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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 SEPTEMBER 30, 1998
-------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209
----------------------------------------------- --------
(Address of principal executive offices) Zip
Code
(704) 553-0038
--------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at October 22, 1998 was 62,003,936 shares.
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<PAGE>
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
September 30, 1998 (Unaudited) and December 31, 1997........4
Condensed Consolidated Statements of Income for the
three months ended September 30, 1998 and 1997 (Unaudited)..5
Condensed Consolidated Statements of Income for the nine months
ended September 30, 1998 and 1997 (Unaudited)..............6
Condensed Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1998 (Unaudited)............7
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (Unaudited)........8
Notes to Condensed Consolidated Financial Statements
(Unaudited).................................................9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................12
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K.............................18
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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 September 30, 1998, and the
related condensed consolidated statements of income for the three-month periods
and nine-month periods ended September 30, 1998 and 1997, the condensed
consolidated statement of stockholders' equity for the nine months ended
September 30, 1998 and the condensed consolidated statements of cash flows for
the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 30, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Ernst & Young LLP
Charlotte, North Carolina
October 16, 1998
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3
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1998 1997
------------------ -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents................. $ 17,213 $ 21,076
Accounts receivable, net.................. 163,601 152,231
Notes receivable.......................... 10,659 8,684
Inventories............................... 48,736 49,302
Deferred income taxes..................... 14,022 13,943
Prepaid expenses and other current assets. 7,275 6,810
----------- -----------
Total current assets................. 261,506 252,046
Notes receivable, net......................... 51,034 53,050
Property, plant and equipment, net............ 110,048 103,641
Goodwill...................................... 75,345 78,568
Deferred income taxes......................... 703 1,088
Other assets.................................. 25,572 17,425
---------- ----------
TOTAL ASSETS.................................. $524,208 $505,818
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $ 33,535 $ 27,133
Accrued liabilities....................... 51,552 61,358
Other current liabilities................. 284 2,101
----------- -------------
Total current liabilities............ 85,371 90,592
Other liabilities............................. 6,512 7,210
Stockholders' Equity:
Preferred stock, $.01 par value;
5,000,000 shares Authorized, no shares
issued and outstanding.................. --- ---
Common stock, $.02 par value; authorized:
200,000,000 shares; outstanding:
September 30, 1998 - 62,003,376
shares; December 31, 1997 - 60,650,761
shares.................................. 1,240 1,213
Contributed capital........................ 343,101 333,715
Retained earnings.......................... 87,984 73,088
---------- ----------
Total stockholders' equity.............. 432,325 408,016
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $524,208 $505,818
========== =========
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
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4
<PAGE>
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
September 30,
---------------------------------
1998 1997
--------------- ---------------
NET SALES..................................... $126,689 $112,122
-------- --------
COSTS AND EXPENSES:
Cost of sales........................... 64,794 52,438
Selling, general and administrative
expense.............................. 26,424 25,175
Research and development expense........ 12,466 10,165
Depreciation and amortization expense... 7,016 4,949
---------- -----------
Total Costs and Expenses.......... 110,700 92,727
---------- -----------
INCOME FROM OPERATIONS........................ 15,989 19,395
---------- -----------
OTHER INCOME (EXPENSES):
Interest income........................ 2,328 3,164
Interest expense....................... (170) (48)
Other, net.............................. 47 (306)
--------- ---------
Total Other Income (Expenses), net... 2,205 2,810
--------- ---------
INCOME BEFORE INCOME TAXES.................... 18,194 22,205
PROVISION FOR INCOME TAXES.................... 6,541 7,171
-------- --------
NET INCOME.................................... $ 11,653 $ 15,034
======== ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE................................ $ 0.19 $ 0.25
========== ==========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION........................... $ 0.18 $ 0.24
========== ==========
See notes to condensed consolidated financial statements
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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)
Nine Months Ended
September 30,
---------------------------------
1998 1997
--------------- ---------------
NET SALES..................................... $303,103 $328,065
-------- --------
COSTS AND EXPENSES:
Cost of sales........................... 150,813 153,559
Selling, general and administrative
expense.............................. 75,966 73,132
Research and development expense........ 38,523 28,183
Depreciation and amortization expense... 20,326 14,234
---------- ----------
Total Costs and Expenses.......... 285,628 269,108
---------- ----------
INCOME FROM OPERATIONS........................ 17,475 58,957
---------- ----------
OTHER INCOME (EXPENSES):
Interest income........................ 6,544 8,207
Interest expense....................... (415) (83)
Other, net............................. (264) (1,049)
----------- ----------
Total Other Income (Expenses), net... 5,865 7,075
----------- ----------
INCOME BEFORE INCOME TAXES.................... 23,340 66,032
PROVISION FOR INCOME TAXES.................... 8,444 22,592
---------- ---------
NET INCOME.................................... $ 14,896 $ 43,440
======== ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE................................. $ 0.24 $ 0.72
========== ===========
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION............................ $ 0.23 $ 0.69
========== ==========
See notes to condensed consolidated financial statements
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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>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total
Common Stock Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
------- -------- ------------ -------- ------------
Balances, December 31,
1997...................... 60,651 $1,213 $333,715 $73,088 $408,016
Net Income................ 14,896 14,896
Stock options exercised... 1,352 27 7,178 7,205
Tax benefit of stock
options exercised........ 2,208 2,208
------- ------- --------- --------- --------
Balances, September 30,
1998...................... 62,003 $1,240 $343,101 $87,984 $432,325
====== ====== ======== ======= ========
</TABLE>
See notes to condensed consolidated financial statements
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7
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Nine Months Ended
September 30,
----------------------------
1998 1997
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....... $25,545 $23,856
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale security... (11,667) ---
Purchases of property, plant and equipment (22,312) (20,475)
Proceeds from sale of equipment........... 161 43
Maturities of short-term investments...... --- 102,479
Purchases of short-term investments....... --- (86,087)
Payments for business acquisition, net of
cash acquired.......................... --- (1,122)
-------- -----------
Net cash used in investing activities (33,818) (5,162)
-------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities.............. (2,795) (1,026)
Issuance of common stock.................. 7,205 2,039
-------- ---------
Net cash provided by financing
activities....................... 4,410 1,013
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (3,863) 19,707
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD................................. 21,076 53,785
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $17,213 $73,492
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest................................... $ 282 $ 55
Income taxes............................... 3,921 5,083
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
See notes to condensed consolidated financial statements
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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 nine-month periods
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. The Company's financial
results in any quarter are highly dependent upon various factors, including the
timing and size of customer orders and the shipment of products for large
orders. Large orders from customers can account for a significant portion of
products shipped in any quarter. Accordingly, the shipment of products in
fulfillment of such large orders can dramatically affect the results of
operations of any single quarter.
In January 1997, the Company completed the acquisition of CNET, Inc. ("CNET").
The operating results of CNET are included in the operating results of the
Company since the acquisition date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1997.
1. INVENTORIES
September 30, December 31,
Inventories consist of: 1998 1997
------------ ------------
Raw materials................... $28,544 $25,970
Work-in-process................. 10,894 10,813
Finished goods.................. 9,298 12,519
------- -------
$48,736 $49,302
2. GOODWILL
Goodwill is shown net of accumulated amortization of $19.0 million and
$15.9 million at September 30, 1998 and December 31, 1997, respectively.
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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 Nine Months
Ended Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- --------
Income tax provision at U.S. statutory
rate............................... $6,368 $7,772 $8,169 $23,111
Reduction in valuation allowance...... --- --- --- (1,145)
Foreign taxes at rates other than U.S.
statutory rate..................... (164) (498) (536) (1,128)
State taxes (net of federal benefit).. 310 432 (246) 1,471
U.S. Research and Experimentation
Credits.................. --- (953) (84) (953)
Foreign sales corporation benefit..... (740) --- (740) ---
Non-deductible goodwill amortization.. 560 418 1,674 1,236
Other non-deductible ................. 207 --- 207 ---
------ ------ ------ -------
Income tax provision.................. $6,541 $7,171 $8,444 $22,592
====== ====== ====== =======
Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 4, the benefits derived from the utilization of tax net
operating loss carryforwards are reported in the statement of operations in the
year such tax benefits are realized and then reclassified from retained earnings
to contributed capital. The Company adopted the accounting method for
utilization of the tax net operating loss carryforwards outlined above on
February 1, 1988. On September 28, 1989, the Securities and Exchange Commission
("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the
SEC staff's position with respect to this accounting treatment. According to the
SEC staff's interpretation of Statement of Financial Accounting Standards No.
96, ACCOUNTING FOR INCOME TAXES, contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with the SEC staff and determined that the SEC staff would
not object to the accounting method outlined above for companies which had
adopted such accounting methods prior to the issuance of SAB 86.
If the original guidance in SAB 86 had been applied, the Company's net
income for the nine-month period ended September 30, 1997 would have been
reduced by the amount of the benefit from utilization of tax net operating loss
carryforwards. Such reduction in net income would have been $1.1 million ($.02
per share) for the nine months ended September 30, 1997. The tax benefits from
these net operating loss carryforwards were fully utilized in 1997.
The Company believes that it is more likely than not that the net deferred
tax asset recorded at September 30, 1998 will be fully realized.
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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:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income............................. $11,653 $15,034 $14,896 $43,440
Denominator:
Denominator for basic income per share -
Weighted average shares.............. 61,926 60,378 61,393 60,252
Effect of dilutive securities:
Stock options.......................... 1,407 3,133 2,165 2,885
------ ----- ------ -----
Denominator for diluted income per
share-adjusted Weighted average shares
and assumed conversions.................. 63,333 63,511 63,558 63,137
====== ====== ====== ======
Net income per weighted average common
share.................................... $ 0.19 $ 0.25 $ 0.24 $ 0.72
======= ======= ======= =======
Net income per common share - assuming
dilution................................. $ 0.18 $ 0.24 $ 0.23 $ 0.69
======= ======= ======= =======
</TABLE>
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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 October 1998, an acceptable
purchase agreement had not been negotiated. However, the Company expects to
pursue divesting this business over time.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from Glenayre's consolidated statements
of operations:
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -----------------
1998 1997 1998 1997
--------- ------- -------- -------
Net sales............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 51.1 46.8 49.8 46.8
------ ------ ------ ------
Gross profit ....................... 48.9 53.2 50.2 53.2
Operating expenses:
Selling, general and administrative. 20.9 22.5 25.1 22.3
Research and development............ 9.8 9.1 12.7 8.6
Depreciation and amortization....... 5.5 4.4 6.7 4.3
------ ------ ------ ------
Total operating expenses........ 36.2 36.0 44.5 35.2
------ ------ ------ ------
Income from operations ................. 12.6 17.3 5.8 18.0
Interest, net........................... 1.7 2.8 2.0 2.5
Other, net.............................. * * * *
------ ------ ------ ------
Income before income taxes.............. 14.4 19.8 7.7 20.1
Provision for income taxes.............. 5.2 6.4 2.8 6.9
------ ------ ------ ------
Net income.............................. 9.2% 13.4% 4.9% 13.2%
====== ====== ====== ======
............
* less than 0.5%
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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 Nine Months
Ended Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
-------- ------- ------- --------
(IN THOUSANDS)
Paging products ................... $92,652 $85,295 $228,386 $250,447
Mobile and fixed network products . 24,836 19,436 52,571 53,809
Microwave communication............ 9,201 7,391 22,146 23,809
-------- -------- -------- --------
$126,689 $112,122 $303,103 $328,065
======== ======== ======== ========
(PERCENTAGE OF NET SALES)
Paging products ................... 73% 76% 76% 77%
Mobile and fixed network products . 20 17 17 16
Microwave communication............ 7 7 7 7
--- --- --- ---
100% 100% 100% 100%
=== === === ===
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES. Net sales for the three months ended September 30, 1998 increased 13%
to $126.7 million as compared to $112.1 million for the three months ended
September 30, 1997. Net sales for the nine months ended September 30, 1998
decreased 8% to $303.1 million as compared to $328.1 million for the nine months
ended September 30, 1997. International sales (sales outside the United States)
were $48.1 million for the three months ended September 30, 1998 as compared to
$61.6 million for the three months ended September 30, 1997 and accounted for
38% and 55% of net sales for the three months ended September 30, 1998 and 1997,
respectively. International sales were $126.7 million for the nine months ended
September 30, 1998 as compared to $161.4 million for the nine months ended
September 30, 1997 and accounted for 42% and 49% of net sales for the nine
months ended September 30, 1998 and 1997, respectively.
Net sales continue to be impacted by a decrease in deliveries of paging
infrastructure to certain Asian countries experiencing economic problems.
Sales to separate single customers totaled approximately 11% and 10% of net
sales for the three-month periods ended September 30, 1998 and 1997,
respectively. Sales to separate single customers totaled approximately 14% and
12%, respectively for the nine-month periods ended September 30, 1998 and 1997.
The Company believes that the dependence on any one customer is mitigated by the
large number of companies in the Company's customer base and the timing for
development and expansions of their systems.
GROSS PROFIT. Gross profit was 49% and 53% for the three-month periods ended
September 30, 1998 and 1997, respectively. Gross profit was 50% and 53% for the
nine-month periods ended September 30, 1998 and 1997. The decline in margins for
1998 is primarily due to a lower sales volume of paging infrastructure equipment
and the inclusion of two-way paging device sales with lower margins since the
acquisition of Wireless Access, Inc. ("WAI") in fourth quarter 1997. Glenayre's
gross profit
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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margins may be affected by several factors including (i) the mix of
products sold, (ii) the price of products sold and (iii) increases in material
costs and other components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $26.4 million and $25.2 million for the three-month periods ended
September 30, 1998 and 1997, respectively and $76.0 million and $73.1 million
for the nine-month periods ended September 30, 1998 and 1997, respectively. The
changes are attributable to the inclusion of Open Development Corporation
("ODC") and WAI operating expenses since their dates of acquisition in the
fourth quarter 1997 offset by lower expenses incurred, primarily related to
consulting, employee incentive and commission plans and trade shows.
Additionally, the Company recorded a $1.4 million charge for the nine-month
period ended September 30, 1998 ($767 thousand during the third quarter) for an
unrealized loss on an available-for-sale debt security. Finally, expenses for
bad debt decreased due to the collection of a receivable in the second and third
quarter that had been previously reserved and written off in a prior year.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $12.5
million and $10.2 million for the three months ended September 30, 1998 and
1997, respectively. The increase for the three months ended September 30, 1998
was due to the inclusion of research and development activities of ODC and WAI
since their dates of acquisition in the fourth quarter 1997 partially offset by
a reduction in temporary contract services. Research and development expenses
were $38.5 million and $28.2 million for the nine months ended September 30,
1998 and 1997, respectively. The increase for the nine months ended September
30, 1998 was primarily due to (i) the inclusion of the research and development
activities of ODC and WAI since their dates of acquisition in the fourth quarter
1997 and (ii) the severance expense recorded in the first quarter of 1998 for
the termination of engineers related to the consolidation of the Company's
paging infrastructure research and development function at its Vancouver,
British Columbia facility. The Company relies on its research and development
programs related to new products and the improvement of existing products for
the continued growth in net sales. Research and development costs are expensed
as incurred.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was
$7.0 million and $4.9 million for the three months ended September 30, 1998 and
1997, respectively, and $20.3 million and $14.2 million for the nine months
ended September 30, 1998 and 1997, respectively. The increases in expenses for
the three-month and nine-month periods are a result of (i) fixed asset purchases
since September 30, 1997, (ii) fixed and intangible assets included in the
fourth quarter 1997 acquisitions of ODC and WAI and (iii) the new operating
business system becoming operational in the second quarter 1998.
INTEREST INCOME, NET. Interest income, net was $2.2 million and $3.1 million for
the three-month periods ended September 30, 1998 and 1997, respectively and $6.1
million and $8.1 million for the nine-month periods ended September 30, 1998 and
1997, respectively. Interest earned in the 1998 periods was lower compared to
the 1997 periods due to the decrease of cash and short-term investments average
balances offset by higher average balances in customer notes receivable. The
Company expects that the level of interest income, net in 1998 will vary in
accordance with the level of secured debt financing commitments issued by
Glenayre and used by its customers.
PROVISION FOR INCOME TAXES. The effective tax rates for the three-month periods
ended September 30, 1998 and 1997 were 36% and 32%, respectively. The effective
tax rates for the nine-month periods ended September 30, 1998 and 1997 were 36%
and 34%, respectively. The difference between the effective rates for these
periods and the combined U.S. federal and state statutory tax rate of
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14
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
approximately 40% is primarily the result of (i) the utilization in 1997 of the
Company's net operating losses ("NOLs"), (ii) lower tax rates on earnings
indefinitely reinvested in certain non-U.S. jurisdictions and (iii) the
application of Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES, ("SFAS 109"), in computing the Company's tax provision. The
difference between the effective tax rates in 1998 compared to 1997 is primarily
the result of the tax benefits of net operating loss carryforwards for financial
statement purposes in accordance with SFAS 109 being fully utilized in 1997. See
Note 3 to the Company's Condensed Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1998, Glenayre's principal
sources of liquidity included $17.2 million of cash and cash equivalents and a
$50 million bank line of credit that expires October 30, 1998. The Company
expects to renew the bank line of credit through October 1999. Borrowings under
the line of credit during the three months and the nine months ended September
30, 1998 ranged from $5 million to $15 million with no borrowings as of
September 30, 1998. Accounts receivable increased $11.3 million from year end
1997 due to extended payment terms offered to customers. Approximately 54% of
the gross notes receivable balance of $65 million as of September 30, 1998
consists of receivables from one customer which has a limited operating history
and is engaged in the buildout of a major two-way personal communications
services network in the newly introduced market of advanced voice and text
paging. Additionally, the Company purchased $11.7 million of 9.0% convertible
senior subordinated notes (included in other assets) issued by this same
customer in May 1998. Accounts payable increased at September 30, 1998 compared
to December 31, 1997 primarily as a result of differences in payment cycles.
Accrued expenses at September 30, 1998 decreased from year end 1997 primarily
due to a reduction in (i) customer deposits, (ii) outside sales commissions
accruals, (iii) state income taxes payable, (iv) long-term project related
accruals, and (v) volume purchase discount accruals partially offset by an
increase in payroll accruals.
On October 21, 1998, in response to uncertainties in world markets, the Company
announced a number of cost reduction activities including a 10% reduction in its
global workforce and moving its Boston operations to its Atlanta facility. These
actions will result in restructuring charges of approximately $8 million that
will be recorded during fourth quarter 1998. The facility consolidation will
result in integration costs of approximately $4 million that will be incurred
during fourth quarter 1998 and first quarter 1999.
In 1996, the Board of Directors of the Company authorized a repurchase program
to buy back 2.5 million shares of the Company's common stock. As of September
30, 1998, no shares have been repurchased under the 1996 program. Additionally,
in 1996, the Company began the implementation of a new operating business
system. This business system began operating in April 1998 at a total
capitalized cost of approximately $17.2 million including $3.4 million of cost
incurred in 1998.
The Company expects to use its cash and cash equivalents and bank line of credit
for working capital and other general corporate purposes, including the
expansion and development of its existing products and markets and the expansion
into complementary businesses. Additionally, the competitive telecommunications
market often requires customer financing commitments. These commitments may be
in the form of guarantees, secured debt or lease financing. At September 30,
1998, the Company had agreements to finance and arrange financing for
approximately $85 million of paging and voice mail products. Further, at
September 30, 1998, the Company had committed, subject to customers meeting
certain conditions and requirements, to finance approximately $6 million for
similar systems. The Company cannot currently predict the extent to which these
commitments will be utilized, since certain
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16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
customers may be able to obtain more favorable terms using traditional financing
sources. From time to time, the Company also arranges for third-party investors
to assume a portion of its commitments. If used, the financing arrangements will
be secured by the equipment sold by Glenayre.
In 1997 Glenayre began the pre-construction phase for a 110,000 square foot
expansion of its Vancouver facility to be used primarily for research and
development and customer service. During the first quarter of 1998 Glenayre
negotiated a contract for up to $15 million for the construction phase of the
expansion. The total cost of the expansion is expected to be approximately $19
million and to be paid throughout the construction period in 1998 and 1999. Of
this total, approximately $3.9 million, including approximately $3.0 million of
cost incurred in 1998, has been paid and included in fixed assets as of
September 30, 1998.
The Company believes that funds generated from continuing operations, together
with its current cash reserves and bank line of credit, will be sufficient to
(i) support the short-term and long-term liquidity requirements for current
operations (including annual capital expenditures and customer financing
commitments) and (ii) to repurchase shares as discussed above. Company
management believes that, if needed, it can establish additional borrowing
arrangements with lending institutions.
INCOME TAX MATTERS. In 1997 and recent years, the Company has had a favorable
income tax position principally because of the existence of a significant amount
of U.S. tax net operating loss carryforwards established prior to 1988 ("prior
NOLs"). These tax loss carryforwards were available to shelter U.S. taxable
income generated by the Company. Under the Company's operating and business
structure, the majority of the worldwide taxable income was earned in the United
States. Therefore, the Company's actual cash outlay for income taxes in 1997 and
recent years was limited to U.S. alternative minimum tax and foreign and state
income taxes. The remainder of prior NOLs were utilized in 1997.
As of September 30, 1998, the Company has U.S. tax net operating loss
carryforwards ("NOLs") aggregating $34 million related to the 1997 acquisitions
of CNET, ODC and WAI. However, the ability to utilize the acquired NOLs to
offset future income is subject to restrictions and there can be no assurance
that they will be utilized in 1998 or future periods. Additionally, the
percentage of worldwide income taxable in international jurisdictions may
increase in the future.
The Company has recorded a deferred tax asset of $15 million, net of a valuation
allowance of $19 million, at September 30, 1998, in accordance with SFAS 109.
This amount represents management's best estimate of the amount of NOLs and
other future deductions that are more likely than not to be realized as offsets
to future taxable income.
YEAR 2000. The Company has been addressing "Year 2000" issues relating to the
processing of date data at the turn of the century. A company-wide task force
has been formed, milestones have been established, and detailed plans are
actively being implemented so that Glenayre research programs, products and
internal infrastructure systems are reviewed and the necessary changes are made.
Glenayre's primary internal operating business system was replaced in 1998 and
is Year 2000 ready. Additionally, Glenayre customer and supplier relationships
are being reviewed to assess and address Year 2000 issues. The Company has
undertaken internal reviews and has contacted certain of its customers to
assess, to the extent possible, Year 2000 issues related to Glenayre products.
The Company believes that it has made significant progress in making its product
lines Year 2000 ready. While the Company is taking reasonable efforts to make
information on the Year 2000 readiness of Glenayre products available to its
customers, this information may not reach all customers. Glenayre's efforts to
address Year 2000 issues will involve additional costs and the time and effort
of a number of Glenayre employees. The Company believes, based on currently
available information, that it will be able to manage its total Year 2000
transition without any material adverse effect on the Company's future
consolidated results of operations, liquidity and capital resources. However, if
the Company, its
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16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
large customers, or significant suppliers are unable to resolve
such processing issues in a timely manner, Year 2000 issues could have a
material impact on the operations of the Company.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's Form 10-K, Summary Annual Report to Stockholders, Form 10-Q's and
Form 8-K's and other written or oral statements made by or on behalf of the
Company may include forward-looking statements reflecting the Company's current
views with respect to future events and financial performance.
Although certain cautionary statements have been made in this Form 10-Q relating
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 to this Form 10-Q.
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17
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
PART II - OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE INAPPLICABLE AND HAVE BEEN OMITTED.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 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.
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18
<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,
Chief Operating Officer and
Chief Financial Officer
(Principal Financial
Officer)
/s/ BILLY C. LAYTON
----------------------------
Billy C. Layton
Vice President, Controller
and Chief Accounting Officer
(Principal Accounting Officer)
Date: October 26, 1998
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
33-88818 on Form S-4, dated March 24, 1995 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated March 25, 1996), Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number
333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective
Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement
Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997 and Registration Statement
Number 333-56375 on Form S-8 dated June 9, 1998 of our report dated October 16,
1998 relating to the unaudited condensed consolidated interim financial
statements of Glenayre Technologies, Inc. and subsidiaries which are included in
its Form 10-Q for the quarter ended September 30, 1998.
Ernst & Young LLP
Charlotte, North Carolina
October 16, 1998
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 17,213
<SECURITIES> 0
<RECEIVABLES> 225,294
<ALLOWANCES> 0
<INVENTORY> 48,736
<CURRENT-ASSETS> 261,506
<PP&E> 110,048
<DEPRECIATION> 0
<TOTAL-ASSETS> 524,208
<CURRENT-LIABILITIES> 85,371
<BONDS> 0
0
0
<COMMON> 344,341
<OTHER-SE> 87,984
<TOTAL-LIABILITY-AND-EQUITY> 524,208
<SALES> 303,103
<TOTAL-REVENUES> 303,103
<CGS> 150,813
<TOTAL-COSTS> 150,813
<OTHER-EXPENSES> 134,815
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,340
<INCOME-TAX> 8,444
<INCOME-CONTINUING> 14,896
<DISCONTINUED> 0
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<EPS-PRIMARY> 0.24
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</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENT UNDER SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Glenayre Technologies, Inc. ("Glenayre" or the "Company"), 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. The issuance of paging system licenses
stimulates demand for the Company's products, however, delays in the issuance of
licenses may adversely affect sales and the timing of sales of the Company's
products.
2
<PAGE>
FINANCING CUSTOMER PURCHASES FOR DEVELOPMENT OF THE TWO-WAY COMMUNICATIONS
MARKET
The Company finances customer purchases of its products for development of
the two-way communications market for the build-out of two-way networks by its
customers who acquired two-way licenses auctioned by the FCC (the "Two-Way
License Holders"). Many of the Two-Way License Holders with whom the Company has
or expects to enter into customer financing arrangements have limited operating
histories, significant debt related to the acquisition of their two-way licenses
and start-up expenses, negative cash flows from operations and some have never
generated an operating profit. The Company generally retains a security interest
in equipment for which it provides financing.
INTERNATIONAL BUSINESS RISKS
Approximately 50% of 1997 fiscal year net sales were generated in markets
outside of the United States. International sales are subject to the customary
risks associated with international transactions, including political risks,
local laws and taxes, the potential imposition of trade or currency exchange
restrictions, tariff increases, transportation delays, difficulties or delays in
collecting accounts receivable, exchange rate fluctuations and the effects of
prolonged currency destabilization in major international markets. Although a
substantial portion of the international sales of the Company's products and
services for fiscal year 1997 was negotiated in United States dollars, the
Company may not be able to maintain such a high percentage of United States
dollar denominated international sales. The Company seeks to mitigate its
currency exchange fluctuation risk by entering into currency hedging
transactions. The Company also acts to mitigate certain risks associated with
international transactions through the purchase of political risk insurance and
the use of letters of credit.
3
