date, and during the period of severance, you and your dependents will continue to be eligible to participate in Glenayre's medical plan at the current employee rates, which will be revised April 1997. Once the severance benefits cease, you may continue your individual and dependent coverage through COBRA at rates which are evaluated annually. d) After the Termination 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 Termination Date. If you breach this provision, you agree that, in addition to any rights and remedies which the Glenayre Companies may possess, and as liquidated damages, you will forfeit your right to receive any payments or benefits to be provided under Paragraphs 2 and 3 of this agreement. 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 Glenayre Technologies, Inc. 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 to consider the terms and conditions of this agreement; (ii) you have been advised to consult with an attorney before signing this agreement; (iii) the consideration provided to you in Paragraphs 2 and 3 above is consideration that you were not entitled to receive before signing this agreement; (iv) you will have 7 days from the date you sign this agreement and deliver it to me to revoke this agreement by notifying me of such revocation; and (v) this agreement shall not become effective or enforceable until after the aforesaid 7 day revocation period has expired. 6. Confidential Information. You agree that you will keep strictly 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 confidentiality provisions 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. Acknowledgment 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 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. 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 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/ G. Smith /s/ Ken Thompson - -------------------------------------------------- ------------------------- Gary B. Smith Ken Thompson President and CEO Date: 3/19/97 ------------------------- cc: Beverley Cox Virginia Hall Gene Pridgen EX-11 3 EXHIBIT 11 EXHIBIT 11 GLENAYRE TECHNOLOGIES, INC. Computation of Earnings Per Common Share (in thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, 1997 1996 Net income ............................... $13,446 $17,076 ======== ======= Primary Earnings Per Share: Weighted average shares outstanding during the period ................... 60,159 60,392 Common stock equivalents .............. 1,744 3,336 ------- ------ 61,903 63,728 ======= ======= Net income per share................... $ .22 $ .27 ======= ======= Fully Diluted Earnings Per Share: 60,159 60,392 Weighted average shares outstanding during the period ...................... 1,743 3,343 ------- ------- Common stock equivalents................. 61,902 63,735 ======= ======= Net income per share $ .22 $ .27 ======= =======
EX-15 4 EXHIBIT 15 EXHIBIT 15 Glenayre Technologies, Inc. and Subsidiaries - ----------------------------------------------------------------------------- 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 33-43798 on Form S-8 dated November 5, 1991 (amended December 9, 1992), 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, and Registration Statement Number 333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective Amendment Number 1 on From S-8 dated January 30, 1997) of our report dated April 17, 1997 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, 1997. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 or the Securities Act of 1933. Ernst & Young LLP Charlotte, North Carolina April 17, 1997 EX-27 5 EXHIBIT 27
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-31-1997 MAR-31-1997 130,609 0 160,433 0 51,317 342,925 83,119 0 543,862 63,318 0 0 0 309,859 166,098 543,862 105,771 105,771 50,550 50,550 36,628 0 14 20,811 7,365 13,446 0 0 0 13,446 .22 .22
EX-99 6 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. Introduction and Acceptance of NPCS Products While certain of Glenayre's customers have completed "beta testing" of Glenayre's products used to provide narrowband personal communications services ("NPCS"), the introduction of NPCS is just beginning on a commercial basis. The timing of the installation of NPCS systems by Glenayre's paging service provider customers may be delayed depending upon delays in installation, difficulties in initial operation of NPCS systems, the availability of financing for its paging service provider customers and the market acceptance of NPCS by the customers of such paging service providers. The development of the NPCS 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 communication 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. Although sales to one customer totaled approximately 13%, 16% and 15% of 1994, 1995 and 1996 fiscal year net sales, respectively, the customers with whom the Company does the largest amount of business is generally subject to change from year to year as a result of the timing for development and expansion of its customers' systems. 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 2 continue and future regulatory changes may not have a positive impact on Glenayre. As the issuance of paging system licenses stimulates demand for the Company's products, 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 NPCS Market The Company expects to continue financing customer purchases of its products for development of the narrowband personal communications services ("NPCS") market for the build-out of NPCS networks by its customers who acquired NPCS licenses auctioned by the FCC (the "NPCS License Holders"). Many of the NPCS License Holders with whom the Company expects to enter into customer financing arrangements have limited operating histories, significant debt related to the acquisition of their NPCS licenses and start-up expenses, negative cash flows from operations and some have never generated an operating profit. The Company plans to retain a lien on any equipment for which it provides financing. International Business Risks Approximately 40% of 1996 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 and exchange rate fluctuations. Although a substantial portion of the international sales of the Company's products and services for fiscal year 1996 was negotiated in U.S. dollars, the Company may not be able to maintain such a high percentage of U.S. 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. 3 -----END PRIVACY-ENHANCED MESSAGE-----