-----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, Ww1X2apzS7Bydqt9z7OJHSEkHJoDVPoTpQqh9vhuoUt6pWf3sTwbNk+M9134OoAi 7BIxpIlTzF9gkjYv5yfHag== 0000950168-98-003293.txt : 19981027 0000950168-98-003293.hdr.sgml : 19981027 ACCESSION NUMBER: 0000950168-98-003293 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981026 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: 98730648 BUSINESS ADDRESS: STREET 1: 5935 CARNEGIE BOULEVARD CITY: CHARLOTTE STATE: NC ZIP: 28209 BUSINESS PHONE: 7045530038 FORMER COMPANY: FORMER CONFORMED NAME: N W GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP INC DATE OF NAME CHANGE: 19880221 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP LTD DATE OF NAME CHANGE: 19871126 10-Q 1 GLENAYRE TECHNOLOGIES, INC. 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1998 ------------------- [ ] 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, 1998 was 62,003,936 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, 1998 (Unaudited) and December 31, 1997........4 Condensed Consolidated Statements of Income for the three months ended September 30, 1998 and 1997 (Unaudited)..5 Condensed Consolidated Statements of Income for the nine months ended September 30, 1998 and 1997 (Unaudited)..............6 Condensed Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 1998 (Unaudited)............7 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (Unaudited)........8 Notes to Condensed Consolidated Financial Statements (Unaudited).................................................9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................12 Part II - Other Information: Item 6. Exhibits and Reports on Forms 8-K.............................18 - ------------------------------------------------------------------------------ 2 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Stockholders of Glenayre Technologies, Inc. Charlotte, North Carolina We have reviewed the accompanying condensed consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of September 30, 1998, and the related condensed consolidated statements of income for the three-month periods and nine-month periods ended September 30, 1998 and 1997, the condensed consolidated statement of stockholders' equity for the nine months ended September 30, 1998 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1998 and 1997. 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, 1997, 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 30, 1998, 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, 1997, 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 16, 1998 - ------------------------------------------------------------------------------ 3 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) September 30, December 31, 1998 1997 ------------------ ----------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents................. $ 17,213 $ 21,076 Accounts receivable, net.................. 163,601 152,231 Notes receivable.......................... 10,659 8,684 Inventories............................... 48,736 49,302 Deferred income taxes..................... 14,022 13,943 Prepaid expenses and other current assets. 7,275 6,810 ----------- ----------- Total current assets................. 261,506 252,046 Notes receivable, net......................... 51,034 53,050 Property, plant and equipment, net............ 110,048 103,641 Goodwill...................................... 75,345 78,568 Deferred income taxes......................... 703 1,088 Other assets.................................. 25,572 17,425 ---------- ---------- TOTAL ASSETS.................................. $524,208 $505,818 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................... $ 33,535 $ 27,133 Accrued liabilities....................... 51,552 61,358 Other current liabilities................. 284 2,101 ----------- ------------- Total current liabilities............ 85,371 90,592 Other liabilities............................. 6,512 7,210 Stockholders' Equity: Preferred stock, $.01 par value; 5,000,000 shares Authorized, no shares issued and outstanding.................. --- --- Common stock, $.02 par value; authorized: 200,000,000 shares; outstanding: September 30, 1998 - 62,003,376 shares; December 31, 1997 - 60,650,761 shares.................................. 1,240 1,213 Contributed capital........................ 343,101 333,715 Retained earnings.......................... 87,984 73,088 ---------- ---------- Total stockholders' equity.............. 432,325 408,016 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $524,208 $505,818 ========== ========= Note: The balance sheet at December 31, 1997 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 September 30, --------------------------------- 1998 1997 --------------- --------------- NET SALES..................................... $126,689 $112,122 -------- -------- COSTS AND EXPENSES: Cost of sales........................... 64,794 52,438 Selling, general and administrative expense.............................. 26,424 25,175 Research and development expense........ 12,466 10,165 Depreciation and amortization expense... 7,016 4,949 ---------- ----------- Total Costs and Expenses.......... 110,700 92,727 ---------- ----------- INCOME FROM OPERATIONS........................ 15,989 19,395 ---------- ----------- OTHER INCOME (EXPENSES): Interest income........................ 2,328 3,164 Interest expense....................... (170) (48) Other, net.............................. 47 (306) --------- --------- Total Other Income (Expenses), net... 2,205 2,810 --------- --------- INCOME BEFORE INCOME TAXES.................... 18,194 22,205 PROVISION FOR INCOME TAXES.................... 6,541 7,171 -------- -------- NET INCOME.................................... $ 11,653 $ 15,034 ======== ======== NET INCOME PER WEIGHTED AVERAGE COMMON SHARE................................ $ 0.19 $ 0.25 ========== ========== NET INCOME PER COMMON SHARE - ASSUMING DILUTION........................... $ 0.18 $ 0.24 ========== ========== 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) Nine Months Ended September 30, --------------------------------- 1998 1997 --------------- --------------- NET SALES..................................... $303,103 $328,065 -------- -------- COSTS AND EXPENSES: Cost of sales........................... 150,813 153,559 Selling, general and administrative expense.............................. 75,966 73,132 Research and development expense........ 38,523 28,183 Depreciation and amortization expense... 20,326 14,234 ---------- ---------- Total Costs and Expenses.......... 285,628 269,108 ---------- ---------- INCOME FROM OPERATIONS........................ 17,475 58,957 ---------- ---------- OTHER INCOME (EXPENSES): Interest income........................ 6,544 8,207 Interest expense....................... (415) (83) Other, net............................. (264) (1,049) ----------- ---------- Total Other Income (Expenses), net... 5,865 7,075 ----------- ---------- INCOME BEFORE INCOME TAXES.................... 23,340 66,032 PROVISION FOR INCOME TAXES.................... 8,444 22,592 ---------- --------- NET INCOME.................................... $ 14,896 $ 43,440 ======== ======== NET INCOME PER WEIGHTED AVERAGE COMMON SHARE................................. $ 0.24 $ 0.72 ========== =========== NET INCOME PER COMMON SHARE - ASSUMING DILUTION............................ $ 0.23 $ 0.69 ========== ========== 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)
Total Common Stock Contributed Retained Stockholders' Shares Amount Capital Earnings Equity ------- -------- ------------ -------- ------------ Balances, December 31, 1997...................... 60,651 $1,213 $333,715 $73,088 $408,016 Net Income................ 14,896 14,896 Stock options exercised... 1,352 27 7,178 7,205 Tax benefit of stock options exercised........ 2,208 2,208 ------- ------- --------- --------- -------- Balances, September 30, 1998...................... 62,003 $1,240 $343,101 $87,984 $432,325 ====== ====== ======== ======= ========
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, ---------------------------- 1998 1997 ----------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES....... $25,545 $23,856 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale security... (11,667) --- Purchases of property, plant and equipment (22,312) (20,475) Proceeds from sale of equipment........... 161 43 Maturities of short-term investments...... --- 102,479 Purchases of short-term investments....... --- (86,087) Payments for business acquisition, net of cash acquired.......................... --- (1,122) -------- ----------- Net cash used in investing activities (33,818) (5,162) -------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Changes in other liabilities.............. (2,795) (1,026) Issuance of common stock.................. 7,205 2,039 -------- --------- Net cash provided by financing activities....................... 4,410 1,013 -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (3,863) 19,707 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................. 21,076 53,785 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $17,213 $73,492 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................... $ 282 $ 55 Income taxes............................... 3,921 5,083 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 EXCEPT PER SHARE DATA) (UNAUDITED) The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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. In January 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. 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, 1997. 1. INVENTORIES September 30, December 31, Inventories consist of: 1998 1997 ------------ ------------ Raw materials................... $28,544 $25,970 Work-in-process................. 10,894 10,813 Finished goods.................. 9,298 12,519 ------- ------- $48,736 $49,302 2. GOODWILL Goodwill is shown net of accumulated amortization of $19.0 million and $15.9 million at September 30, 1998 and December 31, 1997, respectively. - -------------------------------------------------------------------------------- 9 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ 3. INCOME TAXES The Company's consolidated income tax provision was different from the amount computed using the U.S. statutory income tax rate for the following reasons: Three Months Nine Months Ended Ended September 30, September 30, ------------------- ------------------ 1998 1997 1998 1997 -------- ------- ------- -------- Income tax provision at U.S. statutory rate............................... $6,368 $7,772 $8,169 $23,111 Reduction in valuation allowance...... --- --- --- (1,145) Foreign taxes at rates other than U.S. statutory rate..................... (164) (498) (536) (1,128) State taxes (net of federal benefit).. 310 432 (246) 1,471 U.S. Research and Experimentation Credits.................. --- (953) (84) (953) Foreign sales corporation benefit..... (740) --- (740) --- Non-deductible goodwill amortization.. 560 418 1,674 1,236 Other non-deductible ................. 207 --- 207 --- ------ ------ ------ ------- Income tax provision.................. $6,541 $7,171 $8,444 $22,592 ====== ====== ====== ======= Subsequent to the quasi-reorganization completed on February 1, 1988, as described in Note 4, 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 the 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 nine-month period ended September 30, 1997 would have been reduced by the amount of the benefit from utilization of tax net operating loss carryforwards. Such reduction in net income would have been $1.1 million ($.02 per share) for the nine months ended September 30, 1997. The tax benefits from these net operating loss carryforwards were fully utilized in 1997. The Company believes that it is more likely than not that the net deferred tax asset recorded at September 30, 1998 will be fully realized. - -------------------------------------------------------------------------------- 10 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ 4. 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 The following table sets forth the computation of income per share:
Three Months Nine Months Ended Ended September 30, September 30, ------------------- ----------------- 1998 1997 1998 1997 --------- ------- -------- ------- Numerator: Net income............................. $11,653 $15,034 $14,896 $43,440 Denominator: Denominator for basic income per share - Weighted average shares.............. 61,926 60,378 61,393 60,252 Effect of dilutive securities: Stock options.......................... 1,407 3,133 2,165 2,885 ------ ----- ------ ----- Denominator for diluted income per share-adjusted Weighted average shares and assumed conversions.................. 63,333 63,511 63,558 63,137 ====== ====== ====== ====== Net income per weighted average common share.................................... $ 0.19 $ 0.25 $ 0.24 $ 0.72 ======= ======= ======= ======= Net income per common share - assuming dilution................................. $ 0.18 $ 0.24 $ 0.23 $ 0.69 ======= ======= ======= =======
- -------------------------------------------------------------------------------- 11 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures, markets and services telecommunications equipment and software used in wireless personal communication systems throughout the world specifically focused in three primary marketing areas: (i) paging products including infrastructure equipment from the Wireless Messaging Group ("WMG") and Wireless Access two-way paging devices, (ii) mobile and fixed network products from the Integrated Network Group ("ING") including voice mail systems and software applications for network management and calling cards, and (iii) microwave communications from the Wireless Interconnect Group ("WIC"). In January 1997, the Company acquired CNET, Inc. ("CNET"), a developer of software including network management tools. The operating results of CNET are included in the consolidated results of Glenayre since the acquisition date. In September 1997, the Company announced plans to consider divesting Western Multiplex Corporation ("MUX"), which constitutes the WIC Group, allowing Glenayre to focus on its core markets of paging and enhanced messaging. MUX markets products for use in point-to-point microwave communication systems and was acquired by Glenayre in April 1995. As of October 1998, an acceptable purchase agreement had not been negotiated. However, the Company expects to pursue divesting this business over time. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of net sales represented by certain line items from Glenayre's consolidated statements of operations: Three Months Nine Months Ended Ended September 30, September 30, ------------------- ----------------- 1998 1997 1998 1997 --------- ------- -------- ------- Net sales............................... 100.0% 100.0% 100.0% 100.0% Cost of sales........................... 51.1 46.8 49.8 46.8 ------ ------ ------ ------ Gross profit ....................... 48.9 53.2 50.2 53.2 Operating expenses: Selling, general and administrative. 20.9 22.5 25.1 22.3 Research and development............ 9.8 9.1 12.7 8.6 Depreciation and amortization....... 5.5 4.4 6.7 4.3 ------ ------ ------ ------ Total operating expenses........ 36.2 36.0 44.5 35.2 ------ ------ ------ ------ Income from operations ................. 12.6 17.3 5.8 18.0 Interest, net........................... 1.7 2.8 2.0 2.5 Other, net.............................. * * * * ------ ------ ------ ------ Income before income taxes.............. 14.4 19.8 7.7 20.1 Provision for income taxes.............. 5.2 6.4 2.8 6.9 ------ ------ ------ ------ Net income.............................. 9.2% 13.4% 4.9% 13.2% ====== ====== ====== ====== ............ * less than 0.5% - -------------------------------------------------------------------------------- 12 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ The following table sets forth for the periods indicated net sales represented by the Company's primary marketing areas: Three Months Nine Months Ended Ended September 30, September 30, ------------------- ------------------ 1998 1997 1998 1997 -------- ------- ------- -------- (IN THOUSANDS) Paging products ................... $92,652 $85,295 $228,386 $250,447 Mobile and fixed network products . 24,836 19,436 52,571 53,809 Microwave communication............ 9,201 7,391 22,146 23,809 -------- -------- -------- -------- $126,689 $112,122 $303,103 $328,065 ======== ======== ======== ======== (PERCENTAGE OF NET SALES) Paging products ................... 73% 76% 76% 77% Mobile and fixed network products . 20 17 17 16 Microwave communication............ 7 7 7 7 --- --- --- --- 100% 100% 100% 100% === === === === THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 NET SALES. Net sales for the three months ended September 30, 1998 increased 13% to $126.7 million as compared to $112.1 million for the three months ended September 30, 1997. Net sales for the nine months ended September 30, 1998 decreased 8% to $303.1 million as compared to $328.1 million for the nine months ended September 30, 1997. International sales (sales outside the United States) were $48.1 million for the three months ended September 30, 1998 as compared to $61.6 million for the three months ended September 30, 1997 and accounted for 38% and 55% of net sales for the three months ended September 30, 1998 and 1997, respectively. International sales were $126.7 million for the nine months ended September 30, 1998 as compared to $161.4 million for the nine months ended September 30, 1997 and accounted for 42% and 49% of net sales for the nine months ended September 30, 1998 and 1997, respectively. Net sales continue to be impacted by a decrease in deliveries of paging infrastructure to certain Asian countries experiencing economic problems. Sales to separate single customers totaled approximately 11% and 10% of net sales for the three-month periods ended September 30, 1998 and 1997, respectively. Sales to separate single customers totaled approximately 14% and 12%, respectively for the nine-month periods ended September 30, 1998 and 1997. The Company believes that the dependence on any one customer is mitigated by the large number of companies in the Company's customer base and the timing for development and expansions of their systems. GROSS PROFIT. Gross profit was 49% and 53% for the three-month periods ended September 30, 1998 and 1997, respectively. Gross profit was 50% and 53% for the nine-month periods ended September 30, 1998 and 1997. The decline in margins for 1998 is primarily due to a lower sales volume of paging infrastructure equipment and the inclusion of two-way paging device sales with lower margins since the acquisition of Wireless Access, Inc. ("WAI") in fourth quarter 1997. Glenayre's gross profit - -------------------------------------------------------------------------------- 13 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold and (iii) increases in material costs and other components of cost of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expenses were $26.4 million and $25.2 million for the three-month periods ended September 30, 1998 and 1997, respectively and $76.0 million and $73.1 million for the nine-month periods ended September 30, 1998 and 1997, respectively. The changes are attributable to the inclusion of Open Development Corporation ("ODC") and WAI operating expenses since their dates of acquisition in the fourth quarter 1997 offset by lower expenses incurred, primarily related to consulting, employee incentive and commission plans and trade shows. Additionally, the Company recorded a $1.4 million charge for the nine-month period ended September 30, 1998 ($767 thousand during the third quarter) for an unrealized loss on an available-for-sale debt security. Finally, expenses for bad debt decreased due to the collection of a receivable in the second and third quarter that had been previously reserved and written off in a prior year. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $12.5 million and $10.2 million for the three months ended September 30, 1998 and 1997, respectively. The increase for the three months ended September 30, 1998 was due to the inclusion of research and development activities of ODC and WAI since their dates of acquisition in the fourth quarter 1997 partially offset by a reduction in temporary contract services. Research and development expenses were $38.5 million and $28.2 million for the nine months ended September 30, 1998 and 1997, respectively. The increase for the nine months ended September 30, 1998 was primarily due to (i) the inclusion of the research and development activities of ODC and WAI since their dates of acquisition in the fourth quarter 1997 and (ii) the severance expense recorded in the first quarter of 1998 for the termination of engineers related to the consolidation of the Company's paging infrastructure research and development function at its Vancouver, British Columbia facility. The Company relies on its research and development programs related to new products and the improvement of existing products for the continued growth in net sales. Research and development costs are expensed as incurred. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was $7.0 million and $4.9 million for the three months ended September 30, 1998 and 1997, respectively, and $20.3 million and $14.2 million for the nine months ended September 30, 1998 and 1997, respectively. The increases in expenses for the three-month and nine-month periods are a result of (i) fixed asset purchases since September 30, 1997, (ii) fixed and intangible assets included in the fourth quarter 1997 acquisitions of ODC and WAI and (iii) the new operating business system becoming operational in the second quarter 1998. INTEREST INCOME, NET. Interest income, net was $2.2 million and $3.1 million for the three-month periods ended September 30, 1998 and 1997, respectively and $6.1 million and $8.1 million for the nine-month periods ended September 30, 1998 and 1997, respectively. Interest earned in the 1998 periods was lower compared to the 1997 periods due to the decrease of cash and short-term investments average balances offset by higher average balances in customer notes receivable. The Company expects that the level of interest income, net in 1998 will vary in accordance with the level of secured debt financing commitments issued by Glenayre and used by its customers. PROVISION FOR INCOME TAXES. The effective tax rates for the three-month periods ended September 30, 1998 and 1997 were 36% and 32%, respectively. The effective tax rates for the nine-month periods ended September 30, 1998 and 1997 were 36% and 34%, respectively. The difference between the effective rates for these periods and the combined U.S. federal and state statutory tax rate of - -------------------------------------------------------------------------------- 14 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ approximately 40% is primarily the result of (i) the utilization in 1997 of the Company's net operating losses ("NOLs"), (ii) lower tax rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and (iii) the application of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, ("SFAS 109"), in computing the Company's tax provision. The difference between the effective tax rates in 1998 compared to 1997 is primarily the result of the tax benefits of net operating loss carryforwards for financial statement purposes in accordance with SFAS 109 being fully utilized in 1997. See Note 3 to the Company's Condensed Consolidated Financial Statements. FINANCIAL CONDITION AND LIQUIDITY LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1998, Glenayre's principal sources of liquidity included $17.2 million of cash and cash equivalents and a $50 million bank line of credit that expires October 30, 1998. The Company expects to renew the bank line of credit through October 1999. Borrowings under the line of credit during the three months and the nine months ended September 30, 1998 ranged from $5 million to $15 million with no borrowings as of September 30, 1998. Accounts receivable increased $11.3 million from year end 1997 due to extended payment terms offered to customers. Approximately 54% of the gross notes receivable balance of $65 million as of September 30, 1998 consists of receivables from one customer which has a limited operating history and is engaged in the buildout of a major two-way personal communications services network in the newly introduced market of advanced voice and text paging. Additionally, the Company purchased $11.7 million of 9.0% convertible senior subordinated notes (included in other assets) issued by this same customer in May 1998. Accounts payable increased at September 30, 1998 compared to December 31, 1997 primarily as a result of differences in payment cycles. Accrued expenses at September 30, 1998 decreased from year end 1997 primarily due to a reduction in (i) customer deposits, (ii) outside sales commissions accruals, (iii) state income taxes payable, (iv) long-term project related accruals, and (v) volume purchase discount accruals partially offset by an increase in payroll accruals. On October 21, 1998, in response to uncertainties in world markets, the Company announced a number of cost reduction activities including a 10% reduction in its global workforce and moving its Boston operations to its Atlanta facility. These actions will result in restructuring charges of approximately $8 million that will be recorded during fourth quarter 1998. The facility consolidation will result in integration costs of approximately $4 million that will be incurred during fourth quarter 1998 and first quarter 1999. In 1996, the Board of Directors of the Company authorized a repurchase program to buy back 2.5 million shares of the Company's common stock. As of September 30, 1998, no shares have been repurchased under the 1996 program. Additionally, in 1996, the Company began the implementation of a new operating business system. This business system began operating in April 1998 at a total capitalized cost of approximately $17.2 million including $3.4 million of cost incurred in 1998. The Company expects to use its cash and cash equivalents and bank line of credit for working capital and other general corporate purposes, including the expansion and development of its existing products and markets and the expansion into complementary businesses. Additionally, the competitive telecommunications market often requires customer financing commitments. These commitments may be in the form of guarantees, secured debt or lease financing. At September 30, 1998, the Company had agreements to finance and arrange financing for approximately $85 million of paging and voice mail products. Further, at September 30, 1998, the Company had committed, subject to customers meeting certain conditions and requirements, to finance approximately $6 million for similar systems. The Company cannot currently predict the extent to which these commitments will be utilized, since certain - -------------------------------------------------------------------------------- 16 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ customers may be able to obtain more favorable terms using traditional financing sources. From time to time, the Company also arranges for third-party investors to assume a portion of its commitments. If used, the financing arrangements will be secured by the equipment sold by Glenayre. In 1997 Glenayre began the pre-construction phase for a 110,000 square foot expansion of its Vancouver facility to be used primarily for research and development and customer service. During the first quarter of 1998 Glenayre negotiated a contract for up to $15 million for the construction phase of the expansion. The total cost of the expansion is expected to be approximately $19 million and to be paid throughout the construction period in 1998 and 1999. Of this total, approximately $3.9 million, including approximately $3.0 million of cost incurred in 1998, has been paid and included in fixed assets as of September 30, 1998. The Company believes that funds generated from continuing operations, together with its current cash reserves and bank line of credit, will be sufficient to (i) support the short-term and long-term liquidity requirements for current operations (including annual capital expenditures and customer financing commitments) and (ii) to repurchase shares as discussed above. Company management believes that, if needed, it can establish additional borrowing arrangements with lending institutions. INCOME TAX MATTERS. In 1997 and recent years, the Company has had a favorable income tax position principally because of the existence of a significant amount of U.S. tax net operating loss carryforwards established prior to 1988 ("prior NOLs"). These tax loss carryforwards were available to shelter U.S. taxable income generated by the Company. Under the Company's operating and business structure, the majority of the worldwide taxable income was earned in the United States. Therefore, the Company's actual cash outlay for income taxes in 1997 and recent years was limited to U.S. alternative minimum tax and foreign and state income taxes. The remainder of prior NOLs were utilized in 1997. As of September 30, 1998, the Company has U.S. tax net operating loss carryforwards ("NOLs") aggregating $34 million related to the 1997 acquisitions of CNET, ODC and WAI. However, the ability to utilize the acquired NOLs to offset future income is subject to restrictions and there can be no assurance that they will be utilized in 1998 or future periods. Additionally, the percentage of worldwide income taxable in international jurisdictions may increase in the future. The Company has recorded a deferred tax asset of $15 million, net of a valuation allowance of $19 million, at September 30, 1998, in accordance with SFAS 109. This amount represents management's best estimate of the amount of NOLs and other future deductions that are more likely than not to be realized as offsets to future taxable income. YEAR 2000. The Company has been addressing "Year 2000" issues relating to the processing of date data at the turn of the century. A company-wide task force has been formed, milestones have been established, and detailed plans are actively being implemented so that Glenayre research programs, products and internal infrastructure systems are reviewed and the necessary changes are made. Glenayre's primary internal operating business system was replaced in 1998 and is Year 2000 ready. Additionally, Glenayre customer and supplier relationships are being reviewed to assess and address Year 2000 issues. The Company has undertaken internal reviews and has contacted certain of its customers to assess, to the extent possible, Year 2000 issues related to Glenayre products. The Company believes that it has made significant progress in making its product lines Year 2000 ready. While the Company is taking reasonable efforts to make information on the Year 2000 readiness of Glenayre products available to its customers, this information may not reach all customers. Glenayre's efforts to address Year 2000 issues will involve additional costs and the time and effort of a number of Glenayre employees. The Company believes, based on currently available information, that it will be able to manage its total Year 2000 transition without any material adverse effect on the Company's future consolidated results of operations, liquidity and capital resources. However, if the Company, its - -------------------------------------------------------------------------------- 16 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ large customers, or significant suppliers are unable to resolve such processing issues in a timely manner, Year 2000 issues could have a material impact on the operations of the Company. FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's Form 10-K, Summary Annual Report to Stockholders, Form 10-Q's and Form 8-K's and other written or oral statements made by or on behalf of the Company may include forward-looking statements reflecting the Company's current views with respect to future events and financial performance. Although certain cautionary statements have been made in this Form 10-Q relating to factors which may affect future operating results, a more detailed discussion of these factors is set forth in Exhibit 99 to this Form 10-Q. - -------------------------------------------------------------------------------- 17 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ PART II - OTHER INFORMATION ITEMS 1 THROUGH 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 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 None. - -------------------------------------------------------------------------------- 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Glenayre Technologies, Inc. ---------------------------- (Registrant) /s/ STANLEY CIEPCIELINSKI ---------------------------- Stanley Ciepcielinski Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) /s/ BILLY C. LAYTON ---------------------------- Billy C. Layton Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) Date: October 26, 1998 EX-15 2 EXHIBIT 15 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------ EXHIBIT 15 To the Board of Directors and Stockholders of Glenayre Technologies, Inc. Charlotte, North Carolina We are aware of the incorporation by reference in the Registration Statement Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number 33-88818 on Form S-4, dated March 24, 1995 (amended by Post-Effective Amendment Number 1 on Form S-8 dated March 25, 1996), Registration Statement Number 333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number 333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement Number 333-39717 on Form S-8 dated November 7, 1997 and Registration Statement Number 333-56375 on Form S-8 dated June 9, 1998 of our report dated October 16, 1998 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, 1998. Ernst & Young LLP Charlotte, North Carolina October 16, 1998 EX-27 3 GLENAYRE TECHNOLOGIES, INC. FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS DEC-31-1998 SEP-30-1998 17,213 0 225,294 0 48,736 261,506 110,048 0 524,208 85,371 0 0 0 344,341 87,984 524,208 303,103 303,103 150,813 150,813 134,815 0 0 23,340 8,444 14,896 0 0 0 14,896 0.24 0.23
EX-99 4 EXHIBIT 99 EXHIBIT 99 CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Glenayre Technologies, Inc. ("Glenayre" or the "Company"), from time to time, makes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the expectations of management of the Company at the time such statements are made. Glenayre is filing this cautionary statement to identify important factors that could cause Glenayre's actual results to differ materially from those in any forward-looking statements made by or on behalf of Glenayre. POTENTIAL MARKET CHANGES RESULTING FROM RAPID TECHNOLOGICAL ADVANCES Glenayre's business is primarily focused on paging and is subject to competition from alternative forms of communication. In addition, Glenayre's business is also focused on the wireless telecommunications industry. The wireless telecommunications industry is characterized by rapid technological change, including digital cellular telephone systems, which compete, directly or indirectly, with Glenayre's products or the services provided by the Company's customers. While the introduction of more advanced forms of telecommunication may provide opportunities to Glenayre for the development of new products, these advanced forms of telecommunication may reduce the demand for pagers and thus the type of paging systems and related software designed and sold by Glenayre. ACCEPTANCE OF TWO-WAY PAGING COMMUNICATION PRODUCTS While certain of Glenayre's customers have installed Glenayre's products used to provide two-way communications services, these services are available only in certain areas. The growth and installation of two-way paging systems by Glenayre's paging service provider customers may be delayed depending upon delays in installation, difficulties in initial operation of two-way systems, the availability of financing for its paging service provider customers and the market acceptance of two-way paging by the customers of such paging service providers. The development of the two-way market will also be affected by other technological changes in wireless messaging services, regulatory developments and general economic conditions. COMPETITION The Company currently faces competition from a number of other equipment manufacturers, certain of which are larger and have significantly greater resources than the Company. The Company also faces indirect competition from alternative wireless telecommunications technologies, including cellular telephone services, mobile satellite systems, specialized and private mobile radio systems, digital cellular telephone systems and broadband personal communications services. Although these technologies are generally higher priced than traditional paging services, technological improvements could result in increased capacity and efficiency for wireless two-way communication and could result in increased competition for the Company. VARIABILITY OF QUARTERLY RESULTS The Company's financial results in any single quarter are highly dependent upon the timing and size of customer orders and the shipment of products for large orders. Large orders from customers can account for a significant portion of products shipped in any quarter. Sales to one customer, which has a significant United States market presence, totaled approximately 16%, 15% and 11% of 1995, 1996 and 1997 fiscal year net sales, respectively. Beyond 1997, the customers with whom the Company does the largest amount of business are expected to vary from year to year as a result of the timing for development and expansion of customers' paging systems, the expansion into international markets and changes in the proportion of revenues generated by the products and services of Glenayre's newly acquired companies. Furthermore, if a customer delays or accelerates its delivery requirements or a product's completion is delayed or accelerated, revenues expected in a given quarter may be deferred or accelerated into subsequent or earlier quarters. Therefore, annual financial results are more indicative of the Company's performance than quarterly results, and results of operations in any quarterly period may not be indicative of results likely to be realized in the following quarterly periods. VOLATILITY OF STOCK PRICE The market price of Glenayre Common Stock is volatile. The market price of Glenayre Common Stock could be subject to significant fluctuations in response to variations in Glenayre's quarterly operating results and other factors such as announcements of technological developments or new products by Glenayre, developments in Glenayre's relationships with its customers, technological advances by existing and new competitors, general market conditions in the industry and changes in government regulations. In addition, in recent years conditions in the stock market in general and shares of technology companies in particular have experienced significant price and volume fluctuations which have often been unrelated to the operating performance of these specific companies. LIMITS ON PROTECTION OF PROPRIETARY TECHNOLOGY Glenayre owns or licenses numerous patents used in its operations. Glenayre believes that while these patents are useful to Glenayre, they are not critical or valuable on an individual basis. The collective value of the intellectual property of Glenayre is comprised of its patents, blueprints, specifications, technical processes and cumulative employee knowledge. Although Glenayre attempts to protect its proprietary technology through a combination of trade secrets, patent law, nondisclosure agreements and technical measures, such protection may not preclude competitors from developing products with features similar to Glenayre's products. The laws of certain foreign countries in which Glenayre sells or may sell its products, including The Republic of Korea, The People's Republic of China, Saudi Arabia, Thailand, Dubai, India and Brazil, do not protect Glenayre's proprietary rights in the products to the same extent as do the laws of the United States. POTENTIAL CHANGES IN GOVERNMENT REGULATION Many of Glenayre's products operate on radio frequencies. Radio frequency transmissions and emissions, and certain equipment used in connection therewith, are regulated in the United States, Canada and internationally. Regulatory approvals generally must be obtained by Glenayre in connection with the manufacture and sale of its products, and by Glenayre's paging service provider and other wireless customers to operate Glenayre's products. The enactment by federal, state, local or international governments of new laws or regulations or a change in the interpretation of existing regulations could affect the market for Glenayre's products. Although recent deregulation of international telecommunications industries along with recent radio frequency spectrum allocations made by the Federal Communications Commission ("FCC") in the United States have increased the demand for Glenayre's products by providing users of those products with opportunities to establish new paging and other wireless personal communications services, the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded personal communications services may not continue and future regulatory changes may not have a positive impact on Glenayre. The issuance of paging system licenses stimulates demand for the Company's products, however, delays in the issuance of licenses may adversely affect sales and the timing of sales of the Company's products. 2 FINANCING CUSTOMER PURCHASES FOR DEVELOPMENT OF THE TWO-WAY COMMUNICATIONS MARKET The Company finances customer purchases of its products for development of the two-way communications market for the build-out of two-way networks by its customers who acquired two-way licenses auctioned by the FCC (the "Two-Way License Holders"). Many of the Two-Way License Holders with whom the Company has or expects to enter into customer financing arrangements have limited operating histories, significant debt related to the acquisition of their two-way licenses and start-up expenses, negative cash flows from operations and some have never generated an operating profit. The Company generally retains a security interest in equipment for which it provides financing. INTERNATIONAL BUSINESS RISKS Approximately 50% of 1997 fiscal year net sales were generated in markets outside of the United States. International sales are subject to the customary risks associated with international transactions, including political risks, local laws and taxes, the potential imposition of trade or currency exchange restrictions, tariff increases, transportation delays, difficulties or delays in collecting accounts receivable, exchange rate fluctuations and the effects of prolonged currency destabilization in major international markets. Although a substantial portion of the international sales of the Company's products and services for fiscal year 1997 was negotiated in United States dollars, the Company may not be able to maintain such a high percentage of United States dollar denominated international sales. The Company seeks to mitigate its currency exchange fluctuation risk by entering into currency hedging transactions. The Company also acts to mitigate certain risks associated with international transactions through the purchase of political risk insurance and the use of letters of credit. 3 -----END PRIVACY-ENHANCED MESSAGE-----