<PAGE>
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 JUNE 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.
----------------------------------------------------------------------------
(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 July 22, 1996 was 61,321,868 shares.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEX
Part I - Financial Information:
Item 1. Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountant's Review Report........................................................3
Condensed Consolidated Balance Sheets as of
June 30, 1996 (Unaudited) and December 31, 1995..........................................4
Condensed Consolidated Statements of Income for the
Six months ended June 30, 1996 and 1995 (Unaudited)......................................5
Condensed Consolidated Statements of Income for the
Three months ended June 30, 1996 and 1995 (Unaudited)....................................6
Condensed Consolidated Statement of Stockholder's Equity
For the six months ended June 30, 1996 (Unaudited).......................................7
Condensed Consolidated Statements of Cash Flows for the
Six months ended June 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.....................................................12
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
Item 6. Exhibits and Reports on Forms 8-K............................................................16
</TABLE>
2
<PAGE>
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 June 30, 1996, and the
related condensed consolidated statements of income for the three-month periods
and six-month periods ended June 30, 1996 and 1995, the condensed consolidated
statement of stockholders' equity for the six months ended June 30, 1996 and the
condensed consolidated statements of cash flows for the six-month periods ended
June 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
July 19, 1996
3
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................................................. $116,360 $ 70,600
Short-term investments ................................................................ 63,791 44,054
Accounts receivable, net .............................................................. 89,837 89,265
Trade notes receivable, current ....................................................... 7,856 7,960
Inventories ........................................................................... 51,529 50,045
Deferred income taxes ................................................................. 9,216 7,568
Prepaid expenses and other current assets ............................................. 7,298 7,189
-------- --------
Total Current Assets .............................................................. 345,887 276,681
Trade notes receivable ..................................................................... 9,642 14,973
Property, plant and equipment, net ......................................................... 53,742 47,920
Goodwill ................................................................................... 78,531 80,240
Deferred income taxes ...................................................................... 24,722 27,487
Other assets ............................................................................... 522 279
-------- --------
TOTAL ASSETS ...................................................................... $513,046 $447,580
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable ...................................................................... $ 16,877 $ 15,709
Accrued liabilities ................................................................... 35,775 36,162
Other current liabilities ............................................................. 1,330 1,323
-------- --------
Total Current Liabilities ............................................................. 53,982 53,194
Other liabilities .......................................................................... 3,831 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: June 30, 1996 - 61,321,868 shares;
December 31, 1995 - 60,044,752 shares .............................................. 1,226 1,201
Contributed capital ........................................................................ 324,084 297,017
Retained earnings .......................................................................... 129,923 92,476
-------- --------
Total stockholders' equity ............................................................ 455,233 390,694
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................. $513,046 $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
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1996 1995
----------- ---------------
<S> <C> <C>
NET SALES ...................................... $ 194,463 $ 134,841
--------- ---------
COSTS AND EXPENSES:
Costs of sales ............................ 85,599 58,181
Selling, general and administrative expense 37,055 24,225
Research and development expense .......... 13,407 10,644
Depreciation and amortization expense ..... 6,376 3,521
--------- ---------
Total Costs and Expenses .............. 142,437 96,571
--------- ---------
INCOME FROM OPERATIONS ......................... 52,026 38,270
--------- ---------
OTHER INCOME (EXPENSES):
Interest income ........................... 4,821 4,067
Interest expense .......................... (96) (84)
Other, net ................................ 76 44
--------- ---------
Total Other Income (Expenses), net .... 4,801 4,027
--------- ---------
INCOME BEFORE INCOME TAXES ..................... 56,827 42,297
PROVISION FOR INCOME TAXES ..................... 16,888 10,292
--------- ---------
NET INCOME ..................................... $ 39,939 $ 32,005
========= =========
NET INCOME PER COMMON SHARE - PRIMARY .......... $ .63 $ .52
========= =========
NET INCOME PER COMMON SHARE -
FULLY DILUTED ............................. $ .62 $ .52
========= =========
</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
June 30,
-----------------------
1996 1995
----------- ---------
<S> <C> <C>
NET SALES ...................................... $ 105,085 $ 74,979
COSTS AND EXPENSES:
Costs of sales ............................ 45,832 32,322
Selling, general and administrative expense 19,041 12,274
Research and development expense .......... 7,054 5,945
Depreciation and amortization expense ..... 3,280 1,929
--------- ---------
Total Costs and Expenses .............. 75,207 52,470
--------- ---------
INCOME FROM OPERATIONS ......................... 29,878 22,509
--------- ---------
OTHER INCOME (EXPENSES):
Interest income ........................... 2,542 2,086
Interest expense .......................... (43) (39)
Other, net ................................ 56 71
--------- ---------
Total Other Income (Expenses), net .... 2,555 2,118
--------- ---------
INCOME BEFORE INCOME TAXES ..................... 32,433 24,627
PROVISION FOR INCOME TAXES ..................... 9,570 6,404
--------- ---------
NET INCOME ..................................... $ 22,863 $ 18,223
========= =========
NET INCOME PER COMMON SHARE - PRIMARY .......... $ .36 $ .29
========= =========
NET INCOME PER COMMON SHARE -
FULLY DILUTED ............................. $ .36 $ .29
========= =========
</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............................ 39,939 39,939
Stock options exercised............... 1,352 27 12,855 12,882
Utilization of net operating loss
carry forwards..................... 2,492 (2,492) --
Tax benefit of stock options
exercised.......................... 14,147 14,147
Repurchase of common stock........... (75) (2) (2,427) (2,429)
--------- --------- ----------- ---------- ----------------
Balances, June 30, 1996............... 61,322 $1,226 $324,084 $129,923 $455,233
====== ====== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
7
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------
1996 1995
------------ -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................................. 65,547 $ 12,999
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment .................................... (10,568) (10,168)
Proceeds from sale of equipment ..................................... 94 15
Net proceeds from 1993 sale of interest in oil and
gas pipeline construction business ............................ -- 3,600
Maturities of short-term investments ................................ 78,535 49,260
Purchases of short-term investments ................................. (98,272) (48,862)
Cash acquired net of acquisition costs .............................. -- 400
--------- ---------
Net cash used in investing activities ........................... (30,211) (5,755)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities ........................................ (90) (61)
Issuance of common stock ............................................ 12,943 5,198
Common stock repurchases ............................................ (2,429) --
--------- ---------
Net cash provided by financing activities ....................... 10,424 5,137
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................................ 45,760 12,381
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ........................................................... 70,600 52,043
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 116,360 $ 64,424
========= =========
SUPPLEMENT DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest ............................................................ $ 75 $ 80
Income taxes ........................................................ $ 3,685 $ 1,027
</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-and six-month periods ended June
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
June 30, December 31,
Inventories consist of: 1996 1995
---------------- -----------------
Raw materials.................... $29,653 $30,191
Work-in-process:
Uncompleted contracts......... 1,946 604
Other......................... 7,703 7,743
Finished goods................... 12,227 11,507
----------- -----------
$51,529 $50,045
======= ========
2. GOODWILL
Goodwill is shown net of accumulated amortization of $10.6 million and
$8.9 million at June 30, 1996 and December 31, 1995, respectively.
9
<PAGE>
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 Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1996 1995 1996 1995
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate ... $ 11,351 $ 8,620 $ 19,889 $ 14,804
Reduction in valuation allowance .............. (650) (3,261) (2,492) (6,456)
Foreign taxes at rates other than U.S.
statutory rate ............................. (1,742) - (1,980) 132
State taxes (net of federal benefit) .......... 1,054 802 1,847 1,376
U.S. Research and Experimentation Credits ..... (744) - (977) --
Non-deductible goodwill amortization .......... 301 243 601 436
-------- -------- -------- --------
Income tax provision .......................... $ 9,570 $ 6,404 $ 16,888 $ 10,292
======== ======== ======== ========
</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 and six month periods ended June 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 $650 thousand ($.01 per share) and $3.3 million ($.05 per
share) for the three months ended June 30, 1996 and 1995, respectively.
Additionally, the reduction in net income would have been $2.5 million
($.04 per share) and $6.5 million ($.11 per share) for the six months
ended June 30, 1996 and 1995, respectively.
The Company believes that it is more likely than not that the net
deferred tax asset recorded at June 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 REPURCHASE
Pursuant to a stock repurchase plan approved in 1994 by the Board of
Directors, the Company repurchased 75,000 shares of its common stock at a
cost of $2.4 million (shown as a reduction of common stock and
contributed capital) in March 1996.
(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 six-month periods ended
June 30, 1996 and 1995 was 63,882,377 and 61,304,325, respectively. The
number of shares used to compute primary per share data for the
three-month periods ended June 30, 1996 and 1995 was 64,014,861 and
62,123,573, 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 June 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 six-month periods ended June 30, 1996 and 1995 was
64,118,305 and 61,804,263, respectively. The number of shares used to
compute fully diluted per share data for the three-month periods ended
June 30, 1996 and 1995 was 64,144,361 and 62,415,821, respectively.
11
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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 OPERATION
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 service ("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.
SIX MONTHS ENDED JUNE 30, 1996
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
NET SALES
Net sales for the six months ended June 30, 1996 increased to $194.5 million
from net sales for the six months ended June 30, 1995 of $134.8 million, an
increase of $59.6 million, or 44.2%. Net sales of Wireless Messaging products
and Voice and Data products for the six months ended June 30, 1996 increased to
approximately $155.7 million and $25.7 million, respectively, from approximately
$111.1 million and $11.4 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 increased to
approximately $13.0 million from $12.3 million for the 1995 period. Sales to a
single customer totaled approximately 15% and 18% of sales for the six months
ended June 30, 1996 and 1995, respectively.
GROSS PROFIT
Gross profit increased to $108.9 million, or 56.0% of net sales, for the six
months ended June 30, 1996, from $76.7 million, or 56.9% of net sales, for the
six months ended June 30, 1995. The minimal change in gross margin percentage
was due to a change in the mix of products sold and the increase in fixed
manufacturing costs incurred as additional capacity was brought on line during
the latter half of 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $37.1 million, or 19.1%
of net sales, for the six months ended June 30, 1996, from $24.2 million, or
18.0% of net sales, for the six months ended June 30, 1995. The $12.8 million
increase primarily resulted from: (i) increased expenses of approximately $8.8
million for additional personnel related to sales, marketing and general support
functions, (ii) $2.2 million of promotional material, trade shows, increased
travel, and support costs,
12
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
and (iii) increase of $900 thousand relating to increased cost of leased
premises and international sales offices.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $6.4 million or 3.3% of net
sales, for the six months ended June 30, 1996 from $3.5 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 $13.4 million, or 6.9% of net sales,
for the six months ended June 30, 1996, from $10.6 million, or 7.9% of net
sales, for the six months ended June 30, 1995, an increase of $2.8 million, or
26.0%. 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 $4.8 million for the six months
ended June 30, 1996 compared to net interest income realized of $4.0 million for
the six months ended June 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 29.7% for the six months ended
June 30, 1996 and 24.3% for the six months ended June 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 29.7% in 1996 and 24.3% 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.
THREE MONTHS ENDED JUNE 30, 1996
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1995
NET SALES
Net sales for the three months ended June 30, 1996, increased to $105.1 million
from net sales for the three months ended June 30, 1995 of $75.0 million, an
increase of $30.1 million, or 40.2%. Net sales of Wireless Messaging products
and Voice and Data products for the three months ended June 30, 1996
13
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
increased to approximately $83.9 million and $16.1 million, respectively, from
approximately $60.5 million and $6.8 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 1996, service revenue decreased to approximately
$5.2 million from $7.7 million from 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 12% and
11% of sales for the three months ended June 30, 1996 and 1995, respectively.
GROSS PROFIT
Gross profit increased to $59.3 million, or 56.4% of net sales, for the three
months ended June 30, 1996, from $42.7 million, or 56.9% of net sales, for the
three months ended June 30, 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $19.0 million, or 18.1%
of net sales, for the three months ended June 30, 1996 from $12.3 million, or
16.4% of net sales, for the three months ended June 30, 1995. The $6.8 million
increase primarily resulted from: (i) increased expenses of approximately $4.0
million for additional personnel related to sales, marketing and general support
functions; (ii) an increase of $2.1 million relating to additional marketing,
sales support costs such as trade shows, foreign office lease expense, travel
and hiring expenses, and (iii) an additional $700 thousand related to legal
costs associated with international offices, and other normal expenses
associated with increased sales activities and building expansions.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $7.1 million, or 6.7% of net sales,
for the three months ended June 30, 1996, from $5.9 million, or 7.9% of net
sales, for the three months ended June 30, 1995, an increase of $1.1 million, or
18.7%. 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 $3.3 million or 3.1% of net
sales for the three months ended June 30, 1996 from approximately $1.9 million
or 2.6% of net sales for the same 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 $2.5 million for the three months
ended June 30, 1996 compared to net interest income realized of $2.0 million for
the three months ended June 30, 1995. The increase is primarily attributable to
higher average balances in cash and cash equivalents and short-term investments.
14
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 29.5% for the three months ended
June 30, 1996 and 26.0% for the three months ended June 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 29.5% in 1996 and 26.0% 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 June 30, 1996 was $291.9 million, including
cash and cash equivalents and short-term investments of $180.2 million. During
the six months ended June 30, 1996 the Company received cash of $12.9 million
from the exercise of stock options. During the six months ended June 30, 1996,
the Company spent $10.6 million for capital expenditures. These expenditures
were necessary in order to provide the equipment and capacity to meet the growth
of the business.
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 $1.8 million paid toward the new
facility is included in the capital expenditures for the six months ended June
30, 1996 with the remaining $4.7 million expected to be paid by the Company in
1996.
The Company's cash and cash equivalents are placed in short-term investments
consisting of high-grade commercial paper, bank certificates of deposit, U.S.
Treasury bills and notes, and repurchase agreements backed by U.S. Government
securities with original maturities of three months or less. The Company's
short-term investments are comprised of identical types of investments with the
exception that their original maturities are greater than three months, but do
not exceed one year. The Company expects to use its cash, cash equivalents, and
short-term investments for working capital and other general corporate purposes,
including the expansion and development of its existing products and markets,
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). Company management believes that, if needed, it can establish
appropriate borrowing arrangements with lending institutions.
15
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 3 ARE INAPPLICABLE AND HAVE BEEN OMITTED.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
At the Company's Annual Meeting of Stockholders held on May 22, 1996, the
following matters were submitted to a vote of the stockholders of the Company.
(i). The election of three directors each to serve a three-year term expiring
in 1999:
Nominee Shares Voted For Shares
Withheld
--------------------------- ----------------- ---------------
Ramon D. Ardizzone 50,750,850 384,872
Barry W. Gray 50,914,189 221,533
Edward J. Rosenthal 50,776,614 359,108
(ii). The approval of the Glenayre 1996 Incentive Stock Plan:
Votes for: 35,779,472
Votes against: 14,878,809
Votes abstained: 139,964
Broker non-votes: 337,477
(iii). Ratification of the selection of Ernst & Young LLP as auditors for the
year ending December 31, 1996 was approved by a vote of 51,067,434 shares for
and 9,970 shares against, with 58,318 shares abstaining.
ITEM 5 IS INAPPLICABLE AND HAS BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Computation of earnings per common share for the
six-month and three-month periods ended June 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.
16
<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: July 23, 1996
Exhibit 11
GLENAYRE TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
In Thousands Except Per Share Amounts
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net Income ........................................................ $39,939 $32,005 $22,863 $18,223
------- ------- ------- -------
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding during the period ............. 60,664 57,103 60,935 57,849
Common stock equivalents .......................................... 3,218 4,201 3,080 4,275
------- ------- ------- -------
63,882 61,304 64,015 62,124
======= ====== ====== ======
Net income per share .............................................. $ .63 $ .52 $ .36 $ .29
======= ====== ====== ======
FULLY DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding during the period ............. 60,664 57,103 60,935 57,849
Common stock equivalents .......................................... 3,454 4,701 3,209 4,567
------- ------- ------ -------
64,118 61,804 64,144 62,416
======= ====== ====== ======
Net income per share .............................................. $ .62 $ .52 $ .36 $ .29
======= ====== ====== ======
</TABLE>
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 July 19, 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 June 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
July 19, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 180,151
<SECURITIES> 0
<RECEIVABLES> 107,335
<ALLOWANCES> 0
<INVENTORY> 51,529
<CURRENT-ASSETS> 345,887
<PP&E> 68,950
<DEPRECIATION> 15,208
<TOTAL-ASSETS> 513,046
<CURRENT-LIABILITIES> 53,982
<BONDS> 0
0
0
<COMMON> 325,310
<OTHER-SE> 129,923
<TOTAL-LIABILITY-AND-EQUITY> 513,046
<SALES> 194,463
<TOTAL-REVENUES> 194,463
<CGS> 85,599
<TOTAL-COSTS> 85,599
<OTHER-EXPENSES> 56,838
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 56,827
<INCOME-TAX> 16,888
<INCOME-CONTINUING> 39,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,939
<EPS-PRIMARY> .63
<EPS-DILUTED> .62
</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 focused entirely upon 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 can not
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.
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 totalled
approximately 13% and 16% of 1994 and 1995 fiscal year net sales, respectively.
The customers with whom the Company does the largest amount of business
generally change from year to year which results from the timing for development
and
<PAGE>
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 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 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
2
<PAGE>
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
and to facilitate 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