- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A NO. 1
[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 (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
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
- --------------------------------------------------------------------------------
This Quarterly Report on Form 10-Q/A No. 1 amends the Items set forth below in
the Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1998 (the "Form 10-Q").
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...........................13
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K................................23
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.
As discussed more fully in Note 1, the Company has modified the methods used to
value acquired in-process technology recorded and written off in connection with
the Company's 1997 acquisition of Open Development Corporation and Wireless
Access, Inc. and accordingly, has restated the consolidated financial statements
for the year ended December 31, 1997, and the condensed consolidated financial
statements for the three-month period and nine-month period ended September 30,
1998 to reflect this change.
Ernst & Young LLP
Charlotte, North Carolina
October 16, 1998, except for the
restatement related to acquired
in-process technology referred to in
Note 1, as to which the date is
February 15, 1999.
3
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
(Unaudited)
(Restated- (Restated-
See Note 1) See Note 1)
<S> <C> <C>
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 ..................................... 61,351 53,050
Property, plant and equipment, net ........................ 110,048 103,641
Goodwill .................................................. 151,487 164,080
Deferred income taxes ..................................... 703 1,088
Other assets .............................................. 14,211 16,256
-------- --------
TOTAL ASSETS .............................................. $599,306 $590,161
======== ========
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 ...................................... 163,082 157,431
-------- --------
Total stockholders' equity .......................... 507,423 492,359
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................ $599,306 $590,161
======== ========
</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 STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------------
1998 1997
------------------ -----------------
(Restated-
See Note 1)
<S> <C> <C>
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............ 10,134 4,949
------- --------
Total Costs and Expenses................... 113,818 92,727
------- --------
INCOME FROM OPERATIONS................................. 12,871 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............................. 15,076 22,205
PROVISION FOR INCOME TAXES............................. 6,541 7,171
------- --------
NET INCOME............................................. $ 8,535 $ 15,034
======= ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE......................................... $ 0.14 $ 0.25
====== ======
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION.................................... $ 0.13 $ 0.24
====== ======
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------------------
1998 1997
------------------ -----------------
(Restated-
See Note 1)
<S> <C> <C>
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............ 29,571 14,234
------- --------
Total Costs and Expenses................... 294,873 269,108
------- --------
INCOME FROM OPERATIONS................................. 8,230 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............................. 14,095 66,032
PROVISION FOR INCOME TAXES............................. 8,444 22,592
------- --------
NET INCOME............................................. $ 5,651 $ 43,440
======= ========
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE.......................................... $ 0.09 $ 0.72
====== ======
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION..................................... $ 0.09 $ 0.69
====== ======
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
(Restated - See Note 1)
<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 $157,431 $492,359
Net Income...................... 5,651 5,651
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 $163,082 $507,423
====== ====== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
7
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
------------ -------------
(Restated-
See Note 1)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................. $13,878 $23,856
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
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......... (22,151) (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
</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
8
<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 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 as amended by Form 10-K/A No. 1.
1. RESTATEMENT OF FINANCIAL STATEMENTS RELATED TO ACQUIRED IN-PROCESS TECHNOLOGY
During the fourth quarter 1998 and first quarter 1999, the Company and the Staff
of the Securities and Exchange Commission ("Staff") had communication with
respect to the methods used to value acquired in-process technology recorded and
written off at the date of acquisition. As a result, the Company has modified
the methods used to value acquired in-process technology in connection with the
Company's 1997 acquisitions of Open Development Corporation ("ODC") and Wireless
Access, Inc. ("WAI"). Initial calculations of value of the acquired in-process
technology were based on the cost required to complete each project, the
after-tax cash flows attributable to each project, and the selection of an
appropriate rate of return to reflect the risk associated with the stage of
completion of each project. Revised calculations of the value of the acquired
in-process technology are based on adjusted after-tax cash flows that give
explicit consideration to the Staff's views on in-process research and
development as set forth in its September 15, 1998 letter to the AICPA, and the
Staff's comments to the Company to consider (i) the stage of completion of the
in-process technology at the dates of acquisition, (ii) complexity of the work
completed to date, (iii) the difficulty of completing development within a
period of time, (iv) technological uncertainties and (v) the estimated total
project costs of the in-process research and development in arriving at the
valuation amount. As a result of this modification the Company has decreased the
amount of the purchase price allocated to acquired in-process technology in the
ODC acquisition from $44.3 million to $16.4 million and in the WAI acquisition
from $80.9 million to $22.3 million. As a result, the Company increased goodwill
by $87.7 million.
SUMMARY OF EFFECTS OF RESTATEMENTS. The effects of the restatement related to
acquired in-process technology resulted in the following impact on the Company's
results of operations for the three and nine
9
<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)
month periods ended September 30, 1998 and its financial position at September
30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- --------------
<S> <C> <C>
Net income:
As previously reported........... $11,653 $14,896
Adjustment*....................... (3,118) (9,245)
As restated........................ 8,535 5,651
Net income per weighted average common share:
As previously reported............ 0.19 0.24
Adjustment*........................ (0.05) (0.15)
As restated......................... 0.14 0.09
Net income per common share - assuming dilution:
As previously reported............ 0.18 0.23
Adjustment*....................... (0.05) (0.14)
As restated.......................... 0.13 0.09
Financial Position
Goodwill: September 30, 1998 December 31, 1997
------------------ -----------------
As previously reported............ $75,345 $78,568
Adjustment*........................ 76,142 85,512
As restated........................... 151,487 164,080
Notes Receivable, net:
As previously reported............ 51,034 53,050
Reclassification*.................... 10,317 ---
As restated........................... 61,351 53,050
Other Assets:
As previously reported............ 25,572 17,425
Adjustment*........................ (1,044) (1,169)
Reclassification*................... (10,317) ---
As restated........................... 14,211 16,256
Retained Earnings:
As previously reported............ 87,984 73,088
Adjustment*........................ 75,098 84,343
As restated........................... 163,082 157,431
</TABLE>
*The adjustment results from the decrease in the value assigned to acquired
in-process technology and the increased amortization of goodwill and other
intangibles. A receivable previously included in Other Assets has been
reclassified to non-current Notes Receivable in order to conform to the December
31, 1998 financial statement presentation.
10
<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)
2. 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
======= =======
3. GOODWILL
Goodwill is shown net of accumulated amortization of $30.6 million and
$18.0 million at September 30, 1998 and December 31, 1997, respectively.
4. INCOME TAXES
The Company's consolidated income tax provision was different from the
amount computed using the U.S. statutory income tax rate for the following
reasons:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate.. $5,276 $7,772 $4,933 $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......... 1,652 418 4,910 1,236
Other non-deductible ........................ 207 --- 207 ---
------ ------ ------- -------
Income tax provision......................... $6,541 $7,171 $8,444 $22,592
====== ====== ====== =======
</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
11
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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.
5. STOCKHOLDERS' EQUITY
(A) QUASI-REORGANIZATION
On February 1, 1988, the Company completed a quasi-reorganization. After
determining that the Company's balance sheet reflected approximate fair value on
that date and that revaluation was not necessary, the accumulated deficit and
the cumulative translation adjustment were adjusted to zero by reclassifying
them to contributed capital. A new retained earnings account was established as
of February 1, 1988.
(B) INCOME PER COMMON SHARE
The following table sets forth the computation of income per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
1998 1997 1998 1997
------------ -------- -------- --------
(Restated- (Restated-
See Note 1) See Note 1)
<S> <C> <C> <C> <C>
Numerator:
Net income................................... $8,535 $15,034 $5,651 $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..... $0.14 $0.25 $0.09 $0.72
====== ====== ====== ======
Net income per common share - assuming dilution.. $0.13 $0.24 $0.09 $0.69
====== ====== ====== ======
</TABLE>
12
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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, software applications for
network management and data management systems including applications for
calling cards, and (iii) microwave communications products from the Western
Multiplex Group.
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 October 1998, an acceptable purchase agreement had not been negotiated.
However, the Company expects to pursue divesting this business over time.
Glenayre acquired three companies in the year ended December 31, 1997. In
November 1997, the Company acquired Wireless Access, Inc. ("WAI"), a developer
and marketer of two-way paging devices. Glenayre acquired Open Development
Corporation ("ODC"), a developer of database management products including
applications for calling cards in October 1997. In January 1997, the Company
acquired CNET, Inc., a developer of software including network management tools.
The operating results of the three acquired companies are included in the
consolidated results of Glenayre since the acquisition dates.
The ODC and WAI acquisitions were accounted for under the purchase method of
accounting and, as a result, the Company has recorded the assets and liabilities
of these businesses at their estimated fair values, with the excess of the
purchase price over these amounts being recorded as goodwill. In connection with
the allocation of purchase price for ODC and WAI, valuations of all identified
intangible assets of ODC and WAI were made. The intangible assets of these
businesses included in-process technology projects, among other assets, which
were related to research and development that had not reached technological
feasibility and for which there was no alternative future use. The amounts
allocated to purchased research and development for ODC and WAI were based on
adjusted after-tax cash flows and were determined through established valuation
techniques in the high-tech communications industry. Pursuant to applicable
accounting pronouncements, the amounts of the purchase price allocated to these
projects were expensed. In previously issued financial statements, the Company
recorded charges for acquired in-process technology of $125.2 million in 1997 in
connection with the acquisition of ODC and WAI. After communication with the
Staff of the Securities and Exchange Commission (the "Staff"), the Company has
reduced the amount of the charges for acquired in-process technology to $38.7
million in 1997 giving explicit consideration to the Staff's views on in-process
research and development as set forth in its September 15, 1998 letter to the
American Institute of Certified Public Accountants. These reductions have been
reallocated to goodwill and the Company's consolidated financial statements have
been restated to reflect such adjustments as described below and in Note 1 of
the Notes to Condensed Consolidated Financial Statements. See "ACQUIRED
IN-PROCESS TECHNOLOGY."
13
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1998 1997 1998 1997
---------- -------- -------- --------
<S> <C> <C> <C> <C>
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............... 8.0 4.4 9.8 4.3
----- ----- ------ -------
Total operating expenses................ 38.7 36.0 47.5 35.2
----- ----- ------ -------
Income from operations ......................... 10.2 17.3 2.7 18.0
Interest, net................................... 1.7 2.8 2.0 2.5
Other, net...................................... * * * *
----- ----- ------ -------
Income before income taxes...................... 11.9 19.8 4.7 20.1
Provision for income taxes...................... 5.2 6.4 2.8 6.9
----- ----- ------ -------
Net income...................................... 6.7% 13.4% 1.9% 13.2%
====== ===== ====== =======
</TABLE>
- ----------
* less than 0.5%
The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
(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%
=== === === ===
</TABLE>
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
14
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 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, 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 offset by valuation adjustments related to notes
receivable.
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.
15
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was
$10.1 million and $4.9 million for the three months ended September 30, 1998 and
1997, respectively, and $29.6 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. (See "ACQUIRED
IN-PROCESS TECHNOLOGY").
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 and nine month
periods ended September 30, 1998 and 1997 differed from the combined U.S.
federal and state statutory tax rate of approximately 40% due primarily to (i)
nondeductible goodwill amortization, (ii) the utilization of the Company's net
operating losses ("NOLs"), (iii) lower tax rates on earnings indefinitely
reinvested in certain non-U.S. jurisdictions and (iv) 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 an increase in nondeductible goodwill amortization as well as a variance
between the adjustments in each year for realization of tax benefits of net
operating loss carryforwards for financial statement purposes in accordance with
SFAS 109. These adjustments are due primarily due to revisions during each year
to the estimated future taxable income during the Company's loss carryforward
period. See Note 4 to the Company's Condensed Consolidated Financial Statements.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with the 1997 purchases of Wireless Access, Inc. ("WAI") and Open
Development Corporation ("ODC"), the Company made allocations of the purchase
price to acquired in-process technology. These amounts were expensed on the
respective acquisition dates of the acquired businesses because the acquired
in-process technology had not yet reached technological feasibility and had no
future alternative uses. In previously issued financial statements, the Company
recorded charges for acquired in-process technology of $125.2 million in 1997 in
connection with the WAI and ODC acquisitions. Subsequent to these charges, the
Staff of the Securities and Exchange Commission ("Staff") issued a letter to the
American Institute of Certified Public Accountants dated September 15, 1998
("AICPA Letter") stating certain Staff views on in-process research and
development. Additionally, the Staff, in its review of the Form 10-K for the
year ended December 31, 1997 filed by the Company in March 1998, commented on
the valuation of the in-process research and development costs for the WAI and
ODC acquisitions. After consideration of the views of the Staff set forth in the
AICPA Letter and communication with the Staff, the Company requested a
recalculation of the independent valuation analysis for the acquired in-process
technology. As a result of the recalculation, the Company has reduced the amount
of the charges for acquired in-process technology to $38.7 million in 1997 in
connection with the WAI and ODC acquisitions. These reductions have been
reallocated to goodwill to reflect such adjustments as set forth below. Since
the respective dates of acquisition, the Company has
16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
used the acquired in-process technology to develop new advanced two-way
messaging devices and a system platform for the prepaid wireless market, which
have become part of the Company's suite of products. The nature of the efforts
required to develop the acquired in-process technology into commercially viable
products principally relate to the completion of all planning, designing and
testing activities that are necessary to establish that each product can be
produced to meet its design requirements, including functions, features and
technical performance requirements. There can be no assurance that commercial
viability of these products will be achieved. Furthermore, future developments
in the wireless communications industry, changes in other product and service
offerings or other developments could cause the Company to alter or abandon
these plans. Failure to complete the development of these projects in their
entirety, or in a timely manner, could have a material adverse impact on the
Company's operating results, financial condition and results of operations.
A description of the acquired in-process technology and the estimates made by
the Company for each of (i) WAI and (ii) ODC is set forth below.
(i) WAI
The in-process technology acquired in the November 1997 WAI acquisition
consisted of one significant research and development project. The project's
primary goals were focused on improving the technical features of two-way
messaging devices while reducing their overall size. After acquiring WAI, the
Company continued the development of this in-process project. At the time of the
WAI acquisition, the Company assigned a value of $80.9 million to the WAI
in-process technology with the assistance of an independent valuation prepared
at such time. The recalculation described above indicated a value of $22.3
million. In arriving at this value, the Company considered the previously
obtained independent appraisal, the Staff's views on in-process research and
development as set forth in the AICPA Letter and the Staff's comments to the
Company, including: (i) the stage of completion of the in-process technology at
the date of acquisition, (ii) the complexity of the work completed to date,
(iii) the difficulty of completing development within a period of time, (iv)
technological uncertainties and (v) the estimated total project costs of the
in-process research and development in arriving at the valuation amount.
Major assumptions used in valuing the acquired in-process technology included:
Revenue: Significant growth percentage increases in
each of years 1998 and 1999 due to the early life-cycle stage of
two-way messaging in the market place, a decline in absolute
revenue dollars in year 2000 and an insignificant amount of sales
in year 2001 with sales ceasing as more advanced devices
introduced by Glenayre replace the AccessMate and AccessLink-II;
Profit margin percentage: Expected to improve in 1998 and 1999
along with revenue growth then constant over the remaining life
of the products;
Selling, General, and Administrative expenses: Expected to
remain constant as a percentage of revenue through the life of
the products in order to sustain growth;
Expense reductions/synergies: None were anticipated utilizing
WAI as a stand alone operation; and
17
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Discount rates: Due to the nature and characteristics of
in-process technology, a discount rate of 25% was utilized
considering a range of venture capital rates of return.
The Company estimates the WAI in-process project, which was completed in the
second quarter of 1998, was approximately 60% complete at the date of the WAI
acquisition. The project consisted of the development of two new paging devices.
AccessMate. This product is an entry-level two-way wireless data
messaging device. Utilizing a newly developed integrated circuit
chipset technology, the Company is able to decrease the size of
its devices while reducing the consumer price and power
consumption. The AccessMate allows a service provider to offer
guaranteed message receipt by storing and resending a message
when the recipient's device is turned off or out of the service
area.
AccessLink-II. In addition to allowing a service provider to
offer guaranteed message receipt, the AccessLink-II provides
users with the ability to send standard replies, create custom
replies and originate messages to another pager or to an e-mail
address.
At the time of the WAI valuation, the expected total cost of the development
project was approximately $21 million, including costs incurred by WAI prior to
its acquisition. As of December 31, 1998, approximately $6 million had been
incurred since the date of the WAI acquisition for this project, which
approximated the anticipated amount to be incurred at the acquisition date. No
significant additional expected costs will be incurred subsequent to December
31, 1998 to complete the research and development project acquired from WAI.
The actual 1998 revenue and profit margin results related to the valued WAI
in-process technology were significantly lower than projections used which
significantly impacted the Company's 1998 results. The lower results were
primarily related to start up delays in the production of the devices and
performance design issues. The Company anticipates that revenues and profit
margins in 1999 for the AccessMate and the AccessLink-II will be significantly
lower than that estimated for use in the valuation projections at the date of
the WAI acquisition primarily as a result of lower market expectations for such
devices.
(ii) ODC
The in-process technology acquired in the October 1997 ODC acquisition consisted
primarily of a project related to ODC's Service Creation Platform (SCP) and
Service Creation Environment (SCE). This platform enables service providers to
offer subscribers features such as: (i) prepaid wireless calling services with
voice activated dialing, (ii) prepaid wireline calling card services, (iii)
postpaid calling services, (iv) interactive voice response sessions scripted in
foreign languages and (v) account management. Additionally, the platform's
advanced, open architecture allows scalability.
The Company estimates this project, which was completed during the fourth
quarter of 1998, was approximately 50% complete at the date of the ODC
acquisition. At the time of the ODC acquisition, the Company assigned a value of
$44.3 million to the ODC in-process technology with the assistance of an
independent valuation prepared at such time. The recalculation described above
indicated a value of $16.4 million. In arriving at this value, the Company
considered the previously-obtained independent
18
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
appraisal, the Staff's views on in-process research and development as set forth
in the AICPA Letter and the Staff's comments to the Company, including: (i) the
stage of completion of the in-process technology at the date of acquisition,
(ii) complexity of the work completed to date, (iii) the difficulty of
completing development within a period of time, (iv) technological uncertainties
and (v) the estimated total project costs of the in-process research and
development in arriving at the valuation amount.
Major assumptions used in valuing the ODC acquired in-process technology
included:
Revenue: Significant growth rate percentages in each of years
1998 and 1999 due to the early life-cycle stage of the ODC
products in the market place, a modest growth rate percentage in
year 2000, and a decline in absolute revenue dollars in year 2001
through 2003 with sales ceasing thereafter as technological
advances replace the SCP/SCE platform;
Profit margin percentages: Expected to improve approximately 2%
per year from 1997 through 2000 along with the revenue growth
then remaining constant over the remaining life of the products;
Selling, General, and Administrative expenses: Expected to
decrease as a percentage of revenues from 1997 to 1998 due to low
1997 sales and then remain constant as a percentage of revenue
through the life of the products in order to sustain growth;
Expense reductions/synergies: No expense reductions/synergies
were anticipated; and
Discount rates: Due to the nature and characteristics of the ODC
in-process technology, a discount rate of 20% was utilized
considering a range of venture capital rates of return.
At the time of the ODC valuation, the expected total cost of the development
project was approximately $8 million, including costs incurred by ODC prior to
the acquisition. As of December 31, 1998, approximately $4 million had been
incurred since the date of the ODC acquisition for this project, which
approximated the anticipated amount to be incurred at the acquisition date. No
significant additional expected costs will be incurred subsequent to December
31, 1998 to complete the research and development project acquired from ODC.
The actual 1998 revenue and profit margin results related to the valued ODC
in-process technology products were significantly lower than projections used
which significantly impacted the Company's 1998 results. The lower results were
primarily related to a change in management strategy during 1998 toward the
target markets for the SCE/SCP products. This strategic change was from a
multiple market approach for the prepaid wireless, prepaid wireline, and
postpaid calling markets to a single market approach focused solely on the
prepaid wireless market, thus eliminating two markets in which the SCE/SCP
products were expected to be sold. The projections used in the acquired
in-process technology valuation included revenue related to all three of these
markets. Management believes that its future concentration related to this
technology should continue to be primarily in the prepaid wireless market. Given
this strategic change, the Company anticipates that the revenue and profit
19
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
margins for 1999 for the SCE/SCP products will be significantly lower than that
estimated for use in the valuation projections at the date of ODC acquisition.
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 62% of
the gross notes receivable balance of $77 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. 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 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.
20
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 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. 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. net operating loss carryforwards
("NOLs") aggregating $34 million related to 1997 acquisitions of CNET, ODC, and
WAI. However, the ability to utilize the acquired NOLs to offset future income
is subject to restrictions and there can be no assurance that they will be
utilized in 1998 or future periods. Additionally, the percentage of worldwide
income taxable in international jurisdictions may increase in the future. As a
result, the Company expects that its cash tax rate will be significantly higher
in 1998 compared to 1997 and prior years.
The Company has recorded a deferred tax asset of $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. The factors that affect the amount of U.S. taxable
income in the future, in relation to reported income before income taxes,
include primarily the amount of employee stock options exercised and the portion
of such income taxable in jurisdictions outside the U.S., both of which reduce
the amount of income subject to U.S. tax, and therefore reduce the utilization
of existing net operating loss carryforwards.
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
21
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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
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, as amended by Form 10-K/A No. 1, 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/A
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 as
originally filed.
22
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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PART II - OTHER INFORMATION
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. (Previously Filed)
(b) Reports on Form 8-K
None.
23
<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: March 25, 1999
<PAGE>
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, except for the restatement related to acquired in-process technology
referred to in Note 1, as to which the date is February 15, 1999, 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, except for the restatement
related to acquired in-process technology
referred to in Note 1, as to which the date
is February 15, 1999.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
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0
0
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</TABLE>
