SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
-----------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
------------------------------------ --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209
(Address of principal executive offices) Zip Code
(704) 553-0038
---------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par
value $.02 per share, at April 22, 1997 was 60,197,344 shares.
<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
March 31, 1997 (Unaudited) and December 31, 1996.......................4
Condensed Consolidated Statements of Income for the
Three months ended March 31, 1997 and 1996 (Unaudited).................5
Condensed Consolidated Statement of Stockholders' Equity
For the three months ended March 31, 1997 (Unaudited).................6
Condensed Consolidated Statements of Cash Flows for the
Three months ended March 31, 1997 and 1996 (Unaudited).................7
Notes to Condensed Consolidated Financial Statements (Unaudited)............8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................11
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K..........................................15
</TABLE>
2
<PAGE>
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 March 31, 1997, and the
related condensed consolidated statements of income, the condensed consolidated
statement of stockholders' equity and the condensed consolidated statements of
cash flows for the three-month periods ended March 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of
December 31, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 28, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1996, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Charlotte, North Carolina
April 17, 1997
3
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................... $ 82,032 $53,785
Short-term investments....................................... 48,577 78,016
Accounts receivable, net..................................... 126,455 119,851
Trade notes receivable, current.............................. 11,230 10,236
Inventories ................................................. 51,317 50,460
Deferred income taxes........................................ 15,931 19,291
Prepaid expenses and other current assets.................... 7,383 7,957
------- -------
Total Current Assets..................................... 342,925 339,596
Trade notes receivable............................................ 22,748 13,085
Property, plant and equipment, net................................. 83,119 80,501
Goodwill........................................................... 85,016 76,818
Deferred income taxes............................................. 8,581 10,372
Other assets...................................................... 1,473 838
--------- ---------
TOTAL ASSETS...................................................... $543,862 $521,210
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................. $ 17,866 $ 19,614
Accrued liabilities.......................................... 45,212 40,781
Other current liabilities.................................... 240 170
------ -------
Total Current Liabilities................................ 63,318 60,565
Other liabilities................................................. 4,587 4,784
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized,
no shares issued and outstanding.......................... --- ---
Common stock, $.02 par value; authorized 200,000,000 shares;
outstanding: March 31, 1997 - 60,197,344 shares;
December 31, 1996 - 59,868,202 shares..................... 1,203 1,197
Contributed capital.......................................... 308,656 301,771
Retained earnings............................................ 166,098 152,893
--------- --------
Total stockholders' equity................................ 475,957 455,861
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $543,862 $521,210
========= ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
<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>
Three Months Ended
March 31,
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
NET SALES ........................................................ $105,771 $89,378
-------- -------
COSTS AND EXPENSES:
Costs of sales............................................... 50,550 39,767
Selling, general and administrative expense............... 23,444 18,014
Research and development expense............................. 8,649 6,353
Depreciation and amortization expense........................ 4,535 3,096
-------- -------
Total Costs and Expenses................................. 87,178 67,230
-------- -------
INCOME FROM OPERATIONS............................................ 18,593 22,148
-------- -------
OTHER INCOME (EXPENSES):
Interest income.............................................. 2,161 2,279
Interest expense............................................. (14) (53)
Other, net................................................... 71 20
-------- -------
Total Other Income (Expenses), net....................... 2,218 2,246
-------- -------
INCOME BEFORE INCOME TAXES........................................ 20,811 24,394
PROVISION FOR INCOME TAXES........................................ 7,365 7,318
------- -------
NET INCOME........................................................ $13,446 $17,076
======== =======
NET INCOME PER COMMON SHARE - PRIMARY............................. $ .22 $ .27
======== =======
NET INCOME PER COMMON SHARE - FULLY DILUTED...................... $ .22 $ .27
========= ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT 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, 1996.......... 59,868 $1,197 $301,771 $152,893 $455,861
Net Income............................ 13,446 13,446
Stock options exercised............... 16 --- 88 88
Shares issued in connection with
business acquisition............... 313 6 6,535 6,541
Utilization of net operating loss
carryforwards...................... 241 (241) ---
Tax benefit of stock options
exercised.......................... 21 21
------- ------ ------- ------- ------
Balances, March 31, 1997........... 60,197 $1,203 $308,656 $166,098 $475,957
======== ======= ======= ======= ========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1997 1996
---------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. $ 6,384 $ 19,416
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............ (5,639) (4,269)
Proceeds from sale of equipment ....................... 24 19
Maturities of short-term investments .................. 53,661 29,394
Purchases of short-term investments ................... (24,223) (39,378)
Payments for business acquisition, net of cash acquired (1,122) --
------- --------
Net cash provided by (used in) investing activities 22,701 (14,234)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities .......................... (926) (44)
Issuance of common stock .............................. 88 5,360
Common stock repurchases .............................. -- (2,429)
------- --------
Net cash provided by (used in) financing activities (838) 2,887
-------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS .......................................... 28,247 8,069
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................................. 53,785 70,600
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 82,032 $ 78,669
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 20 $ 41
Income taxes .......................................... 1,072 2,337
</TABLE>
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
See notes to condensed consolidated financial statements
7
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of dollars)
(unaudited)
Glenayre Technologies, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. The Company's financial results in any quarter are
highly dependent upon various factors, including the timing and size of customer
orders and the shipment of products for large orders. Large orders from
customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1996.
1. BUSINESS ACQUISITION
On January 9, 1997, the Company completed the acquisition of CNET, Inc.
("CNET"), located in Plano, Texas. CNET develops and provides integrated
operational support systems, network management, traffic analysis, and radio
frequency propagation software products and services for the global wireless
communications industry. CNET licenses its products to cellular, paging and
personal communications services operators and wireless equipment manufacturers
worldwide. The purchase price of $7.7 million consisted of 369,983 shares of the
Company's common stock (including 56,620 shares issuable upon exercise of stock
options) valued at $6.5 million, $1.0 million in cash and $194,000 in
acquisition costs. The acquisition will be accounted for as a purchase business
combination and the purchase price was assigned to the net assets acquired based
on the fair values of such assets and liabilities at the date of the
acquisition, as follows:
Current assets.......................... $1,752
Equipment............................... 412
Goodwill................................ 9,343
Other non-current assets................ 346
Liabilities assumed..................... (4,118)
--------
$7,735
========
2. INVENTORIES
March 31, December 31,
Inventories consist of: 1997 1996
------------------ -----------------
Raw materials................. $25,230 $25,656
Work-in-process:
Uncompleted contracts...... 4,429 3,757
Other...................... 7,079 7,603
Finished goods................ 14,579 13,444
------- -------
$51,317 $50,460
======= =======
8
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
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3. GOODWILL
Goodwill is shown net of accumulated amortization of $13.5 million and
$12.4 million at March 31, 1997 and December 31, 1996, respectively.
4. INCOME TAXES
The Company's consolidated income tax provision was different from the
amount computed using the U.S. statutory income tax rate for the following
reasons:
Three Months Ended
March 31,
--------------------------
1997 1996
Income tax provision at U.S. statutory rate..... $7,284 $8,538
Reduction in valuation allowance................ (241) (1,842)
Foreign taxes at rates other than U.S.
statutory rate............................... (560) (238)
State taxes (net of federal benefit)............ 479 793
U.S. Research and Experimentation Credits....... --- 300
Non-deductible goodwill amortization.......... . 403 (233)
------ ------
Income tax provision............................ $7,365 $7,318
====== =======
Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 5, the benefits derived from the utilization of tax net
operating loss carryforwards are reported in the statement of operations in the
year such tax benefits are realized and then reclassified from retained earnings
to contributed capital. The Company adopted the accounting method for
utilization of these tax net operating loss carryforwards outlined above on
February 1, 1988. On September 28, 1989, the Securities and Exchange Commission
("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the
SEC staff's position with respect to this accounting treatment. According to the
SEC staff's interpretation of Statement of Financial Accounting Standards No.
96, "Accounting for Income Taxes," contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with the SEC staff and determined that the SEC staff would
not object to the accounting method outlined above for companies which had
adopted such accounting methods prior to the issuance of SAB 86.
If the original guidance in SAB 86 had been applied, the Company's net
income for the three-months ended March 31, 1997 and 1996 would have been
reduced by the amount of the benefit from utilization of tax net operating loss
carryforwards. Such reduction in net income would have been $241,000 (less than
$.01 per share) and $1.8 million ($.03 per share) for the three months ended
March 31, 1997 and 1996, respectively.
The Company believes that it is more likely than not that the net
deferred tax asset recorded at March 31, 1997 will be fully realized.
9
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
- ----------------------------------------------------------------------------
5. STOCKHOLDERS' EQUITY
(a) Quasi-Reorganization
On February 1, 1988, the Company completed a quasi-reorganization. After
determining that the Company's balance sheet reflected approximate fair value on
that date and that revaluation was not necessary, the accumulated deficit and
the cumulative translation adjustment were adjusted to zero by reclassifying
them to contributed capital. A new retained earnings account was established as
of February 1, 1988.
(b) Income per Common Share
Primary income per common share was computed by dividing net income by
the weighted average number of shares of common stock outstanding plus the
shares that would be outstanding assuming exercise of dilutive stock options
which are considered to be common stock equivalents. The number of common shares
that would be issued from the exercise of stock options has been reduced by the
number of common shares that could be purchased from the proceeds at the average
market price of the Company's stock during the periods such options were
outstanding. The number of shares used to compute primary per share data for the
three-month periods ended March 31, 1997 and 1996 was 61,903,081 and 63,727,518,
respectively.
For purposes of the fully diluted income per share computations, the
number of shares that could be issued from the exercise of stock options
outstanding at the end of the period has been reduced by the number of shares
which could have been purchased from the proceeds at the higher of the market
price of the Company's stock on March 31, 1997 and 1996 or the average market
prices during the periods such options were outstanding. For those options
exercised during the period, the computation for the period prior to exercise is
based on the market price when the option was exercised. The number of shares
used to compute fully diluted per share data for the three-month periods ended
March 31, 1997 and 1996 was 61,901,683 and 63,734,640 respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," ("FASB 128") which is required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact is
expected to result in an increase of less than $.01 to primary earnings per
share for the three months ended March 31, 1997 and an increase in primary
earnings per share for the three months ended March 31, 1996 of $.01 per share.
The impact of FASB 128 on the calculation of fully diluted earnings per share
for these quarters is not expected to be material.
(c) Stock Options
Subsequent to March 31, 1997, the Plan Administration Committee of the
Board of Directors of Glenayre repriced substantially all outstanding stock
options held by current employees of Glenayre with exercise prices in excess of
$9 per share to the closing market price on the repricing date. This repricing
covered outstanding stock options for approximately 3 million shares of the
Common Stock of Glenayre.
10
<PAGE>
Glenayre Technologies, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures,
markets and services telecommunications equipment and software used in wireless
personal communications systems throughout the world. The Company's product
families are grouped in either (i) Wireless Messaging (including products and
services sold into the paging and Narrowband Personal Communication Services
("NPCS") marketplace and the Company's major service and support groups); (ii)
Integrated Network (including the Company's MVP(R) Modular Voice Processing
system and the network management systems of its newly acquired subsidiary,
CNET, Inc.); and (iii) Wireless Interconnect (including products for microwave
communications systems and rural radio.) On January 9, 1997 the Company
completed the acquisition of CNET, Inc. ("CNET"). The operating results of CNET
are included in the operating results of the Company since the acquisition date.
The following discussion should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and related Notes and the Cautionary
Statement included as Exhibit 99.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1996
NET SALES
The Company's net sales for the three months ended March 31, 1997 increased to
$106 million from net sales for the three months ended March 31, 1996 of $89
million, an increase of $16 million, or 18%. The increase in sales was primarily
due to increased delivery of the Company's MVP systems and microwave radio
products. Net sales of the Wireless Messaging, Integrated Network and Wireless
Interconnect groups were approximately $84 million, $13 million and $9 million,
respectively, for the three months ended March 31, 1997 compared to
approximately $80 million, $4 million, and $5 million, respectively, for the
three months ended March 31, 1996. Sales to a single customer, Paging Network,
Inc. ("PageNet"), totaled approximately 14% and 17% of sales for the three
months ended March 31, 1997 and 1996, respectively. PageNet issued a press
release on April 17, 1997 which announced, among other things, that Motorola,
Inc. had been selected as PageNet's preferred infrastructure supplier. The
Company is unable to determine the impact this development will have on future
operating results. The Company believes that the dependence on any one customer
is mitigated by the large number of companies in the Company's customer base and
the timing for development and expansions of their systems.
The Company continues to anticipate continued growth in 1997 sales of its paging
products to the international market. However, due to the current constrained
financing market for the U.S. paging industry and existing capacity of paging
providers to serve their subscribers, the Company expects 1997 shipments to the
domestic market of its one-way paging products to be below 1996 levels. These
are forward-looking statements and the Company's actual results could differ
materially due to rapid technological advances in the wireless
telecommunications industry, delays in the introduction and market acceptance of
NPCS products and systems, competition, limits on protection of Glenayre's
proprietary technology, changes in governmental regulation and international
business risks.
11
<PAGE>
GROSS PROFIT
Gross profit increased to $55 million, or 52% of net sales, for the three months
ended March 31, 1997, from $50 million, or 56% of net sales, for the three
months ended March 31, 1996. The decrease in gross margin percentage is
primarily the result of: (i) a change in the product mix which included a
greater portion of sales of products with lower margins including increased
revenue from international turn-key projects; and (ii) additional customer
support costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $23 million, or 22% of
net sales, for the three months ended March 31, 1997, from $18 million, or 20%
of net sales, for the three months ended March 31, 1996. The increase in expense
is primarily due to: (i) the addition of sales, marketing, and administrative
personnel and other expenses associated with the Company's higher sales volume;
(ii) the inclusion of operating expenses incurred by CNET only since the
acquisition date in January 1997; and (iii) general increases in personnel costs
and other purchased services.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $4.5 million or 4% of net
sales, for the three months ended March 31, 1997 from $3.1 million or 3% of net
sales for the three months ended March 31, 1996. The increase is primarily
attributable to: (i) the significant increase in purchases of equipment during
1996 and (ii) the amortization of goodwill related to the acquisition of CNET in
January 1997.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs increased to $8.6 million, or 8% of net sales,
for the three months ended March 31, 1997, from $6.4 million, or 7% of net
sales, for the three months ended March 31, 1996, an increase of $2.3 million,
or 36%. The Company relies on its research and development programs related to
new products and the improvement of existing products for the continued growth
of its business. The increase in expense is primarily a result of additional
expenditures in manpower and materials for these programs and the inclusion of
expenditures incurred by CNET only since the acquisition date in January 1997.
Research and development costs are expensed as incurred.
INTEREST INCOME, NET
The Company realized net interest income of $2.1 million for the three months
ended March 31, 1997 compared to net interest income realized of $2.2 million
for the three months ended March 31, 1996. Higher average balances in cash and
cash equivalents, short-term investments and notes receivables were offset by
lower average interest rates experienced on cash equivalents and short-term
investments in the 1997 period compared to 1996.
INCOME TAXES
The difference between the combined U.S. federal and state statutory tax rate of
approximately 40% and the effective tax rate of 35.4% for the three months ended
March 31, 1997 and 30.0% for the three months ended March 31, 1996 is primarily
the result of: (i) the utilization of the Company's net
12
<PAGE>
operating losses; (ii) lower tax rates on earnings indefinitely
reinvested in certain non-U.S. jurisdictions and (iii) the application of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," ("SFAS 109"), in computing the Company's tax provision. The difference
between the effective tax rate of 35.4% in 1997 and 30.0% in 1996 is primarily
the result of a variance between the 1997 and 1996 adjustments for realization
of tax benefits of net operating loss carryforwards for financial statement
purposes in accordance with SFAS 109 primarily due to revisions during each
period to the estimated future taxable income during the Company's loss
carryforward period. See Note 4 to the Condensed Consolidated Financial
Statements.
FINANCIAL CONDITION AND LIQUIDITY
The Company's working capital at March 31, 1997 was $280 million, including cash
and cash equivalents and short-term investments of $131 million. Accrued
liabilities at March 31, 1997 increased from December 31, 1996 primarily as a
result of increased operating activities and timing differences. Notes
receivables at March 31, 1997 increased from December 31, 1996 due to customer
requests for financing in the normal course of business primarily for purchases
of the Company's one-way paging and NPCS products. Goodwill at March 31, 1997
increased from December 31, 1996 as a result of the CNET acquisition in January
1997. During the three months ended March 31, 1997, the Company spent $5.6
million for capital expenditures. These expenditures were necessary in order to
provide the equipment to meet the growth of the business.
The Company's cash and cash equivalents are placed in short-term investments
consisting of high-grade commercial paper, bank certificates of deposit, U.S.
Treasury bills and notes, and repurchase agreements backed by U.S. Government
securities with original maturities of three months or less. The Company's
short-term investments are comprised of identical types of investments with the
exception that their original maturities are greater than three months, but do
not exceed one year.
The Company expects to use its cash, cash equivalents, and short-term
investments for working capital and other general corporate purposes, including
the expansion and development of its existing products and markets, and the
possible expansion into complementary businesses. In September 1996, the Board
of Directors authorized the purchase of 2,500,000 shares of the Company's common
stock. As of March 31, 1997, no shares had been repurchased under the 1996
authorization. Additionally, the competitive telecommunications market often
requires customer financing commitments. These commitments may be in the form of
guarantees, secured debt or lease financing. At March 31, 1997, the Company had
agreements to finance and arrange financing for approximately $57 million of
paging and voice mail products. Further, at March 31, 1997, the Company had
committed, subject to customers meeting certain conditions and requirements, to
finance approximately $65 million for similar systems. The Company cannot
currently predict the extent to which these commitments will be utilized, since
certain customers may be able to obtain more favorable terms using traditional
financing sources. From time to time, the Company also arranges for third-party
investors to assume a portion of its commitments. If exercised, the financing
arrangements will be secured by the equipment sold by Glenayre.
The Company believes that funds generated from continuing operations, together
with its current cash reserves, will be sufficient to support its short-term and
long-term liquidity requirements for current operations (including capital
expenditures and stock repurchases). Company management believes that, if
needed, it can establish appropriate borrowing arrangements with lending
institutions.
13
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's Form 10-K, Annual Report to Stockholders, Form 10-Q or any Form
8-K or any other written or oral statements made by or on behalf of the Company
include forward-looking statements reflecting the Company's current views with
respect to future events and financial performance.
Although certain cautionary statements have been made in this Form 10-Q related
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 of this Form 10-Q.
14
<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 Termination Agreement, dated March 18, 1997
between the Company and Kenneth C.Thompson.
Exhibit 11 Computation of earnings per common share for
the three-month periods ended March 31, 1997
and 1996.
Exhibit 15 Letter regarding unaudited interim financial
information.
Exhibit 27 Financial Data Schedule. (Filed in electronic
format only. Pursuant to Rule 402 of
Regulation S-T, this schedule shall not be
deemed filed for purposes of Section 11 of the
Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
Exhibit 99 Cautionary statement under safe harbor
provisions of the Private Securities Litigation
Reform Act of 1995.
(b) Reports on Form 8-K
During the three months ended March 31, 1997, the Company filed a
Current Report on Form 8-K dated February 26, 1997. Under Item 5,
the Company reported that it issued a press release which announced
that a shareholder's derivative lawsuit had been filed against
certain current and former members of its Board of Directors by one
shareholder.
15
<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: April 23, 1997
<PAGE>
EXHIBIT 10
March 18, 1997
Dear Ken,
This letter is written confirmation of our discussion regarding your
resignation from your position as Executive Vice President Business Operations.
We have mutually agreed to terminate your employment, effective no later than
March 31, 1997 (the "Termination Date"), and I am prepared to offer you the
following severance package contingent on your acceptance of the terms and
conditions of this agreement.
1. Accrued Salary and Benefits. You will be paid all salary and benefits
to which you are entitled through the Termination Date. You will be
paid for your accrued but unused vacation as of such date. You will
also be paid your deferred compensation distribution in accordance with
the plan document and your Election Deferral Forms.
2. Severance Payments. You will be paid a lump sum severance payment of
$10,000 on April 4, 1997. You will also receive severance benefits in
the form of bi-weekly payments of $8,076.92 until March 31, 1998. The
foregoing payments shall be made in accordance with Glenayre's payroll
practices and shall be subject to all applicable withholding as an
employee. During 12 month severance period, you agree to provide
consulting and related services to Glenayre as may be reasonably
requested from time to time by authorized representatives of Glenayre.
You may also continue to make contributions to the 401(k) Pension Plan,
in accordance with the terms of the plan document, during the severance
period.
3. Benefits Following the Termination Date.
a) I will recommend to the Plan Administration Committee of the
Board of Directors of Glenayre Technologies, Inc. that all of
your options for Glenayre Technologies, Inc. common stock be
fully vested, effective April 7, 1997. Additionally, I will
recommend that you also be permitted to exercise your options
within two (2) years after March 31, 1997. If approved by the
Plan Administration Committee, you will receive written
confirmation of this accelerated vesting schedule and extended
exercise period.
b) After the Termination Date, should Glenayre achieve or exceed
its minimum earnings target for Corporate performance based on
the current Management By Objectives Plan, you will receive a
pro-rata payment (25% of the 70% Corporate performance
portion) for your three months of employment in 1997.
c) After the Termination Date, and during the period of
severance, you and your dependents will continue to be
eligible to participate in Glenayre's medical plan at the
current employee rates, which will be revised April 1997. Once
the severance benefits cease, you may continue your individual
and dependent coverage through COBRA at rates which are
evaluated annually.
d) After the Termination Date, you shall cease to be covered by
all vacation and holiday leave programs, the Employee Stock
Purchase Plan, short and long-term disability, and AD&D, and
you shall cease to be entitled to any perquisites or benefit
rights not expressly covered by this agreement.
<PAGE>
4. No Recruitment of Employees.
a) You agree not to recruit, provide information on any personnel
of the Glenayre Companies, or assist another employer in the
recruitment of any employee of the Glenayre Companies within
one year after the Termination Date. If you breach this
provision, you agree that, in addition to any rights and
remedies which the Glenayre Companies may possess, and as
liquidated damages, you will forfeit your right to receive any
payments or benefits to be provided under Paragraphs 2 and 3
of this agreement. For purposes of this agreement, the term
"Glenayre Companies" means Glenayre Technologies, Inc.,
Glenayre Electronics, Inc., Western Multiplex Corporation and
all other subsidiaries and affiliates of, and successors to,
the foregoing corporations.
5. Waiver of Employment Rights or Claims.
a) You acknowledge that there are laws and regulations
prohibiting employment practices pursuant to which you may
have rights or claims. These include Title VII of the Civil
Rights Act of 1964, as amended, the Age Discrimination in
Employment Act, as amended, and as well as other federal and
state executive orders, statutes and regulations. You also
acknowledge that there are other common law theories,
including laws of contract and tort, which may relate to your
employment rights.
b) You hereby waive and release any rights or claims that you may
have arising out of your employment with Glenayre
Technologies, Inc. or the termination of that employment,
including those described in Paragraph 5(a), and under any
other laws, whether with respect to the Glenayre Companies or
any of their employees, officers, directors or agents,
provided that you do not waive any rights or claims which may
arise after the date you sign this agreement.
c) It is agreed and you acknowledge that (i) you have had at
least 21 days to consider the terms and conditions of this
agreement; (ii) you have been advised to consult with an
attorney before signing this agreement; (iii) the
consideration provided to you in Paragraphs 2 and 3 above is
consideration that you were not entitled to receive before
signing this agreement; (iv) you will have 7 days from the
date you sign this agreement and deliver it to me to revoke
this agreement by notifying me of such revocation; and (v)
this agreement shall not become effective or enforceable until
after the aforesaid 7 day revocation period has expired.
6. Confidential Information. You agree that you will keep strictly
confidential and will not disclose, directly or indirectly, any
document or information (including all proprietary, confidential, or
trade secret information of the Glenayre Companies, that you have had
in your possession or of which you were/are aware) relating to your
employment with Glenayre or to the business and operations of any of
the Glenayre Companies. You further agree that you will not make any
statement nor take any action which might adversely reflect upon any of
the Glenayre Companies, or any of their officers, directors or
employees. likewise, Glenayre and its directors and officers will not
make any statement nor take any action which might adversely reflect
upon you.
7. Remedies for Breach. You acknowledge and agree that in the event of a
breach by you of the confidentiality provisions hereof, Glenayre may,
in addition to whatever other rights and remedies it may have at law or
in equity, withhold any amounts or benefits otherwise payable or due
under Paragraph 2 and 3 of this agreement.
8. Acknowledgment of Understanding and Voluntariness. You acknowledge that
you understand completely everything set forth in this agreement, that
you have had ample opportunity to review this agreement and all its
ramifications with an attorney of your own choosing, and that you have
entered into this agreement voluntarily, without any coercion
whatsoever, of your own free will, and that you intend legally to be
bound by this agreement.
<PAGE>
9. Entire Agreement. This agreement constitutes the entire agreement
between Glenayre and you and will not be construed as an admission of
liability, wrongdoing, or discrimination by any of the Glenayre
Companies or any of their officers, directors, employees or agents.
10. Severability. If any provision hereof shall be determined to be
unenforceable, such fact shall not invalidate or render unenforceable
any other provision hereof.
11. Binding Effect. This agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal
representatives, successors and assigns, as the case may be.
12. Governing Laws. This agreement shall be deemed to have made in the
State of North Carolina and shall be interpreted, construed, and
enforced in accordance with the laws of the State of North Carolina.
If the foregoing terms and conditions are acceptable to you, please
sign in the space indicated below.
Sincerely, Accepted and agreed to:
/s/ G. Smith /s/ Ken Thompson
- -------------------------------------------------- -------------------------
Gary B. Smith Ken Thompson
President and CEO
Date: 3/19/97
-------------------------
cc: Beverley Cox
Virginia Hall
Gene Pridgen
<PAGE>
EXHIBIT 11
GLENAYRE TECHNOLOGIES, INC.
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
<S> <C> <C>
Net income ............................... $13,446 $17,076
======== =======
Primary Earnings Per Share:
Weighted average shares outstanding
during the period ................... 60,159 60,392
Common stock equivalents .............. 1,744 3,336
------- ------
61,903 63,728
======= =======
Net income per share................... $ .22 $ .27
======= =======
Fully Diluted Earnings Per Share:
60,159 60,392
Weighted average shares outstanding
during the period ...................... 1,743 3,343
------- -------
Common stock equivalents................. 61,902 63,735
======= =======
Net income per share $ .22 $ .27
======= =======
</TABLE>
<PAGE>
EXHIBIT 15
Glenayre Technologies, Inc. and Subsidiaries
- -----------------------------------------------------------------------------
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-43798 on Form S-8 dated November 5, 1991 (amended December 9, 1992),
Registration Statement Number 33-68766 on Form S-8 dated September 14, 1993,
Registration Statement Number 33-80464 on Form S-8 dated June 17, 1994,
Registration Statement Number 33-88818 on Form S-4, dated March 24, 1995
(amended by Post Effective Amendment Number 1 on Form S-8 dated March 25, 1996),
Registration Statement Number 333-04635 on Form S-8 dated May 28, 1996, and
Registration Statement Number 333-15845 on Form S-4 dated November 8, 1996
(amended by Post-Effective Amendment Number 1 on From S-8 dated January 30,
1997) of our report dated April 17, 1997 relating to the unaudited condensed
consolidated interim financial statements of Glenayre Technologies, Inc. and
subsidiaries which are included in its Form 10-Q, for the quarter ended March
31, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 or the Securities Act of 1933.
Ernst & Young LLP
Charlotte, North Carolina
April 17, 1997
<PAGE>
<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>
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 130,609
<SECURITIES> 0
<RECEIVABLES> 160,433
<ALLOWANCES> 0
<INVENTORY> 51,317
<CURRENT-ASSETS> 342,925
<PP&E> 83,119
<DEPRECIATION> 0
<TOTAL-ASSETS> 543,862
<CURRENT-LIABILITIES> 63,318
<BONDS> 0
0
0
<COMMON> 309,859
<OTHER-SE> 166,098
<TOTAL-LIABILITY-AND-EQUITY> 543,862
<SALES> 105,771
<TOTAL-REVENUES> 105,771
<CGS> 50,550
<TOTAL-COSTS> 50,550
<OTHER-EXPENSES> 36,628
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 20,811
<INCOME-TAX> 7,365
<INCOME-CONTINUING> 13,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,446
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</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"), from time to
time, makes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements reflect the
expectations of management of the Company at the time such statements are made.
Glenayre is filing this cautionary statement to identify important factors that
could cause Glenayre's actual results to differ materially from those in any
forward-looking statements made by or on behalf of Glenayre.
Potential Market Changes Resulting from Rapid Technological Advances
Glenayre's business is primarily focused on paging and is subject to
competition from alternative forms of communication. In addition, Glenayre's
business is also focused on the wireless telecommunications industry. The
wireless telecommunications industry is characterized by rapid technological
change, including digital cellular telephone systems, which compete, directly or
indirectly, with Glenayre's products or the services provided by the Company's
customers. While the introduction of more advanced forms of telecommunication
may provide opportunities to Glenayre for the development of new products, these
advanced forms of telecommunication may reduce the demand for pagers and thus
the type of paging systems and related software designed and sold by Glenayre.
Introduction and Acceptance of NPCS Products
While certain of Glenayre's customers have completed "beta testing" of
Glenayre's products used to provide narrowband personal communications services
("NPCS"), the introduction of NPCS is just beginning on a commercial basis. The
timing of the installation of NPCS systems by Glenayre's paging service provider
customers may be delayed depending upon delays in installation, difficulties in
initial operation of NPCS systems, the availability of financing for its paging
service provider customers and the market acceptance of NPCS by the customers of
such paging service providers. The development of the NPCS market will also be
affected by other technological changes in wireless messaging services,
regulatory developments and general economic conditions.
Competition
The Company currently faces competition from a number of other
equipment manufacturers, certain of which are larger and have significantly
greater resources than the Company. The Company also faces indirect competition
from alternative wireless telecommunications technologies, including cellular
telephone services, mobile satellite systems, specialized and private mobile
radio systems, digital cellular telephone systems and broadband personal
communication services. Although these technologies are generally higher priced
than traditional paging services, technological improvements could result in
increased capacity and efficiency for wireless two-way communication and could
result in increased competition for the Company.
<PAGE>
Variability of Quarterly Results
The Company's financial results in any single quarter are highly
dependent upon the timing and size of customer orders and the shipment of
products for large orders. Large orders from customers can account for a
significant portion of products shipped in any quarter. Although sales to one
customer totaled approximately 13%, 16% and 15% of 1994, 1995 and 1996 fiscal
year net sales, respectively, the customers with whom the Company does the
largest amount of business is generally subject to change from year to year as a
result of the timing for development and expansion of its customers' systems.
Furthermore, if a customer delays or accelerates its delivery requirements or a
product's completion is delayed or accelerated, revenues expected in a given
quarter may be deferred or accelerated into subsequent or earlier quarters.
Therefore, annual financial results are more indicative of the Company's
performance than quarterly results, and results of operations in any quarterly
period may not be indicative of results likely to be realized in the following
quarterly periods.
Volatility of Stock Price
The market price of Glenayre Common Stock is volatile. The market price
of Glenayre Common Stock could be subject to significant fluctuations in
response to variations in Glenayre's quarterly operating results and other
factors such as announcements of technological developments or new products by
Glenayre, developments in Glenayre's relationships with its customers,
technological advances by existing and new competitors, general market
conditions in the industry and changes in government regulations. In addition,
in recent years conditions in the stock market in general and shares of
technology companies in particular have experienced significant price and volume
fluctuations which have often been unrelated to the operating performance of
these specific companies.
Limits on Protection of Proprietary Technology
Glenayre owns or licenses numerous patents used in its operations.
Glenayre believes that while these patents are useful to Glenayre, they are not
critical or valuable on an individual basis. The collective value of the
intellectual property of Glenayre is comprised of its patents, blueprints,
specifications, technical processes and cumulative employee knowledge. Although
Glenayre attempts to protect its proprietary technology through a combination of
trade secrets, patent law, nondisclosure agreements and technical measures, such
protection may not preclude competitors from developing products with features
similar to Glenayre's products. The laws of certain foreign countries in which
Glenayre sells or may sell its products, including The Republic of Korea, The
People's Republic of China, Saudi Arabia, Thailand, Dubai, India and Brazil, do
not protect Glenayre's proprietary rights in the products to the same extent as
do the laws of the United States.
Potential Changes in Government Regulation
Many of Glenayre's products operate on radio frequencies. Radio
frequency transmissions and emissions, and certain equipment used in connection
therewith, are regulated in the United States, Canada and internationally.
Regulatory approvals generally must be obtained by Glenayre in connection with
the manufacture and sale of its products, and by Glenayre's paging service
provider and other wireless customers to operate Glenayre's products. The
enactment by federal, state, local or international governments of new laws or
regulations or a change in the interpretation of existing regulations could
affect the market for Glenayre's products. Although recent deregulation of
international telecommunications industries along with recent radio frequency
spectrum allocations made by the Federal Communications Commission ("FCC") in
the United States have increased the demand for Glenayre's products by providing
users of those products with opportunities to establish new paging and other
wireless personal communications services, the trend toward deregulation and
current regulatory developments favorable to the promotion of new and expanded
personal communications services may not
2
<PAGE>
continue and future regulatory changes may not have a positive impact on
Glenayre. As the issuance of paging system licenses stimulates demand for the
Company's products, delays in the issuance of licenses may adversely affect
sales and the timing of sales of the Company's products.
Financing Customer Purchases For Development of NPCS Market
The Company expects to continue financing customer purchases of its
products for development of the narrowband personal communications services
("NPCS") market for the build-out of NPCS networks by its customers who acquired
NPCS licenses auctioned by the FCC (the "NPCS License Holders"). Many of the
NPCS License Holders with whom the Company expects to enter into customer
financing arrangements have limited operating histories, significant debt
related to the acquisition of their NPCS licenses and start-up expenses,
negative cash flows from operations and some have never generated an operating
profit. The Company plans to retain a lien on any equipment for which it
provides financing.
International Business Risks
Approximately 40% of 1996 fiscal year net sales were generated in
markets outside of the United States. International sales are subject to the
customary risks associated with international transactions, including political
risks, local laws and taxes, the potential imposition of trade or currency
exchange restrictions, tariff increases, transportation delays, difficulties or
delays in collecting accounts receivable and exchange rate fluctuations.
Although a substantial portion of the international sales of the Company's
products and services for fiscal year 1996 was negotiated in U.S. dollars, the
Company may not be able to maintain such a high percentage of U.S. dollar
denominated international sales. The Company seeks to mitigate its currency
exchange fluctuation risk by entering into currency hedging transactions. The
Company also acts to mitigate certain risks associated with international
transactions through the purchase of political risk insurance and the use of
letters of credit.
3
<PAGE>
