- --------------------------------------------------------------------------------
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 JUNE 30, 1998
---------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ----------
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
---------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5935 CARNEGIE BLVD., CHARLOTTE, NORTH CAROLINA 28209
----------------------------------------------- ---------
(Address of principal executive offices) Zip Code
(704) 553-0038
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock, par value
$.02 per share, at July 23, 1998 was 61,883,192 shares.
- --------------------------------------------------------------------------------
<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 June 30,
1998 ("the Form 10-Q").
INDEX
<TABLE>
Part I - Financial Information:
Item 1. Financial Statements
Page
<S> <C>
Independent Accountant's Review Report......................................3
Condensed Consolidated Balance Sheets as of
June 30, 1998 (Unaudited) and December 31, 1997..........................4
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1998 and 1997 (Unaudited)....................5
Condensed Consolidated Statements of Operations for the
six months ended June 30, 1998 and 1997 (Unaudited).....................6
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1998 (Unaudited).......................7
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited)......................8
Notes to Condensed Consolidated Financial Statements (Unaudited)............9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................13
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K..........................................22
</TABLE>
2
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of June 30, 1998, and the
related condensed consolidated statements of income for the three-month periods
and six-month periods ended June 30, 1998 and 1997, the condensed consolidated
statement of stockholders' equity for the six months ended June 30, 1998 and the
condensed consolidated statements of cash flows for the six-month periods ended
June 30, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 30, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
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 acquisitions 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 six-month period ended June 30, 1998
to reflect this change.
Ernst & Young LLP
Charlotte, North Carolina
July 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
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C> <C>
June 30, 1998 December 31, 1997
---------------- --------------------
(Unaudited)
(Restated- (Restated-
See Note 1) See Note 1)
ASSETS
Current Assets:
Cash and cash equivalents.......................... $21,430 $21,076
Accounts receivable, net........................... 145,679 152,231
Notes receivable................................... 6,514 8,684
Inventories........................................ 50,176 49,302
Deferred income taxes.............................. 14,098 13,943
Prepaid expenses and other current assets.......... 8,604 6,810
--------- ---------
Total current assets.......................... 246,501 252,046
Notes receivable, net.................................. 51,218 53,050
Property, plant and equipment, net..................... 109,647 103,641
Goodwill............................................... 155,707 164,080
Deferred income taxes.................................. 933 1,088
Other assets........................................... 14,857 16,256
--------- ---------
TOTAL ASSETS........................................... $578,863 $590,161
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $30,998 $27,133
Accrued liabilities................................ 45,631 61,358
Other current liabilities.......................... 308 2,101
--------- ---------
Total current liabilities..................... 76,937 90,592
Other liabilities...................................... 6,723 7,210
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
Authorized, no shares issued and outstanding..... -- --
Common stock, $.02 par value; authorized:
200,000,000 Shares; outstanding: June 30, 1998 -
61,812,767 Shares; December 31, 1997 - 60,650,761
shares............................................. 1,232 1,213
Contributed capital................................. 339,424 333,715
Retained earnings................................... 154,547 157,431
--------- ---------
Total stockholders' equity....................... 495,203 492,359
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $578,863 $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
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
Three Months Ended
June 30,
---------------------------------------
1998 1997
------------------ -----------------
(Restated-
See Note 1)
<S> <C> <C>
NET SALES.............................................. $81,881 $110,172
--------- ---------
COSTS AND EXPENSES:
Cost of sales.................................... 40,255 50,571
Selling, general and administrative expense...... 24,229 24,513
Research and development expense................. 11,864 9,369
Depreciation and amortization expense............ 10,060 4,750
--------- ---------
Total Costs and Expenses................... 86,408 89,203
--------- ---------
INCOME (LOSS) FROM OPERATIONS.......................... (4,527) 20,969
--------- ---------
OTHER INCOME (EXPENSES):
Interest income................................. 1,859 2,882
Interest expense................................ (79) (21)
Other, net....................................... (215) (814)
--------- ---------
Total Other Income (Expenses), net........ 1,565 2,047
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES...................... (2,962) 23,016
PROVISION FOR INCOME TAXES............................. 43 8,056
--------- ---------
NET INCOME (LOSS)...................................... $(3,005) $ 14,960
========= =========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE........................................... $ (0.05) $ 0.25
========= =========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION...................................... $ (0.05) $ 0.24
========= =========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
0
Six Months Ended
June 30,
---------------------------------------
1998 1997
------------------ -----------------
(Restated-
See Note 1)
<S> <C> <C>
NET SALES.............................................. $176,414 $215,943
-------- --------
COSTS AND EXPENSES:
Cost of sales.................................... 86,019 101,121
Selling, general and administrative expense...... 49,542 47,957
Research and development expense................. 26,057 18,018
Depreciation and amortization expense............ 19,437 9,285
-------- --------
Total Costs and Expenses................... 181,055 176,381
-------- --------
INCOME (LOSS) FROM OPERATIONS.......................... (4,641) 39,562
-------- --------
OTHER INCOME (EXPENSES):
Interest income................................. 4,216 5,043
Interest expense................................ (245) (35)
Other, net....................................... (311) (743)
-------- --------
Total Other Income (Expenses), net........ 3,660 4,265
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES...................... (981) 43,827
PROVISION FOR INCOME TAXES............................. 1,903 15,421
-------- --------
NET INCOME (LOSS)...................................... $ (2,884) $ 28,406
========= ========
NET INCOME (LOSS) PER WEIGHTED AVERAGE
COMMON SHARE........................................... $ (0.05) $ 0.47
========= =========
NET INCOME (LOSS) PER COMMON SHARE -
ASSUMING DILUTION...................................... $ (0.05) $ 0.45
========= =========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
(Restated-See Note 1)
<TABLE>
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 Loss.......................... (2,884) (2,884)
Stock options exercised........... 932 19 4,505 4,524
Tax benefit of stock options
exercised...................... 1,204 1,204
------ ------ -------- -------- ---------
Balances, June 30, 1998........ 61,583 $1,232 $339,424 $154,547 $495,203
====== ====== ======== ======== =========
</TABLE>
See notes to condensed consolidated financial statements
7
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
Six Months Ended June 30,
----------------------------------
1998 1997
------------- -------------
(Restated-
See Note 1)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.. $14,767 $24,500
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (16,376) (12,681)
Proceeds from sale of equipment..................... 163 38
Maturities of short-term investments................ --- 73,084
Purchases of short-term investments................. --- (58,480)
Payments for business acquisition, net of cash acquired --- (1,122)
------- -------
Net cash provided by (used in) investing
activities.................................. (16,213) 839
CASH FLOWS FROM FINANCING ACTIVITIES: ------- -------
Changes in other liabilities........................ (2,724) (980)
Issuance of common stock........................... 4,524 1,196
------- -------
Net cash provided by financing activities..... 1,800 216
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 354 25,555
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD........................................... 21,076 53,785
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,430 $79,340
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest............................................. $ 119 $ 49
Income taxes......................................... 2,596 2,007
</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
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. The Company's financial results in any
quarter are highly dependent upon various factors, including the timing and size
of customer orders and the shipment of products for large orders. Large orders
from customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
In January 1997, the Company completed the acquisition of CNET, Inc. ("CNET").
The operating results of CNET are included in the operating results of the
Company since the acquisition date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1997, 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.
9
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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 six month periods ended June 30, 1998
and its financial position at June 30, 1998 and December 31, 1997.
<TABLE>
<S> <C> <C>
Three Months Six Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
Net income:
As previously reported........... $ 77 $ 3,243
Adjustment*....................... (3,082) (6,127)
As restated........................ (3,005) (2,884)
Net income per weighted average common share:
As previously reported............ 0.00 0.05
Adjustment*........................ (0.05) (0.10)
As restated......................... (0.05) (0.05)
Net income per common share - assuming
dilution:
As previously reported............ 0.00 0.05
Adjustment*....................... (0.05) (0.10)
As restated.......................... (0.05) (0.05)
Financial Position
Goodwill: June 30, 1998 December 31, 1997
------------- -----------------
As previously reported............ $76,407 $78,568
Adjustment*........................ 79,300 85,512
As restated........................... 155,707 164,080
Notes Receivable, net:
As previously reported............ 39,551 53,050
Reclassification*.................... 11,667 ---
As restated........................... 51,218 53,050
Other Assets:
As previously reported............ 27,608 17,425
Adjustment*........................ (1,084) (1,169)
Reclassification*................... (11,667) ---
As restated........................... 14,857 16,256
Retained Earnings:
As previously reported............ 76,331 73,088
Adjustment*........................ 78,216 84,343
As restated........................... 154,547 157,431
</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
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
2. INVENTORIES
June 30, December 31,
Inventories consist of: 1998 1997
------------- --------------
Raw materials......................... $28,106 $25,970
Work-in-process....................... 10,682 10,813
Finished goods........................... 11,388 12,519
------- -------
$50,176 $49,302
======= =======
3. GOODWILL
Goodwill is shown net of accumulated amortization of $26.4 million and $18.0
million at June 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>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Income tax provision at U.S. statutory rate.. $(1,036) $8,055 $(343) $15,339
Reduction in valuation allowance............. --- (902) --- (1,145)
Foreign taxes at rates other than U.S.
statutory rate............................ (197) (72) (372) (630)
State taxes (net of federal benefit)......... (361) 560 (556) 1,039
U.S. Research and Experimentation Credits --- --- (84) ---
Non-deductible goodwill amortization......... 1,637 415 3,258 818
------ ------ ------ -------
Income tax provision......................... $43 $8,056 $1,903 $15,421
====== ====== ====== =======
</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.
11
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
If the original guidance in SAB 86 had been applied, the Company's net income
for the three-month and six-month periods ended June 30, 1997 would have been
reduced by the amount of the benefit from utilization of tax net operating loss
carryforwards. Such reduction in net income would have been $902,000 ($.01 per
share) for the three months ended June 30, 1997. Additionally, the reduction in
net income would have been $1.1 million ($.02 per share) for the six months
ended June 30, 1997. The tax benefits from these net operating loss
carryforwards were fully utilized in 1997.
The Company believes that it is more likely than not that the net deferred tax
asset recorded at June 30, 1998 will be fully realized.
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 (LOSS) PER COMMON SHARE
The following table sets forth the computation of income (loss) per share:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------
1998 1997 1998 1997
------------ -------- ------- --------
(Restated- (Restated-
See Note 1) See Note 1)
<S> <C> <C> <C> <C>
Numerator:
Net income (loss).............................. $(3,005) $14,960 $(2,884) $28,406
Denominator:
Denominator for basic income (loss) per share -
weighted average shares...................... 61,332 60,216 61,120 60,187
Effect of dilutive securities:
stock options.................................. --- 2,489 --- 2,735
------ ------ ------ ------
Denominator for diluted income (loss) per
share-adjusted weighted average shares and
assumed conversions 61,332 62,705 61,120 62,922
====== ====== ====== ======
Net income (loss) per weighted average common share $(0.05) $0.25 $(0.05) $0.47
======= ===== ======= =====
Net income (loss) per common share - assuming $(0.05) $0.24 $(0.05) $0.45
======= ===== ======= =====
dilution
</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 July 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>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 49.2 45.9 48.8 46.8
------ ------ ------ -----
Gross profit ............................... 50.8 54.1 51.2 53.2
Operating expenses:
Selling, general and administrative......... 29.6 22.3 28.1 22.2
Research and development.................... 14.5 8.5 14.8 8.4
Depreciation and amortization............... 12.3 4.3 11.0 4.3
------ ------ ------ -----
Total operating expenses................ 56.4 35.1 53.9 34.9
------ ------ ------ -----
Income (loss) from operations .................. (5.6) 19.0 (2.6) 18.3
Interest, net................................... 2.2 2.6 2.3 2.3
Other, net...................................... * (0.7) * *
------ ------ ------ -----
Income (loss) before income taxes............... (3.6) 20.9 (0.6) 20.3
Provision for income taxes...................... * 7.3 1.1 7.1
------ ------ ------ -----
Net income (loss)............................... (3.7)% 13.6% 1.6% 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>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Paging products .......................... $63,590 $81,744 $135,735 $165,152
Mobile and fixed network products ........ 11,600 20,896 27,734 34,373
Microwave communication................... 6,691 7,532 12,945 16,418
--------- -------- -------- --------
$81,881 $110,172 $176,414 $215,943
========= ======== ========= ========
(PERCENTAGE OF NET SALES)
Paging products .......................... 78% 79% 77% 77%
Mobile and fixed network products ........ 14 13 18 16
Microwave communication................... 8 8 5 7
100% 100% 100% 100%
=== === === ===
</TABLE>
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
NET SALES. Net sales for the three months ended June 30, 1998 decreased 26% to
$81.9 million as compared to $110.2 million for the three months ended June 30,
1997. Net sales for the six months ended June 30, 1998 decreased 18% to $176.4
million as compared to $215.9 million for the six
14
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
months ended June 30, 1997. International sales (sales outside the United
States) were $34.0 million for the three months ended June 30, 1998 as compared
to $50.9 million for the three months ended June 30, 1997 and accounted for 42%
and 46% of net sales for the 1998 and 1997 periods, respectively. International
sales were $78.6 million for the six months ended June 30, 1998 as compared to
$99.8 million for the six months ended June 30, 1997.
The decline in net sales for the 1998 periods is primarily the result of (i)
later than expected receipt of significant paging infrastructure orders having
special configuration requirements resulting in manufacturing and shipping
delays, (ii) design delays associated with a new release of Glenayre's MVP
Modular Voice Processing system, (iii) production start-up problems with the
Company's new AccessMate pager devices and (iv) company operational problems
related to the implementation phase of a new business system in April 1998.
Additionally, net sales continue to be impacted by a decrease in deliveries of
paging infrastructure to certain Asian countries experiencing currency
destabilization problems.
The Company is currently taking actions to ensure a more timely and responsive
shipment of orders with special configuration requirements. Glenayre began
shipping the new release of the MVP platform and the new AccessMate pager
devices in June 1998. Additionally, the implementation phase of the Company's
new business system was substantially finalized in the second quarter of 1998.
The Company believes that overall revenues during the second half of 1998 may
exceed the first six months of 1998 as a result of (i) indications that its
United States customers are continuing to build out two-way paging systems, (ii)
timing of scheduled orders in the current backlog and (iii) the expected
deliveries of its new pager devices. This is a forward looking statement which
is subject to the factors discussed in the cautionary statement attached as
Exhibit 99 to this Form 10-Q, as originally filed. 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 20% and 13% of net
sales for the three-month periods ended June 30, 1998 and 1997. Sales to
separate single customers totaled approximately 17% and 14%, respectively for
the six-month periods ended June 30, 1998 and 1997. The Company believes that
the dependence on any one customer is mitigated by the large number of companies
in the Company's customer base and the timing for development and expansions of
their systems.
GROSS PROFIT. Gross profit was 51% and 54% for three-month periods ended June
30, 1998 and 1997, respectively. Gross profit was 51% and 53% for the six- month
periods ended June 30, 1998 and 1997. The decline in margins for 1998 is
primarily due to a lower sales volume and product mix. Glenayre's gross profit
margins may be affected by several factors including (i) the mix of products
sold, (ii) the price of products sold and (iii) increases in material costs and
other components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $24.2 million and $24.5 million for the three-month periods ended
June 30, 1998 and 1997, respectively and $49.5 million and $48.0 million for the
six-month periods ended June 30, 1998 and 1997, respectively. The changes are
attributable to the inclusion of Open Development Corporation ("ODC") and
Wireless Access ("WAI") operating expenses since their dates of acquisition in
the fourth quarter 1997 offset by lower expenses incurred, primarily related to
travel, employee incentive and commission plans, and trade shows. Additionally,
expenses for collection of doubtful accounts for the 1998 periods was reduced by
approximately $850 thousand upon the collection in the second quarter 1998 of a
receivable written off prior to 1998.
15
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses were $11.9
million and $9.4 million for the three months ended June 30, 1998 and 1997,
respectively, and $26.1 million and $18.0 million for the six months ended June
30, 1998 and 1997, respectively. The increase for the 1998 periods was primarily
due to (i) the addition of engineering personnel since the second quarter 1997
and (ii) the inclusion of research and development activities of ODC and WAI
since their dates of acquisition in fourth quarter 1997. The Company relies on
its research and development programs related to new products and the
improvement of existing products for the continued growth in net sales. Research
and development costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense was
$10.1 million and $4.8 million for the three months ended June 30, 1998 and
1997, respectively, and $19.4 million and $9.3 million for the six months ended
June 30, 1998 and 1997, respectively. The increases in expenses for the
three-month and six-month periods is a result of (i) fixed asset purchases since
June 30, 1997, (ii) fixed and intangible assets included in the fourth quarter
1997 acquisition of ODC and WAI and (iii) the new business system becoming
operational in the second quarter 1998. See "ACQUIRED IN-PROCESS TECHNOLOGY".
INTEREST INCOME, NET. Interest income, net was $1.8 million and $2.9 million for
the three-month periods ended June 30, 1998 and 1997, respectively and $4.0
million and $5.0 million for the six-month periods ended June 30, 1998 and 1997,
respectively. Interest earned in the 1998 periods was lower due to the decrease
of cash and short-term investments average balances partially offset by higher
average balances in customer notes receivable. The Company expects that the
level of interest income, net in 1998 will vary in accordance with the level of
secured debt financing commitments issued by Glenayre and used by its customers.
PROVISION FOR INCOME TAXES. The effective tax rates for the three and six month
periods ended June 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
16
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 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;
17
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 standalone operation; and
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 re sending 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
18
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 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
19
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 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 June 30, 1998, Glenayre's principal sources
of liquidity included $21.4 million of cash and cash equivalents and a $50
million bank line of credit that expires in October 1998. Borrowings under the
line of credit during the six months ended June 30, 1998 ranged from $5 million
to $15 million with no borrowings as of June 30, 1998. Notes receivable, net,
decreased to $57.7 million at June 30, 1998 compared to $61.7 million at year
end 1997 due to a significant paydown by one customer partially offset by
additional requests from customers for financing primarily related to the sales
of paging and voice mail products. Approximately 71% of the gross notes
receivable balance as of June 30, 1998 consists of receivables from one customer
which has a limited operating history and is engaged in the buildout of a major
narrowband personal communications services network in the newly introduced
market of advanced voice and text paging. Accounts and accrued expenses in the
aggregate at June 30, 1998 decreased from year end 1997 primarily due to (i)
significant payroll related and sales commission payments, (ii) reduction in
state income taxes payable, (iii) customer deposit applications and (iv)
decrease in long-term project related accruals.
In 1996, the Board of Directors of the Company authorized a repurchase program
to buy back 2.5 million shares of the Company's common stock. As of June 30,
1998, no shares have been repurchased under the 1996 program. Additionally, in
1996, the Company began the implementation of a new operating business system.
This business system began operating in April 1998 at a total capitalized cost
of approximately $16.7 million including $2.9 million of cost incurred in 1998.
The Company's cash and cash equivalents generally consist of high-grade
commercial paper, bank certificates of deposit, Treasury bills, notes or agency
securities guaranteed by the U.S. Government, and repurchase agreements backed
by U.S. Government securities with original maturities of three months or less.
The Company expects to use its cash and cash equivalents and bank line of credit
for working capital and other general corporate purposes, including the
expansion and development of its existing products and markets and the expansion
into complementary businesses. Additionally, the competitive telecommunications
market often requires customer financing commitments. These commitments may be
in the form of guarantees, secured debt or lease financing. At June 30, 1998,
the Company had agreements to finance and arrange financing for approximately
$87 million of paging and voice mail products. Further, at June 30, 1998, the
Company had committed, subject to customers meeting certain conditions and
requirements, to finance approximately $6 million for similar systems. The
Company cannot currently predict the extent to which these commitments will be
utilized, since certain customers may be able to obtain more favorable terms
using traditional financing sources. From 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
20
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
of the expansion. The total cost of the expansion is expected to be
approximately $19 million and to be paid throughout the construction period in
1998 and 1999. Of this total, approximately $2.4 million, including
approximately $1.5 million of cost incurred in 1998, has been paid and included
in fixed assets as of June 30, 1998.
The Company believes that funds generated from continuing operations, together
with its current cash reserves and bank line of credit, will be sufficient to
(i) support the short-term and long-term liquidity requirements for current
operations (including annual capital expenditures and customer financing
commitments) and (ii) to repurchase shares as discussed above. Company
management believes that, if needed, it can establish additional borrowing
arrangements with lending institutions.
INCOME TAX MATTERS. In 1997 and recent years, the Company 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 June 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 June 30, 1998, in accordance with SFAS 109. This
amount represents management's best estimate of the amount of NOLs and other
future deductions that are more likely than not to be realized as offsets to
future taxable income. 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's Form 10-K, as amended by Form 10K/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.
21
<PAGE>
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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.
22
<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
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
EXHIBIT 15
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We are aware of the incorporation by reference in the Registration Statement
Number 33-43797 on Form S-8 dated November 5, 1991, Registration Statement
Number 33-68766 on Form S-8 dated September 14, 1993, Registration Statement
Number 33-80464 on Form S-8 dated June 17, 1994, Registration Statement Number
33-88818 on Form S-4, dated March 24, 1995 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated March 25, 1996), Registration Statement Number
333-04635 on Form S-8 dated May 28, 1996 (amended by Post-Effective Amendment
Number 1 on Form S-8 dated May 22, 1998), Registration Statement Number
333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective
Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement
Number 333-38169 on Form S-8 dated October 17, 1997, Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997 and Registration Statement
Number 333-56375 on Form S-8 dated June 9, 1998 of our report dated July 16,
1998, 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 June 30, 1998.
Ernst & Young LLP
Charlotte, North Carolina
July 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.
<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>
<CIK> 0000808918
<NAME> GLENAYRE TECHNOLOGIES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,430
<SECURITIES> 0
<RECEIVABLES> 203,411
<ALLOWANCES> 0
<INVENTORY> 50,176
<CURRENT-ASSETS> 246,501
<PP&E> 109,647
<DEPRECIATION> 0
<TOTAL-ASSETS> 578,863
<CURRENT-LIABILITIES> 76,937
<BONDS> 0
0
0
<COMMON> 1,232
<OTHER-SE> 493,971
<TOTAL-LIABILITY-AND-EQUITY> 578,863
<SALES> 176,414
<TOTAL-REVENUES> 176,414
<CGS> 86,019
<TOTAL-COSTS> 86,019
<OTHER-EXPENSES> 95,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245
<INCOME-PRETAX> (981)
<INCOME-TAX> 1,903
<INCOME-CONTINUING> (2,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,884)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
