-----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, CkGAj8YuSJT7d+96GFa2q9InV5eoXNp8P26faz8VvIjuE1SRu9LW2no+7hzym0Re NQ3+2c1z4G9ai1GnqhekqQ== 0000950168-97-003060.txt : 19971024 0000950168-97-003060.hdr.sgml : 19971024 ACCESSION NUMBER: 0000950168-97-003060 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971023 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: SEC FILE NUMBER: 000-15761 FILM NUMBER: 97699675 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 [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 22, 1997 was 60,447,906 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 September 30, 1997 (Unaudited) and December 31, 1996.....................................4 Condensed Consolidated Statements of Income for the nine months ended September 30, 1997 and 1996 (Unaudited)................................5 Condensed Consolidated Statements of Income for the three months ended September 30, 1997 and 1996 (Unaudited)...............................6 Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1997 (Unaudited).................................7 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited)................................8 Notes to Condensed Consolidated Financial Statements (Unaudited)..............................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................14 Part II - Other Information: Item 6. Exhibits and Reports on Forms 8-K............................................................20 - --------------------------------------------------------------------------------------------------------------------
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 September 30, 1997, and the related condensed consolidated statements of income for the three-month periods and nine-month periods ended September 30, 1997 and 1996, the condensed consolidated statement of stockholders' equity for the nine months ended September 30, 1997 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 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 October 17, 1997 - -------------------------------------------------------------------------------- 3 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS (Unaudited) Current Assets: Cash and cash equivalents.................................... $ 73,492 $ 53,785 Short-term investments....................................... 61,624 78,016 Accounts receivable, net..................................... 150,247 119,851 Trade notes receivable, current.............................. 6,555 10,236 Inventories ................................................. 51,651 50,460 Deferred income taxes........................................ 5,286 19,291 Prepaid expenses and other current assets.................... 6,980 7,957 --------- --------- Total Current Assets..................................... 355,835 339,596 Trade notes receivable............................................ 47,654 13,085 Property, plant and equipment, net................................ 90,471 80,501 Goodwill.......................................................... 82,636 76,818 Deferred income taxes............................................. 9,534 10,372 Other assets...................................................... 2,780 838 --------- --------- TOTAL ASSETS...................................................... $ 588,910 $ 521,210 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................. $ 23,292 $ 19,614 Accrued liabilities.......................................... 51,484 40,781 Other current liabilities.................................... 226 170 --------- --------- Total Current Liabilities................................ 75,002 60,565 Other liabilities................................................. 5,311 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: September 30, 1997 - 60,443,239 shares; December 31, 1996 - 59,868,202 shares..................... 1,208 1,197 Contributed capital.......................................... 312,201 301,771 Retained earnings............................................ 195,188 152,893 --------- --------- Total stockholders' equity................................ 508,597 455,861 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $ 588,910 $ 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) Nine Months Ended September 30, ----------------------- 1997 1996 -------- -------- NET SALES .......................................... $328,065 $286,035 -------- -------- COSTS AND EXPENSES: Costs of sales................................. 153,559 129,429 Selling, general and administrative expense.... 73,132 58,226 Research and development expense............... 28,183 20,697 Depreciation and amortization expense.......... 14,234 9,855 -------- -------- Total Costs and Expenses................... 269,108 218,207 -------- -------- INCOME FROM OPERATIONS.............................. 58,957 67,828 -------- -------- OTHER INCOME (EXPENSES): Interest income................................ 8,207 7,437 Interest expense............................... (83) (135) Other, net..................................... (1,049) 105 -------- -------- Total Other Income (Expenses), net......... 7,075 7,407 -------- -------- INCOME BEFORE INCOME TAXES.......................... 66,032 75,235 PROVISION FOR INCOME TAXES.......................... 22,592 21,495 -------- -------- NET INCOME.......................................... $ 43,440 $ 53,740 ======== ======== NET INCOME PER COMMON SHARE - PRIMARY............... $ .69 $ .84 ======== ======== NET INCOME PER COMMON SHARE - FULLY DILUTED.................................. $ .69 $ .84 ======== ======== See notes to condensed consolidated financial statements - -------------------------------------------------------------------------------- 5 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share amounts) (unaudited) Three Months Ended September 30, ---------------------- 1997 1996 -------- -------- NET SALES ......................................... $112,122 $ 91,572 -------- -------- COSTS AND EXPENSES: Costs of sales................................ 52,438 43,830 Selling, general and administrative expense... 25,175 21,171 Research and development expense.............. 10,165 7,290 Depreciation and amortization expense......... 4,949 3,479 -------- -------- Total Costs and Expenses.................. 92,727 75,770 -------- -------- INCOME FROM OPERATIONS............................. 19,395 15,802 -------- -------- OTHER INCOME (EXPENSES): Interest income............................... 3,164 2,616 Interest expense.............................. (48) (39) Other, net.................................... (306) 29 -------- -------- Total Other Income (Expenses), net........ 2,810 2,606 -------- -------- INCOME BEFORE INCOME TAXES......................... 22,205 18,408 PROVISION FOR INCOME TAXES......................... 7,171 4,607 -------- -------- NET INCOME......................................... $ 15,034 $ 13,801 ======== ======== NET INCOME PER COMMON SHARE - PRIMARY.............. $ .24 $ .22 ======== ======== NET INCOME PER COMMON SHARE - FULLY DILUTED................................. $ .24 $ .22 ======== ======== See notes to condensed consolidated financial statements - -------------------------------------------------------------------------------- 6 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (dollars and shares in thousands) (unaudited)
Common Stock Total ------------ Contributed Retained Stockholders' Shares Amount Capital Earnings Equity -------- ------ ----------- -------- ------------ Balances, December 31, 1996.......... 59,868 $1,197 $301,771 $152,893 $455,861 Net Income........................... 43,440 43,440 Stock options exercised.............. 262 5 2,034 2,039 Shares issued in connection with business acquisition.............. 313 6 6,535 6,541 Utilization of net operating loss carryforwards..................... 1,145 (1,145) --- Tax benefit of stock options exercised......................... 716 716 ------ ------ -------- -------- -------- Balances, September 30, 1997......... 60,443 $1,208 $312,201 $195,188 $508,597 ====== ====== ======== ======== ========
See notes to condensed consolidated financial statements - -------------------------------------------------------------------------------- 7 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (tabular amounts in thousands of dollars) (unaudited)
Nine Months Ended September 30, ------------------------------- 1997 1996 ------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $ 23,856 $ 77,219 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................... (20,475) (20,444) Proceeds from sale of equipment.............................. 43 123 Maturities of short-term investments......................... 102,479 122,793 Purchases of short-term investments.......................... (86,087) (186,314) Payments for business acquisition, net of cash acquired...... (1,122) --- -------- -------- Net cash used in investing activities.................... (5,162) (83,842) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in other liabilities................................. (1,026) (1,289) Issuance of common stock..................................... 2,039 14,108 Common stock repurchases..................................... --- (36,313) -------- -------- Net cash provided by (used in) financing activities...... 1,013 (23,494) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................ 19,707 (30,117) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................................... 53,785 70,600 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................ $ 73,492 $ 40,483 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest..................................................... $ 55 $ 68 Income taxes................................................. 5,083 4,911
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 - -------------------------------------------------------------------------------- 8 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands of dollars) (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 and nine-month periods ended September 30, 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 was 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 September 30, December 31, Inventories consist of: 1997 1996 ------------ ------------ Raw materials........................... $26,755 $25,656 Work-in-process: Uncompleted contracts................ 3,011 3,757 Other................................ 5,867 7,603 Finished goods.......................... 16,018 13,444 ------- ------- $51,651 $50,460 ======= ======= - -------------------------------------------------------------------------------- 9 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 3. GOODWILL Goodwill is shown net of accumulated amortization of $15.9 million and $12.4 million at September 30, 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------- ------- Income tax provision at U.S. statutory rate..... $7,772 $6,443 $23,111 $26,332 Reduction in valuation allowance................ --- (2,929) (1,145) (5,421) Foreign taxes at rates other than U.S. statutory rate............................... (498) 194 (1,128) (1,786) State taxes (net of federal benefit)............ 432 598 1,471 2,445 U.S. Research and Experimentation Credits....... (953) --- (953) (977) Non-deductible goodwill amortization............ 418 301 1,236 902 ------ ------ ------- ------- Income tax provision............................ $7,171 $4,607 $22,592 $21,495 ====== ====== ======= =======
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 September 30, 1996 and for the nine-month periods ended September 30, 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 $2.9 million ($.05 per share) for the three months ended September 30, 1996. Additionally, the reduction in net income would have been $1.1 million ($.02 per share) and $5.4 million ($.08 per share) for the nine months ended September 30, 1997 and 1996, respectively. The Company believes that it is more likely than not that the net deferred tax asset recorded at September 30, 1997 will be fully realized. - -------------------------------------------------------------------------------- 10 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) Stockholders Rights Agreement In May 1997, the Company's Board of Directors adopted a Preferred Shares Rights Agreement. Under the Preferred Shares Rights Agreement, the Board of Directors declared a dividend of one Right for each outstanding share of common stock to holders of record as of the close of business on June 12, 1997. Initially, the Rights will automatically trade with the common stock and will not be exercisable. If any person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock, or commences a tender or exchange offer that results in that person or group acquiring such level of beneficial ownership, each Rights holder (other than Rights owned by such person or group, which become void) is entitled to purchase, for an exercise price of $80, 1/100th of a share of Series A Junior Participating Preferred Stock. Each fractional preferred share will have economic and voting terms similar to those of one share of common stock. In the event of such a tender offer or 15% or more stock acquisition, the Rights certificates, after a short period, will trade separately from the common stock and will be exercisable. Each Right, under certain circumstances, entitles the holder to purchase the number of shares of Glenayre common stock (or, at the discretion of the Board of Directors, shares of Series A Junior Participating Preferred Stock) which have an aggregate market value equal to twice the exercise price of $80. Under certain circumstances, the Board of Directors may exchange each outstanding Right for either one share of Glenayre common stock or 1/100th share of Series A Junior Participating Preferred Stock. The Board may also redeem the Rights at a price of $0.01 per Right. In addition, if any person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock and Glenayre either merges with or into another company or Glenayre sells 50% or more of its assets or earning power to another company, each Rights holder (other than Rights owned by such person or group, which become void) is entitled to purchase, for an exercise price of $80, a number of shares of the surviving company which has a market value equal to twice the exercise price. The Rights will expire on May 21, 2007, unless redeemed earlier. - -------------------------------------------------------------------------------- 11 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- (c) Stock Options In April 1997, due to a significant decline in the market price of the Company's common stock, the Plan Administration Committee of the Board of Directors reduced the exercise price to $9.00 per share on options to purchase approximately 3.0 million shares which had been awarded originally at various dates from May 1994 to March 1997 at $10.63 to $47.67 per share to employees of the Company. The reduced exercise price and the original exercise prices reflected the fair market value of the Company's common stock on the date of modification and the dates of the original awards. In April 1997, the Board of Directors approved an amendment to the 1996 Incentive Stock Plan (the "Plan") which provides for formula-based awards of stock options to non-officer directors who are directors as of April 18, 1997 or first elected a director subsequent to that date. In April 1997 and August 1997, the Plan Administration Committee of the Board of Directors granted options to purchase an aggregate of 150,000 shares and 30,000 shares of common stock at $9.00 and $18.75, respectively, per share to six directors pursuant to the amended formula-based provisions of the Plan. (d) 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 the primary per share data for the nine-month periods ended September 30, 1997 and 1996 was 63,136,635 and 63,845,604, respectively. The number of shares used to compute primary per share data for the three-month period ended September 30, 1997 and 1996 was 63,510,895 and 63,747,916, 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 September 30, 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 nine-month periods ended September 30, 1997 and 1996 was 63,310,244 and 63,867,033, respectively. The number of shares used to compute fully diluted per share data for the three-month periods ended September 30, 1997 and 1996 was 63,510,583 and 63,747,665 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 $.01 to primary earnings per share for the three-month periods ended September 30, 1997 and 1996. The impact is expected to result in an increase of $.03 and $.04 to primary earnings per share for the nine months ended September 30, 1997 and 1996, respectively. The impact of FASB 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material. - -------------------------------------------------------------------------------- 12 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 6. SUBSEQUENT EVENTS (a) Business Acquisition On October 15, 1997, the Company completed the acquisition of Open Development Corporation ("ODC"), located in Norwood, Massachusetts. ODC is a developer of enhanced service software and products for telecommunications providers. The purchase price of approximately $48 million consists of approximately 243 thousand shares of the Company's common stock issuable upon exercise of stock options valued at approximately $3 million, approximately $44 million in cash and approximately $1 million in acquisition costs. The acquisition will be accounted for as a purchase business combination. (b) Pending Business Acquisition On October 1, 1997, the Company entered into an agreement to acquire Wireless Access Inc. ("WAI"), located in Santa Clara, California. WAI develops and markets two-way paging devices. The estimated purchase price of approximately $101 million consists of approximately 1.4 million shares of the Company's common stock issuable upon exercise of stock options valued at approximately $17 million, approximately $82 million in cash and approximately $2 million in acquisition costs. The acquisition will be accounted for as a purchase business combination and is expected to be completed in November 1997. The acquisition is subject to approval by the WAI shareholders. The Company expects to record a fourth quarter 1997 charge of approximately $110 to $120 million in the aggregate for purchased research and development technology as part of the ODC and WAI acquisitions. The charge represents a write-off of purchased research and development technology that had not reached the working model stage and had no alternative future use. - -------------------------------------------------------------------------------- 13 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. ("CNET")); and (iii) Wireless Interconnect (products for microwave communications systems). On January 9, 1997 the Company completed the acquisition of CNET. The operating results of CNET are included in the operating results of the Company since the acquisition date. On October 15, 1997, the Company completed the acquisition of Open Development Corporation, a developer of enhanced service software and products for telecommunications providers. Additionally, in November 1997, the Company expects to complete the acquisition of Wireless Access Inc., a developer and marketer of two-way paging devices. In September 1997, the Company announced plans to divest its microwave communications systems unit. 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. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES The Company's net sales for the nine months ended September 30, 1997 increased to $328 million from net sales for the nine months ended September 30, 1996 of $286 million, an increase of $42 million, or 15%. The increase in sales was primarily due to increased delivery of the Company's MVP systems. Net sales of the Wireless Messaging, Integrated Network and Wireless Interconnect groups were approximately $250 million, $54 million and $24 million, respectively, for the nine months ended September 30, 1997 compared to approximately $248 million, $17 million, and $21 million, respectively, for the nine months ended September 30, 1996. Sales to a single customer totaled approximately 12% and 15% of sales for the nine months ended September 30, 1997 and 1996, 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. The Company anticipates continued growth in 1997 sales of its paging products to the international market and delivery of its MVP systems. 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 - -------------------------------------------------------------------------------- 14 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- materially due to rapid technological advances in the wireless telecommunications industry, delays in the market acceptance of NPCS products and systems, competition, limits on protection of Glenayre's proprietary technology, changes in governmental regulation and international business risks. GROSS PROFIT Gross profit increased to $175 million, or 53% of net sales, for the nine months ended September 30, 1997, from $157 million, or 55% of net sales, for the nine months ended September 30, 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 $73 million, or 22% of net sales, for the nine months ended September 30, 1997, from $58 million, or 20% of net sales, for the nine months ended September 30, 1996. The increase is primarily due to: (i) the addition of sales, marketing, and administrative personnel and other expenses associated with the Company's higher international sales volume; (ii) the inclusion of operating expenses incurred by CNET since its acquisition on January 9, 1997; and (iii) general increases in personnel costs and other purchased services. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased to $14 million or 4% of net sales, for the nine months ended September 30, 1997 from $10 million or 3% of net sales for the nine months ended September 30, 1996. The increase is primarily attributable to: (i) the continuing purchases of equipment to meet the growth of the business 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 $28 million, or 9% of net sales, for the nine months ended September 30, 1997, from $21 million, or 7% of net sales, for the nine months ended September 30, 1996, an increase of $7 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 since its acquisition on January 9, 1997. Research and development costs are expensed as incurred. INTEREST INCOME, NET The Company realized net interest income of $8.1 million for the nine months ended September 30, 1997 compared to net interest income realized of $7.3 million for the nine months ended September 30, 1996. Higher balances in notes receivable and higher average interest rates experienced on cash equivalents and short-term investments were offset by lower average balances in cash, cash equivalents and short-term investments. - -------------------------------------------------------------------------------- 15 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- OTHER EXPENSE, NET The increase in expense for the nine months ended September 30, 1997 from the same period in the prior year is primarily a result of expenses resulting from a realignment of certain domestic sales, management, and engineering personnel in order to enhance organizational efficiencies. INCOME TAXES The difference between the combined U.S. federal and state statutory tax rate of approximately 40% and the effective tax rate of 34% for the nine months ended September 30, 1997 and 29% for the nine months ended September 30, 1996 is primarily the result of: (i) the utilization of the Company's net 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 34% in 1997 and 29% 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. THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1996 NET SALES The Company's net sales for the three months ended September 30, 1997 increased to $112 million from net sales for the three months ended September 30, 1996 of $92 million, an increase of $20 million, or 22%. The increase in sales was primarily due to increased delivery of the Company's MVP systems and one-way paging products. Net sales of the Wireless Messaging, Integrated Network and Wireless Interconnect groups were approximately $85 million, $20 million and $7 million, respectively, for the three months ended September 30, 1997 compared to approximately $78 million, $6 million, and $8 million, respectively, for the three months ended September 30, 1996. No single customer accounted for more than 10% of sales for the three months ended September 30, 1997. Sales to a single customer totaled approximately 16% of sales for the three months ended September 30, 1996. GROSS PROFIT Gross profit increased to $60 million, or 53% of net sales, for the three months ended September 30, 1997, from $48 million, or 52% of net sales, for the three months ended September 30, 1996. The increase in gross margin percentage is primarily attributable to a change in the product mix partially offset by increased revenue from international turn-key projects which typically realize lower margins. - -------------------------------------------------------------------------------- 16 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense increased to $25 million, or 22% of net sales, for the three months ended September 30, 1997, from $21 million, or 23% of net sales, for the three months ended September 30, 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 international sales volume; (ii) the inclusion of operating expenses incurred by CNET since its acquisition on January 9, 1997; and (iii) general increases in personnel costs and other purchased services. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased to $4.9 million or 4% of net sales, for the three months ended September 30, 1997 from $3.5 million or 4% of net sales for the three months ended September 30, 1996. The increase is primarily attributable to: (i) the continuing purchases of equipment to meet the growth of the business 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 $10.2 million, or 9% of net sales, for the three months ended September 30, 1997, from $7.3 million, or 8% of net sales, for the three months ended September 30, 1996, an increase of $2.9 million, or 39%. The increase in expense is primarily a result of additional expenditures in manpower and the inclusion of expenditures incurred by CNET since its acquisition on January 9, 1997. INTEREST INCOME, NET The Company realized net interest income of $3.1 million for the three months ended September 30, 1997 compared to net interest income realized of $2.6 million for the three months ended September 30, 1996. Higher balances in notes receivable and higher average interest rates experienced on cash equivalents and short-term investments were offset by lower average balances in cash, cash equivalents and short-term investments. OTHER EXPENSE, NET The increase in expense for the three months ended September 30, 1997 from the same period in the prior year is primarily a result of expenses resulting from a realignment of certain domestic sales, management, and engineering personnel in order to enhance organizational efficiencies. INCOME TAXES The difference between the combined U.S. federal and state statutory tax rate of approximately 40% and the effective tax rate of 32% for the three months ended September 30, 1997 and 25% for the three months ended September 30, 1996 is primarily the result of: (i) lower tax rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and (ii) the application of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," ("SFAS 109"), in computing the - -------------------------------------------------------------------------------- 17 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- Company's tax provision. The difference between the effective tax rate of 32% in 1997 and 25% 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 September 30, 1997 was $281 million, including cash and cash equivalents and short-term investments of $135 million. During the nine months ended September 30, 1997, the Company received cash of $2.0 million from the exercise of stock options. Accounts receivable, accounts payable, and accrued liabilities at September 30, 1997 increased from December 31, 1996 primarily as a result of increased operating activities and timing differences. Notes receivables at September 30, 1997 increased from December 31, 1996 due to customer financing primarily for purchases of the Company's one-way paging and NPCS products. Goodwill at September 30, 1997 increased from December 31, 1996 as a result of the CNET acquisition in January 1997. During the nine months ended September 30, 1997, the Company spent $20 million for capital expenditures. These expenditures were necessary in order to provide the equipment to meet the growth of the business. Additionally, in 1996, the Company began the implementation of a new operating business system. This business system is expected to be operational by the second quarter of 1998 at a total capitalized cost of approximately $16 million. Of this total approximately $10.6 million ($7.1 million in 1997) has been paid as of September 30, 1997. 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 except 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 the fourth quarter 1997, the Company has completed or expects to complete acquisitions which will significantly reduce its cash and cash equivalents and short term investments (see Note 6 to the Condensed Consolidated Financial Statements). On October 15, 1997, the Company completed the acquisition of Open Development Corporation ("ODC"). The purchase price for ODC of approximately $48 million consisted of approximately 243 thousand shares of the Company's common stock issuable upon exercise of stock options valued at approximately $3 million, approximately $44 million in cash and approximately $1 million in acquisition costs. On October 1, 1997, the Company entered into an agreement to acquire Wireless Access Inc. ("WAI"). The estimated purchase price for WAI of approximately $101 million will consist of approximately 1.4 million shares of the Company's common stock issuable upon exercise of stock options valued at approximately $17 million, approximately $82 million in cash and approximately $2 million in acquisition costs. The WAI acquisition is expected to be completed in November 1997. The Company expects to record a fourth quarter 1997 charge of approximately $110 to $120 million in the aggregate for purchased research and development technology as part of the ODC and WAI acquisitions. In September 1996, the Board of Directors authorized the purchase of 2,500,000 shares of the Company's common stock. As of September 30, 1997, no shares had been repurchased under the 1996 authorization. - -------------------------------------------------------------------------------- 18 Glenayre Technologies, Inc. and Subsidiaries - -------------------------------------------------------------------------------- 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 September 30, 1997, the Company had agreements to finance and arrange financing for approximately $95 million of paging and voice mail products. 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 generally 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). Glenayre has received commitments from a group of banks to loan the Company up to $50 million under a one-year unsecured revolving credit agreement. The agreement contains covenants that include certain financial tests, including a maximum leverage ratio, minimum fixed charge coverage ratio and minimum net worth. The Company will pay a commitment fee of no more than 0.225% annually of the unused portion of the line. The Company anticipates closing on the credit agreement in the fourth quarter of 1997. Company management believes that, if needed, it can establish additional borrowing arrangements with lending institutions. 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 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 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. - -------------------------------------------------------------------------------- 19 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 4 Termination Agreement, dated September 30, 1997, between the Company and Ramon D. Ardizzone is filed herewith. Exhibit 11 Computation of earnings per common share for the nine-month and three-month periods ended September 30, 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 September 30, 1997, the Company filed a Current Report on Form 8-K dated September 9, 1997. Under Item 5 the Company announced plans to acquire Wireless Access Inc. of Santa Clara, California and Open Development Corporation of Norwood, Massachusetts, and plans to divest its microwave radio unit (Wireless Interconnect Group, previously Western Multiplex Corporation). - -------------------------------------------------------------------------------- 20 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: October 23, 1997 - -------------------------------------------------------------------------------- EX-4 2 EXHIBIT 4 EXHIBIT 4 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made and entered into effective as of the 30th day of September, 1997 by and between GLENAYRE TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and RAMON D. ARDIZZONE (the "Executive"). Statement of Purpose The Company and the Executive entered into an Employment Agreement dated June 21 1995, as amended on December 8, 1995 and December 12, 1996 (the "Employment Agreement"). The Company and the Executive desire to terminate the Executive's employment under the Employment Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing Statement of Purpose and the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. The Executive's employment under the Employment Agreement shall terminate effective as September 30, 1997 (the "Termination Date") and the Executive shall no longer be employed by the Company or its affiliates. 2. The Company acknowledges and agrees that all options to purchase the Company's common stock previously granted by the Company to the Executive are fully vested and that such options continue after the Termination Date to be exercisable for the applicable 10-year periods. 3. The Company acknowledges and agrees that, pursuant to Paragraph 2(f) of the Employment Agreement, promptly after the Termination Date, (i) the Company shall pay to the Executive the sum of (A) his accrued but unpaid Base Salary, plus (B) his accrued but unpaid vacation pay, plus (C) any other compensation payments or benefits which have accrued and are payable in connection with such termination and (ii) the Executive (and his dependents) shall be entitled to participate in the Company's Retiree Medical Plan as provided in Paragraph 2(f)(6) of the Employment Agreement. Promptly after the bonuses under the Company's 1997 MBO Plan are determined, the Company shall pay to the Executive 75% of the bonus under the MBO Plan that he would have been entitled to receive for 1997, but for the termination of his employment by the Company on the Termination Date. The Company will also pay to the Executive, promptly after the Termination Date, the sum of $8,883 (subject to withholding) and $640 will be paid by the Company for the Executive's account under to the Company's Deferred Compensation Plan, as special severance payments to compensate the Executive because the Company is unable to make a matching contribution ($6,400) for the Executive to the Company's 401(k) Plan for 1997. 4. The Company acknowledges and agrees that the termination of the Executive's employment under the Employment Agreement does not affect his position as Chairman of the Board of Directors of the Company and that, beginning October 1, 1997, the Executive shall be paid an annual fee of $150,000 (as such fee may be changed by the Board of Directors of the Company from time to time in its sole discretion), payable quarterly in arrears, for his services as such until the further order of the Board of Directors of the Company. - -------------------------------------------------------------------------------- 5. The Executive acknowledges and agrees no event has occurred prior to the date hereof which constitutes "Good Reason" (as defined in Paragraph 2(e) of the Employment Agreement) or a "Change in Control" of the Company (as defined in Paragraph 2(e)(6) of the Employment Agreement), which in either case would entitle the Executive to terminate his employment under the Employment Agreement and to be paid certain payments under Paragraph 2(f) of the Employment Agreement. IN WITNESS WHEREOF, the parities have executed this Agreement effective as of the day and year first above written. GLENAYRE TECHNOLOGIES, INC. /s/ Gary B. Smith ------------------------------------- Gary B. Smith President and Chief Executive Officer /s/ Ramon D. Ardizzone ------------------------------------- Ramon D. Ardizzone Chairman of the Board - -------------------------------------------------------------------------------- EX-11 3 EXHIBIT 11 EXHIBIT 11 GLENAYRE TECHNOLOGIES, INC. Computation of Earnings Per Common Share (in thousands, except per share amounts) (Unaudited)
Nine Months Ended September 30, Three Months Ended September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Net Income..................................................... $43,440 $53,740 $15,034 $13,801 ======= ======= ======= ======= Primary Earnings Per Share: Weighted average shares outstanding during the period.......... 60,252 60,844 60,378 61,192 Common stock equivalents....................................... 2,885 3,002 3,133 2,556 ------- ------- ------- ------- 63,137 63,846 63,511 63,748 ======= ======= ======= ======= Net income per share........................................... $ .69 $ .84 $ .24 $ .22 ======= ======= ======= ======= Fully Diluted Earnings Per Share: Weighted average shares outstanding during the period.......... 60,252 60,844 60,378 61,192 Common stock equivalents....................................... 3,058 3,023 3,133 2,556 ------- ------- ------- ------- 63,310 63,867 63,511 63,748 ======= ======= ======= ======= Net income per share........................................... $ .69 $ .84 $ .24 $ .22 ======= ======= ======= =======
- -------------------------------------------------------------------------------- EX-15 4 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, 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) and Registration Statement Number 333-38169 on Form S-8 dated October 17, 1997 of our report dated October 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 September 30, 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 October 17, 1997 - -------------------------------------------------------------------------------- EX-99 5 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 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 finances 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 has or 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 generally retains a security interest on 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. EX-27 6 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 9-MOS DEC-31-1997 SEP-30-1997 135,116 0 204,456 0 51,651 355,835 90,471 0 588,910 75,002 0 0 0 313,409 195,188 588,910 328,065 328,065 153,559 153,559 115,549 0 83 66,032 22,592 43,440 0 0 0 43,440 .69 .69
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