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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, 1998
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209
- --------------------------------------------------- --------
(Address of principal executive offices) Zip Code
(704) 553-0038
--------------------------------------------
(Registrant's telephone number, including area code
NOT APPLICABLE
---------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at July 23, 1998 was 61,883,192 shares.
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEX
Part I - Financial Information:
Item 1. Financial Statements
Page
----
Independent Accountant's Review Report.........................3
Condensed Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and December 31, 1997.............4
Condensed Consolidated Statements of Income for the three months
ended June 30, 1998 and 1997 (Unaudited)....................5
Condensed Consolidated Statements of Income for the
six months ended June 30, 1998 and 1997 (Unaudited)........6
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1998 (Unaudited)..........7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited)........8
Notes to Condensed Consolidated Financial Statements
(Unaudited)..................................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................12
Part II - Other Information:
Item 4. Submission of Matters to a Vote of Security Holders...........17
Item 6. Exhibits and Reports on Forms 8-K.............................17
2
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of June 30, 1998, and the
related condensed consolidated statements of income for the three-month periods
and six-month periods ended June 30, 1998 and 1997, the condensed consolidated
statement of stockholders' equity for the six months ended June 30, 1998 and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 30, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Charlotte, North Carolina
July 16, 1998
3
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31,
June 30, 1998 1997
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................. $ 21,430 $ 21,076
Accounts receivable, net.................. 145,679 152,231
Notes receivable.......................... 6,514 8,684
Inventories............................... 50,176 49,302
Deferred income taxes..................... 14,098 13,943
Prepaid expenses and other current assets. 8,604 6,810
----- ------
Total current assets................. 246,501 252,046
Notes receivable, net......................... 39,551 53,050
Property, plant and equipment, net............ 109,647 103,641
Goodwill...................................... 76,407 78,568
Deferred income taxes......................... 933 1,088
Other assets.................................. 27,608 17,425
-------- --------
TOTAL ASSETS.................................. $500,647 $505,818
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $ 30,998 $ 27,133
Accrued liabilities....................... 45,631 61,358
Other current liabilities................. 308 2,101
------ -------
Total current liabilities............ 76,937 90,592
Other liabilities............................. 6,723 7,210
Stockholders' Equity:
Preferred stock, $.01 par value;
5,000,000 shares
Authorized, no shares issued and
outstanding............................... --- ---
Common stock, $.02 par value; authorized:
200,000,000 Shares;
outstanding: June 30, 1998 - 61,812,767
Shares; December 31, 1997 - 60,650,761
shares.................................... 1,232 1,213
Contributed capital........................ 339,424 333,715
Retained earnings.......................... 76,331 73,088
------ --------
Total stockholders' equity.............. 416,987 408,016
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $500,647 $505,818
======== ========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
4
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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)
Three Months Ended
June 30,
---------------------------------
1998 1997
--------------- ---------------
NET SALES..................................... $81,881 $110,172
------- --------
COSTS AND EXPENSES:
Cost of sales........................... 40,255 50,571
Selling, general and administrative
expense.............................. 24,229 24,513
Research and development expense........ 11,864 9,369
Depreciation and amortization expense... 6,978 4,750
------ --------
Total Costs and Expenses.......... 83,326 89,203
------ --------
INCOME (LOSS) FROM OPERATIONS................. (1,445) 20,969
------- --------
OTHER INCOME (EXPENSES):
Interest income........................ 1,859 2,882
Interest expense....................... (79) (21)
Other, net.............................. (215) (814)
----- ---------
Total Other Income (Expenses),
net.......................... 1,565 2,047
----- --------
INCOME BEFORE INCOME TAXES.................... 120 23,016
PROVISION FOR INCOME TAXES.................... 43 8,056
---------- ---------
NET INCOME.................................... $ 77 $ 14,960
=========== ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE.................................. $ 0.00 $ 0.25
========== ==========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION............................. $ 0.00 $ 0.24
========== ==========
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)
Six Months Ended
June 30,
---------------------------------
1998 1997
--------------- ---------------
NET SALES..................................... $176,414 $215,943
-------- --------
COSTS AND EXPENSES:
Cost of sales........................... 86,019 101,121
Selling, general and administrative
expense............................. 49,542 47,957
Research and development expense........ 26,057 18,018
Depreciation and amortization expense... 13,310 9,285
------- -------
Total Costs and Expenses.......... 174,928 176,381
------- -------
INCOME FROM OPERATIONS........................ 1,486 39,562
------- -------
OTHER INCOME (EXPENSES):
Interest income........................ 4,216 5,043
Interest expense....................... (245) (35)
Other, net.............................. (311) (743)
------- --------
Total Other Income (Expenses),
net...... .................... 3,660 4,265
------- -------
INCOME BEFORE INCOME TAXES.................... 5,146 43,827
PROVISION FOR INCOME TAXES.................... 1,903 15,421
--------- --------
NET INCOME.................................... $ 3,243 $ 28,406
========= ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE.................................. $ 0.05 $ 0.47
========== ==========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION............................. $ 0.05 $ 0.45
========= ==========
See notes to condensed consolidated financial statements
6
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
<TABLE>
<S> <C>
Common Stock Total
------------------ Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
------- -------- ------------ -------- ------------
Balances, December 31,
1997.................... 60,651 $1,213 $333,715 $73,088 $408,016
Net Income................ 3,243 3,243
Stock options exercised... 932 19 4,505 4,524
Tax benefit of stock
options exercised......... 1,204 1,204
------ ------ -------- ------- --------
Balances, June 30, 1998... 61,583 $1,232 $339,424 $76,331 $416,987
====== ====== ======== ======= ========
</TABLE>
See notes to condensed consolidated financial statements
7
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Six Months Ended June 30,
----------------------------
1998 1997
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. $26,434 $24,500
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale security... (11,667) ---
Purchases of property, plant and equipment (16,376) (12,681)
Proceeds from sale of equipment........... 163 38
Maturities of short-term investments...... --- 73,084
Purchases of short-term investments....... --- (58,480)
Payments for business acquisition, net of
cash acquired.......................... --- (1,122)
------- ---------
Net cash provided by (used in)
investing activities.............. (27,880) 839
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities.............. (2,724) (980)
Issuance of common stock................. 4,524 1,196
-------- --------
Net cash provided by financing
activities....................... 1,800 216
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS....... 354 25,555
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD................................. 21,076 53,785
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,430 $79,340
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest................................... $ 119 $ 49
Income taxes............................... 2,596 2,007
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
See notes to condensed consolidated financial statements
8
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. The Company's financial results in any
quarter are highly dependent upon various factors, including the timing and size
of customer orders and the shipment of products for large orders. Large orders
from customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
In January 1997, the Company completed the acquisition of CNET, Inc. ("CNET").
The operating results of CNET are included in the operating results of the
Company since the acquisition date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1997.
1. INVENTORIES
June 30, December 31,
Inventories consist of: 1998 1997
------------ ------------
Raw materials................... $28,106 $25,970
Work-in-process................. 10,682 10,813
Finished
goods........................... 11,388 12,519
------ --------
$50,176 $49,302
======= =======
2. GOODWILL
Goodwill is shown net of accumulated amortization of $18.0 million and
$15.9 million at June 30, 1998 and December 31, 1997, respectively.
9
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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3. INCOME TAXES
The Company's consolidated income tax provision was different from the
amount computed using the U.S. statutory income tax rate for the following
reasons:
Three Months Six Months Ended
Ended June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- --------
Income tax provision at U.S. statutory
rate............................... $42 $8,055 $1,801 $15,339
Reduction in valuation allowance...... --- (902) --- (1,145)
Foreign taxes at rates other than U.S.
statutory rate..................... (197) (72) (372) (630)
State taxes (net of federal benefit).. (361) 560 (556) 1,039
U.S. Research and Experimentation
Credits..................... --- --- (84) ---
Non-deductible goodwill amortization.. 559 415 1,114 818
--- ------ ------ -------
Income tax provision.................. $43 $8,056 $1,903 $15,421
=== ====== ====== =======
Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 4, the benefits derived from the utilization of tax net
operating loss carryforwards are reported in the statement of operations in the
year such tax benefits are realized and then reclassified from retained earnings
to contributed capital. The Company adopted the accounting method for
utilization of the tax net operating loss carryforwards outlined above on
February 1, 1988. On September 28, 1989, the Securities and Exchange Commission
("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the
SEC staff's position with respect to this accounting treatment. According to the
SEC staff's interpretation of Statement of Financial Accounting Standards
No. 96, ACCOUNTING FOR INCOME TAXES, contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with the SEC staff and determined that the SEC staff would
not object to the accounting method outlined above for companies which had
adopted such accounting methods prior to the issuance of SAB 86.
If the original guidance in SAB 86 had been applied, the Company's net
income for the three-month and six-month periods ended June 30, 1997 would have
been reduced by the amount of the benefit from utilization of tax net operating
loss carryforwards. Such reduction in net income would have been $902,000 ($.01
per share) for the three months ended June 30, 1997. Additionally, the reduction
in net income would have been $1.1 million ($.02 per share) for the six months
ended June 30, 1997. The tax benefits from these net operating loss
carryforwards were fully utilized in 1997.
The Company believes that it is more likely than not that the net deferred
tax asset recorded at June 30, 1998 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) INCOME PER COMMON SHARE
The following table sets forth the computation of income per share:
Six Months
Three Months Ended
Ended June 30, June 30,
------------------ ---------------
1998 1997 1998 1997
--------- ------- ------ ------
Numerator:
Net income............................ $77 $14,960 $3,243 $28,406
Denominator:
Denominator for basic income per share -
weighted average shares............. 61,332 60,216 61,120 60,187
Effect of dilutive securities:
stock options......................... 2,537 2,489 2,472 2,735
------ ------- ----- ------
Denominator for diluted income per
share-adjusted
Weighted average shares and assumed
conversions........................... 63,869 62,705 63,592 62,922
====== ====== ====== ======
Net income per weighted average common
share ................................ $0.00 $0.25 $0.05 $0.47
===== ======= ====== =======
Net income per common share - assuming
dilution............................... $0.00 $0.24 $0.05 $0.45
===== ======= ===== =======
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 OPERATIONS
OVERVIEW
Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures,
markets and services telecommunications equipment and software used in wireless
personal communication systems throughout the world specifically focused in
three primary marketing areas: (i) paging products including infrastructure
equipment from the Wireless Messaging Group ("WMG") and Wireless Access two-way
paging devices, (ii) mobile and fixed network products from the Integrated
Network Group ("ING") including voice mail systems and software applications for
network management and calling cards, and (iii) microwave communications from
the Wireless Interconnect Group ("WIC").
In January 1997, the Company acquired CNET, Inc. ("CNET"), a developer of
software including network management tools. The operating results of CNET are
included in the consolidated results of Glenayre since the acquisition date.
In September 1997, the Company announced plans to consider divesting Western
Multiplex Corporation ("MUX"), which constitutes the WIC Group, allowing
Glenayre to focus on its core markets of paging and enhanced messaging. MUX
markets products for use in point-to-point microwave communication systems and
was acquired by Glenayre in April 1995. As of July 1998, an acceptable purchase
agreement had not been negotiated. However, the Company expects to pursue
divesting this business over time.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from Glenayre's consolidated statements
of operations:
Six Months
Three Months Ended
Ended June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
-------- ------- -------- -------
Net sales........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 49.2 45.9 48.8 46.8
------ ----- ---- ----
Gross profit ....................... 50.8 54.1 51.2 53.2
Operating expenses:
Selling, general and administrative. 29.6 22.3 28.1 22.2
Research and development............ 14.5 8.5 14.8 8.4
Depreciation and amortization....... 8.5 4.3 7.5 4.3
---- ---- ------ ------
Total operating expenses........ 52.6 35.1 50.4 34.9
------ ----- ----- -----
Income (loss) from operations .......... (1.8) 19.0 0.8 18.3
Interest, net........................... 2.2 2.6 2.3 2.3
Other, net.............................. * (0.7) * *
------ ----- ------ ------
Income before income taxes.............. * 20.9 2.9 20.3
Provision for income taxes.............. * 7.3 1.1 7.1
------ ------- ------ ------
Net income.............................. *% 13.6% 1.8% 13.2%
====== ====== ===== =====
- ----------
* less than 0.5%
12
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas:
Three Months Six Months Ended
Ended June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- --------
(IN THOUSANDS)
Paging products ................... $63,590 $81,744 $135,735 $165,152
Mobile and fixed network products . 11,600 20,896 27,734 34,373
Microwave communication............ 6,691 7,532 12,945 16,418
-------- --------- -------- -------
$81,881 $110,172 $176,414 $215,943
======== ======== ========= ========
(PERCENTAGE OF NET SALES)
Paging products ................... 78% 79% 77% 77%
Mobile and fixed network products . 14 13 18 16
Microwave communication............ 8 8 5 7
------- -------- --------- --------
100% 100% 100% 100%
=== === === ===
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
NET SALES. Net sales for the three months ended June 30, 1998 decreased 26% to
$81.9 million as compared to $110.2 million for the three months ended June 30,
1997. Net sales for the six months ended June 30, 1998 decreased 18% to $176.4
million as compared to $215.9 million for the six months ended June 30, 1997.
International sales (sales outside the United States) were $34.0 million for the
three months ended June 30, 1998 as compared to $50.9 million for the three
months ended June 30, 1997 and accounted for 42% and 46% of net sales for the
1998 and 1997 periods, respectively. International sales were $78.6 million for
the six months ended June 30, 1998 as compared to $99.8 million for the six
months ended June 30, 1997.
The decline in net sales for the 1998 periods is primarily the result of (i)
later than expected receipt of significant paging infrastructure orders having
special configuration requirements resulting in manufacturing and shipping
delays, (ii) design delays associated with a new release of Glenayre's MVP
Modular Voice Processing system, (iii) production start-up problems with the
Company's new AccessMate pager devices and (iv) company operational problems
related to the implementation phase of a new business system in April 1998.
Additionally, net sales continue to be impacted by a decrease in deliveries of
paging infrastructure to certain Asian countries experiencing currency
destabilization problems.
The Company is currently taking actions to ensure a more timely and responsive
shipment of orders with special configuration requirements. Glenayre began
shipping the new release of the MVP platform and the new AccessMate pager
devices in June 1998. Additionally, the implementation phase of the Company's
new business system was substantially finalized in the second quarter of 1998.
The Company believes that overall revenues during the second half of 1998 may
exceed the first six months of 1998 as a result of (i) indications that its
United States customers are continuing to build out two-way paging systems, (ii)
timing of scheduled orders in the current backlog and (iii) the expected
deliveries of its new pager devices. This is a forward looking statement which
is subject to the factors discussed in the cautionary statement attached as
Exhibit 99 to this 10-Q. There can be no assurance
13
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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that the Company's sales levels or growth will remain at or exceed historical
levels in any future period.
Sales to separate single customers totaled approximately 20% and 13% of net
sales for the three-month periods ended June 30, 1998 and 1997. Sales to
separate single customers totaled approximately 17% and 14%, respectively for
the six-month periods ended June 30, 1998 and 1997. The Company believes that
the dependence on any one customer is mitigated by the large number of companies
in the Company's customer base and the timing for development and expansions of
their systems.
GROSS PROFIT. Gross profit was 51% and 54% for three-month periods ended June
30, 1998 and 1997, respectively. Gross profit was 51% and 53% for the six- month
periods ended June 30, 1998 and 1997. The decline in margins for 1998 is
primarily due to a lower sales volume and product mix. Glenayre's gross profit
margins may be affected by several factors including (i) the mix of products
sold, (ii) the price of products sold and (iii) increases in material costs and
other components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $24.2 million and $24.5 million for the three-month periods ended
June 30, 1998 and 1997, respectively and $49.5 million and $48.0 million for the
six-month periods ended June 30, 1998 and 1997, respectively. The changes are
attributable to the inclusion of Open Development Corporation ("ODC") and
Wireless Access ("WAI") operating expenses since their dates of acquisition in
the fourth quarter 1997 offset by lower expenses incurred, primarily related to
travel, employee incentive and commission plans, and trade shows. Additionally,
expenses for collection of doubtful accounts for the 1998 periods was reduced by
approximately $850 thousand upon the collection in the second quarter 1998 of a
receivable written off prior to 1998.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $11.9
million and $9.4 million for the three months ended June 30, 1998 and 1997,
respectively, and $26.1 million and $18.0 million for the six months ended June
30, 1998 and 1997, respectively. The increase for the 1998 periods was primarily
due to (i) the addition of engineering personnel since the second quarter 1997
and (ii) the inclusion of research and development activities of ODC and WAI
since their dates of acquisition in fourth quarter 1997. The Company relies on
its research and development programs related to new products and the
improvement of existing products for the continued growth in net sales. Research
and development costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was
$7.0 million and $4.8 million for the three months ended June 30, 1998 and 1997,
respectively, and $13.3 million and $9.3 million for the six months ended June
30, 1998 and 1997, respectively. The increases in expenses for the three-month
and six-month periods is a result of (i) fixed asset purchases since June 30,
1997, (ii) fixed and intangible assets included in the fourth quarter 1997
acquisition of ODC and WAI and (iii) the new business system becoming
operational in the second quarter 1998.
INTEREST INCOME, NET. Interest income, net was $1.8 million and $2.9 million for
the three-month periods ended June 30, 1998 and 1997, respectively and $4.0
million and $5.0 million for the six-month periods ended June 30, 1998 and 1997,
respectively. Interest earned in the 1998 periods was lower due to the decrease
of cash and short-term investments average balances partially offset by higher
average balances in customer notes receivable. The Company expects that the
level of interest income, net in 1998 will vary in accordance with the level of
secured debt financing commitments issued by Glenayre and used by its customers.
14
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES. The effective tax rates for the three-month periods
ended June 30, 1998 and 1997 were 36% and 35%, respectively. The effective tax
rates for the six-month periods ended June 30, 1998 and 1997 were 37% and 35%,
respectively. The difference between the effective rates for these periods and
the combined U.S. federal and state statutory tax rate of approximately 40% is
primarily the result of (i) the utilization in 1997 of the Company's net
operating losses ("NOLs"), (ii) lower tax rates on earnings indefinitely
reinvested in certain non-U.S. jurisdictions and (iii) the application of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, ("SFAS 109"), in computing the Company's tax provision. The difference
between the effective tax rates in 1998 compared to 1997 is primarily the result
of the realization of tax benefits of net operating loss carryforwards for
financial statement purposes in accordance with SFAS 109 being fully utilized in
1997. See Note 3 to the Company's Condensed Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1998, Glenayre's principal sources
of liquidity included $21.4 million of cash and cash equivalents and a $50
million bank line of credit that expires in October 1998. Borrowings under the
line of credit during the six months ended June 30, 1998 ranged from $5 million
to $15 million with no borrowings as of June 30, 1998. Notes receivable
decreased $15.7 million at June 30, 1998 compared to year end 1997 due to a
significant paydown by one customer partially offset by additional requests from
customers for financing primarily related to the sales of paging and voice mail
products. Approximately 63% of the gross notes receivable balance as of June 30,
1998 consists of receivables from one customer which has a limited operating
history and is engaged in the buildout of a major narrowband personal
communications services network in the newly introduced market of advanced voice
and text paging. Additionally, the Company purchased $11.7 million of 9.0%
convertible senior subordinated notes (included in other assets) issued by this
same customer in May 1998. Accounts and accrued expenses in the aggregate at
June 30, 1998 decreased from year end 1997 primarily due to (i) significant
payroll related and sales commission payments, (ii) reduction in state income
taxes payable, (iii) customer deposit applications and (iv) decrease in
long-term project related accruals.
In 1996, the Board of Directors of the Company authorized a repurchase program
to buy back 2.5 million shares of the Company's common stock. As of June 30,
1998, no shares have been repurchased under the 1996 program. Additionally, in
1996, the Company began the implementation of a new operating business system.
This business system began operating in April 1998 at a total capitalized cost
of approximately $16.7 million including $2.9 million of cost incurred in 1998.
The Company's cash and cash equivalents generally consist of high-grade
commercial paper, bank certificates of deposit, Treasury bills, notes or agency
securities guaranteed by the U.S. Government, and repurchase agreements backed
by U.S. Government securities with original maturities of three months or less.
The Company expects to use its cash and cash equivalents and bank line of credit
for working capital and other general corporate purposes, including the
expansion and development of its existing products and markets and the expansion
into complementary businesses. Additionally, the competitive telecommunications
market often requires customer financing commitments. These commitments may be
in the form of guarantees, secured debt or lease financing. At June 30, 1998,
the Company had agreements to finance and arrange financing for approximately
$87 million of paging and voice mail products. Further, at June 30, 1998, the
Company had committed, subject to customers meeting certain conditions and
requirements, to finance approximately $6 million for similar systems. The
Company cannot currently predict the extent to which these commitments will be
utilized, since certain customers may be able to obtain more favorable terms
using traditional financing sources. From
15
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
time to time, the Company also arranges for third-party investors to assume a
portion of its commitments. If used, the financing arrangements will be secured
by the equipment sold by Glenayre.
In 1997 Glenayre began the pre-construction phase for a 110,000 square foot
expansion of its Vancouver facility to be used primarily for research and
development and customer service. During the first quarter of 1998 Glenayre
negotiated a contract for up to $15 million for the construction phase of the
expansion. The total cost of the expansion is expected to be approximately $19
million and to be paid throughout the construction period in 1998 and 1999. Of
this total, approximately $2.4 million, including approximately $1.5 million of
cost incurred in 1998, has been paid and included in fixed assets as of June 30,
1998.
The Company believes that funds generated from continuing operations, together
with its current cash reserves and bank line of credit, will be sufficient to
(i) support the short-term and long-term liquidity requirements for current
operations (including annual capital expenditures and customer financing
commitments) and (ii) to repurchase shares as discussed above. Company
management believes that, if needed, it can establish additional borrowing
arrangements with lending institutions.
INCOME TAX MATTERS. In 1997 and recent years, the Company has had a favorable
income tax position principally because of the existence of a significant amount
of U.S. tax net operating loss carryforwards established prior to 1988 ("prior
NOLs"). These tax loss carryforwards were available to shelter U.S. taxable
income generated by the Company. Under the Company's operating and business
structure, the majority of the worldwide taxable income was earned in the United
States. Therefore, the Company's actual cash outlay for income taxes in 1997 and
recent years was limited to U.S. alternative minimum tax and foreign and state
income taxes. The remainder of prior NOLs were utilized in 1997.
As of June 30, 1998, the Company has U.S. tax net operating loss carryforwards
("NOLs") aggregating $34 million related to 1997 acquisitions of CNET, ODC and
WAI. However, the ability to utilize the acquired NOLs to offset future income
is subject to restrictions and there can be no assurance that they will be
utilized in 1998 or future periods. Additionally, the percentage of worldwide
income taxable in international jurisdictions may increase in the future. As a
result, the Company expects that its cash tax rate will be significantly higher
in 1998 compared to 1997 and prior years.
The Company has recorded a deferred tax asset of $34 million, net of a valuation
allowance of $19 million, at June 30, 1998, in accordance with SFAS 109. This
amount represents management's best estimate of the amount of NOLs and other
future deductions that are more likely than not to be realized as offsets to
future taxable income.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's Form 10-K, Summary Annual Report to Stockholders, Form 10-Q's and
Form 8-K's and other written or oral statements made by or on behalf of the
Company may include forward-looking statements reflecting the Company's current
views with respect to future events and financial performance.
Although certain cautionary statements have been made in this Form 10-Q relating
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 to this Form 10-Q.
16
<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 21, 1998, 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 2001:
Nominee Shares Voted Shares
For Withheld
--- --------
John J. Hurley 55,579,233 767,181
Horace H. Sibley 55,578,894 767,520
Gary B. Smith 55,577,183 769,231
(ii). An amendment to the Company's 1996 Incentive Stock Plan to increase
the number of shares of Common Stock authorized thereunder from
2,200,000 to 4,400,000 was approved by a vote of 19,858,586 shares for
and 16,281,029 shares against, with 197,553 shares abstaining.
Broker non-votes were 20,009,246 shares.
(iii). Ratification of the selection of Ernst & Young LLP as auditors for the
year ending December 31, 1998 was approved by a vote of 56,098,247
shares for and 141,838 shares against, with 106,329 shares abstaining.
ITEM 5 IS INAPPLICABLE AND HAS BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10 Glenayre Technologies, Inc. Management By Objective
Plan for the year ended December 31, 1998.
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.
17
<PAGE>
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 29, 1998
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
EXHIBIT 10
The Glenayre Technologies, Inc. Management By Objective Plan was created to
motivate and provide incentive to the key managers of Glenayre Technologies,
Inc. and its wholly-owned subsidiaries around the world to maximize profits. The
plan is based on the Targeted Performance of the Company and each Business
Sector and on the Participant's Individual Performance as agreed upon during the
Glenayre Performance Appraisal process.
Your MBO Level is a percentage of your Annual Base Salary approved each year by
the Chief Executive Officer, and/or Sr. Vice President, Human Resources as
applicable. In addition, Executive Officer MBO levels are approved each year by
the Board of Directors.
Your Target MBO Bonus is comprised of three components: Business Sector
Performance, Company Performance and Individual Performance. You can achieve up
to 200% of your Target MBO Bonus if your Business Sector and the Company achieve
certain targets.
TARGET MBO BONUS :
This is your Annual Base Salary X your MBO Level at 100% of target for each
component.
EXAMPLE:
If your Annual Base Salary is $50,000 and your MBO Level is 20%, your Target MBO
Bonus would be as follows:
Target MBO Bonus $10,000
Individual 30% $ 3,000
Sector 50% $ 5,000
Company 20% $ 2,000
NOTE: THERE ARE ADDITIONAL EXAMPLES FOLLOWING THE INDIVIDUAL PERFORMANCE SECTION
THAT ILLUSTRATE POTENTIAL MBO BONUS PAYMENTS AT VARIOUS LEVELS OF PERFORMANCE
FOR EACH COMPONENT.
BUSINESS SECTOR PERFORMANCE
Business Sector Performance Component = 50% of Target MBO Bonus (except for
Participants in the Corporate MBO Bonus Plan where it is not applicable).
Business Sector Performance is based on the Business Sector's Total Performance
Objective, which is defined as Contribution Margin less Controllable Costs, less
allocations and indirect cost.
Contribution Margin is defined as Net Sales less Materials, Labor, Variable
Burden and Other Costs of Sales (all as determined under the Company's normal
accounting methods).
Indirect costs and allocation methods are determined by the Financial Budget
Team and approved by the Chief Financial Officer during the annual planning
cycle.
Controllable Costs are comprised of the cost centers directly controlled by the
Business Sector.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
If a Participant transfers from one Business Sector to another, the quarterly
MBO bonus will be calculated based upon which sector he or she was in for the
majority of the plan period. (Majority is defined as greater than 1/2 of the
period.)
Quarterly Business Sector Performance targets are established in support of the
Company's business plan.
If the actual quarterly Business Sector Performance meets Compensation Plan
Minimum Target, an MBO payment will be made proportionate to Business Sector
Performance (actual /target) up to the maximum Compensation Plan Stretch Target
of the Targeted Earnings Performance. The Business Sector MBO bonus payment is
independent of the Company Performance Bonus.
EXAMPLE:
Annual Business Sector Target Bonus = $5,000 ( Annual Base Salary X Target MBO
Bonus X Business Sector Performance Portion ($50,000 X 20% X 50%)).
Quarterly Business Sector Target MBO Bonus Payments at 100% =
QUARTER CALCULATION TARGET MBO BONUS QTR. PMT.
1st Quarter 5,000 X 12.5% = $ 625 $ 625
2nd Quarter 5,000 X 25% - 1st Qtr. Pmt. = $ 1,250 $ 625
3rd. Quarter 5,000 X 52% -1st and 2nd Qtr. Pmts. = $ 2,600 $ 1,350
4th Quarter 5,000 X 100% - 1st, 2nd, and 3rd. Qtr. Pmts. = $ 5,000 $ 2,400
Total Business Sector Performance Portion at 100% of Target $ 5,000
Both Business Sector Performance and MBO bonus opportunity are cumulative, so
that quarterly targets are based on year-to-date targets for each quarter, which
may adjust your MBO bonus opportunity during the course of the Plan Year.
If the actual performance for your Business Sector is proportionate to 110% of
your Target MBO Bonus, as a Participant, you will receive 110% of your target
Business Sector Performance bonus opportunity.
ACTUAL % OF TARGET TARGET MBO ACTUAL MBO
MBO BONUS BONUS BONUS
1ST QUARTER 95% $625 $ 593.75
2ND QUARTER 110% $1,250.00 $1,375.00
- 593.75 - 593.75
----------- ----------
$ 656.25 $ 781.25
COMPANY PERFORMANCE
Company Performance Component = 20% of Target MBO Bonus (except for Participants
in the Corporate MBO Bonus Plan, where it comprises 70% of Target MBO Bonus).
Company Performance is based on Income from Operations which is defined below.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
Quarterly Company Performance targets are established in support of the
Company's business plan.
If the actual quarterly Company Performance meets Compensation Plan Minimum
Target, an MBO payment will be made proportionate to Company Performance (actual
/target) up to the maximum Compensation Plan Stretch Target of the Targeted
Earnings Performance. The Company MBO bonus payment is independent of the
Business Sector Performance Bonus.
EXAMPLE:
Annual Company Target Bonus = $2,000 ( Annual Base Salary X Target MBO Bonus X
Company Performance Portion ( $50,000 X 20% X 20%)).
Quarterly Company Target MBO Bonus payments at 100% =
<TABLE>
<CAPTION>
QUARTER CALCULATION TARGET MBO BONUS QTR. PMT.
<S> <C> <C> <C> <C>
1st Quarter 2,000 X 12.5% = $250 $ 250
2nd Quarter 2,000 X 25% - 1st Qtr. Pmt. = $500 $ 250
3rd. Quarter 2,000 X 52% -1st and 2nd Qtr. Pmts. = $1,040 $ 540
4th Quarter 2,000 X 100% - 1st, 2nd, and 3rd. Qtr. Pmts. = $2,000 $ 960
Total Company Performance Portion at 100% of Target $ 2,000
</TABLE>
Both Company Performance and MBO bonus opportunity are cumulative, so that
quarterly targets are based on year-to-date targets for each quarter, which may
adjust your MBO bonus opportunity during the course of the year.
If the actual Company performance is proportionate to 110% of your Target MBO
Bonus, as a Participant, you will receive 110% of your target Company
Performance bonus opportunity.
ACTUAL % TARGET TARGET MBO ACTUAL MBO
MBO BONUS BONUS BONUS
1ST QUARTER 95% $250 $ 237.50
2ND QUARTER 110% $500.00 $550.00
- 237.50 -237.50
-------- -------
$262.50 $312.50
INDIVIDUAL PERFORMANCE
Individual Performance Component = 30%
At the beginning of the Plan Year, you and your manager will establish a minimum
of three measurable goals to be achieved within the Plan Year. You will be
measured at the end of the Plan Year based on your achievement of these goals,
which will be directly tied to the 30% Individual Performance portion of your
total Target MBO Bonus.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
The Individual Performance component of the Plan is evaluated at year-end and is
paid annually in the final MBO Bonus Plan payment. This MBO bonus payment is
independent of the Company Performance bonus unless the Company Performance
exceeds the target, in which case the Individual Performance bonus will be paid
proportionate to Company Performance.
EXAMPLE:
Individual Performance Bonus Formula:
Individual Performance Bonus = Annual Base Salary X Target MBO Bonus
X 30% ( Individual Performance Portion)
X Percent of Individual Objectives Achieved X
Company Performance ( If actual Company
Performance exceeds target)
Individual Performance Target Bonus = $3,000
Individual Performance Achievement: 100%
Company Performance: 110%
Individual Bonus Paid = $3,300
Objectives Achieved X Company Earnings Performance ( If
actual Company Performance exceeds target)
EXAMPLES OF ANNUAL MBO BONUS PAYMENT AT DIFFERENT PERFORMANCE LEVELS
Salary $50,000
MBO Level 20%
Target MBO Bonus $10,000
Component Weights Target MBO Bonus
Individual 30% $3,000
Business Sector 50% $5,000
Company 20% $2,000
EXAMPLE #1
ACTUAL % OF TARGET MBO BONUS AMOUNT
MBO BONUS
Individual 83% $ 2,739
Business Sector 162% $ 8,100
Company 110% $ 2,200
Total $13,039
EXAMPLE #2
ACTUAL % OF TARGET MBO BONUS AMOUNT
MBO BONUS
Individual 70% $ 3,360
Business Sector 80% $ 4,000
Company 160% $ 3,200
Total $10,560
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
EXAMPLE #3
ACTUAL % OF TARGET MBO BONUS AMOUNT
MBO BONUS
Individual 52% $ 1,560
Business Sector 150% $ 7,500
Company 30% $ 0
Total $ 9,060
PAYMENTS
1. Company Performance and Business Sector Performance bonus payments are paid
quarterly to participants who meet the Eligibility Requirements.
2. Individual Performance bonus payments are paid annually to participants who
meet the Eligibility Requirements.
3. All MBO bonus payments are made through special payroll check with all
applicable taxes and contributions withheld.
Participation or eligibility to participate in the Plan is not a guarantee of
employment or of continued payment. The Plan is subject to change or revocation
at the discretion of the Board of Directors or the Chief Executive Officer of
the Company.
DEFINITIONS
o Company -- Glenayre Technologies, Inc. and its subsidiaries.
o Currency Exchange Rate -- Average internal exchange rate for the Plan Year.
o Income from Operations -- Income from the operations of the Company less
allocations and indirect costs, excluding the impact of interest income or
expense, exchange gain/(loss), other income/(loss), income taxes or
investment tax credits, any real estate transactions and expenses, and
business unit disposal or acquisition costs.
o Eligibility Requirements--
a. Quarterly MBO bonus payments - Participants who remain employed for the
full fiscal quarter. New participant or changes to current
participant's Target MBO bonus will be prorated based on the length of
time of eligibility.
b. Year-end MBO bonus payment - Participants who remain employed for the
Full Plan Year.
c. Participants must maintain a satisfactory level of performance through
the Plan period(s).
Periods of paid or unpaid leave of absence in excess of 30 days per year
will not be considered for MBO eligibility. Annual Base Salary will be
prorated according to the length of disability. Payment of earned MBO
bonuses will be paid upon return to work from a leave of absence.
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
o Annual Base Salary -- Annual base salary (prior to deductions for
contributions to the 401(k) Plan, for health care coverage, to flexible
spending accounts, or to any other Company sponsored pre-tax or deferred
compensation plans) received by a Participant from the Company while
participating in the Plan.
o Individual Performance -- A minimum of three measurable objectives stated
on the Glenayre Performance Appraisal form for the Participant. These
objectives are established by the Participant and his/her manager. The
achievement of these objectives is monitored by the Participant's manager.
The Individual Objective Performance comprises 30% of the Participant's
Target MBO Bonus.
o Participant -- A full time, regular employee of the Company who is
approved by the Chief Executive Officer to be a Participant in the Plan.
Plan participation will be prorated based on the length of time a
Participant is eligible. No employee of the Company may participate in
more than one incentive, bonus or commission plan.
o Participant's MBO Level -- The percentage of pay that the Participant
could receive from the Plan if the targeted Company Performance, Business
Sector Performance and Individual Performance objectives are achieved at
the 100% level. If the Company exceeds its targeted performance goal, the
percentage of pay will be increased. The MBO Level for each Participant is
recommended to and approved by the Chief Executive Officer and/or Sr. Vice
President, Human Resources, as applicable. In addition, Executive Officer
MBO levels are approved each year by the Board of Directors.
o Payment Date -- Estimated
Calendar Payment
Quarter Date
------- ----
1st May
2nd August
3rd November
4th FORTY-FIVE (45) days after the audit
completion by the independent auditors
and Board of Directors approval of the
Company's fiscal year-end financial
statements.
o Payout Percentage -- Percentage of Target MBO Bonus for Company and/or
Business Unit achieving specific earnings targets. Participants are
eligible to receive 70% of their bonus eligibility when the Compensation
Plan Minimum Targets for the Company and the Business Units are achieved,
and up to 200% of eligibility if Compensation Plan Stretch Targets for the
Company and Business Units are achieved.
QUARTER PERCENTAGE OF MBO BONUS PAID CUMULATIVE TOTAL
------- ---------------------------- ----------------
1st 12.5% 12.5%
2nd 12.5% 25.0%
3rd 27.0% 52.0%
4th 48.0% plus Individual Portion 100.0%
<PAGE>
GLENAYRE TECHNOLOGIES, INC. MANAGEMENT BY OBJECTIVE PLAN
EXAMPLE OF QUARTERLY PAYMENTS WITH ALL COMPONENTS AT 100% OF GOALS.
Annual Base Salary = $50,000
MBO Level = 20%
Target MBO = $7,000
Individual Performance = $3,000
Total Annual MBO = $10,000
Assume 100% of Goals at Each Quarter
QUARTER PERCENTAGE OF ELIGIBLE BONUS PAID DOLLARS PAID
------- --------------------------------- ------------
1st 12.5% $875
2nd 12.5% $875
3rd 27.0% $1,890
4th 48.0% plus Individual Portion $6,360
Total Annual MBO Payment $10,000
o Plan -- Glenayre Technologies, Inc. Management By Objective Plan (MBO)
o Plan Year -- January 1 through December 31.
o Targeted Performance -- The Company Performance Target and Business Sector
Performance Target as approved by the Board of Directors. Stretch targets
are established by the President and Chief Executive Officer and Chief
Financial Officer and approved by the Board of Directors. Targeted
Performance comprises 70% of the Participant's Target MBO Bonus.
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
33-88818 on Form S-4, dated March 24, 1995 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated March 25, 1996), Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number
333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective
Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement
Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997 and Registration Statement
Number 333-56375 on Form S-8 dated June 9, 1998 of our report dated July 16,
1998 relating to the unaudited condensed consolidated interim financial
statements of Glenayre Technologies, Inc. and subsidiaries which are included in
its Form 10-Q for the quarter ended June 30, 1998.
Ernst & Young LLP
Charlotte, North Carolina
July 16, 1998
<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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,430
<SECURITIES> 0
<RECEIVABLES> 191,744
<ALLOWANCES> 0
<INVENTORY> 50,176
<CURRENT-ASSETS> 246,501
<PP&E> 109,647
<DEPRECIATION> 0
<TOTAL-ASSETS> 500,647
<CURRENT-LIABILITIES> 76,937
<BONDS> 0
0
0
<COMMON> 1,232
<OTHER-SE> 415,755
<TOTAL-LIABILITY-AND-EQUITY> 500,647
<SALES> 176,414
<TOTAL-REVENUES> 176,414
<CGS> 86,019
<TOTAL-COSTS> 86,019
<OTHER-EXPENSES> 88,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245
<INCOME-PRETAX> 5,146
<INCOME-TAX> 1,903
<INCOME-CONTINUING> 3,243
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,243
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</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.
ACCEPTANCE OF TWO-WAY PAGING COMMUNICATION PRODUCTS
While certain of Glenayre's customers have installed Glenayre's products
used to provide two-way communications services, these services are available
only in certain areas. The growth and installation of two-way paging systems by
Glenayre's paging service provider customers may be delayed depending upon
delays in installation, difficulties in initial operation of two-way systems,
the availability of financing for its paging service provider customers and the
market acceptance of two-way paging by the customers of such paging service
providers. The development of the two-way market will also be affected by other
technological changes in wireless messaging services, regulatory developments
and general economic conditions.
COMPETITION
The Company currently faces competition from a number of other equipment
manufacturers, certain of which are larger and have significantly greater
resources than the Company. The Company also faces indirect competition from
alternative wireless telecommunications technologies, including cellular
telephone services, mobile satellite systems, specialized and private mobile
radio systems, digital cellular telephone systems and broadband personal
communications services. Although these technologies are generally higher priced
than traditional paging services, technological improvements could result in
increased capacity and efficiency for wireless two-way communication and could
result in increased competition for the Company.
VARIABILITY OF QUARTERLY RESULTS
The Company's financial results in any single quarter are highly dependent
upon the timing and size of customer orders and the shipment of products for
large orders. Large orders from customers can account for a significant portion
of products shipped in any quarter. Sales to one customer, which has a
significant United States market presence, totaled approximately 16%, 15% and
11% of 1995, 1996 and
<PAGE>
1997 fiscal year net sales, respectively. Beyond 1997, the customers with whom
the Company does the largest amount of business are expected to vary from year
to year as a result of the timing for development and expansion of customers'
paging systems, the expansion into international markets and changes in the
proportion of revenues generated by the products and services of Glenayre's
newly acquired companies. Furthermore, if a customer delays or accelerates its
delivery requirements or a product's completion is delayed or accelerated,
revenues expected in a given quarter may be deferred or accelerated into
subsequent or earlier quarters. Therefore, annual financial results are more
indicative of the Company's performance than quarterly results, and results of
operations in any quarterly period may not be indicative of results likely to be
realized in the following quarterly periods.
VOLATILITY OF STOCK PRICE
The market price of Glenayre Common Stock is volatile. The market price of
Glenayre Common Stock could be subject to significant fluctuations in response
to variations in Glenayre's quarterly operating results and other factors such
as announcements of technological developments or new products by Glenayre,
developments in Glenayre's relationships with its customers, technological
advances by existing and new competitors, general market conditions in the
industry and changes in government regulations. In addition, in recent years
conditions in the stock market in general and shares of technology companies in
particular have experienced significant price and volume fluctuations which have
often been unrelated to the operating performance of these specific companies.
LIMITS ON PROTECTION OF PROPRIETARY TECHNOLOGY
Glenayre owns or licenses numerous patents used in its operations.
Glenayre believes that while these patents are useful to Glenayre, they are not
critical or valuable on an individual basis. The collective value of the
intellectual property of Glenayre is comprised of its patents, blueprints,
specifications, technical processes and cumulative employee knowledge. Although
Glenayre attempts to protect its proprietary technology through a combination of
trade secrets, patent law, nondisclosure agreements and technical measures, such
protection may not preclude competitors from developing products with features
similar to Glenayre's products. The laws of certain foreign countries in which
Glenayre sells or may sell its products, including The Republic of Korea, The
People's Republic of China, Saudi Arabia, Thailand, Dubai, India and Brazil, do
not protect Glenayre's proprietary rights in the products to the same extent as
do the laws of the United States.
POTENTIAL CHANGES IN GOVERNMENT REGULATION
Many of Glenayre's products operate on radio frequencies. Radio frequency
transmissions and emissions, and certain equipment used in connection therewith,
are regulated in the United States, Canada and internationally. Regulatory
approvals generally must be obtained by Glenayre in connection with the
manufacture and sale of its products, and by Glenayre's paging service provider
and other wireless customers to operate Glenayre's products. The enactment by
federal, state, local or international governments of new laws or regulations or
a change in the interpretation of existing regulations could affect the market
for Glenayre's products. Although recent deregulation of international
telecommunications industries along with recent radio frequency spectrum
allocations made by the Federal Communications Commission ("FCC") in the United
States have increased the demand for Glenayre's products by providing users of
those products with opportunities to establish new paging and other wireless
personal communications services, the trend toward deregulation and current
regulatory developments favorable to the promotion of new and expanded personal
communications services may not continue and future regulatory changes may not
have a positive impact on Glenayre. 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.
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FINANCING CUSTOMER PURCHASES FOR DEVELOPMENT OF THE TWO-WAY COMMUNICATIONS
MARKET
The Company finances customer purchases of its products for development of
the two-way communications market for the build-out of two-way networks by its
customers who acquired two-way licenses auctioned by the FCC (the "Two-Way
License Holders"). Many of the Two-Way License Holders with whom the Company has
or expects to enter into customer financing arrangements have limited operating
histories, significant debt related to the acquisition of their two-way licenses
and start-up expenses, negative cash flows from operations and some have never
generated an operating profit. The Company generally retains a security interest
in equipment for which it provides financing.
INTERNATIONAL BUSINESS RISKS
Approximately 50% of 1997 fiscal year net sales were generated in markets
outside of the United States. International sales are subject to the customary
risks associated with international transactions, including political risks,
local laws and taxes, the potential imposition of trade or currency exchange
restrictions, tariff increases, transportation delays, difficulties or delays in
collecting accounts receivable, exchange rate fluctuations and the effects of
prolonged currency destabilization in major international markets. Although a
substantial portion of the international sales of the Company's products and
services for fiscal year 1997 was negotiated in United States dollars, the
Company may not be able to maintain such a high percentage of United States
dollar denominated international sales. The Company seeks to mitigate its
currency exchange fluctuation risk by entering into currency hedging
transactions. The Company also acts to mitigate certain risks associated with
international transactions through the purchase of political risk insurance and
the use of letters of credit.
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