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, 1996
---------------------------
[ ] 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.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209
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(Address of principal executive offices) Zip Code
(704) 553-0038
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 23, 1996 was 59,862,834 shares.
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I - Financial Information:
Item 1. Financial Statements
Page
Independent Accountant's Review Report........................................................3
Condensed Consolidated Balance Sheets as of
September 30, 1996 (Unaudited) and December 31, 1995.....................................4
Condensed Consolidated Statements of Income for the
Nine months ended September 30, 1996 and 1995 (Unaudited)................................5
Condensed Consolidated Statements of Income for the
Three months ended September 30, 1996 and 1995 (Unaudited)...............................6
Condensed Consolidated Statement of Stockholder's Equity
For the nine months ended September 30, 1996 (Unaudited).................................7
Condensed Consolidated Statements of Cash Flows for the
Nine months ended September 30, 1996 and 1995 (Unaudited)................................8
Notes to Condensed Consolidated Financial Statements (Unaudited)..............................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................13
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K............................................................18
</TABLE>
2
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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, 1996, and the
related condensed consolidated statements of income for the three-month periods
and nine-month periods ended September 30, 1996 and 1995, the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 1996 and the condensed consolidated statements of cash flows for
the nine-month periods ended September 30, 1996 and 1995. 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, 1995, 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 31, 1996, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of December 31,
1995, 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 18, 1996
3
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 40,483 $ 70,600
Short-term investments....................................... 107,575 44,054
Accounts receivable, net..................................... 96,604 89,265
Trade notes receivable, current.............................. 9,530 7,960
Inventories ................................................. 53,843 50,045
Deferred income taxes........................................ 28,191 7,568
Prepaid expenses and other current assets.................... 7,678 7,189
--------------- ---------------
Total Current Assets..................................... 343,904 276,681
Trade notes receivable............................................ 11,441 14,973
Property, plant and equipment, net................................ 60,965 47,920
Goodwill.......................................................... 77,674 80,240
Deferred income taxes............................................. 5,332 27,487
Other assets...................................................... 570 279
---------------- ---------------
TOTAL ASSETS...................................................... $499,886 $447,580
================ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 18,009 $15,709
Accrued liabilities.......................................... 39,730 36,162
Other current liabilities.................................... 176 1,323
--------------- ----------------
Total Current Liabilities................................ 57,915 53,194
Other liabilities................................................. 4,117 3,692
Stockholders' Equity:
Preferred stock, $.01 per value; 5,000,000 shares authorized,
no shares issued and outstanding.......................... -- --
Common stock, $.02 par value; authorized 200,000,000 shares;
outstanding: September 30, 1996 - 59,862,834 shares;
December 31, 1995 - 60,044,752 shares..................... 1,197 1,201
Contributed capital.......................................... 295,862 297,017
Retained earnings............................................ 140,795 92,476
--------------- ----------------
Total stockholders' equity................................ 437,854 390,694
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $499,886 $447,580
=============== ===============
</TABLE>
Note: The balance sheet at December 31, 1995 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
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------------
1996 1995
---------------------- ---------------------
<S> <C> <C>
NET SALES......................................................... $286,035 $222,945
-------------- --------------
COSTS AND EXPENSES:
Costs of sales............................................... 129,429 96,067
Selling, general and administrative expense.................. 58,226 39,657
Research and development expense............................. 20,697 17,084
Depreciation and amortization expense........................ 9,855 5,778
------------- ---------------
Total Costs and Expenses................................. 218,207 158,586
------------- ---------------
INCOME FROM OPERATIONS............................................ 67,828 64,359
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OTHER INCOME (EXPENSES):
Interest income.............................................. 7,437 6,100
Interest expense............................................. (135) (138)
Other, net................................................... 105 246
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Total Other Income (Expenses), net....................... 7,407 6,208
------------- ---------------
INCOME BEFORE INCOME TAXES........................................ 75,235 70,567
PROVISION FOR INCOME TAXES........................................ 21,495 17,501
------------- ---------------
NET INCOME........................................................ $ 53,740 $ 53,066
============= ===============
NET INCOME PER COMMON SHARE - PRIMARY............................. $ .84 $ .85
================ ===============
NET INCOME PER COMMON SHARE -
FULLY DILUTED................................................ $ .84 $ .85
================= ================
</TABLE>
See notes to condensed consolidated financial statements
5
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Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------------------------
1996 1995
---------------------- ---------------------
<S> <C> <C>
NET SALES ........................................................ $91,572 $88,104
------------ ---------------
COSTS AND EXPENSES:
Costs of sales.................................................. 43,830 37,886
Selling, general and administrative expense............... 21,171 15,432
Research and development expense............................. 7,290 6,440
Depreciation and amortization expense........................ 3,479 2,257
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Total Costs and Expenses................................. 75,770 62,015
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INCOME FROM OPERATIONS............................................ 15,802 26,089
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OTHER INCOME (EXPENSES):
Interest income.............................................. 2,616 2,033
Interest expense............................................. (39) (54)
Other, net................................................... 29 202
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Total Other Income (Expenses), net....................... 2,606 2,181
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INCOME BEFORE INCOME TAXES........................................ 18,408 28,270
PROVISION FOR INCOME TAXES........................................ 4,607 7,209
------------- ---------------
NET INCOME........................................................ $13,801 $21,061
============ ===============
NET INCOME PER COMMON SHARE - PRIMARY............................. $ .22 $ .33
============= ===============
NET INCOME PER COMMON SHARE -
FULLY DILUTED................................................ $ .22 $ .33
============= ==============
</TABLE>
See notes to condensed consolidated financial statements
6
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Stock Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
-------- ----------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995.......... 60,045 $1,201 $297,017 $92,476 $390,694
Net Income............................ 53,740 53,740
Stock options exercised............... 1,388 28 14,019 14,047
Utilization of net operating loss
carryforwards...................... 5,421 (5,421) --
Tax benefit of stock options
exercised.......................... 15,686 15,686
Repurchase of common stock............ (1,570) (32) (36,281) (36,313)
------- -------- ---------- ----------- ----------
Balances, September 30, 1996.......... 59,863 $1,197 $295,862 $140,795 $437,854
======= ======= ========== =========== ==========
</TABLE>
See notes to condensed consolidated financial statements
7
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------------
1996 1995
---------------- ------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES......................... $77,219 $28,562
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment.................................. (20,444) (21,517)
Proceeds from sale of equipment................................... 123 14
Net proceeds from 1993 sale of interest in oil and gas
pipeline construction business................................. -- 3,600
Maturities of short-term investments.............................. 122,793 83,471
Purchases of short-term investments............................... (186,314) (97,878)
Cash acquired net of acquisition costs............................ -- 396
----------- ----------
Net cash used in investing activities......................... (83,842) (31,914)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities...................................... (1,289) (288)
Issuance of common stock.......................................... 14,108 12,483
Common stock repurchases.......................................... (36,313) --
----------- -----------
Net cash provided by (used in) financing activities........... (23,494) 12,195
---------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................................................. (30,117) 8,843
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD......................................................... 70,600 52,043
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $40,483 $60,886
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.......................................................... $ 68 $ 139
Income taxes...................................................... $ 4,911 $ 1,323
</TABLE>
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On April 25, 1995, the Company acquired Western Multiplex Corporation. In
connection with this acquisition the Company paid $1,323,000 in acquisition
costs and issued common stock valued at $27,260,000 for assets with a fair value
of $31,769,000 and assumed liabilities of $3,186,000.
See notes to condensed consolidated financial statements
8
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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, 1996 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1996. 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 April 1995, the Company completed the acquisition of Western Multiplex
Corporation ("MUX"). The operating results of MUX 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, 1995.
1. INVENTORIES
September 30, December 31,
Inventories consist of: 1996 1995
------------------ -----------------
Raw materials............... $29,647 $30,191
Work-in-process:
Uncompleted contracts.... 2,899 604
Other.................... 9,104 7,743
Finished goods.............. 12,193 11,507
----------- -----------
$53,843 $50,045
=========== ==========
2. GOODWILL
Goodwill is shown net of accumulated amortization of $11.5 million and
$8.9 million at September 30, 1996 and December 31, 1995, respectively.
9
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1996 1995 1996 1995
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate.. $6,443 $9,894 $26,332 $24,698
Reduction in valuation allowance............. (2,929) (2,595) (5,421) (9,051)
Foreign taxes at rates other than U.S.
statutory rate............................ 194 (1,391) (1,786) (1,259)
State taxes (net of federal benefit)......... 598 917 2,445 2,293
U.S. Research and Experimentation Credits.... - - (977) -
Non-deductible goodwill amortization......... 301 384 902 820
---------- -------- ------- -------
Income tax provision......................... $4,607 $7,209 $21,495 $17,501
====== ====== ======= =======
</TABLE>
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 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-month and nine-month periods ended September 30,
1996 and 1995 would have been reduced by the amount of the benefit from
utilization of tax net operating loss carryforwards. Such reduction in
net income would have been $2.9 million ($.05 per share) and $2.6 million
($.04 per share) for the three months ended September 30, 1996 and 1995,
respectively. Additionally, the reduction in net income would have been
$5.4 million ($.08 per share) and $9.1 million ($.15 per share) for the
nine months ended September 30, 1996 and 1995, respectively.
The Company believes that it is more likely than not that the net
deferred tax asset recorded at September 30, 1996 will be fully realized.
10
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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) STOCK REPURCHASES
In 1994, the Board of Directors of the Company authorized the repurchase
from time-to-time of the Company's common stock not to exceed
approximately 1.7 million shares. The Company repurchased 75,000 shares
and 1,495,000 shares in March 1996 and September 1996, respectively, at
an aggregate cost of $36.3 million completing the original repurchase
authorization. On September 25, 1996 the Board of Directors authorized
the repurchase up to an additional 2.5 million shares.
(C) ESTABLISHMENT OF INCENTIVE STOCK PLAN
On May 22, 1996, the Company's stockholders approved the establishment of
the 1996 Incentive Stock Plan (the "Plan") to promote the long-term
financial interest and growth of the Company, reserving 2,200,000 shares
for directors, certain key employees and other key persons providing
services to the Company and its subsidiaries. The Plan is administered by
a committee of the Board of Directors.
(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 primary per share data for the nine-month periods ended
September 30, 1996 and 1995 was 63,845,604 and 62,083,536, respectively.
The number of shares used to compute primary per share data for the
three-month periods ended September 30, 1996 and 1995 was 63,747,916 and
63,536,072, 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, 1996 and 1995 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,
1996 and 1995 was 63,867,033 and 62,663,733 respectively. The number of
shares used to compute fully diluted per share data for the three-month
periods ended September 30, 1996 and 1995 was 63,747,665 and 63,707,642,
respectively.
11
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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5. PENDING BUSINESS ACQUISITION
On October 16, 1996, the Company entered into an agreement to acquire
CNET, Inc. ("CNET"), located in Plano, Texas. CNET provides operational
support, network management and network planning, software products,
services and equipment to the wireless communications industry. The
estimated purchase price of approximately $7.5 million consists of
approximately 310,000 shares of the Company's common stock valued at
approximately $6.5 million based on the stock price at the date of the
agreement and $1 million in cash. In addition, the Company will assume
certain stock options to purchase shares of CNET common stock which will
be converted into options to purchase approximately 60,000 shares of the
Company's common stock.
12
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 (paging and narrowband
personal communication services ("NPCS") products), or (ii) Voice and Data
Technologies (voice messaging, microwave communication and radio telephone
products) categories. Additionally, Glenayre provides service and support to its
products. In April 1995, the Company completed the acquisition of Western
Multiplex Corporation ("MUX"). The operating results of MUX are included in the
operating results of the Company since the acquisition date.
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and related Notes and the Cautionary
Statement included as Exhibit 99.
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1995
NET SALES
Net sales for the nine months ended September 30, 1996 increased to $286.0
million from net sales for the nine months ended September 30, 1995 of $222.9
million, an increase of $63.1 million, or 28.3%. Net sales of Wireless Messaging
products and Voice and Data products for the nine months ended September 30,
1996 increased to approximately $223.2 million and $40.7 million, respectively,
from approximately $178.9 million and $21.7 million, respectively, for the prior
period. The increase in net sales was primarily a result of the sales of new
systems and the continued expansion and upgrading of existing systems within the
installed customer base. In the 1996 period, service revenue including
maintenance contracts, installation, project management and training revenue
decreased to approximately $22.1 million from $22.3 million for the 1995 period.
Sales to a single customer totaled approximately 15% and 19% of sales for the
nine months ended September 30, 1996 and 1995, respectively.
GROSS PROFIT
Gross profit increased to $156.6 million, or 54.8% of net sales, for the nine
months ended September 30, 1996, from $126.9 million, or 56.9% of net sales, for
the nine months ended September 30, 1995. The decrease in gross margin
percentage is primarily the result of: (i) an increase in fixed costs from
additional capacity brought on line during the latter half of 1995 in
anticipation of NPCS product line shipments which have been delayed by customers
and which would have increased volume and utilized the additional capacity; and
(ii) additional customer support costs. The Company expects the commercial
shipments of its NPCS product line will begin in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $58.2 million, or 20.4%
of net sales, for the nine months ended September 30, 1996, from $39.7 million,
or 17.8% of net sales, for the nine months
13
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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of approximately $10.8 million for additional personnel related to sales,
marketing and general support functions; (ii) an increase of $5.5 million
relating to additional marketing, sales support costs such as promotional
material, trade shows, international office lease expenses, travel and hiring
expenses; and (iii) $2.3 million related to legal costs associated with
international offices and other normal expenses associated with increased
operating activities.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $9.9 million or 3.4% of net
sales, for the nine months ended September 30, 1996 from $5.8 million or 2.6% of
net sales for the prior period. The increase is primarily attributable to (i)
the significant purchases of plant and equipment during 1995 and (ii) goodwill
related to the acquisition of MUX in April 1995.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $20.7 million, or 7.2% of net sales,
for the nine months ended September 30, 1996, from $17.1 million, or 7.7% of net
sales, for the nine months ended September 30, 1995, an increase of $3.6
million, or 21.1%. The increase was primarily a result of increased research and
development manpower and research material purchased. The research and
development costs were primarily for new product development and enhancements to
existing products. Both hardware and software development costs are included in
research and development costs. All research and development costs are expensed
as incurred.
INTEREST INCOME, NET
The Company realized net interest income of $7.3 million for the nine months
ended September 30, 1996 compared to net interest income realized of $6.0
million for the nine months ended September 30, 1995. The increase is primarily
attributable to higher average balances in cash and cash equivalents and
short-term investments.
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 28.6% for the nine months ended
September 30, 1996 and 24.8% for the nine months ended September 30, 1995 is
primarily the result of the utilization of the Company's net operating losses
and 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 28.6% in 1996 and
24.8% in 1995 is primarily the result of a variance between the 1996 and 1995
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 3 to the Condensed Consolidated
Financial Statements.
14
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1995
NET SALES
Net sales for the three months ended September 30, 1996, increased to $91.6
million from net sales for the three months ended September 30, 1995 of $88.1
million, an increase of $3.5 million, or 3.9%. The increase in net sales was
primarily a result of the increase in sales of Voice and Data products. Net
sales of Wireless Messaging products and Voice and Data products for the three
months ended September 30, 1996 were approximately $67.5 million and $15.0
million, respectively, compared with approximately $67.8 million and $10.3
million, respectively, for the prior period. In 1996, service revenue decreased
to approximately $9.2 million from $10.0 million in 1995. The decrease was
primarily due to fewer project management and installation contracts being
completed in 1996 compared to the prior period. One customer accounted for
approximately 16% and 21% of sales for the three months ended September 30, 1996
and 1995, respectively.
GROSS PROFIT
Gross profit decreased to $47.7 million, or 52.1% of net sales, for the three
months ended September 30, 1996, from $50.2 million, or 57.0% of net sales, for
the three months ended September 30, 1995. The decrease in gross margin
percentage is primarily the result of: (i) an increase in fixed costs from
additional capacity brought on line during the second half of 1995 in
anticipation of NPCS product line shipments which have been delayed by customers
and which would have utilized the additional capacity; (ii) additional customer
support costs; and (iii) product mix which included a greater proportion of
sales of products with lower margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $21.2 million, or 23.1%
of net sales, for the three months ended September 30, 1996 from $15.4 million,
or 17.5% of net sales, for the three months ended September 30, 1995. The $5.7
million increase primarily resulted from: (i) increased expenses of
approximately $3.6 million for additional personnel related to sales, marketing
and general support functions; and (ii) an increase of approximately $1.8
million relating to additional marketing, sales support costs such as trade
shows, international office lease expenses, travel and hiring expenses.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $7.3 million, or 8.0% of net sales,
for the three months ended September 30, 1996, from $6.4 million, or 7.3% of net
sales, for the three months ended September 30, 1995, an increase of $850
thousand, or 13.2%. The increase was primarily a result of increased research
and development manpower and research material purchased.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $3.5 million or 3.8% of net
sales for the three months ended September 30, 1996 from approximately $2.3
million or 2.6% of net sales for the same
15
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
period in 1995. The increase is primarily attributable to the significant
purchases of plant and equipment during 1995.
INTEREST INCOME, NET
The Company realized net interest income of $2.6 million for the three months
ended September 30, 1996 compared to net interest income realized of $2.0
million for the three months ended September 30, 1995. The increase is primarily
attributable to higher average balances in cash and cash equivalents and
short-term investments.
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 25.0% for the three months ended
September 30, 1996 and 25.5% for the three months ended September 30, 1995 is
primarily the result of the utilization of the Company's net operating losses
and the application of SFAS 109 in computing the Company's tax provision. The
difference between the effective tax rate of 25.0% in 1996 and 25.5% in 1995 is
primarily the result of a variance between the 1996 and 1995 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 3 to the Condensed Consolidated Financial
Statements.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital at September 30, 1996 was $286.0 million,
including cash and cash equivalents and short-term investments of $148.1
million. Accounts payable and accrued liabilities at September 30, 1996
increased from December 31, 1995 primarily as a result of timing differences and
increased levels of operating activities. During the nine months ended September
30, 1996 the Company received cash of $14.1 million from the exercise of stock
options. During the nine months ended September 30, 1996, the Company spent
$20.4 million for capital expenditures. These expenditures were necessary in
order to provide the equipment and capacity to meet the growth of the business.
During the nine months ended September 30, 1996, the Company repurchased
1,570,000 of its common shares at an aggregate cost of $36.3 million.
In April 1996, the Company completed negotiations to build a 75,000 square foot
facility with a total cost of approximately $6.5 million in Atlanta, Georgia to
replace the current leased Atlanta facilities used for sales, service, research
and development, and training. Approximately $4.4 million paid toward the new
facility is included in the capital expenditures for the nine months ended
September 30, 1996 with the remaining $2.1 million expected to be paid by the
Company by December 31, 1996.
In September 1996, the Company completed negotiations to purchase a 42,000
square foot facility with a total cost of approximately $11.0 million in
Singapore to replace the current leased facilities used for sales and service.
Approximately $1.0 million paid toward the new facility is included in the
capital expenditures for the nine months ended September 30, 1996 with
approximately $9.0 million and $1.0 million to be paid by the Company in
November 1996 and the first quarter 1997, respectively.
The Company's cash and cash equivalents are placed in short-term investments
consisting of high-grade commercial paper, bank certificates of deposit, U.S.
Treasury bills and notes, and repurchase agreements backed by U.S. Government
securities with original maturities of three months or less. The Company's
short-term investments are comprised of identical types of investments with the
exception that their original maturities are greater than three months, but do
not exceed one year.
16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
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, financing
customer purchases of its products, and the possible expansion into
complementary businesses.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to support its short-term and
long-term liquidity requirements for current operations (including capital
expenditures and stock repurchases). Company management believes that, if
needed, it can establish appropriate borrowing arrangements with lending
institutions.
17
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 Employment Agreement, dated August 27, 1996,
between Glenayre Technologies, Inc. and
Gary B. Smith is filed herewith.
Exhibit 11 Computation of earnings per common share for the
nine-month and three-month periods ended September
30, 1996 and 1995.
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
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Glenayre Technologies, Inc.
-----------------------------------
(Registrant)
/s/ Stanley Ciepcielinski
-----------------------------------
Stanley Ciepcielinski
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Billy C. Layton
-----------------------------------
Billy C. Layton
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Date: October 24, 1996
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
as of the 27th day of August, 1996 by and between GLENAYRE TECHNOLOGIES, INC., a
Delaware corporation (the "Corporation"), and GARY B. SMITH (the "Executive").
Statement of Purpose
The Corporation desires to secure the Executive's continued
participation in the manner hereinafter specified in the business of the
Corporation and to make provision for payment of reasonable compensation to the
Executive for such services. The Executive is willing to be employed by the
Corporation to perform the duties incident to such employment upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing Statement of Purpose
and the terms and provisions of this Agreement, the parties hereto agree as
follows:
1. Employment and Duties.
(a) Employment. Effective as of June 26, 1996, the Corporation hereby
employs the Executive, and the Executive hereby agrees to serve, as the
President and Chief Operating Officer of the Corporation.
(b) Duties. In such capacity, the Executive agrees to perform such
duties and exercise such powers commensurate with his office as may from time to
time be reasonably requested of him by the Chief Executive Officer of the
Corporation or the Board of Directors of the Corporation (the "Board") or vested
in him by the bylaws of the Corporation, subject to the control and direction of
the Chief Executive Officer of the Corporation and the Board. During the Term,
the Executive shall:
(1) devote substantially all of his business time, attention
and abilities to the businesses of the Corporation (including its
subsidiaries or affiliates, when so required), and in any case as much
thereof as the Chief Executive Officer of the Corporation or the Board
may reasonably deem to be necessary for such businesses;
(2) faithfully serve the Corporation and use his best efforts
to promote and develop the interests of the Corporation; and
(3) not acquire, directly or indirectly, any interest in any
firm, partnership, association or corporation, the business operations
of which may in any manner, directly or indirectly, compete with the
trade or businesses of the Corporation or any of its subsidiaries or
affiliates, provided that the Executive may beneficially own, directly
or indirectly, or exercise control or direction over, the voting
securities of a publicly traded company, on the condition that the
percentage of such securities owned, controlled or directed by the
Executive shall not exceed 5% of the voting securities of the publicly
traded company.
2. Term of Employment.
(a) Term. The initial term of the Executive's employment hereunder
shall be for a period of two years, commencing on June 26, 1996. The term of the
Executive's employment hereunder shall be automatically renewed for successive
two-year renewal terms thereafter unless written notice is given by either party
to the other party not later than 180 days prior to the expiration of the
initial term or any renewal term. The initial term and each renewal term are
referred to collectively in this Agreement as the "Term".
<PAGE>
(b) Earlier Termination. Notwithstanding the provisions of Paragraph
2(a) above, the Executive's employment hereunder may be terminated prior to the
expiration of the Term as follows:
(1) The Corporation may terminate the Executive's employment
hereunder for "Cause" (as defined in Paragraph 2(c) below), provided
that the Corporation complies with the provisions of Paragraph 2(f)(1)
below;
(2) The Corporation may terminate the Executive's employment
hereunder upon the Executive's "Total and Permanent Disability" (as
defined in Paragraph 2(d) below), provided that the Corporation
complies with the provisions of Paragraph 2(f)(1) and (2) below;
(3) The Executive may terminate his employment hereunder for
"Good Reason" (as defined in Paragraph 2(e) below);
(4) The Executive's employment hereunder shall terminate
automatically upon his death.
(c) Definition of "Cause". As used herein, "Cause" shall mean the
occurrence of any of the following:
(1) the Executive's resignation from the office of President
and Chief Operating Officer of the Corporation without its prior
consent;
(2) acts of dishonesty or fraud on the part of the Executive
which are intended to result in his substantial personal enrichment at
the expense of the Corporation or its affiliates;
(3) the conviction after the exhaustion of all appeals by the
Executive of a felony involving moral turpitude or the entry of a plea
of nolo contendere for such a felony; or
(4) material violation of the Executive's responsibilities as
set forth herein which are willful and deliberate; provided, however,
that prior to the determination by the Board (acting on the
recommendation of the Chief Executive Officer of the Corporation) that
"Cause" under this Paragraph 2(c)(4) has occurred, the Board shall (A)
provide to the Executive in writing, in reasonable detail, the reasons
for the Board's determination that such "Cause" exists, (B) afford the
Executive a reasonable opportunity to remedy any such breach, (C)
provide the Executive an opportunity to be heard at the Board meeting
where the final decision to terminate the Executive's employment
hereunder for such "Cause" is to be considered, and (D) make any
decision that such "Cause" exists in good faith.
(d) Definition of "Total and Permanent Disability". The Executive shall
be considered to have a "Total and Permanent Disability" if he qualifies for
disability benefits under a long-term disability plan sponsored by the
Corporation or its affiliates.
(e) Definition of "Good Reason". As used herein, "Good Reason" shall
mean the occurrence of any of the following:
(1) except where such failure or change is specifically
approved by the Executive (whether as a member of the Board or
individually), failure to elect or reelect or to appoint or reappoint
the Executive to the office of President and Chief Operating Officer of
the Corporation, or to a senior executive office of the Corporation or
of any of its subsidiaries or affiliates at least equal in dignity,
responsibility, importance and scope thereto, or any other material
change by the Corporation of the Executive's functions, duties or
responsibilities which would cause the ranking or level, dignity,
responsibility, importance or scope of the Executive's position with
the Corporation to become of less dignity, responsibility, importance
or scope from the position and attributes thereof described in
Paragraph 1
<PAGE>
above; provided, however, that the Executive must first (i)
provide the Board with written notice specifying the particular failure
of the Corporation under this Paragraph 2(e)(1), and (ii) allow the
Board 60 days from receipt of notice to cure such failure;
(2) the liquidation, dissolution, consolidation or merger of
the Corporation, or the transfer of all or substantially all of its
assets, other than a transaction in which a successor corporation with
a net worth at least equal to that of the Corporation assumes this
Agreement and all obligations and undertakings of the Corporation
hereunder;
(3) any failure by the Corporation to pay to the Executive the
Base Salary or other compensation and benefits provided for herein;
(4) any other material breach of this Agreement by the
Corporation; or
(5) any "Change in Control", which shall mean any of the
following:
(A) the acquisition, after the date of this
Agreement, of 25% or more of the Corporation's common stock by
any person, entity or united group, which acquisition is not
supported by the Executive and the Chief Executive Officer of
the Corporation; or
(B) a material change in the composition or character
of the Board which shall include, but not be limited to, (i)
the replacement of a majority of incumbent directors by
directors not supported by the Executive and the Chief
Executive Officer of the Corporation or (ii) at any meeting of
the Corporation's shareholders, the election of a majority of
directors standing for election who have not been supported by
the Executive and the Chief Executive Officer of the
Corporation.
(6) Any change in the principal office of the Corporation to a
location which is more than 30 miles from its current principal office
at 5935 Carnegie Boulevard, Charlotte, North Carolina 28209.
(f) Payments to the Executive Upon Termination of Employment. In the
event that the Executive's employment with the Corporation is terminated,
whether upon the expiration of the Term or upon the earlier termination of the
Term as provided in Paragraph 2(b) above, then the Corporation shall pay to the
Executive the following amounts on the date of such termination and shall
provide to the Executive the following benefits, as applicable:
(1) In the event that the Executive's employment hereunder is
terminated for any reason whatsoever, the Corporation shall pay to the
Executive an amount equal to the sum of (i) his accrued but unpaid Base
Salary, plus (ii) his accrued but unpaid vacation pay, plus (iii) any
other compensation payments or benefits which have accrued and are
payable in connection with such termination.
(2) In the event that the Executive's employment hereunder is
terminated (i) by the Corporation because of the Executive's "Total and
Permanent Disability" pursuant to Paragraph 2(b)(2) above, (ii) because
of the Executive's death pursuant to Paragraph 2(b)(4) above or (iii)
by the Executive for "Good Reason" pursuant to Paragraph 2(b)(3) above,
then and in any such event, the Corporation shall also pay to the
Executive a pro rata share of his bonus under the Management by
Objectives Bonus Plan described in Paragraph 3(b) below for the fiscal
year of the Corporation in which such termination occurs, calculated,
for purposes of determining whether the targets contained therein have
been met, under the assumption that the results of operations and
financial condition of the Corporation (or any applicable subsidiary)
as of the termination date shall continue on the same basis through the
end of such fiscal year.
<PAGE>
(3) In the event that the Executive's employment hereunder is
terminated (i) by the Corporation without "Cause" or (ii) by the
Executive for "Good Reason" pursuant to Paragraph 2(b)(3) above, then
and in any such event, the Corporation shall also pay to the Executive
an amount equal to two times the annual rate of Base Salary being paid
to the Executive at the time of such termination.
(4) In the event that the Executive's employment hereunder is
terminated upon expiration of the Term (unless the Executive refused to
negotiate with the Corporation for an employment agreement with terms
substantially similar to this Agreement), then the Corporation shall
also pay to the Executive an amount equal to 50% of the annual rate of
Base Salary being paid to the Executive at the time of such
termination.
3. Compensation. Subject to the terms of this Agreement and until the
termination of the Term as provided in Paragraph 2 above, the Corporation shall
pay compensation and provide benefits to the Executive as follows:
(a) Base Salary. The Corporation shall pay to the Executive an initial
base salary of $250,000 per annum, which shall be automatically increased to
$275,000 per annum, effective as of January 1, 1997. Such base salary, as
increased at least annually on each January 1 during the Term as provided in
this Paragraph, is referred to herein as the "Base Salary". The Base Salary
shall be payable in equal monthly installments on the last business day of each
month, or in such other installments and at such other times as the parties
hereto may mutually agree upon. The Base Salary shall be increased (but not
decreased) effective on January 1, 1997 as provided in this Paragraph and on
each anniversary date thereafter in the manner determined by the Board or its
Compensation Committee in its absolute discretion.
(b) Management by Objectives Bonus Plan. The Executive shall
participate in the Management by Objectives Bonus Plan, as in effect from time
to time.
(c) Stock Options. As of June 26, 1996, the Executive has been awarded
options to purchase 50,000 shares of the Corporation's common stock, $.02 par
value per share.
(d) 401(K) Plan. The Executive shall be eligible to participate in the
Corporation's 401(K) voluntary deferred compensation program (the "401(K) Plan")
up to the maximum amount permitted by the terms of the 401(K) Plan, and the
Corporation agrees to match the amounts of compensation deferred up to the
maximum amount permitted under the provisions of the 401(K) Plan.
(e) Automobile or Automobile Allowance. The Corporation shall furnish
an automobile or, at the Corporation's election, an automobile allowance to the
Executive. Such automobile or automobile allowance shall be commensurate with
the Executive's senior position, and, if the Executive is furnished an
automobile, the Corporation shall pay all reasonable expenses for the operation,
insurance and maintenance of such automobile.
(f) Vacation. The Executive shall be entitled to take four weeks of
vacation (or, if more, the vacation provided under the Corporation's standard
vacation policy for senior executives) in each successive 12-month period during
the Term at such times as shall be mutually convenient to the Executive and the
Corporation.
(g) Other Benefits. In addition to participation in all of the
compensation and incentive programs as described in this Agreement, the
Executive shall be entitled to participate in all bonus, compensation, savings,
stock option, and other incentive plans and programs and in all retirement,
life, medical/dental and disability insurance and benefit plans of the
Corporation, to the extent that he qualifies under the eligibility requirements
of the respective plan or program.
(h) Reimbursement of Expenses. In addition to automobile expenses, the
Corporation shall reimburse the Executive for all reasonable expenses incurred
personally by him on behalf of the Corporation.
4. Location of Office. The Executive's principal place of employment
shall be in Charlotte, North Carolina and he shall not be required to change
such principal place of employment.
<PAGE>
5. Confidential Information.
(a) Covenant. The Executive shall not divulge, during the Term or at
any time thereafter, to any person not employed by the Corporation or its
subsidiaries or affiliates or otherwise engaged to render services to the
Corporation or its subsidiaries or affiliates, any material Confidential
Information.
(b) Definition of "Confidential Information". As used herein,
"Confidential Information" means:
(1) the name, address or requirements of any customer of the
Corporation; or
(2) any other secret or confidential information relating to
any activity, invention or discovery of the Corporation not already in
the public domain that the Executive has or shall have acquired during
his employment by the Corporation or its subsidiaries or affiliates.
Provided, however, that this provision shall not preclude the Executive from
disclosing such Confidential Information as may be required by any applicable
law, regulation or directive or any governmental agency, court or other
authority having jurisdiction in the matter, or in the proper course of conduct
of the Corporation's business. In the event that any person seeks legally to
compel the Executive to disclose Confidential Information, the Executive shall
promptly provide the Corporation with notice so that the Corporation may have
opportunity to seek a protective order or other appropriate remedy.
6. Benefit of Designs.
(a) Familiarity with Inventions, Etc. In this Paragraph 6, the term
"Corporation" includes any of its subsidiaries or affiliates thereof. The
Executive acknowledges that the Corporation is engaged in the research, design
and manufacture of various products and desires to acquire inventions and
improvements relating thereto. The Executive, in connection with his duties
hereunder, will become familiar with the Corporation's businesses and is
expected, to the extent consistent with his senior position, to utilize the
Corporation's time, materials, facilities and information in making inventions
and improvements relating to such products.
(b) Records and Disclosure. The Executive shall keep, maintain and make
available to the Corporation complete and up-to-date written records, including
photographs and drawings, of his inventions and improvements relating to the
Corporation's products that the Executive may solely or jointly make during the
period of employment under this Agreement, which records shall be the property
of the Corporation. The Executive shall promptly and fully disclose in writing
to the Corporation all such inventions and improvements, whether patentable or
not, which relate to the Corporation's products that the Executive may solely or
jointly make during the period of his employment under this Agreement which
relate directly to any circuit, circuit design concept or program developed or
being developed by the Corporation during the period of the Executive's
employment of which he was aware, and all such inventions and improvements shall
be the sole and exclusive property of the Corporation.
(c) Rights to Inventions, Etc. The Executive further agrees to assign
and does hereby assign and transfer to the Corporation all his right, title and
interest in and to all such inventions and improvements and in and to any letter
patent or application for letters patent thereon in and for all countries. The
Executive further agrees, at the expense of the Corporation, to do all things
and to execute and deliver all documents necessary therefor whenever so
requested by the Corporation.
7. Non-Competition. The Executive agrees that following the termination
of his employment by the Corporation, he will not at any time during the period
of six months from the date of such termination (without the prior written
consent of the Corporation, which consent will not be unreasonably withheld),
either individually or in partnership, or in conjunction with any person or
persons, firm, association, syndicate, company or corporation as principal,
agent, director, officer, employee, consultant, investor or in any other manner
whatsoever, carry on or be engaged in or be
<PAGE>
concerned with or interested in, or advise, lend money to, guarantee the debts
or obligations of or permit his name or any part thereof to be used or employed
by any such person or persons, firm, association, syndicate, company, or
corporation engaged in or concerned with any interests in any business in
competition with the business of the Corporation (or any of its subsidiaries or
affiliates) carried on by them during the term or terms of this Agreement within
North America; provided that the Executive may beneficially own, directly or
indirectly, or exercise control or direction over the voting securities of a
publicly traded company, but the number of voting securities so owned,
controlled or directed by the Executive shall not exceed 5% of the voting
securities of such publicly traded company; and further provided that where the
Executive's employment under this Agreement is terminated without "Cause" or by
the Executive for "Good Reason" and in either case the Corporation makes the
payment described in Paragraph 2(f)(3) hereof, the period of non-competition
described in this Paragraph 7 shall be one year from the date of termination of
the Executive's employment under this Agreement.
8. Indemnification. The Corporation agrees to indemnify, defend and
hold harmless the Executive from and against any and all liabilities to which he
may be subject as a result of his employment hereunder (as a result of his
service as an officer or director of the Corporation or as an officer or
director of any of its subsidiaries or affiliates), as well as the costs,
including attorney's and other professional fees and disbursements, of any legal
action brought or threatened against him as a result of such employment, to the
fullest extent permitted by, and subject to the limitations of, Delaware law.
9. Reimbursement of Legal and Related Expenses. In the event that any
dispute shall arise between the Executive and the Corporation relating to his
rights under this Agreement, and it is determined by agreement between the
parties, or by a final judgment of a court of competent jurisdiction that is no
longer subject to appeal, that the Executive has been substantially successful
in his claims, then reasonable legal fees and disbursements of the Executive in
connection with such dispute shall be paid by the Corporation.
10. Assignment. The Executive may not assign this Agreement or any of
his rights, benefits, obligations or duties hereunder to any other person, firm,
corporation or other entity.
11. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed to have been duly given when
personally delivered or on the fourth business day after being placed in the
United States mail by certified mail, return receipt requested, postage prepaid,
addressed to the parties hereto as follows (provided that notice of change of
address shall be deemed given only when actually received):
As to the Corporation: Glenayre Technologies, Inc.
5935 Carnegie Boulevard
Charlotte, North Carolina 28209
Attention: Chief Executive Officer
As to the Executive: Gary B. Smith
c/o Glenayre Technologies, Inc.
5935 Carnegie Boulevard
Charlotte, North Carolina 28209
The address of any of the parties may be changed from time to time by such party
serving notice upon the other parties.
12. Law Applicable. This Agreement is made and executed with the
intention that the construction, interpretation and validity hereof shall be
determined in accordance with and governed by the laws of the State of North
Carolina.
13. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the Corporation, its successors and assigns. This Agreement shall
be binding upon and inure to the benefit of the Executive, his heirs and
personal representatives.
<PAGE>
14. Entire Agreement; Modification. This Agreement constitutes the
entire agreement between the parties with respect to the subject matter hereof
and supersedes and cancels all prior or contemporaneous oral or written
agreements and understandings between them with respect to the subject matter
hereof. This Agreement may not be changed or modified orally but only by an
instrument in writing signed by the parties hereto, which instrument states that
it is an amendment to this Agreement.
15. Severability. Should any provision of this Agreement or any part
thereof be held invalid or unenforceable, the same shall not affect or impair
any other provision of this Agreement or any part thereof and the invalidity or
unenforceability of any provision of this Agreement shall not have any effect on
or impair the obligation of the Corporation or the Executive.
16. Execution. This Agreement is hereby executed in multiple
counterparts, each of which shall be deemed an original hereof.
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
signed by its officers and its corporate seal to be hereunto affixed, and the
Executive has hereunto set his hand and seal, all as of the day and year first
above written.
GLENAYRE TECHNOLOGIES, INC.
[CORPORATE SEAL]
By: /s/ Ramon D. Ardizzone
ATTEST: Chairman of the Board and Chief Executive Officer
/s/ Billy C. Layton
Assistant Secretary
/s/ Gary B. Smith [SEAL]
Gary B. Smith
EXHIBIT 11
GLENAYRE TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
In Thousands Except Per Share Amounts
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income.................................................. $53,740 $53,066 $13,801 $21,061
======== ======= ======== =======
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding during the period....... 60,844 57,749 61,192 59,019
Common stock equivalents.................................... 3,002 4,335 2,556 4,517
------- ------- -------- ------
63,846 62,084 63,748 63,536
====== ====== ====== ======
Net income per share........................................ $ .84 $ .85 $ .22 $ .33
====== ===== ===== =====
FULLY DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding during the period....... 60,844 57,749 61,192 59,019
Common stock equivalents.................................... 3,023 4,915 2,556 4,689
------- ------- ------- -------
63,867 62,664 63,748 63,708
====== ====== ====== ======
Net income per share........................................ $ .84 $ .85 $ .22 $ .33
====== ===== ===== =====
</TABLE>
<PAGE>
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 33-43798 on Form S-8 dated November 5, 1991 (amended December 9, 1992),
Registration Statement Number 33-68766 on Form S-8 dated September 14, 1993,
Registration Statement Number 33-80464 on Form S-8 dated June 17, 1994,
Registration Statement Number 33-88818 on Form S-4, dated March 24, 1995
(amended by Post Effective Amendment Number 1 on Form S-8 dated March 25, 1996),
and Registration Statement Number 333-04635 on Form S-8 dated May 28, 1996, of
our report dated October 18, 1996 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, 1996.
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 18, 1996
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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.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
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0
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<TOTAL-LIABILITY-AND-EQUITY> 499,886
<SALES> 286,035
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<CGS> 129,429
<TOTAL-COSTS> 129,429
<OTHER-EXPENSES> 88,778
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</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Glenayre Technologies, Inc. ("Glenayre" or the "Company") sets forth
below the following cautionary statement identifying important factors that
could cause the Company's actual results to differ materially from those
projected in any forward looking statements made by or on behalf of the Company.
These cautionary statements are made pursuant to Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both enacted
pursuant to the Private Securities Litigation Reform Act of 1995.
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, and subject to, rapid
and significant technological change and future technological advances,
including digital-based cellular telephone systems, which may result in the
availability of new services or products which compete, directly or indirectly,
with Glenayre's products or the services provided by the Company's customers.
The effect of such technological advances on the business of the Company cannot
be predicted, and there can be no assurance that such technological advances
will not adversely affect Glenayre. 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 transmission systems
and related software designed and sold by Glenayre. In addition, there can be no
assurance that Glenayre will be able to develop successfully these new products
or to provide additional enhancements to its existing products.
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, and there can be no assurance that the
Company will be able to compete successfully in the future. In addition,
manufacturers of wireless telecommunications equipment, including those in the
cellular telephone industry, certain of which are larger and have significantly
greater resources than the Company, could elect to enter into the Company's
markets and compete with Glenayre's products. 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-based cellular telephone systems and broadband
personal communication services. These technologies, among others, are currently
in use or under development. Although these technologies are higher priced than
traditional paging services or are not yet commercially available, technological
improvements could result in increased capacity and efficiency for wireless
two-way communication and, accordingly, could result in increased competition
for the Company. See "Potential Market Changes from Rapid Technological
Advances".
VARIABILITY OF QUARTERLY RESULTS
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. Sales to one customer totaled
approximately 13% and 16% of 1994 and 1995 fiscal year net sales, respectively.
The customers with whom the Company does the
<PAGE>
largest amount of business generally 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.
In addition, comparisons to the results of the Company's prior quarterly periods
may not be appropriate indicators of future quarterly period results.
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. Such market fluctuations and economic conditions
unrelated to Glenayre may adversely affect the market price of Glenayre's Common
Stock.
LIMITS ON PROTECTION OF PROPRIETARY TECHNOLOGY AND INFRINGEMENT CLAIMS
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 some 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. Although Glenayre believes that its products
and technology do not infringe on the proprietary rights of others, Glenayre is
currently party to certain infringement claims, and there can be no assurance
that third parties will not assert additional infringement claims against
Glenayre in the future. If such litigation resulted in Glenayre's inability to
use technology, Glenayre might be required to expend substantial resources to
develop alternative technology or to license the prior technology. There can be
no assurance that Glenayre could successfully develop alternative technology or
license the prior technology on commercially reasonable terms. Glenayre does not
believe, however, that an adverse resolution of the pending claims would have a
material adverse effect on Glenayre.
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. There can
be no assurance that appropriate regulatory approvals will continue to be
obtained, or that approvals required with respect to products being developed
for the personal communications services market will be obtained. 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, there can be no assurance that the trend
toward deregulation and current regulatory developments favorable to the
promotion of new and expanded personal communications services will continue or
that other future regulatory changes will have a positive impact on
2
<PAGE>
Glenayre. In February 1996, the FCC released a notice of proposed rule making
covering a licensing rule and procedure change on the 929 MHz and 931 MHz as
well as certain other paging frequencies which included a freeze on its
acceptance of new applications for paging system licenses. In April 1996, the
FCC partially lifted this freeze to permit paging service providers to submit
expansion applications for paging transmitter sites within 40 miles of their
existing sites. As the issuance of new paging system licenses stimulates demand
for the Company's products, this freeze may adversely affect sales and the
timing of sales of the Company's products in the United States.
FINANCING CUSTOMER PURCHASES FOR DEVELOPMENT OF NPCS MARKET
The Company expects to finance 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 recently acquired NPCS
licenses auctioned by the FCC (the "NPCS License Holders"). Glenayre has
provided customer financing in the past on a selected basis but generally has
not extended credit except in accordance with the usual and customary terms of
the industry. The NPCS market, including two-way paging, is still in the
developmental stages and will require the application of new technology. There
can be no assurances that this technology will be developed, that NPCS will be
accepted in the marketplace or that NPCS will be commercially viable. The
development of the NPCS market will be affected by matters beyond the control of
the Company such as technological changes in wireless messaging services,
regulatory developments and general economic conditions. Many of the NPCS
License Holders with whom the Company expects to enter into customer financing
arrangements have limited operating histories, significant debt related to the
acquisition of their NPCS licenses and start-up expenses, negative cash flows
from operations and some have never generated an operating profit. There can be
no assurance that these customers will be able to repay Glenayre for the
equipment sold under customer financing arrangements. The Company plans to
retain a lien on any equipment for which it provides financing. There can be no
assurance that the equipment will be returned in the event of a default or be
saleable upon recovery.
INTERNATIONAL BUSINESS RISKS
Approximately 35% of 1995 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, to a lesser extent, exchange rate
fluctuations. Although a substantial portion of the international sales of the
Company's products and services for fiscal year 1995 was negotiated in U.S.
dollars, there can be no assurance that the Company will be able to maintain
such a high percentage of U.S. dollar denominated international sales. The
Company seeks to mitigate its currency exchange fluctuation risk by entering
into currency hedging transactions. The Company also acts to mitigate certain
risks associated with international transactions through the purchase of
political risk insurance and the use of letters of credit.
3
