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 MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-15761
GLENAYRE TECHNOLOGIES, INC.
---------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 98-0085742
---------------------------- ---------------------
(State or Other (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 April 17, 1998 was 61,161,994 shares.
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 March 31,
1998 (the "Form 10-Q").
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information:
Item 1. Financial Statements
Page
----
<S> <C> <C>
Independent Accountant's Review Report......................................3
Condensed Consolidated Balance Sheets as of
March 31, 1998 (Unaudited) and December 31, 1997.........................4
Condensed Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 (Unaudited)...................5
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 1998 (Unaudited)....................6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (Unaudited)...................7
Notes to Condensed Consolidated Financial Statements (Unaudited)............8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................12
Part II - Other Information:
Item 6. Exhibits and Reports on Forms 8-K..........................................21
</TABLE>
2
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Glenayre Technologies, Inc.
Charlotte, North Carolina
We have reviewed the accompanying condensed consolidated balance sheet of
Glenayre Technologies, Inc. and subsidiaries as of March 31, 1998, and the
related condensed consolidated statements of income for the three-month periods
ended March 31, 1998 and 1997, the condensed consolidated statement of
stockholders' equity for the three months ended March 31, 1998 and the condensed
consolidated statements of cash flows for the three-month periods ended March
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Glenayre Technologies, Inc. as of
December 31, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and in our report dated January 30, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
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 ended March 31, 1998, to reflect this
change.
Ernst & Young LLP
Charlotte, North Carolina
April 17, 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
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
ASSETS (Restated- (Restated-
See Note 1) See Note 1)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents............................... $29,640 $21,076
Accounts receivable, net................................ 147,509 152,231
Notes receivable........................................ 6,611 8,684
Inventories............................................. 41,578 49,302
Deferred income taxes................................... 14,098 13,943
Prepaid expenses and other current assets............... 7,936 6,810
--------- --------
Total current assets.................................. 247,372 252,046
Notes receivable, net..................................... 40,637 53,050
Property, plant and equipment, net........................ 107,092 103,641
Goodwill.................................................. 159,937 164,080
Deferred income taxes..................................... 933 1,088
Other assets............................................. 15,749 16,256
-------- --------
$571,720 $590,161
TOTAL ASSETS.............................................. ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................ $19,932 $27,133
Accrued liabilities..................................... 49,749 61,358
Other current liabilities............................... 295 2,101
-------- -----
Total current liabilities............................. 69,976 90,592
Other liabilities......................................... 6,774 7,210
Stockholders' Equity:
Preferred stock, $.01 par value; 5,000,000 shares
Authorized, no shares issued and outstanding.......... --- ---
Common stock, $.02 par value; authorized: 200,000,000
shares; outstanding: March 31, 1998 - 61,139,025 shares;
December 31, 1997 - 60,650,761 shares................. 1,223 1,213
Contributed capital..................................... 336,195 333,715
Retained earnings....................................... 157,552 157,431
------- -------
Total stockholders' equity............................ 494,970 492,359
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $571,720 $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
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
1998 1997
----- ----
(Restated-
See Note 1)
<S> <C> <C> <C>
NET SALES ............................................ $94,533 $105,771
--------- ------------
COSTS AND EXPENSES:
Cost of sales..................................... 45,764 50,550
Selling, general and administrative expense....... 25,313 23,444
Research and development expense.................. 14,193 8,649
Depreciation and amortization expense............. 9,377 4,535
----------- ------------
Total Costs and Expenses...................... 94,647 87,178
----------- ------------
INCOME (LOSS) FROM OPERATIONS......................... (114) 18,593
----------- ------------
OTHER INCOME (EXPENSES):
Interest income................................... 2,357 2,161
Interest expense.................................. (166) (14)
Other, net........................................ (96) 71
----------- ------------
Total Other Income (Expenses), net............ 2,095 2,218
----------- ------------
INCOME BEFORE INCOME TAXES............................ 1,981 20,811
PROVISION FOR INCOME TAXES............................ 1,860 7,365
----------- ------------
NET INCOME............................................ $121 $13,446
=========== ============
NET INCOME PER WEIGHTED AVERAGE
COMMON SHARE........................................ $ 0.00 $ 0.22
=========== ============
NET INCOME PER COMMON SHARE -
ASSUMING DILUTION................................. $ 0.00 $ 0.22
=========== ============
</TABLE>
See notes to condensed consolidated financial statements
5
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
(Restated - See Note 1)
<TABLE>
<CAPTION>
Total
Common Stock Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
-------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997...... 60,651 $1,213 $333,715 $157,431 $492,359
Net Income....................... 121 121
Stock options exercised.......... 488 10 1,639 1,649
Tax benefit of stock options
Exercised..................... 841 841
--- ---
------ ------ -------- -------- --------
Balances, March 31, 1998....... 61,139 $1,223 $336,195 $157,552 $494,970
====== ====== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
6
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended March 31,
---------------------------------
1998 1997
------------ -------------
<S> <C> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.. $17,814 $6,384
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment.......... (8,410) (5,639)
Proceeds from sale of equipment..................... 149 24
Maturities of short-term investments................ --- 53,661
Purchases of short-term investments................. --- (24,223)
Payments for business acquisition, net of cash acquired --- (1,122)
Net cash provided by (used in) investing ------- ------
activities.................................. (8,261) 22,701
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in other liabilities........................ (2,638) (926)
Issuance of common stock........................... 1,649 88
------- ------
Net cash used in financing activities......... (989) (838)
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 8,564 28,247
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD........................................... 21,076 53,785
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............... $29,640 $82,032
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest............................................. $ 99 $ 20
Income taxes......................................... 1,909 1,072
</TABLE>
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On January 9, 1997, the Company acquired CNET, Inc. ("CNET"). In connection with
this acquisition the Company paid $1,194,000 (including $194,000 in acquisition
costs) and issued common stock valued at $6,541,000 for assets with a fair value
of $11,853,000 and assumed liabilities of $4,118,000.
See notes to condensed consolidated financial statements
7
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. The Company's financial results in any quarter are
highly dependent upon various factors, including the timing and size of customer
orders and the shipment of products for large orders. Large orders from
customers can account for a significant portion of products shipped in any
quarter. Accordingly, the shipment of products in fulfillment of such large
orders can dramatically affect the results of operations of any single quarter.
In January 1997, the Company completed the acquisition of CNET, Inc. ("CNET").
The operating results of CNET are included in the operating results of the
Company since the acquisition date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Glenayre Technologies, Inc. Annual Report on
Form 10-K for the year ended December 31, 1997, 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.
8
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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 months ended March 31, 1998 and its
financial position at March 31, 1998.
Three Months
ended
March 31, 1998
------------------
Net income:
As previously reported........... $3,166
Adjustment*....................... (3,045)
As restated........................ 121
Net income per weighted average common share:
As previously reported............ 0.05
Adjustment*........................ (0.05)
As restated......................... 0.00
Net income per common share -
assuming dilution:
As previously reported............ 0.05
Adjustment*....................... (0.05)
As restated.......................... 0.00
<TABLE>
<CAPTION>
Financial Position
Goodwill: March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C> <C>
As previously reported............ $77,514 $78,568
Adjustment*........................ 82,423 85,512
As restated........................... 159,937 164,080
Other Assets:
As previously reported............ 16,874 17,425
Adjustment*........................ (1,125) (1,169)
As restated........................... 15,749 16,256
Retained Earnings:
As previously reported............ 76,254 73,088
Adjustment*........................ 81,298 84,343
As restated........................... 157,552 157,431
</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.
9
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
2. INVENTORIES
March 31, December 31,
Inventories consist of: 1998 1997
------------- --------------
Raw materials......................... $23,440 $25,970
Work-in-process....................... 8,748 10,813
Finished goods........................ 9,390 12,519
------- -------
$41,578 $49,302
======= =======
3. GOODWILL
Goodwill is shown net of accumulated amortization of $22.2 million and
$18.0 million at March 31, 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:
Three Months Ended
March 31,
----------------------
1998 1997
-------- ----------
Income tax provision at U.S. statutory rate.. $693 $7,284
Reduction in valuation allowance............. --- (241)
Foreign taxes at rates other than U.S.
statutory rate............................ (175)
(560)
State taxes (net of federal benefit)......... (195) 479
U.S. Research and Experimentation Credits (84) ---
Non-deductible goodwill amortization......... 1,621 403
------- --------
Income tax provision......................... $1,860 $7,365
====== ======
Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 4, the benefits derived from the utilization of tax net
operating loss carryforwards are reported in the statement of operations in the
year such tax benefits are realized and then reclassified from retained earnings
to contributed capital. The Company adopted the accounting method for
utilization of the tax net operating loss carryforwards outlined above on
February 1, 1988. On September 28, 1989, the Securities and Exchange Commission
("SEC") released Staff Accounting Bulletin No. 86 ("SAB 86") which set forth the
SEC staff's position with respect to this accounting treatment. According to the
SEC staff's interpretation of Statement of Financial Accounting Standards No.
96, ACCOUNTING FOR INCOME TAXES, contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with the SEC staff and determined that the SEC staff would
not object to the accounting method outlined above for companies which had
adopted such accounting methods prior to the issuance of SAB 86.
If the original guidance in SAB 86 had been applied, the Company's net income
for the three months ended March 31, 1997 would have been reduced by the amount
of the benefit from utilization of tax
10
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
net operating loss carryforwards. Such reduction in net income would have been
$241,000 (less than $.01 per share) for the three months ended March 31, 1997.
The tax benefits from these net operating loss carryforwards were fully utilized
in 1997.
The Company believes that it is more likely than not that the net deferred
tax asset recorded at March 31, 1998 will be fully realized.
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
<TABLE>
<CAPTION>
The following table sets forth the computation of income per share:
1998 1997
------------- ----------
<S> <C> <C> <C>
(Restated-
See Note1)
Numerator:
Net income........................................ $121 $13,446
Denominator:
Denominator for basic income per share -
weighted average shares......................... 60,906 60,159
Effect of dilutive securities:
stock options................................... 2,364 1,744
------ ------
Denominator for diluted income per share-adjusted
weighted average shares and assumed conversions. 63,270 61,903
====== ======
Net income per weighted average common share.......... $0.00 $0.22
===== =====
Net income per common share - assuming dilution....... $0.00 $0.22
===== =====
</TABLE>
11
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Glenayre Technologies, Inc. ("Glenayre" or the "Company") designs, manufactures,
markets and services telecommunications equipment and software used in wireless
personal communication systems throughout the world specifically focused in
three primary marketing areas: (i) paging products including infrastructure
equipment from the Wireless Messaging Group ("WMG") and Wireless Access two-way
paging devices, (ii) mobile and fixed network products from the Integrated
Network Group ("ING") including voice mail systems, 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 April 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."
12
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of net
sales represented by certain line items from Glenayre's consolidated statements
of operations:
Three Months Ended March 31,
----------------------------
1998 1997
------------ -----------
Net sales....................................... 100.0% 100.0%
Cost of sales................................... 48.4 47.8
---- ----
Gross profit ............................... 51.6 52.2
Operating expenses:
Selling, general and administrative......... 26.8 22.1
Research and development.................... 15.0 8.2
Depreciation and amortization............... 9.9 4.3
--- ---
Total operating expenses................ 51.7 34.6
---- ----
Income (loss) from operations .................. (0.1) 17.6
Interest, net................................... 2.3 2.0
Other, net...................................... (0.1) 0.1
----- ---
Income before income taxes...................... 2.1 19.7
Provision for income taxes...................... 2.0 7.0
--- ---
Net income...................................... 0.1% 12.7%
==== ====
The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas:
Three Months Ended March 31,
1998 1997
------------ -----------
(IN THOUSANDS)
Paging products .......................... $72,144 $83,497
Mobile and fixed network products ........ 16,135 13,475
Microwave communication................... 6,254 8,799
------- --------
$94,533 $105,771
======= ========
(PERCENTAGE OF NET SALES)
Paging products .......................... 76% 79%
Mobile and fixed network products ........ 17 13
Microwave communication................... 7 8
--- ---
100% 100%
=== ===
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NET SALES. Net sales for the three months ended March 31, 1998 decreased 11% to
$94.5 million as compared to $105.8 million for the three months ended March 31,
1997. International sales (sales outside the United States) were $44.6 million
for the three months ended March 31, 1998 as compared to $48.8 million for the
three months ended March 31, 1997 and accounted for 47% and 46% of net sales for
the 1998 and 1997 periods, respectively.
13
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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The decline in sales is primarily the result of a decrease in deliveries of the
Company's paging infrastructure products to both (i) the Pacific Rim market
caused by currency destabilization in certain Asian countries and (ii) the
United States market. This decrease was mitigated by the sales of two-way paging
devices from Wireless Access, Inc. ("WAI") whose operating results are included
in the Company's consolidated results only since its acquisition in the fourth
quarter of 1997. The Company anticipates improvement in revenues for the
remainder of 1998 based on indications that its United States customers are
continuing to build out two-way paging systems along with Glenayre's expected
introductions of new two-way paging data products. Additionally, the Company is
optimistic that the Asian market will begin to rebound in the latter half of
1998 as the worst stages of the currency issues are passed. However, there can
be no assurance that the Company's sales levels or growth will remain at or
exceed historical levels in any future period.
Sales to separate single customers totaled approximately 14% of net sales for
each of the three-month periods ending March 31, 1998 and 1997. The Company
believes that the dependence on any one customer is mitigated by the large
number of companies in the Company's customer base and the timing for
development and expansions of their systems.
GROSS PROFIT. Gross profit was 51.6% and 52.2% for three-month periods ended
March 31, 1998 and 1997, respectively. Glenayre's gross profit margins may be
affected by several factors including (i) the mix of products sold, (ii) the
price of products sold and (iii) increases in material costs and other
components of cost of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative
expenses were $25.3 million and $23.4 million for the three-month periods ended
March 31, 1998 and 1997, respectively. The increase was primarily due to the
inclusion of Open Development Corporation ("ODC") and WAI operating expenses
since their dates of acquisition in the fourth quarter 1997.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses increased to
$14.2 million for the three months ended March 31, 1998 compared to $8.6 million
for the three months ended March 31, 1997. The increase was primarily due to (i)
restructuring and other related expenses amounting to approximately $1.3 million
as a result of the consolidation of the Company's paging infrastructure research
and development function at its Vancouver, British Columbia facility, (ii) the
addition of engineering personnel since the first quarter 1997 and (iii) the
inclusion of research and development activities of ODC and WAI since their
dates of acquisition in fourth quarter 1997. The Company relies on its research
and development programs related to new products and the improvement of existing
products for the continued growth in net sales. Research and development costs
are expensed as incurred.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased to $9.4 million for the three months ended March 31, 1998 compared to
$4.5 million for the three months ended March 31, 1997. The increase in
depreciation and amortization expense was due to significant fixed and
intangible asset purchases subsequent to first quarter 1997 and the amortization
of goodwill and intangible assets related to the WAI and ODC acquisitions. See
"ACQUIRED IN-PROCESS TECHNOLOGY."
INTEREST INCOME, NET. Interest income, net was $2.2 million and $2.1 million for
the three-month periods ended March 31, 1998 and 1997, respectively. Interest
earned on higher balances in customer notes receivable offset the decline in
short-term investment balances. The Company expects that the
14
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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level of interest income, net in 1998 will vary in accordance with the level of
secured debt financing commitments used by Glenayre's customers.
PROVISION FOR INCOME TAXES. The effective tax rates for the three months ended
March 31, 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 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.
15
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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
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
16
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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 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;
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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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
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 March 31, 1998, Glenayre's principal sources
of liquidity included $29.6 million of cash and cash equivalents and a $50
million bank line of credit that expires in October 1998. Borrowings under the
line of credit during the three months ended March 31, 1998 ranged from $5
million to $15 million with no borrowings as of March 31, 1998. Notes receivable
decreased $14.5 million at March 31, 1998 compared to year end 1997 due to a
significant paydown by one customer offset by additional requests from customers
for financing primarily related to the sales of paging and voice mail products.
Approximately 61% of the notes receivable balance as of March 31, 1998 consists
of receivables from one customer which has a limited operating history and is
engaged in the buildout of a major narrowband personal communications services
network in the newly introduced market of advanced voice and text paging.
Inventories at March 31, 1998 decreased from year end 1997 primarily due to (i)
a raw material inventory reduction program, (ii) a substantial usage of
18
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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remaining AccessLink two-way paging devices which are expected to be replaced in
the second quarter 1998 by the next generation two-way devices and (iii) the
timing of shippable orders. Accounts payable and accrued expenses in the
aggregate at March 31, 1998 decreased from year end 1997 primarily due to (i)
significant payroll related payments, (ii) corresponding decreases in inventory
purchases, (iii) customer deposits applications and (iv) decrease in long-term
project related accruals.
In 1996, the Board of Directors of the Company authorized a repurchase program
to buy back 2.5 million shares of the Company's common stock. As of March 31,
1998, no shares have been repurchased under the 1996 program. Additionally, in
1996, the Company began the implementation of a new operating business system.
This business system began operating in April 1998 at a total capitalized cost
of approximately $16 million. Of this total, approximately $15 million,
including $1.7 million of cost incurred in 1998, has been paid and included in
fixed assets as of March 31, 1998.
The Company's cash and cash equivalents generally consist of high-grade
commercial paper, bank certificates of deposit, Treasury bills, notes or agency
securities guaranteed by the U.S. Government, and repurchase agreements backed
by U.S. Government securities with original maturities of three months or less.
The Company expects to use its cash and cash equivalents and bank line of credit
for working capital and other general corporate purposes, including the
expansion and development of its existing products and markets and the expansion
into complementary businesses. Additionally, the competitive telecommunications
market often requires customer financing commitments. These commitments may be
in the form of guarantees, secured debt or lease financing. At March 31, 1998,
the Company had agreements to finance and arrange financing for approximately
$106 million of paging and voice mail products. Further, at March 31, 1998, the
Company had committed, subject to customers meeting certain conditions and
requirements, to finance approximately $6 million for similar systems. The
Company cannot currently predict the extent to which these commitments will be
utilized, since certain customers may be able to obtain more favorable terms
using traditional financing sources. From time to time, the Company also
arranges for third-party investors to assume a portion of its commitments. If
used, the financing arrangements will be secured by the equipment sold by
Glenayre.
In 1997 Glenayre began the pre-construction phase for a 110,000 square foot
expansion of its Vancouver facility to be used primarily for research and
development and customer service. During the first quarter of 1998 Glenayre
negotiated a contract for up to $15 million for the construction phase of the
expansion. The total cost of the expansion is expected to be approximately $19
million and to be paid throughout the construction period in 1998 and 1999. Of
this total, approximately $1.4 million, including approximately $500,000 of cost
incurred in 1998, has been paid and included in fixed assets as of March 31,
1998.
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.
19
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GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
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As of March 31, 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 March 31, 1998, in accordance with SFAS 109. This
amount represents management's best estimate of the amount of NOLs and other
future deductions that are more likely than not to be realized as offsets to
future taxable income. 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.
20
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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.
21
<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, Registration Statement Number
333-15845 on Form S-4 dated November 8, 1996 (amended by Post-Effective
Amendment Number 1 on Form S-8 dated January 30, 1997), Registration Statement
Number 333-38169 on Form S-8 dated October 17, 1997 and Registration Statement
Number 333-39717 on Form S-8 dated November 7, 1997 of our report dated April
17, 1998, 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 March 31, 1998.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 or the Securities Act of 1933.
Ernst & Young LLP
Charlotte, North Carolina
April 17, 1998, except for the restatement
related to acquired in-process technology
referred to in Note 1, as to which the date is
February 15, 1999.
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BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 194,757
<ALLOWANCES> 0
<INVENTORY> 41,578
<CURRENT-ASSETS> 247,372
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