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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 MARCH 31, 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 April 17, 1998 was 61,161,994 shares.
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<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information:
Item 1. Financial Statements
Page
----
<S> <C>
Independent Accountant's Review Report..................................3
Condensed Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and December 31, 1997...................4
Condensed Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 (Unaudited).............5
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1998 (Unaudited)..............6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (Unaudited).............7
Notes to Condensed Consolidated Financial Statements (Unaudited)........8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K......................................16
</TABLE>
2
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of March 31, 1998, and the
related condensed consolidated statements of income for the three-month periods
ended March 31, 1998 and 1997, the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 1998 and the condensed
consolidated statements of cash flows for the three-month periods ended March
31, 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
April 17, 1998
3
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.......................................... $29,640 $21,076
Accounts receivable, net........................................... 147,509 152,231
Notes receivable................................................... 6,611 8,684
Inventories........................................................ 41,578 49,302
Deferred income taxes.............................................. 14,098 13,943
Prepaid expenses and other current assets.......................... 7,936 6,810
-------- --------
Total current assets............................................. 247,372 252,046
Notes receivable, net................................................. 40,637 53,050
Property, plant and equipment, net.................................... 107,092 103,641
Goodwill.............................................................. 77,514 78,568
Deferred income taxes................................................. 933 1,088
Other assets......................................................... 16,874 17,425
-------- --------
TOTAL ASSETS $490,422 $505,818
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................... $19,932 $27,133
Accrued liabilities................................................. 49,749 61,358
Other current liabilities........................................... 295 2,101
-------- --------
Total current liabilities......................................... 69,976 90,592
Other liabilities..................................................... 6,774 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: March 31, 1998 - 61,139,025 shares;
December 31, 1997 - 60,650,761 shares............................. 1,223 1,213
Contributed capital................................................. 336,195 333,715
Retained earnings................................................... 76,254 73,088
-------- --------
Total stockholders' equity........................................ 413,672 408,016
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................ $490,422 $505,818
======== ========
</TABLE>
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
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
1998 1997
---------------------- -----------------
<S> <C> <C>
NET SALES ........................................................ $94,533 $105,771
------------ ---------------
COSTS AND EXPENSES:
Cost of sales................................................ 45,764 50,550
Selling, general and administrative expense.................. 25,313 23,444
Research and development expense............................. 14,193 8,649
Depreciation and amortization expense........................ 6,332 4,535
------------- ---------------
Total Costs and Expenses................................. 91,602 87,178
------------- ---------------
INCOME FROM OPERATIONS............................................ 2,931 18,593
------------- ---------------
OTHER INCOME (EXPENSES):
Interest income.............................................. 2,357 2,161
Interest expense............................................. (166) (14)
Other, net................................................... (96) 71
------------- ---------------
Total Other Income (Expenses), net....................... 2,095 2,218
------------- ---------------
INCOME BEFORE INCOME TAXES........................................ 5,026 20,811
PROVISION FOR INCOME TAXES........................................ 1,860 7,365
------------- ---------------
NET INCOME........................................................ $ 3,166 $13,446
============= ===============
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE.................................................... $ 0.05 $ 0.22
============= ===============
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION............................................ $ 0.05 $ 0.22
============ ================
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Total
Common Stock Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
---------- ---------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997............ 60,651 $1,213 $333,715 $73,088 $408,016
Net Income............................. 3,166 3,166
Stock options exercised................ 488 10 1,639 1,649
Tax benefit of stock options
exercised........................... 841 841
------ ------ -------- ------- --------
Balances, March 31, 1998.............. 61,139 $1,223 $336,195 $76,254 $413,672
====== ====== ======== ======= ========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.. $17,814 $6,384
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (8,410) (5,639)
Proceeds from sale of equipment.................................. 149 24
Maturities of short-term investments............................. --- 53,661
Purchases of short-term investments.............................. --- (24,223)
Payments for business acquisition, net of cash acquired.......... --- (1,122)
-------- -------
Net cash provided by (used in) investing activities........ (8,261) 22,701
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities..................................... (2,638) (926)
Issuance of common stock......................................... 1,649 88
-------- -------
Net cash used in financing activities...................... (989) (838)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 8,564 28,247
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD........................................................ 21,076 53,785
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,640 $82,032
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.......................................................... $ 99 $ 20
Income taxes...................................................... 1,909 1,072
</TABLE>
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
See notes to condensed consolidated financial statements
7
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS 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 period ended March 31, 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
March 31, December 31,
Inventories consist of: 1998 1997
--------- ---------
Raw materials........................ $23,440 $25,970
Work-in-process...................... 8,748 10,813
Finished goods....................... 9,390 12,519
------- -------
$41,578 $49,302
======= =======
2. GOODWILL
Goodwill is shown net of accumulated amortization of $16.9 million and
$15.9 million at March 31, 1998 and December 31, 1997, respectively.
8
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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3. INCOME TAXES
The Company's consolidated income tax provision was different from the
amount computed using the U.S. statutory income tax rate for the following
reasons:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
------- ------
<S> <C> <C>
Income tax provision at U.S. statutory rate............ $1,759 $7,284
Reduction in valuation allowance....................... --- (241)
Foreign taxes at rates other than U.S.
statutory rate...................................... (175) (560)
State taxes (net of federal benefit)................... (195) 479
U.S. Research and Experimentation Credits.............. (84) ---
Non-deductible goodwill amortization................... 555 403
------ ------
Income tax provision................................... $1,860 $7,365
====== ======
</TABLE>
Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 4, the benefits derived from the utilization of tax net
operating loss carryforwards are reported in the statement of operations in the
year such tax benefits are realized and then reclassified from retained earnings
to contributed capital. The Company adopted the accounting method for
utilization of 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 months ended March 31, 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 $241,000 (less than $.01 per share) for
the three months ended March 31, 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 March 31, 1998 will be fully realized.
9
<PAGE>
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:
1998 1997
------- -------
Numerator:
Net income.......................................... $3,166 $13,446
Denominator:
Denominator for basic income per share -
weighted average shares........................... 60,906 60,159
Effect of dilutive securities:
stock options..................................... 2,364 1,744
------ ------
Denominator for diluted income per share-adjusted
weighted average shares and assumed conversions... 63,270 61,903
====== ======
Net income per weighted average common share............ $0.05 $0.22
===== =====
Net income per common share - assuming dilution......... $0.05 $0.22
===== =====
10
<PAGE>
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") 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 April 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 Ended March 31,
1998 1997
------ ------
Net sales.................................. 100.0% 100.0%
Cost of sales.............................. 48.4 47.8
------ ------
Gross profit .......................... 51.6 52.2
Operating expenses:
Selling, general and administrative.... 26.8 22.1
Research and development............... 15.0 8.2
Depreciation and amortization.......... 6.7 4.3
------ ------
Total operating expenses........... 48.5 34.6
------ ------
Income from operations .................... 3.1 17.6
Interest, net.............................. 2.3 2.0
Other, net................................. (0.1) 0.1
------ ------
Income before income taxes................. 5.3 19.7
Provision for income taxes................. 2.0 7.0
------ ------
Net income................................. 3.3% 12.7%
====== ======
11
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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 Ended March 31,
1998 1997
------- --------
(IN THOUSANDS)
Paging products ........................ $72,144 $83,497
Mobile and fixed network products ...... 16,135 13,475
Microwave communication................. 6,254 8,799
------- --------
$94,533 $105,771
======= ========
(PERCENTAGE OF NET SALES)
Paging products ........................ 76% 79%
Mobile and fixed network products ...... 17 13
Microwave communication................. 7 8
------- --------
100% 100%
======= ========
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales for the three months ended March 31, 1998 decreased 11% to
$94.5 million as compared to $105.8 million for the three months ended March 31,
1997. International sales (sales outside the United States) were $ 44.6 million
for the three months ended March 31, 1998 as compared to $48.8 million for the
three months ended March 31, 1997 and accounted for 47% and 46% of net sales for
the 1998 and 1997 periods, respectively.
The decline in sales is primarily the result of a decrease in deliveries of the
Company's paging infrastructure products to both (i) the Pacific Rim market
caused by currency destabilization in certain Asian countries and (ii) the
United States market. This decrease was mitigated by the sales of two-way paging
devices from Wireless Access, Inc. ("WAI") whose operating results are included
in the Company's consolidated results only since its acquisition in the fourth
quarter of 1997. The Company anticipates improvement in revenues for the
remainder of 1998 based on indications that its United States customers are
continuing to build out two-way paging systems along with Glenayre's expected
introductions of new two-way paging data products. Additionally, the Company is
optimistic that the Asian market will begin to rebound in the latter half of
1998 as the worst stages of the currency issues are passed. However, there can
be no assurance 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 14% of net sales for
each of the three-month periods ending March 31, 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 51.6% and 52.2% for three-month periods ended
March 31, 1998 and 1997, respectively. 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.
12
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $25.3 million and $23.4 million for the three-month periods ended
March 31, 1998 and 1997, respectively. The increase was primarily due to the
inclusion of Open Development Corporation ("ODC") and WAI operating expenses
since their dates of acquisition in the fourth quarter 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses increased to
$14.2 million for the three months ended March 31, 1998 compared to $8.6 million
for the three months ended March 31, 1997. The increase was primarily due to (i)
restructuring and other related expenses amounting to approximately $1.3 million
as a result of the consolidation of the Company's paging infrastructure research
and development function at its Vancouver, British Columbia facility, (ii) the
addition of engineering personnel since the first quarter 1997 and (iii) 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
increased to $6.3 million for the three months ended March 31, 1998 compared to
$4.5 million for the three months ended March 31, 1997. The increase in
depreciation and amortization expense was due to significant fixed and
intangible asset purchases subsequent to first quarter 1997.
INTEREST INCOME, NET. Interest income, net was $2.2 million and $2.1 million for
the three-month periods ended March 31, 1998 and 1997, respectively. Interest
earned on higher balances in customer notes receivable offset the decline in
short-term investment balances. The Company expects that the level of interest
income, net in 1998 will vary in accordance with the level of secured debt
financing commitments used by Glenayre's customers.
PROVISION FOR INCOME TAXES. The difference between effective tax rates of 37%
and 35% for the three months ended March 31, 1998 and 1997, respectively 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 each of the years 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 Consolidated Financial Statements.
13
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1998, Glenayre's principal sources
of liquidity included $29.6 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 three months ended March 31, 1998 ranged from $5
million to $15 million with no borrowings as of March 31, 1998. Notes receivable
decreased $14.5 million at March 31, 1998 compared to year end 1997 due to a
significant paydown by one customer offset by additional requests from customers
for financing primarily related to the sales of paging and voice mail products.
Approximately 61% of the notes receivable balance as of March 31, 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.
Inventories at March 31, 1998 decreased from year end 1997 primarily due to (i)
a raw material inventory reduction program, (ii) a substantial usage of
remaining AccessLink two-way paging devices which are expected to be replaced in
the second quarter 1998 by the next generation two-way devices and (iii) the
timing of shippable orders. Accounts payable and accrued expenses in the
aggregate at March 31, 1998 decreased from year end 1997 primarily due to (i)
significant payroll related payments, (ii) corresponding decreases in inventory
purchases, (iii) customer deposits 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 March 31,
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 million. Of this total, approximately $15 million,
including $1.7 million of cost incurred in 1998, has been paid and included in
fixed assets as of March 31, 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 March 31, 1998,
the Company had agreements to finance and arrange financing for approximately
$106 million of paging and voice mail products. Further, at March 31, 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 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 $1.4 million, including approximately $500,000 of cost
incurred in 1998, has been paid and included in fixed assets as of March 31,
1998.
14
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 March 31, 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, as the volume of international
sales is expected to grow, 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 recent years.
The Company has recorded a deferred tax asset of $34 million, net of a valuation
allowance of $19 million, at March 31, 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 related
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.
15
<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.
16
<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: April 24, 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, 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 and Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997 of our report dated April
17, 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 March 31, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 or the Securities Act of 1933.
Ernst & Young LLP
Charlotte, North Carolina
April 17, 1998
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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, the introduction of
these services are just beginning on a commercial basis. 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
<PAGE>
significant United States market presence, totaled approximately 16%, 15% and
11% of 1995, 1996 and 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.
3
<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 any 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
