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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
|_| 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 Identification No.)
incorporation or organization)
5935 CARNEGIE BOULEVARD, CHARLOTTE, NORTH CAROLINA 28209
(Address of principal executive offices) Zip Code
(704) 553-0038
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
--------------
Common Stock, $.02 par value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 6, 1998 was approximately $670 million. The number of shares
of the Registrant's common stock outstanding on March 6, 1998 was 61,008,517.
DOCUMENTS INCORPORATED BY REFERENCE:
Document Location in Form 10-K
-------- ---------------------
Proxy Statement for 1998 Annual Meeting of Stockholders Part III
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PART I
Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Glenayre Technologies, Inc. ("Glenayre" or the "Company") was incorporated
pursuant to the laws of the State of Delaware on September 21, 1987, and is the
successor to a corporation organized on April 7, 1945. The principal executive
offices of the Company are located at 5935 Carnegie Boulevard, Charlotte, NC
28209. The Company's telephone number is (704) 553-0038. The term "Glenayre" or
the "Company" as used hereinafter means Glenayre Technologies, Inc. or Glenayre
Technologies, Inc. and its subsidiaries.
Glenayre is a worldwide provider of telecommunications equipment and related
software used in the wireless personal communications service markets including
wireless messaging, voice processing, mobile data systems and point-to-point
wireless interconnection products. The Company designs, manufactures, markets
and services its products principally under the Glenayre name. These products
include switches, transmitters, receivers, controllers, software, paging devices
and other equipment used in personal communications systems (including paging,
voice messaging, cellular, and message management and mobile data systems),
microwave communication systems and radio telephone systems.
On January 9, 1997, the Company completed the acquisition of CNET, Inc.
("CNET"), located in Plano, Texas. CNET develops and provides integrated
operational support systems, network management, traffic analysis and radio
frequency propagation software products and services for the global wireless
communications industry. CNET licenses its products to cellular, paging and
personal communications services operators and wireless equipment manufacturers
worldwide. The purchase price of approximately $7.7 million consisted of
approximately 370,000 shares of the Company's common stock (including 56,620
shares issuable upon exercise of stock options) valued at approximately $6.5
million, approximately $1.0 million in cash and approximately $194,000 in
acquisition costs.
On October 15, 1997, the Company completed the acquisition of Open Development
Corporation ("ODC"), located in Norwood, Massachusetts. ODC is a developer of
enhanced service software and products for telecommunications providers. The
purchase price of approximately $48 million consisted of approximately 242,000
shares of the Company's common stock issuable upon exercise of stock options
valued at approximately $3 million, approximately $44 million in cash and
approximately $1 million in acquisition costs.
On November 3, 1997, the Company completed the acquisition of Wireless Access
Inc. ("WAI"), located in Santa Clara, California. WAI develops and markets
two-way paging devices. The purchase price of approximately $101 million
consisted of approximately 1.4 million shares of the Company's common stock
issuable upon exercise of stock options valued at approximately $17 million,
approximately $82 million in cash and approximately $2 million in acquisition
costs.
CNET, ODC and WAI acquisitions were accounted for as purchase business
combinations.
Since April 1995, the Company has been engaged in the design, manufacture, and
marketing of products for use in point-to-point microwave communications through
its acquisition of Western Multiplex Corporation. In September 1997, the Company
announced plans to consider divesting the microwave unit.
NARRATIVE DESCRIPTION OF BUSINESS
The Company's operating activities are currently focused in three marketing
areas: paging products, mobile and fixed network products and microwave
communication.
PAGING PRODUCTS
Glenayre's Paging Products operations accounted for approximately 77%, 87% and
89% of net sales for 1997, 1996, and 1995, respectively and are sold into the
one-way and two-way paging marketplace. Paging products include switches,
transmitters, receivers, controllers and related software provided by the
Company's Wireless Messaging Group ("WMG") and two-way paging devices from
Glenayre's newly acquired subsidiary, WAI. Additionally, the Company's major
service and support
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groups are included in WMG. Glenayre believes it has the leading market share in
the United States and that it is a leading participant internationally in the
paging switch, controller and transmitter market.
Paging is a method of wireless telecommunication which uses an assigned radio
frequency to contact a paging subscriber anywhere within a service area. A
paging system is generally operated by a service provider which incurs the cost
of building and operating the system. Each service provider in the United States
licenses spectrum from the Federal Communications Commission ("FCC") and
elsewhere from the authorized government body to operate a paging frequency
within either a local, regional or national geographical area. Each paging
subscriber is assigned a distinct telephone number which a caller dials (either
directly or via the internet) to activate the subscriber's pager (a pocket-sized
radio receiver carried by the subscriber).
The paging system is comprised of four general elements: (i) the "Control
Point", (ii) the "Link Medium", (iii) the Paging Radio Frequency ("RF") Network,
and (iv) the End User Devices. Telephone calls for a subscriber are received
(typically via the public service telephone network) by a paging switch located
at the Control Point. The message (numeric or alphanumeric) is then forwarded to
the Link Medium via a data network. The information is then forwarded to the
Paging RF Network via means determined by the type of Link Medium deployed by
the paging operator (examples include satellite distribution, RF terrestrial,
wireline, microwave, etc.). This RF network consists of a network of transmitter
base stations and controllers. The message is reformatted and converted to a
radio signal, which is then sent by the transmitters via antennae to the
subscriber's pager ("End User Devices"). The transmitters manufactured by
Glenayre are specifically designed to simulcast, which is the transmission of
the same signal by two or more transmitters on the same channel frequency at the
same time in an overlap area (a geographical region accessible by more than one
transmitter). The Company's equipment exhibits exceptional accuracy in
simulcasting performance, resulting in superior voice and data quality and
coverage area, and in superior reliability and exactitude of message reception.
The radio signal is received by the end user device which causes the pager or
personal messaging device to emit a beep, vibrate, or otherwise notify the
subscriber that a message has been received and stored in the device. The device
then provides the subscriber with information from the caller in the form of a
voice, tone, numeric or alphanumeric message. This is typically termed "one-way"
paging since the initiator does not receive notification of message received or
any response from the target subscriber.
The two-way paging system is similar to one-way paging systems. The inherent
difference is that two-way paging systems close the loop from end user device
back into the infrastructure equipment and/or back to the initiator of the
message. In order to effect this reverse path communications, (i) the end user
devices must have an internal transmitter, (ii) the paging provider must deploy
a receiver network to obtain and transfer the data back into the system, and
(iii) there must be a reconciliation device which handles the traffic flow.
Glenayre provides (i) personal messaging devices which have both receiver and
transmitter, (ii) the industry standard receiver network equipment, and (iii) a
scalable, network flexible, reconciliation device. Once the end user device
receives the radio signal from the transmitters via antennae, the two-way end
user device then transmits information to the receiver RF network via receiver
antennae. The information is reformatted and sent back into the two-way system
via means determined by the media deployed (typically high speed data networks).
This information path is unique to two-way paging (as opposed to one-way) and
can be used to locate the end user, acknowledge receipt of message and initiate
messaging from the user.
In addition, some two-way applications require a different type of transmitter
base station. Glenayre introduced a new line of state of the art, digital signal
processing ("DSP") based linear transmitters in 1996. Since many of the two-way
license holders are also one-way paging providers, the Company deemed it
advisable to develop a field scalable RF product line which can be deployed in a
low end (and lower price configuration) initially to support either one-way or
two way applications, and grow (via field upgrade kits) as the provider's system
migrates to two-way and adds subscribers. In addition, Glenayre has developed
field kits which allow limited two-way operations with the Company's older RF
base station equipment which allows limited entry into the two-way market for
smaller service providers.
A pager has an advantage over a landline telephone in that the pager's reception
is not restricted to a single location. Pagers (or personal messaging devices)
also have advantages over a cellular portable telephone in that a pager is
smaller, has a much longer battery life, has excellent coverage and roaming
capability, is more robust and durable, more reliable (the device as well as the
service) and is easier and less expensive to use.
The paging market continues to evolve and grow with the continued commercial
deployment throughout 1997 of two-way systems. This evolution is expected to
continue through 1998 and start to expand internationally. Two-way systems
provide such services as device location, two-way acknowledgment and custom
response paging, remote mobile wireless e-mail,
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subscriber initiated messaging, subscriber to subscriber messaging, advanced
voice paging, machine control and feedback, and other data services.
Glenayre's product offering to the two-way market includes a systems approach
providing a migration path from its existing one-way paging product line.
Glenayre offers its customers an end-to-end solution for two-way applications.
The Company has developed new technology-based products with state of the art
architecture and technology which accommodates the advanced services expected to
be available through two-way service offerings. This systems approach includes
full product lines of radio frequency linear transmitters, advanced network
controllers, the fixed receiver network (to receive messaging from the
end-user), switch equipment, and network management tools.
The design of a paging system is customer specific and depends on (i) the number
of paging subscribers the service provider desires to accommodate, (ii) the
operating radio frequency, (iii) the geography of the service area, (iv) the
expected system growth and (v) specific features desired by the customer. Paging
equipment hardware and software developed by the Company may be used with all
types of paging services, including voice, tone, numeric (telephone number
display) or alphanumeric messaging (words and numbers display).
Paging Infrastructure Products and Services:
Switches. The smallest Glenayre switch, the GL3000ES, can serve as few as 100
subscribers and can be expanded incrementally to a capacity of 75,000
subscribers. Glenayre's large paging switches, the GL3000L and the GL3000XL,
support subscriber levels from 20,000 to over 1,000,000.
The GL3000 two-way switch is capable of being upgraded to support new two-way
voice and data services, while retaining support for existing one-way services
such as numeric and alphanumeric paging. Service providers can combine one-way
and two-way paging service on one switch.
The Company is involved at an early stage in the development of industry wide
technology standards and is familiar with developments in paging protocol
standards throughout the world. The Company works closely with its customers in
the design of large, complex paging networks. Glenayre believes that its
customers' purchasing decisions are based, in large part, on the quality and
technological capabilities of such networks. Glenayre believes that its switches
have the most advanced networking capability in the industry. This networking
capability allows the interconnection of multiple switches to offer a number of
wide-area capabilities (such as remote billing, roaming and database backup).
Glenayre believes that the advanced hardware and software features of its
switches ensure high reliability and high volume call processing.
Paging switches manufactured by the Company are constructed in modular fashion,
which permits expansion to accommodate growth and the addition of technological
enhancements. Paging switch enhancements and upgrades also require the purchase
of the Company's components and software. This results from the unique and
proprietary software incorporated in Glenayre switches, which the Company
believes represents a significant technological competitive advantage.
RF Equipment - Transmitters and Receivers. Transmitters are available in
frequency ranges of 137MHz to 960MHz and in power levels of 4 watts to 500 watts
(not including any power gain from the antennae). Radio link receivers are
available in frequency ranges of 66MHz to 960MHz. Satellite link receivers are
available for integration directly with the transmitters at both Ku- and C-band
frequencies.
Glenayre's GL-T8601(500 watts) and GL-T8501 (250 watts) transmitters are
designed to allow paging carriers to easily migrate their networks to compete in
the two-way paging market by providing a straightforward field upgrade to linear
transmitters. For paging carriers, the transmitters' migration path reduces the
risk of obsolescence and the costs of investing in new linear transmitter sites.
The T8601 and T8501 transmitters complement the T8500/8600 900MHz one-way
transmitters which have been the Company's core RF products since 1994.
Glenayre's GL-T9000 series of linear transmitters are designed to transmit both
ReFLEX(TM) and InFLEXion(TM) two-way formats and are capable of transmitting
other established protocols. The design of the GL-T9000 transmitter employs new
and advanced techniques including DSP modulation and linearization. The GL-T9000
product line is scalable; with the T9000 a service provider can start at a low
power level (supporting limited two-way applications and numbers of
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subscribers) and then later upgrade in the field to a higher power level as the
provider enhances its services and increases its subscriber base. This minimizes
initial investment while still allowing the service provider to grow as the
subscriber base grows.
In addition to the two-way and 900MHz transmitter product lines, the Company
also provides transmitter and receiver equipment in the VHF (137MHz to 175MHz),
280MHz to 330MHz, and UHF (395MHz to 512MHz) bands. Due to the large volume of
transmitter base stations required in a large paging system, Glenayre's base
stations are designed to minimize the customer's total cost of ownership. As
such they are designed (i) to minimize costs associated with site rental and
ancillary fees, (ii) to provide for scalability and flexibility, (iii) for
reliability and facilitation of maintenance, (iv) for ease of programming and
configuration, (v) to provide maximal operational efficiency, (vi) with flexible
networking and communications capabilities, and (vii) to provide for custom
configurations where appropriate.
The GL-R9000 series of receivers detects the responses returned from the two-way
subscriber devices. The GL-R9000 series of receivers takes advantage of
innovative DSP demodulation techniques that maximize receiver sensitivity.
Available in a one-rack unit size, it can support spatial diversity (enabling
sensitivity gains from two separate receive antennae at a fixed receiver site).
Glenayre provides these receivers both as part of the two-way base station
offering as well as in a stand alone configuration which is used for fill-in
locations to enhance geographical coverage. Glenayre believes that its receiver
network equipment is the industry standard in terms of performance, which
translates into lower system costs for the Company's customers.
Depending upon frequency, antenna type and height, topography, and power,
Glenayre transmitter base station systems are designed to cover broadcast cells
with a diameter from 3 to 100 miles. Typical simulcast systems have broadcast
cells which vary from 3 to 15 miles in diameter. Glenayre transmitters are
designed specifically for the high performance and reliability required for the
high speed simulcast networks required by advanced one-way and two-way
applications.
Current technology allows a transmitter that is manufactured by Glenayre or by
its competitors to be used with the Company's paging switches. However, within a
single geographic paging network (comprised of a switch, a control system and a
number of transmitters installed in a specific geography) where transmitters
simulcast on a single frequency, all transmitters must be of the same make in
order to avoid substantial and expensive modifications that would be necessary
to assure the integrity of the paging system. The Company believes its large
installed base of transmitter equipment provides it with a significant
competitive advantage in selling products for system expansions to existing
customers.
Controllers. The Company currently offers or supports four products for
transmitter control: (i) the GL5000 control system is a medium-feature
transmitter control system used primarily in international markets; (ii) the
QT1000 TXC is a full-feature system providing automatic early notification of
system variances and automatic remote adjustment capabilities to ensure that all
transmitters in the system remain synchronized; (iii) the GL-C2000 product line
supports all existing digital paging formats and will support all currently
proposed "high speed" paging and messaging formats (including some two-way
applications) with data transmission rates from 200 to 6,400 bits per second
when coupled with the appropriate Glenayre RF hardware; and (iv) the GL-C9000,
in combination with the GL3100 RF Director, is designed to control two-way
transmitter systems, with high-speed voice and advanced data capabilities.
Additionally, the GL3100 RF Director provides reverse channel traffic handling
for two-way systems. The latter two controllers have advanced data handling and
flexible networking capabilities which lend themselves to advanced
communications networks.
Glenayre has extended the technology of its GL-C2000 transmitter controller to
control base stations used in two-way systems. The base station controller has
high-speed data capabilities and flexible linking options. The newest control
products of the GL-C2000 line were developed for field scalability to support
the changing needs of service providers as their offerings and subscriber base
grow. Additionally, Glenayre's RF Director is the central control point for a
two-way RF network. The RF Director has been designed to manage a high volume of
forward and reverse channel traffic and is available with optional full
redundancy.
Glenayre also provides a state of the art operations and maintenance control
(OMC) system which provides its customers a means by which to monitor, control,
and upgrade their one-way and two-way systems.
Message Management Systems. Glenayre's message management systems and operator
assisted paging systems combine its paging switch hardware with its proprietary
software. Glenayre's GL3930 and GL3960 alphanumeric switches are fully
compatible with the Company's paging switches and allow extensive data entry by
as few as 2 to as many as 300 telephone operators. Glenayre's alphanumeric
messaging products allow an operator at a telephone answering service or at a
paging or
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cellular provider to input, store and transmit messages containing words and
numbers by utilizing a paging switch encoder. Alphanumeric messages can be sent
by telephone, facsimile or computer and can be received by pagers, portable
computers, electronic organizers, facsimile equipment and similar personal
communication devices. Due to the continuing demand for lengthier messages and
the impact of such demand on available radio frequencies, most service providers
are migrating to the more efficient, higher speed digital format. Consequently,
Glenayre believes its sophisticated high speed switches and software are
particularly well suited for alphanumeric applications.
Service and Support. Glenayre provides service to customers on a regular basis
including installation, project management of turnkey systems, training, service
or extended warranty contracts with the Company. The Company believes that it is
essential to provide reliable service to customers in order to solidify customer
relationships and to be the vendor of choice when new services or system
expansions are sought by a customer. This relationship is further developed as
customers come to depend upon the Company for installation, system optimization,
warranty and post-warranty services.
The Company has a warranty and maintenance program for both its hardware and
software products and maintains a large customer service network, known as the
Glenayre Care Group, throughout the world. Glenayre's standard warranty provides
its customers with repair or replacement of all defective Glenayre manufactured
equipment. The warranty is valid in the case of the majority of its transmitters
for two years, and in the case of all other products for one year from the later
of date of shipment or date of installation by a Glenayre qualified technician.
The major locations of the Glenayre Care Group are Vancouver, British Columbia;
Quincy, Illinois; Atlanta, Georgia; Amsterdam, Netherlands; and Singapore. The
Glenayre Care Group, the majority of the employees of which are technical
specialists, maintains the Company's installed base of equipment and is equipped
with an automated field service management system to provide more responsive
customer service.
Competition. The Company is a leading worldwide supplier of switches,
transmitters, receivers, controllers and software, used in paging, voice
messaging and message management systems. While the services from the foregoing
products represent a significant portion of the wireless personal communications
systems industry today, the industry is expanding to include new enhanced
services and new markets. The wireless personal communications industry includes
equipment manufacturers that serve many of the same personal communications
services ("PCS") markets served by the Company. Certain of the Company's
competitors have significantly greater resources than the Company, and there can
be no assurance that Glenayre will be able to compete successfully in the
future. In addition, manufacturers of wireless telecommunications equipment,
including those in the cellular telephone and PCS industries, certain of which
are larger and have significantly greater resources than the Company, could
attempt to enter into the Company's markets and compete with Glenayre's products
and systems.
Competition in Glenayre's infrastructure equipment markets is based upon
quality, product features, technical performance capabilities, service and
price. While infrastructure equipment and systems of the type sold by Glenayre
typically represent less than one-quarter of a paging service provider's total
capital investment, such equipment and systems are nevertheless critical for the
operation of the pager devices and the paging network. Glenayre believes that it
compares favorably with its competitors due to its reputation for high-quality
and technically superior products and service, its willingness and ability to
support customer requests, and its ability to offer complete turn-key systems
customized to specifications provided by the customer.
The Company's determination of its competitive market position is based upon its
knowledge of sales of products of the type sold by the Company in the segment of
the wireless personal communications industry in which the Company competes,
information derived from its close working relationship with large paging
service providers and market information obtained from industry trade
publications and sources.
o United States. The Company believes that it has the leading market
share (based on the number of units sold) of the United States market
for sales of one-way and two-way switches and related equipment and
software, and one-way and two-way transmitters and controllers. It is
the Company's belief that its leadership position with respect to the
sale of paging switches in the United States substantially exceeds
that of its principal competitor in this market, which is Motorola,
Inc. ("Motorola"). The Company believes that it captured the largest
percentage of sales of paging switches serving more than 10,000
subscribers in each of the last three years.
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The Company believes sales of its transmitter and controller products
exceeded sales of such products by Motorola in each of the last three
years. The Company believes, however, that Motorola remains a
substantial competitor with a significant market share in this market.
Other competitors in this market include L M Ericsson Telephone
Company ("Ericsson") and smaller manufacturers that primarily serve
small local paging service providers which represents a small segment
of the total domestic infrastructure market.
o International. The Company believes that it is one of the leading
participants in markets outside of the United States in the sale of
paging switches, paging transmitters and controllers (based on the
number of units sold). The Company believes that it sold the most
paging switches outside of the United States during each of the last
three years, exceeding sales by each of its two principal competitors
in this market, Motorola and Ericsson.
The Company believes that the Company and Motorola have the largest
and approximately equivalent shares of the international paging
transmitter and controller market. Ericsson also is a significant
competitor in this market with what the Company believes to be a
substantially smaller share of the market than either of Glenayre or
Motorola.
Paging Messaging Devices:
Since November 1997, the Company has provided two-way paging devices through its
newly acquired subsidiary, Wireless Access, Inc. ("WAI") based in Santa Clara,
California. WAI designs, develops and markets innovative, low-power, two-way
wireless data messaging devices. The Company's products are based on Motorola's
family of FLEX two-way paging protocols which the Company believes will become
the industry's standard two-way wireless data messaging protocols. The two-way
wireless data messaging capability of the Company's devices will allow service
providers to reuse their RF spectrum and thereby offer expanded two-way
alphanumeric wireless data messaging services to significantly more users than
would be possible with a traditional one-way alphanumeric paging network.
AccessLink(TM). The Company's current two-way data messaging product, the
AccessLink, is based on Motorola's ReFLEX50 protocol and utilizes the Company's
proprietary battery management, transceiver antenna and user interface designs.
The AccessLink has a memory capacity of 110 Kbytes, representing approximately
130,000 characters. In addition to traditional alphanumeric pager functions,
the AccessLink in conjunction with the SkyTel two-way data messaging service
provided by Mobile Telecommunications Technologies Corp. ("Mtel"), a customer of
the Company is capable of the following:
o Message Origination. The AccessLink allows a user to create and send
custom messages from the device. A user is able to create a message by
selecting letters displayed on the onscreen keyboard using an
omni-directional keypad. In addition, a user can send a preprogrammed
or user-created message to another AccessLink user, to an Internet
e-mail user, to a one-way alphanumeric pager, to a dial-in system
which uses synthesized voice technology to deliver a message or,
expected in the future, to a fax machine.
o Internet Connectivity. The AccessLink user can exchange messages with
Internet e-mail users. AccessLink users can have an e-mail address
defined by their service provider that allows them to receive e-mail
messages across the Internet. In addition, AccessLink users can
originate e-mail messages from the device and send them to any
Internet e-mail user's address.
o Ease of Use. The AccessLink's easy-to-manipulate omni-directional
keypad and innovative user interface provide the user with an easy
means of creating, storing and sending messages. All information is
contained within folders, which can be opened and closed with the
omni-directional keypad. The AccessLink's one-handed omni-directional
keypad also allows the user to scroll through the display and move the
cursor to select options.
o Computer Connectivity. The AccessLink provides a serial port for
connection to personal or palm top computers. Once connected to the
computer with the appropriate applications software, a user can send
and receive messages with the AccessLink acting as a wireless modem.
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o High-Powered Transmitter. The AccessLink provides the maximum transmit
power allowed by the FCC in a mobile two-way device. Achieving this
high-power level is critical for creating and sending long, custom
messages. The Company believes the AccessLink balances the need to
generate a high level of transmit power with the need for extended
battery life while utilizing a single AA battery.
AccessMate(TM). The Company is developing the AccessMate to enable wireless data
messaging service providers to offer customers expanded alphanumeric wireless
data messaging services at prices competitive with today's one-way paging
service subscription prices. The AccessMate is expected to be an entry-level
two-way wireless data messaging device that has all the functionality of today's
alphanumeric pagers together with the ability to allow service providers to
efficiently manage their network capacity through spectrum reuse. The Company is
designing the AccessMate to be approximately the same size as today's one-way
alphanumeric pagers with a four-line LCD display and more than 30 days of
battery life. The AccessMate is expected to allow a service provider to ensure
guaranteed message receipt by storing and resending a message when the
recipient's device is turned off or out of the service area. AccessMate will be
Glenayre's first device which utilizes the Company's proprietary integrated
chipset. The Company believes its IC chipset technology will enable the Company
to decrease the size of its devices while simultaneously reducing the cost and
power consumption of the devices.
AccessLink II. The Company is developing the AccessLink II to enable wireless
data messaging service providers to offer customers two-way paging
service capabilities in a device to be approximately the same size as today's
one-way alphanumeric pagers with a four-line LCD display and more than 30
days of battery life. As with the AccessMate, the AccessLink II is expected
to allow a service provider to ensure guaranteed message receipt by storing and
resending a message when the recipient's device is turned off or is out of the
service area. The AccessLink II will also utilize the Company's proprietary
integrated chipset. The AccessMate and AccessLink II are expected to be in
commercial production in 1998.
Integrated Circuit ("IC") Chipsets. The Company has designed chipsets to contain
substantially all of the two-way wireless data messaging circuitry, including
circuitry which implements the appropriate two-way wireless data messaging
protocol. The Company's design philosophy is that its devices will improve as
the Company increases the level of integration of the elements of its devices.
The Company has invested in the design of a first in a series of IC chipsets
whose goals are the continued reduction in size, cost and power consumption of
its mobile devices. As a result of utilizing a highly integrated transceiver
chipset, the Company believes its device designs will benefit through a
reduction in the number of components required on the circuit boards, a
reduction in the physical size of the mobile device, improved reliability and
ruggedness of the mobile device, increased battery life, and improved
testability and repeatability of the design.
Competition. Motorola, the only other company that currently has a product that
operates in a two-way wireless data messaging network, has historically
dominated the market for paging devices, with sales of its products representing
over 80% of sales of all paging devices. Motorola and other potential producers
of devices for the two-way wireless data messaging market, such as Uniden,
Phillips, Sony and Casio, have longer operating histories, significantly greater
financial, technological, management and marketing resources, greater name
recognition and larger installed customer bases than Glenayre. In addition, each
of these companies can devote greater resources to developing, marketing and
selling their products than Glenayre and may be able to respond more quickly to
new or emerging technologies and changes in customer needs. There can be no
assurance that the Company will obtain market acceptance of its products in the
face of competing technologies or be successful in introducing new products. The
failure of Glenayre to compete effectively could result in lower prices, reduced
margins or loss of market share, any of which could have an adverse effect on
the Company.
Competition in the Company's end user device markets is based upon quality,
product features, technical performance, capabilities, service and price, in
addition to battery life, size, ease of use, appearance, durability, and
reliability. End user devices represent a much more significant ratio (than
infrastructure) of a paging provider's total capital investment.
Marketing and Sales, Customers. The Company markets to paging carriers primarily
in the United States through a direct sales force. To date, nearly all of the
Company's two-way device revenues have been from Mtel.
8
MOBILE AND FIXED NETWORK PRODUCTS
Mobile and fixed network products from the Company's Integrated Network Group
accounted for approximately 16%, 6% and 7% of net sales for 1997, 1996 and 1995,
respectively and is comprised of the Company's Intelligis product line including
(i) the MVP system, (ii) network management systems developed by CNET since
January 1997, and (iii) software applications for calling card services by ODC
since October 1997. By combining the three operations into a cohesive product
offering, the Company believes it will be in a strong position to solve a
service provider's needs. The MVP System and the openMEDIA platform provide
network operators with the enhanced services and calling card products needed to
increase revenues from the current customer base and to acquire new subscribers.
The Glenayre OPTIONS(TM) products give network operators the system intelligence
needed to operate their networks more efficiently thus reducing costs and
increasing reliability.
MVP system. Glenayre's MVP(R) Modular Voice Processing system is an enhanced
services platform that enables cellular, PCS, wireline and paging network
operators to offer their subscribers value-added services that enhance and
complement their core communication products.
The MVP platform's flexibility allows service providers to choose the number and
combination of enhanced services to offer, including voice and fax messaging,
short message service, automatic call return, continuous calling and CONSTANT
TOUCH(TM) Service, a single number service. With the MVP System, subscribers can
place calls by using a telephone keypad or by using the subscriber's voice
alone.
The MVP system's scaleable architecture provides service providers with an
efficient growth path for their subscriber base. The MVP system can start out
small and grow to handle over 1,000,000 subscribers. Additionally, the MVP
platform interfaces into the myriad of trunk interfaces provided by central
office switches, cellular switches, paging terminals, telephone answering
systems and inter exchange carrier ("IXC") switches, even integrating into
different telecommunication networks simultaneously.
The MVP system provides voice messaging with intelligent message notification.
Subscribers are notified, via their pager or phone handset, when they receive a
new message in their mailbox. The MVP system communicates the number and type of
message received, including urgent and fax messages.
The MVP system's Auto Call Back feature allows the subscriber to return calls
with a keystroke. When the caller leaves a message, the MVP system captures the
caller's telephone number, either by Automatic Number Identification or by the
caller manually entering the caller's number. When the subscriber listens to the
message, the callback number plays as part of the voice message. At any time,
the subscriber can press a button and the caller's phone number is dialed by the
MVP system. After the call is completed, the subscriber is returned to the
subscriber's voice mailbox.
Fax messaging permits faxes to be sent directly to a subscriber's voice mailbox.
The subscriber is notified that a fax message has been received in the
subscriber's voice mailbox. The fax is stored in memory and can be printed from
any fax machine when the subscriber is ready to retrieve it.
CONSTANT TOUCH, Glenayre's single number application, gives subscribers control
of their communications. With CONSTANT TOUCH, subscribers combine all personal
and business telephone numbers (pager, home, office, cellular and fax) into a
single number that will reach them anywhere. By incorporating any or all of a
subscriber's telephone numbers, callers only have to use one number to reach the
subscriber.
When a caller dials the subscriber's CONSTANT TOUCH number, the system prompts
them to speak their name and enter their telephone number. The MVP system then
calls a series of preprogrammed numbers to notify the subscriber that a caller
is holding. The MVP plays the caller's name, "introducing" the caller. The
subscriber can choose to connect with the subscriber's caller or forward the
caller to the subscriber's voice mailbox or assistant.
A major development project for the MVP system in the next few years is speech
recognition. Glenayre has developed a new voice dialing application allowing
subscribers to place calls using only their voice. The subscriber speaks a name
or telephone number and the MVP system places the call. Glenayre expects to
develop additional speech recognition products, as well as incorporate speech
recognition technology into the voice mailbox.
9
Additionally, Glenayre expects to develop a new messaging capability
incorporating internet technology with the MVP system. This technology called
Unified Messaging, will give the MVP system the ability to incorporate voice,
data, fax and e-mail, into a subscriber's mailbox. With Unified Messaging,
subscribers point and click on a graphical user interface to access their voice,
data or other message types.
The Company believes that by providing multiple voice and data applications on a
single platform, the MVP system gives service providers a means to generate
additional revenue and increase subscriber loyalty.
Network Management Systems. During 1997, the Company renamed CNET's product line
as Glenayre OPTIONS. Glenayre OPTIONS' software integrates strategic operational
support systems, network management, RF planning and traffic analysis functions.
These tools ensure that wireless and wireline operators continually evolve their
businesses beyond the competition. The benefits that Glenayre customers enjoy
are reduced costs, improved customer retention, enhanced technological
leadership and improved time to market.
BOS. Basic Operations System ("BOS") is used by network operators to
integrate, monitor and manage complex communications and computing networks.
Through its modular collection of UNIX-based operational support programs, BOS
collects real-time network performance and customer detail data from
continuously operating networks. Layered applications translate BOS data into
information operators can use to make network management, resource allocation
and strategic planning decisions. BOS allows users to graphically view the
network and immediately determine the health of any component. It can be
automated to generate alarms alerting staff to system problems, and can be
programmed to self-heal the network under predetermined conditions. The software
operates across multi-vendor, multi-protocol network component, protecting
current and future network investments. BOS' graphical user interface is
intuitive making it easy to use for network operators, engineers and software
developers, and is relevant for non-technical personnel engaged in related
activities such as updating subscriber services and feature sets.
WiNGS. WiNGS advanced RF planning tools allow users to go from the initial
planning of their wireless network through the maintenance phase of network
planning. WiNGS takes data (coverage, interference, channel loading, traffic,
demographics, terrain, detailed roadways, microwave path analysis) from almost
any source, then integrates and analyzes it to predict RF performance. WiNGS can
incorporate field measurement data or other information from a network
management system to determine how the network is performing compared to how it
was planned. WiNGS features automatic frequency planning, analysis across
numerous systems using multiple propagation methodologies and extensive plotting
capabilities. The database will automatically populate FCC and FAA required
forms.
Traffic Trending Tool. With Traffic Trending Tool key network performance
and customer data are layered onto the wireless topology for visual analysis and
trending assessment. Traffic Trending Tool graphically displays data in a broad
scope, identifying problem areas and trends immediately. It takes data
geographically referenced to an RF plan and compares various attributes for
trending analysis. Traffic Trending Tool is designed to proactively manage a
wireless network by quickly identifying network problems and forecasting
shortages and other problem areas before they occur.
Software Application for Calling Cards. Glenayre's openMEDIA software integrates
the hardware and software elements of a telephony network to provide a powerful
and scaleable platform for database functions including calling card services
for wireless and wireline networks. OpenMEDIA's enhanced applications (prepaid
calling card, prepaid cellular and enhanced calling card) facilitate the rapid
deployment and ongoing evolution of a network operator's product offerings.
Additionally, the applications allow network operators the ability to expand
their customer bases and help drive network usage.
OpenMEDIA Prepaid Calling Card enables a service provider to establish prepaid
calling card programs that offer flexibility in card management, call rating and
service branding. The openMEDIA prepaid application enables service providers to
offer the following features to their subscribers: numerous calling methods,
real time card recharge, an integrated customer service application, multiple
language prompting, fraud detection and control, information services and voice
mail. Glenayre's openMEDIA Cellular Prepaid application offers the same features
available from the openMEDIA Prepaid application, plus certain enhancements
designed for cellular service providers. The Company is developing new releases
of its Cellular Prepaid application to include advanced features such as
voice-activated "hands-free" dialing, inbound call screening, advanced
cellular-to-cellular call rating, and nationwide cellular roaming. Glenayre's
Enhanced Calling Card application enables service providers to introduce
traditional post-paid calling card services with the advanced features of the
Company's other applications rapidly and effectively. Glenayre is developing new
releases of this application to support
10
multiple billing options, an improved rating engine, voice dialing, alias lists,
Internet account access and support for corporate calling cards.
Glenayre's openMEDIA Enhanced Services Platform ("ESP") is a client/server-based
software platform from which multiple telecommunications applications can be run
across shared network and database resources. The openMEDIA ESP provides an
interface between telephony and computing resources, including switches, voice
response units ("VRUs"), databases, billing systems and network management
software. The platform facilitates the generation of call flows and insulates
application developers from low-level programming of hardware components.
OpenMEDIA's modular, client/server architecture permits the replacement and
interchangeability of network hardware components and ensures the reusability of
common software modules as Glenayre develops new applications. The openMEDIA ESP
provides the following key features: rapid service creation, modularity, high
volume and scalability, network connectivity and fast call setup, real-time call
management, external interfaces and disaster recovery and reliability.
Competition. For sales of MVP systems, the Company competes in the United States
and internationally primarily with Boston Technology, Inc., Centigram
Communications Corporation, Comverse Technologies, Inc., Octel Communications
Corporation and Unisys Corporation.
The Company competes directly with Objective Systems Integrators, Inc., Boole &
Babbage, Inc., Lucent Technologies, Hewlett Packard Company and IBM Corporation
for the sale of it's network management products.
For sales of prepaid calling cards, cellular prepaid and enhanced calling card
products, the Company competes in the United States and internationally
primarily with Boston Communications Group, Inc., Brite Voice Systems, Inc. and
Precision Systems, Inc.
MICROWAVE COMMUNICATION
The Company's Wireless Interconnect Group ("WIC") designs, manufactures and
markets products for use in point-to-point microwave communications systems
which accounted for approximately 7%, 7% and 4% of net sales for 1997, 1996 and
1995, respectively. These products include the microwave radios themselves, both
in analog and digital transmission formats, and analog baseband products.
Glenayre also provides cellular and PCS operators with wireless cell site and
base station interconnect infrastructure. The Company's products are sold to
communications service providers, including cellular, specialized mobile radio
("SMR") and inter-exchange common carriers; industrial companies, including
utilities, railroads and petroleum producers; federal, state and local
governmental entities; and users of wireless data communications.
For sales of microwave radio products, the Company competes in the United States
and internationally primarily with Alcatel Alsthom, California Microwave
Corporation, Digital Microwave Corporation, Ericsson, Harris Corporation, P-Com,
Inc. and Siemens A.G.
CUSTOMERS
Glenayre sells to a range of customers worldwide. In the United States,
customers include the regional Bell operating companies, public and private
radio common carriers, private carrier paging operators, PCS carriers and
cellular carriers. Internationally, customers include public telephone and
telegraph companies, paging and cellular carriers as well as private
telecommunication service providers servicing cellular, PCS and paging.
Sales to a single customer totaled approximately 11%, 15% and 16% of 1997, 1996
and 1995 net sales, respectively. Although a single customer accounted for more
than 10% of the Company's net sales in each of the prior three years, the
dependence on any one customer is mitigated by the large number of entities in
the Company's customer base. The amount of business with any customer in a
reporting period is determined by the timing of the development and expansion of
existing customers' and new customers' systems.
11
MARKETING AND SALES
The Company markets its products and services in the United States and
internationally primarily through a direct sales force. Glenayre also utilizes
distributors and agents to sell its products in certain countries and geographic
regions to markets outside of the Company's core markets. Glenayre maintains
sales offices throughout the United States.
In an effort to better serve its international customers, Glenayre has
established sales offices outside of the United States in various locations
worldwide, including:
Manila, Philippines Singapore
New Delhi, India Toronto, Canada
Vancouver, Canada Hong Kong
Mexico City, Mexico Milton Keynes, England
Guangzhou, China Beijing, China
Dubai, United Arab Emirates Prague, Czech Republic
Sao Paulo, Brazil Amsterdam, Netherlands
Seoul, Korea Taipei, Taiwan
Tokyo, Japan
Glenayre has staffed each of these offices with either local or expatriate
multilingual personnel. The Company expects to add new offices and personnel
outside of the United States to meet the increasing demand for its products in
international markets. See Note 13 to the Company's Consolidated Financial
Statements for information relating to export sales.
As part of the Company's integrated marketing and sales efforts, Glenayre
encourages and facilitates a philosophy of open communication between the
Company and its customers. Toward that end, the Company often invites customer
representatives to meet with Glenayre's engineers and marketing personnel to
collaborate in the development of new and enhanced products.
The competitive telecommunications market often requires customer financing
commitments. These commitments may be in the form of guarantees, secured debt or
lease financing. See Note 12 to the Company's Consolidated Financial Statements.
INTERNATIONAL BUSINESS RISKS
Approximately 50% of 1997 net sales were generated in markets outside of the
United States. International sales are subject to the customary risks associated
with international transactions, including political risks, local laws and
taxes, the potential imposition of trade or currency exchange restrictions,
tariff increases, transportation delays, difficulties or delays in collecting
accounts receivable, and, to a lesser extent, exchange rate fluctuations.
Although a substantial portion of 1997 international sales of the Company's
products and services were negotiated in U.S. dollars, there can be no assurance
that the Company will be able to maintain such a high percentage of U.S.
dollar-denominated international sales. The Company seeks to mitigate its
currency exchange fluctuation risk by entering into currency hedging
transactions. The Company also acts to mitigate certain risks associated with
international transactions through the purchase of political risk insurance and
the use of letters of credit.
RESEARCH AND DEVELOPMENT
The Company believes that a strong commitment to research and development is
essential to the continued growth of its business. Glenayre has consistently
developed innovative products and product improvements for the wireless personal
communications services industry and has often been the first to bring such
products to market. One of the key components of the Company's development
strategy is the promotion of a close relationship between its product
development staff, internally with Glenayre's manufacturing and marketing
personnel, and externally with Glenayre's customers. This strategy has allowed
Glenayre to develop and bring to market customer-driven products in a timely
manner.
The Company has extensive expertise in the technologies required to develop
wireless communications systems and products including digital signal processing
("DSP"), voice processing (both FM and linear), real-time software, networking
and network management software, high-speed digital logic, high and low power
radio frequency, protocol development, data network and system design. With the
November 1997 acquisition of Wireless Access, Inc., the Company now retains a
core competence in Application Specific Integrated Circuit (ASIC) development
and implementation. The Company believes that by having a research and
development staff with expertise in these key areas, it is well positioned to
develop enhancements for its existing
12
products as well as new personal communication products. Investment in advanced
computer-aided design tools for simulation and analysis has allowed Glenayre to
reduce the time for bringing new products to market.
The majority of the Company's research and development staff are engineers or
computer science professionals. Glenayre's research and development efforts are
located in its Vancouver, British Columbia, Canada; Sunnyvale, California;
Atlanta, Georgia; Norwood, Massachusetts and Santa Clara, California facilities.
Total research and development costs for the Company were $40 million, $29
million and $24 million or 9%, 7% and 7% of net sales for 1997, 1996 and 1995,
respectively. The Company devotes substantial resources to research and
development in order to develop new products, improve existing products and
support ongoing custom feature and enhancement development. The availability of
research and development funds depends upon the Company's revenues and
profitability. Reductions in such expenditures could impair the Company's
ability to innovate and compete.
New Products and Upgrades. The principal new products and enhancements
introduced by the Company in 1997 related to its Paging Products included the
following: (i) a DSP based multi-channel high powered linear transmitter; (ii) a
multiprocessor version of the two-way control and encoder system; (iii) advanced
features for paging switches including FLEX roaming, timed services, high
capacity voice and configurable digital trunk; (iv) advanced networking for the
paging switch in the form of WMtp and WMapi; (v) advanced features for
traditional control including dial backup and modular field upgradability; and
(vi) Chinese characters paging was added to the base operator assisted paging
switch.
The principal new products and enhancements introduced by the Integrated Network
Group in 1997 included the following: (i) a software application to emulate a
non-Glenayre voicemail system, (ii) modification to a fax platform to support
worldwide web server, (iii) a significant increase in MVP voice storage capacity
and (iv) a cellular data messaging protocol to send messages and page
notifications.
Additionally, in 1997, the Company's Wireless Interconnect Group introduced: (i)
the LYNXsc family of license-free spread spectrum digital radios with enhanced
features and offering throughput capacities of 56kbs to 4T1 (one T1 is equal to
1.544Mbs) and (ii) the WM 6/45 licensed radio operating at 6GHz and providing a
throughput capacity of 45Mbs, a fully integrated simple network management tool,
an internet protocol router, and a wayside Ethernet channel.
MANUFACTURING
Glenayre currently manufactures its Paging Products and MVP systems at Company
facilities in Quincy, Illinois and Vancouver, British Columbia, Canada except
for its two-way paging devices which are assembled by a third-party
manufacturer. The Company's manufacturing expertise resides in assembling
sub-assemblies and final systems that are configured to its customers'
specifications. The components and assemblies used in the Company's products
include electronic components such as resistors, capacitors, transistors and
semiconductors such as field programmable gate arrays, digital signal processors
and microprocessors; mechanical materials such as cabinets in which the systems
are built; and peripherals, including disk drives. The components and parts used
in the Company's products are generally available from multiple sources. Some
components, especially those utilizing the latest technology, may only be
available from one source. In those instances where components are purchased
from a single source, the supplier and the specific component are reviewed both
prior to initial specification and then frequently afterward for stability and
performance. Although the Company believes that single sourced components could
either be obtained from another source or redesigned, temporary delays or
increased costs in obtaining these materials may be experienced. Additionally,
as necessary, the Company purchases sufficient quantities of certain components
which have long-lead requirements in the world market. The Company performs
standard procedures to test, tune and verify products prior to shipment to the
customer.
The Company believes in setting high standards of quality throughout all its
operations. The Company has certification to the ISO 9001 international standard
for quality assurance in areas including design, manufacture, assembly and
service for the Quincy, Illinois; Vancouver, British Columbia; and Atlanta,
Georgia facilities. ISO is a worldwide federation of national standards bodies
which have united to develop internationally accepted quality systems standards
so that customers and manufacturers have a system in place that provides a known
quality. The standards set by ISO cover every facet of quality from management
responsibility to service and delivery. Management believes that adhering to the
stringent ISO 9001 procedures not only creates efficiency in its operations, but
also positions Glenayre to meet the exacting standards required by its
customers.
13
The Company utilizes Materials Resource Planning ("MRP") systems for production
planning in its manufacturing locations and state-of-the-art workstations for
its engineering functions. Glenayre is in the process of implementing a business
operating system that will link a significant portion of the Company's business
functions in order to further grow and enhance the business. This system is
expected to become operational by the second quarter of 1998. The Company's
present facilities are believed to be adequate for current manufacturing needs,
but the process of upgrading its facilities is expected to continue.
PATENTS AND TRADEMARKS
The Company owns or licenses numerous patents used in its current operations.
The Company believes that while these patents are useful to the Company, they
are not critical or valuable on an individual basis, and that the collective
value of the intangible property of the Company is comprised of its patents,
blueprints, specifications, technical processes and cumulative employee
knowledge. Although the Company attempts to protect its proprietary technology
through a combination of trade secrets, patent law, non-disclosure agreements
and technical measures, such protection may not preclude competitors from
developing products with features similar to the Company's products. The laws of
certain foreign countries in which the Company sells or may sell its products,
including South Korea, People's Republic of China, Saudi Arabia, Thailand,
Dubai, India and Brazil, do not protect the Company's proprietary rights in the
products to the same extent as do the laws of the United States. Although the
Company believes that its products and technology do not infringe on the
proprietary rights of others, the Company is currently party to certain
infringement claims, and there can be no assurance that third parties will not
assert additional infringement claims against the Company in the future. If such
litigation resulted in the Company's inability to use the technology, the
Company might be required to expend substantial resources to develop alternative
technology or to license the prior technology. There can be no assurance that
the Company could successfully develop alternative technology or license the
prior technology on commercially reasonable terms. The Company does not believe,
however, that an adverse resolution of the pending claims would have a material
adverse effect on the Company.
The Company considers its trademarks "Glenayre", "WMtp" and Wmapi" to be
valuable assets. These trademarks are protected through trademark registrations
in the United States and various countries throughout the world.
BACKLOG
The Company's firm backlog at December 31, 1997 and 1996 was approximately $139
million and $166 million, respectively. In general, the Company expects to
commence shipment of the orders in the backlog within six months of their
respective backlog dates. Approximately 65% of orders on hand at December 31,
1997 are expected to be shipped during 1998. The orders not being shipped in
1998 are primarily due to the timing of delivery as requested by customers. This
is a forward looking estimate which is subject to substantial change based on
the timing of installation of systems by the Company's paging service provider
customers and the market acceptance of personal communication products by the
customers of such paging service providers.
GOVERNMENT REGULATION
Many of Glenayre's products operate on radio frequencies or connect to public
telecommunications networks. Radio frequency and telecommunications network
equipment is regulated in the North American and in many international markets.
Regulatory approvals generally must be obtained by the Company in connection
with the manufacture and sale of its products, and by the service providers that
operate the Company's products. There can be no assurance that appropriate
regulatory approvals will continue to be obtained. The enactment by national,
provincial, or local governments of new laws or regulations or a change in the
interpretation of existing regulations could affect the market for the Company's
products. The Company believes that global privatization and deregulation of
telecommunications industries have, however, increased demand for the Company's
products. Privatization, while providing new opportunities, has tended to
destabilize the administrative and technical procedures for placing products
into recently privatized markets. The scope to which the Company's products are
subject to regulation has increased. The Company has implemented programs to
address the technical, administrative, and legal challenges of this dynamic
global regulatory environment.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed approximately
2,400 persons. The Company believes its employee relations to be good.
14
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the Company's
principal facilities:
Size Owned or Lease
Location (Square Feet) Leased Expiration Date Uses
-------- ------------- ------ --------------- ----
Vancouver, British Columbia 185,124 142,244 owned Manufacturing, service,
42,880 leased 1998-2002 accounting, purchasing and
training facilities,
research and development.
Quincy, Illinois 162,356 154,256 owned 2000 Manufacturing, service,
8,100 leased sales, accounting,
purchasing and training
facilities.
Sunnyvale, California 45,709 leased 2006 Manufacturing, service,
sales, accounting,
purchasing, research and
development.
Santa Clara, California 29,600 leased 2002 Service, sales, accounting,
purchasing, research and
development, administration.
Atlanta, Georgia 75,000 owned Sales, service, research
and development, and
training facilities.
Charlotte, North Carolina 45,000 owned Corporate headquarters,
marketing, accounting and
finance, sales, service and
training facilities.
Norwood, Massachusetts 64,183 leased 2001 Service, sales, accounting,
purchasing, research and
development.
Singapore 42,000 owned Service, sales, accounting
and training facilities.
In addition to its sales offices listed above, Glenayre also maintains sales
offices throughout the United States and internationally. See
"Business--Marketing and Sales." During 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 service. 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. Approximately
$900,000 paid toward architect and engineering fees related to the new expansion
is included in capital expenditures for the year ended December 31, 1997. During
the first quarter of 1998 Glenayre negotiated a contract to expend up to $15
million for the construction phase of the expansion. Except for this expansion,
the Company's facilities are believed to be adequate for its current needs,
although the process of upgrading its facilities to meet technological and
market requirements is expected to continue.
ITEM 3. LEGAL PROCEEDINGS
On January 31, 1997 an amended class action complaint (the "Complaint") was
filed in the United States District Court for the Southern District of New York
against the Company and certain of its executive officers and directors alleging
the Company artificially inflated the value of its common stock during the
period February 6, 1996 to September 13, 1996 by making false and misleading
statements in its public disclosures. The Complaint was dismissed in November
1997, but the plaintiffs were granted the right to refile. The Complaint was
refiled December 19, 1997. The Complaint consolidates two lawsuits filed in the
fourth quarter of 1996. The plaintiffs seek unspecified damages based upon the
decrease in market value of the shares of the Company's stock. On February
20,1997, a shareholder's derivative complaint was filed in the United States
District Court for the Southern District Court of New York against certain
current and former directors and against the Company, as a nominal defendant,
alleging that the directors breached their fiduciary obligations to the Company
by subjecting the Company to the class action referred to above. The plaintiff
seeks unspecified damages on behalf of the Company. Management denies any
liability and intends to defend these actions vigorously and believes that the
ultimate resolution will not have a material adverse effect on the Company's
financial position or future results of operations.
15
Additionally, the Company is party to several intellectual property claims and
disputes related to its business operations. The Company believes that the
ultimate resolution of these claims and disputes will not have a material effect
on the Company's financial position or future results of operations. However, if
such litigation resulted in the Company's inability to use technology, the
Company might be required to expend substantial resources to develop alternative
technology or to license such technology on commercially reasonable terms.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the symbol
"GEMS." The table below sets forth the high and low sale prices for the
Company's common stock on The Nasdaq Stock Market for the periods indicated.
Price Range of
Common Stock
-------------------------
High Low
------- --------
Year Ended December 31, 1996
First Quarter................................... $48.750 $30.375
Second Quarter.................................. 53.750 34.500
Third Quarter................................... 53.250 18.625
Fourth Quarter.................................. 27.750 19.375
Year Ended December 31, 1997
First Quarter................................... $23.125 $9.750
Second Quarter.................................. 16.875 8.000
Third Quarter................................... 21.500 13.625
Fourth Quarter.................................. 16.813 9.344
At March 6, 1998 there were approximately 1,900 holders of record of the
Company's common stock.
The Company has not paid cash dividends since 1982 and does not anticipate
paying cash dividends in the foreseeable future. The Company expects to utilize
future earnings to finance the development and expansion of its business.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data of Glenayre presented below
for each of the five years in the period ended December 31, 1997 has been
derived from the Company's audited Consolidated Financial Statements. The
Company has been in the telecommunications equipment and related software
business since November 10, 1992 and previously was engaged in the real estate
development business and in oil and gas pipeline construction. The Company
acquired Western Multiplex Corporation ("MUX"), a manufacturer of microwave
radio systems, on April 25, 1995. The Company made three acquisitions in 1997:
(i) CNET, Inc., a developer of software including network management tools on
January 9, 1997, (ii) Open Development Corporation ("ODC"), a developer of
software including applications for calling cards on October 15, 1997, and (iii)
Wireless Access, Inc. ("WAI"), a developer and marketer of two-way paging
devices on November 3, 1997. The results of the acquired companies are included
from the dates of acquisition by the Company. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and the other financial data included
elsewhere herein.
(In thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------------
1997(1) 1996 1995 1994 1993
----------- ----------- ----------- ----------- ---------
Operating Data:
Net sales ............................... $ 451,679 $ 390,246 $ 321,404 $ 172,107 $ 136,139
Income (loss) before change in accounting
principle and extraordinary item ...... (49,549) 70,444 76,448 33,095 23,700
Discontinued operations(2) .............. -- -- -- 388 100
Extraordinary item ...................... -- -- -- -- (1,695)
Change in accounting principle .......... (688) -- -- -- --
Net income (loss) ....................... (78,092) 70,444 76,448 33,483 22,105
Per Share Data(3):
Per Weighted Average Common Share:
Income (loss) before accounting change
and extraordinary items ............... (1.28) 1.16 1.31 0.60 0.52
Net income (loss) ....................... (1.29) 1.16 1.31 0.61 0.49
Per Common Share-Assuming Dilution:
Income (loss) before accounting change
and extraordinary items ............... (1.28) 1.11 1.22 0.56 0.48
Net income (loss) ....................... (1.29) 1.11 1.22 0.57 0.45
At December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ---------
Balance Sheet Data:
Working capital ........................ $ 161,454 $ 279,031 $ 223,487 $ 135,209 $ 94,898
Total assets ........................... 505,818 521,210 447,580 284,961 228,244
Long-term debt, including current
portion .............................. 3,747 879 2,147 2,019 3,451
Stockholders' equity ................... 408,016 455,861 390,694 245,435 198,708
(1) The results for 1997 were impacted by a $125.2 million charge for purchased
research and development related to the ODC and WAI acquisitions and a $5.2
million write-off of goodwill related to the CNET acquisition. See Note 1
to the Consolidated Financial Statements.
(2) Effective December 31, 1992 and July 6, 1993, the Company adopted formal
plans to dispose of its oil and gas pipeline construction and real estate
operations, respectively. These operations are accounted for as
discontinued for all periods presented.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). For further discussion of earnings per
share and the impact of SFAS 128, see the Note 2 to the Consolidated
Financial Statements.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Glenayre designs, manufactures, markets and services telecommunications
equipment and software used in wireless personal communication systems
throughout the world specifically focused in three primary marketing areas: (i)
paging products including infrastructure equipment from the Wireless Messaging
Group ("WMG") and Wireless Access two-way paging devices, (ii) mobile and fixed
network products from the Integrated Network Group ("ING") including voice mail
systems and software applications for network management and calling cards, and
(iii) microwave communications and rural radio from the Wireless Interconnect
Group ("WIC").
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, a developer of software 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.
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.
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:
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Net sales ............................................. 100% 100% 100%
Cost of sales ......................................... 48 46 43
---- ---- ----
Gross profit ...................................... 52 54 57
Operating expenses
Selling, general and administrative ............... 22 21 18
Research and development .......................... 9 7 7
Charge for purchased research and development ..... 28 -- --
Depreciation and amortization ..................... 5 4 3
Write-off of goodwill ............................. 1 -- --
---- ---- ----
Total operating expenses ...................... 65 32 28
---- ---- ----
Operating income (loss) ............................... (13) 22 29
Interest, net ......................................... 2 3 3
Other, net ............................................ * * *
---- ---- ----
Income (loss) before income taxes and
accounting change ................................... (11) 25 32
Provision for income taxes ............................ 6 7 8
---- ---- ----
Income (loss) before accounting change ................ (17) 18 24
Accounting change (net of income tax benefit) ......... * -- --
---- ---- ----
Net income (loss) ..................................... (17)% 18% 24%
==== ==== ====
- -------------------
*less than 0.5%
18
The following table sets forth for the periods indicated net sales represented
by the Company's primary marketing areas :
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(dollars in thousands)
Paging products ............................ $348,789 $337,091 $284,805
Mobile and fixed network products .......... 70,619 24,911 23,592
Microwave communication and rural radio .... 32,271 28,244 13,007
-------- -------- --------
$451,679 $390,246 $321,404
======== ======== ========
(percentage of net sales)
Paging products ............................ 77% 87% 89%
Mobile and fixed network products .......... 16 6 7
Microwave communication and rural radio .... 7 7 4
-------- -------- --------
100% 100% 100%
Years Ended December 31, 1997, 1996, and 1995
Net Sales. Net sales for 1997 increased 16% to $451.7 million as compared to
$390.2 million in 1996, which increased 21% from $321.4 million in 1995.
International sales (sales outside the United States) increased to $227.2
million in 1997 as compared to $154.3 million in 1996 and $113.9 million in 1995
and accounted for 50%, 40%, and 35% of net sales for 1997, 1996, and 1995,
respectively.
Due to the existing capacity of paging providers to serve their subscribers
coupled with constrained financing markets, 1997 shipments to the United States
market of the Company's one-way paging infrastructure products were below 1996
levels. The same conditions had caused a slower growth rate in the domestic
market for these products in 1996 compared to 1995. However, significant
investments made by the Company in the international arena have resulted in
continued strong international sales growth in 1997 and 1996 of its paging
products offsetting declines in the domestic market.
The increase in the Company's 1997 net sales compared to 1996 was primarily due
to the increased delivery of Glenayre's voice mail system, the MVP, to both the
domestic and international markets. The 1997 implementation of a more aggressive
international strategy helped reverse the significant decrease in the MVP
product line growth rate experienced in 1996 compared to 1995. The growth in the
Company's 1996 net sales compared to 1995 came from both paging products and
microwave communication. The increase in paging products was primarily due to
(i) the continued expansion and upgrading of existing systems within the
installed customer base, (ii) the expansion into international markets, and
(iii) the delivery of newly introduced two-way paging products. The increase in
microwave communication product sales in 1996 was due to (i) increased demand
for these products and (ii) the inclusion of MUX operations only since its April
1995 acquisition.
As a result of significant investments made by the Company in international
markets, continued growth of international sales of its paging products and
mobile and fixed network products is anticipated. 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.
Gross Profit. Gross profit was 52% for 1997 compared to 54% in 1996 and 57% in
1995. The declines in gross profit percentages in 1997 and 1996 were affected by
(i) increased revenue from international turn-key projects with lower margins,
(ii) changes in the mix of sales of the Company's products, and (iii) increased
customer support costs. The 1996 decline was also impacted by an increase in
fixed costs resulting from additional capacity brought on line during the latter
half of 1995 in anticipation of two-way paging commercial product shipments
which did not reach expected 1996 levels due to customer delays. The Company
anticipates its gross profit percentage to be approximately 50% to 52% in 1998.
However, Glenayre's gross profit margins may be affected by several factors
including (i) the mix of products sold, (ii) the price of products sold, (iii)
increases in material costs and other components of cost of sales, and (iv) the
inclusion for the full year of sales from companies acquired in 1997.
19
Selling, General and Administrative Expense. Selling, general and administrative
expenses were $100.6 million, $80.4 million, and $56.6 million for 1997, 1996,
and 1995, respectively. These increases were primarily due to (i) the addition
of sales, marketing, technical support, and administrative personnel and other
expenses ( including travel, telephone, and new office openings) to support the
increases in international sales volume, (ii) the inclusion of CNET, ODC, and
WAI operating expenses since the dates of the acquisitions in 1997, and (iii)
general increases in employee costs and purchased services. Glenayre expects
that spending for selling, general and administrative expenses will increase in
absolute dollars in 1998 but should approximate 1997 and 1996 percentages of net
sales.
Research and Development Expense. Research and development expenses increased to
$40.4 million in 1997 compared to $29.0 million in 1996 and $24.0 million in
1995. These increases were primarily due to the addition of engineering
personnel and additional purchased research materials. The 1997 increase was
also affected by the research and development activities of CNET, ODC, and WAI
since the dates of the acquisitions in 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. Research and development expenses as a percentage of
net sales increased to 9% in 1997 from 7% in 1996 and 1995. Glenayre expects
spending for research and development in 1998 to increase as a percentage of net
sales to approximately 10% to 11% with absolute dollars changing in relation to
net sales reflecting the Company's continued focus on the development and timely
introduction of new products.
Charge for Purchased Research and Development. Purchased research and
development costs of $125.2 million were expensed in 1997. These costs include
$44.3 million and $80.9 million for the purchase of technology under development
associated with ODC's enhanced service software and with WAI's two-way paging
expertise. The ODC acquisition provides the technology for Glenayre to further
strengthen its position as a worldwide provider in the enhanced service platform
market. The WAI acquisition gives Glenayre the expertise in advanced pagers and
integrated circuit design positioning the Company to offer some of the most
advanced, complete paging systems available.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased to $20.2 million in 1997 compared to $13.5 million in 1996 and $8.6
million in 1995. The Company has spent $32.9 million, $43.0 million, and $34.6
million in 1997, 1996, and 1995, respectively, in order to provide the equipment
and capacity necessary to meet the growth of its business. Additionally,
goodwill and other intangibles acquired through the businesses purchased
amounted to $26.7 million and $22.0 million in 1997 and 1995, respectively. The
increases in depreciation and amortization expense were due to these significant
fixed and intangible asset purchases. Glenayre anticipates equipment purchases
in 1998 to be at approximately the 1997 levels which is expected to increase
depreciation and amortization expense in 1998 compared to 1997.
Write-off of Goodwill. At December 31, 1997, the Company wrote off $5.2 million
of the goodwill balance related to the January 1997 acquisition of CNET. Revised
projected results over the remaining goodwill amortization period of six years
for the acquired operations were not sufficient to support the remaining
goodwill and, in accordance with the Company's policy, the short-fall was
written off. The write-off will reduce the CNET goodwill amortization expense in
1998 as compared to 1997 by approximately $800,000.
Interest Income, Net. Interest income, net increased to $10.4 million in 1997
compared to $9.7 million in 1996 and $8.3 million in 1995. The increase in 1997
compared to 1996 was primarily due to higher balances in notes receivable along
with higher average interest rates earned. The increase in 1996 compared to 1995
was attributable to higher average balances in cash, cash equivalents and
short-term investments. The Company expects that the level of interest income,
net in 1998 will vary in accordance with the level of secured debt financing
commitments exercised by Glenayre's customers.
Other, Net. The increase in expense for 1997 as compared to 1996 and 1995 was
primarily due to expenses related to a realignment of certain domestic sales,
management, and engineering personnel in order to enhance organizational
efficiencies. Additionally, in 1997, the significant decline in relation to the
U.S. dollar of currencies of certain countries, including Canada, Singapore and
Taiwan, created unrealized translation expense as a result of the remeasurement
of the net assets of the Company's foreign operations from the local denominated
currency to the functional currency for consolidation. The translational loss or
gain recorded is expected to vary in 1998 depending on the amount of net assets
in a foreign country and the change in the relation of the foreign country's
currency to the U.S. dollar.
In the first quarter of 1998, Glenayre announced that, in order to improve
operational efficiencies, the paging infrastructure research and development
function would be consolidated at the Vancouver, British Columbia facility. As a
result of this
20
decision, the Company expects to incur restructuring and other related expenses
amounting to approximately $1.5 to 2.0 million in 1998.
Provision for Income Taxes. The difference between effective tax rates of 34% ,
27% and 25% for 1997, 1996, and 1995, respectively and the combined U.S. federal
and state statutory tax rate of approximately 40% is primarily the result of (i)
the utilization of the Company's net operating losses ("NOLs"), (ii) lower tax
rates on earnings indefinitely reinvested in certain non-U.S. jurisdictions and
(iii) the application of Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes," ("SFAS 109"), in computing the Company's tax
provision. The 1997 effective tax rate is net of the non-deductible charges for
purchased research and development and write-off of goodwill. The difference
between the effective tax rates in each of the years is primarily the result of
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 primarily due to revisions during each year to the
estimated future taxable income during the Company's loss carryforward period.
See Note 8 to the Company's Consolidated Financial Statements.
Glenayre had a significantly lower book tax rate as compared with the statutory
tax rate in 1996 and 1995 as a result of reductions in the valuation allowance
attributable to the Company's NOLs established prior to 1988 ("prior NOLs"). The
prior NOLs had a balance of $70 million as of December 31, 1996 and were fully
utilized during 1997. The remainder of these prior NOLs were utilized during
1997. At December 31, 1997, the Company had approximately $34 million of NOLs
related to companies acquired during 1997("acquired NOLs"). However, due to
certain restrictions limiting the Company's future use of the acquired NOLs, the
potential benefit of the acquired NOLs has been fully reserved.
As a result of the final usage of the prior NOLs and uncertainty as to the usage
of the acquired NOLS, the book tax rate is expected to increase to approximately
37% in 1998. However, the actual book tax rate may be different from the
Company's estimate due to various issues including (i) future tax legislation,
(ii) the changes in the amount of international business by the Company, (iii)
the utilization of U.S. Research and Development tax credits, (iv) changes in
federal, state or international tax rates, (v) the availability of foreign sales
corporation benefits and (vi) the actual utilization of the acquired NOLs.
Cumulative Effect of Change in Accounting Principle. The Company changed its
accounting policy in 1997 pursuant to Emerging Issues Task Force No. 97-13
("EITF No. 97-13") for the project to implement a new business operating system
that Glenayre began in 1996 and expects to complete in the second quarter of
1998. Previously all direct costs relating to the project were capitalized,
including the portion related to business process reengineering. In accordance
with EITF No. 97-13, the unamortized balance of these reengineering costs as of
November 1997 of approximately $1.1 million, or $688,000 after tax benefit was
written off.
Financial Condition and Liquidity
Liquidity and Capital Resources. At December 31, 1997, Glenayre's principal
sources of liquidity included $21 million of cash and cash equivalents and a $50
million bank line of credit that expires in October 1998. There were no
borrowings under the line of credit in 1997. The decrease in cash, cash
equivalents and short-term investments of $111 million for 1997 is principally
due to (i) $124 million of funds (net of cash acquired) used to purchase CNET,
ODC, and WAI and (ii) purchases of plant and equipment amounting to $33 million,
offset by $45 million of funds provided by operations. The cash provided by
operating activities was primarily due to net income (before certain non-cash
charges including the charge for purchased research and development and the
write-off of goodwill) offset by significant increases in accounts and notes
receivables. Accounts receivable increased primarily due to (i) higher levels of
international turnkey projects with longer payment terms and (ii) increased
levels of customer contracts with non-standard terms. Notes receivable increased
$38 million for 1997 due to additional requests from customers for financing
primarily related to the sales of paging and voice mail products. Approximately
72% of the notes receivable balance as of December 31, 1997 consists of
receivables from two customers, one of which accounts for $24.8 million, 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. Deferred income taxes decreased $15 million in
1997 primarily as result of the utilization of the Company's NOLs. Other assets
increased $17 million principally due to intangible assets (other than goodwill)
acquired in the purchase of ODC and WAI. Accounts payable and accrued
liabilities increased $28 million in 1997 primarily related to the three
acquisitions and increased levels of international turnkey projects.
21
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. No shares were
repurchased under this program in 1996 or 1997. Additionally, in 1996, the
Company began the implementation of a new operating business system. This
business system is expected to be operational by the second quarter of 1998 at a
total capitalized cost of approximately $16 million. Of this total,
approximately $14 million, including $10 million of cost incurred in 1997, has
been paid and included in fixed assets as of December 31, 1997.
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 December 31,
1997, the Company had agreements to finance and arrange financing for
approximately $92 million of paging and voice mail products. Further, at
December 31, 1997, 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 exercised, the financing arrangements will be secured by the
equipment sold by Glenayre.
During 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 service. 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. Approximately $900,000 paid toward architect and engineering fees
related to the new expansion is included in capital expenditures for the year
ended December 31, 1997. During the first quarter of 1998 Glenayre negotiated a
contract to expend up to $15 million for the construction phase of the
expansion.
The Company believes that funds generated from continuing operations, together
with its current cash reserves and bank line of credit, will be sufficient to
(i) support the short-term and long-term liquidity requirements for current
operations (including annual capital expenditures and customer financing
commitments) and (ii) to repurchase shares as discussed above. Company
management believes that, if needed, it can establish additional borrowing
arrangements with lending institutions.
Income Tax Matters. In 1997 and recent years, the Company has had a favorable
income tax position principally because of the existence of a significant amount
of U.S. tax net operating loss carryforwards established prior to 1988. 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 described in Note 8 to the Company's Consolidated Financial Statements, the
Company at December 31, 1997 had U.S. NOLs aggregating $34 million related to
1997 acquisitions of CNET, ODC, and WAI. However, the ability to utilize the
acquired NOLs to offset future income is subject to restrictions and there can
be no assurance that they will be utilized in 1998 or future periods.
Additionally, as the volume of international sales is expected to grow, the
percentage of worldwide income taxable in international jurisdictions may
increase in the future. As a result, the Company expects that its cash tax rate
will be significantly higher in 1998 compared to 1997 and recent years.
The Company has recorded a deferred tax asset of $15 million, net of a valuation
allowance of $19 million, at December 31, 1997, 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.
Impact of Year 2000. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have a time-sensitive software may
22
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in normal business activities.
Initial investigations indicate that modifications, to the Company's products in
order to resolve any year 2000 issues appear to be insignificant. Based on
preliminary reviews from presently available information, the current
installation of a new business operating system (as described above in
"Liquidity and Capital Resources") and the significant capital equipment
purchases in recent years to upgrade technological capabilities, the costs of
addressing potential problems are not currently expected to have a material
adverse impact on the Company's financial position, results of operations, or
cash flows in future periods. However, if the Company, its large customers, or
significant suppliers are unable to resolve such processing issues in a timely
manner, it could have a material impact on the operations of the Company.
Accordingly, the Company plans to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
Inflation. For the three fiscal years ended December 31, 1997, the Company does
not believe inflation has had a material effect on its results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-K, the Company's Summary Annual Report to Stockholders, any Form
10-Q or any Form 8-K of the Company or any other written or oral statements made
by or on behalf of the Company 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-K related
to factors which may affect future operating results, a more detailed discussion
of these factors is set forth in Exhibit 99 to this Form 10-K.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries as of
December 31, 1997, 1996 and 1995 and for each of the three years in the period
ended December 31, 1997, as well as the report of independent auditors thereon,
are set forth on the following pages. The index to such financial statements and
required financial statement schedules is set forth below and at Item 14(a) of
this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
(i) Financial Statements: Page
----
Report of Ernst & Young LLP Independent Auditors ........................ 25
Consolidated Balance Sheets at December 31, 1997 and 1996 ............... 26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ...................................... 27
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 .......................... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ...................................... 29
Notes to Consolidated Financial Statements .............................. 31
(ii) Supplemental Schedules:
(For the years ended December 31, 1997, 1996 and 1995)
Schedule II - Valuation and Qualifying Accounts ......................... 53
All other schedules are omitted because they are not applicable or not
required.
24
REPORT OF INDEPENDENT AUDITORS
Stockholders
Glenayre Technologies, Inc.
We have audited the consolidated balance sheets of Glenayre Technologies, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index of Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Glenayre Technologies, Inc. and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Charlotte, North Carolina
January 30, 1998
25
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
-------------------
1997 1996
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents .................................. $ 21,076 $ 53,785
Short-term investments ..................................... -- 78,016
Accounts receivable, net ................................... 152,231 119,851
Notes receivable ........................................... 8,684 10,236
Inventories ................................................ 49,302 50,460
Deferred income taxes ...................................... 13,943 19,291
Prepaid expenses and other current assets .................. 6,810 7,957
-------- --------
Total current assets ..................................... 252,046 339,596
Notes receivable, net ......................................... 53,050 13,085
Property, plant and equipment, net ............................ 103,641 80,501
Goodwill ...................................................... 78,568 76,818
Deferred income taxes ......................................... 1,088 10,372
Other assets .................................................. 17,425 838
-------- --------
TOTAL ASSETS .................................................. $505,818 $521,210
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 27,133 $ 19,614
Accrued liabilities ......................................... 61,358 40,781
Other current liabilities ................................... 2,101 170
-------- --------
Total current liabilities ................................. 90,592 60,565
Other liabilities ............................................. 7,210 4,784
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: 1997-60,650,761 shares;
1996-59,868,202 shares .................................... 1,213 1,197
Contributed capital ......................................... 333,715 301,771
Retained earnings ........................................... 73,088 152,893
-------- --------
Total stockholders' equity ................................ 408,016 455,861
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................... $505,818 $521,210
======== ========
See notes to consolidated financial statements.
26
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
NET SALES ........................................... $ 451,679 $ 390,246 $ 321,404
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .................................. 217,793 180,468 138,773
Selling, general and administrative expense .... 100,619 80,428 56,579
Research and development expense ............... 40,425 28,983 23,968
Charge for purchased research and development .. 125,200 -- --
Depreciation and amortization expense .......... 20,211 13,482 8,571
Write-off of goodwill .......................... 5,183 -- --
--------- --------- ---------
Total costs and expenses ....................... 509,431 303,361 227,891
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ....................... (57,752) 86,885 93,513
--------- --------- ---------
OTHER INCOME (EXPENSES):
Interest income ................................ 10,577 9,805 8,457
Interest expense ............................... (227) (151) (190)
Other, net ..................................... (2,147) 112 (35)
--------- --------- ---------
Total other income ............................. 8,203 9,766 8,232
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ........................................ (49,549) 96,651 101,745
PROVISION FOR INCOME TAXES .......................... 27,855 26,207 25,297
--------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE .................... (77,404) 70,444 76,448
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (NET OF INCOME TAX BENEFIT OF $362) ..... (688) -- --
--------- --------- ---------
NET INCOME (LOSS) ................................... $ (78,092) $ 70,444 $ 76,448
--------- --------- ---------
INCOME (LOSS) PER WEIGHTED AVERAGE COMMON
SHARE:
Income (loss) before cumulative effect of change in
accounting principle .............................. $ (1.28) $ 1.16 $ 1.31
Cumulative effect of change in accounting principle (.01) -- --
--------- --------- ---------
Net income (loss) per weighted average common share . $ (1.29) $ 1.16 $ 1.31
========= ========= =========
INCOME (LOSS) PER COMMON SHARE--ASSUMING
DILUTION:
Income (loss) before cumulative effect of change in
accounting principle .............................. $ (1.28) $ 1.11 $ 1.22
Cumulative effect of change in accounting principle . (.01) -- --
--------- --------- ---------
Net income (loss) per common share--assuming dilution $ (1.29) $ 1.11 $ 1.22
========= ========= =========
See notes to consolidated financial statements.
27
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars and shares in thousands)
Common Stock Total
-------------------------- Contributed Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- --------- --------- ---------
Balances, December 31, 1994 .................. 55,991 $ 1,120 $ 215,862 $ 28,453 $ 245,435
Net income ................................... 76,448 76,448
Stock options exercised ...................... 2,899 58 16,090 16,148
Shares issued and options assumed in
connection with business acquisition ....... 1,185 24 27,244 27,268
Utilization of net operating loss
carryforwards .............................. 12,425 (12,425) --
Tax benefit of stock options exercised ....... 26,433 26,433
Repurchase of common stock ................... (30) (1) (1,037) (1,038)
--------- --------- --------- --------- ---------
Balances, December 31, 1995 .................. 60,045 1,201 297,017 92,476 390,694
Net income ................................... 70,444 70,444
Stock options exercised ...................... 1,393 28 14,061 14,089
Utilization of net operating loss
carryforwards .............................. 10,027 (10,027) --
Tax benefit of stock options exercised ....... 16,947 16,947
Repurchase of common stock ................... (1,570) (32) (36,281) (36,313)
--------- --------- --------- --------- ---------
Balances, December 31, 1996 .................. 59,868 1,197 301,771 152,893 455,861
Net loss ..................................... (78,092) (78,092)
Stock options exercised ...................... 470 10 2,516 2,526
Shares issued and options assumed
in connection with business
acquisitions ............................... 313 6 26,461 26,467
Utilization of net operating loss
carryforwards .............................. 1,713 (1,713) --
Tax benefit of stock options exercised ....... 1,254 1,254
--------- --------- --------- --------- ---------
Balances, December 31, 1997 .................. 60,651 $ 1,213 $ 333,715 $ 73,088 $ 408,016
========= ========= ========= ========= =========
See notes to consolidated financial statements.
28
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(tabular amounts in thousands of dollars)
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ (78,092) $ 70,444 $ 76,448
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ........................ 20,211 13,482 8,571
Changes in deferred income taxes ..................... 18,164 5,392 (4,998)
Loss on disposal of equipment ........................ 254 82 203
Charge for purchased research & development .......... 125,200 -- --
Write-off of goodwill ................................ 5,183 -- --
Tax benefit of stock options exercised ............... 1,254 16,947 26,433
Stock compensation expense ........................... -- -- 169
Other noncash expenses ............................... -- 121 73
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Accounts receivable ............................... (27,922) (30,586) (54,222)
Notes receivable .................................. (38,084) (388) (1,637)
Inventories ....................................... 7,083 (415) (23,152)
Prepaids and other current assets ................. 2,172 (768) 227
Other assets ...................................... (1,127) (559) (3,384)
Accounts payable .................................. 1,168 3,905 5,406
Accrued liabilities ............................... 8,532 4,619 8,811
Other liabilities ................................. 720 1,207 93
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ............................................ 44,716 83,483 39,041
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ............. (32,889) (43,017) (34,638)
Proceeds from sale of equipment ........................ 46 123 26
Net proceeds from sale of interest in oil and gas
pipeline construction business ....................... -- -- 3,600
Maturities of short-term investments ................... 164,103 171,812 122,679
Purchases of short-term investments .................... (86,087) (205,774) (127,271)
Acquisitions, net of cash acquired ..................... (123,646) -- 396
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................. (78,473) (76,856) (35,208)
--------- --------- ---------
29
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(tabular amounts in thousands of dollars)
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings ................ (1,478) (1,279) (325)
Issuance of common stock .......................... 2,526 14,150 16,087
Common stock repurchases .......................... -- (36,313) (1,038)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,048 (23,442) 14,724
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................ (32,709) (16,815) 18,557
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .... 53,785 70,600 52,043
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......... $ 21,076 $ 53,785 $ 70,600
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................ $ 114 $ 140 $ 85
Income taxes .................................... 6,290 6,183 1,843
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.
On October 15, 1997, the Company acquired Open Development Corporation ("ODC").
In connection with this acquisition the Company paid $44,742,000 (including
$1,355,000 in acquisition costs) and assumed options to purchase common stock
valued at $3,289,000 for assets and in-process research and development with a
fair value of $59,040,000 and assumed liabilities of $11,009,000.
On November 3, 1997, the Company acquired Wireless Access, Inc. ("WAI"). In
connection with this acquisition the Company paid $83,779,000 (including
$1,939,000 in acquisition costs) and assumed options to purchase common stock
valued at $16,636,000 for assets and in-process research and development with a
fair value of $108,801,000 and assumed liabilities of $8,386,000.
On April 25, 1995, the Company acquired Western Multiplex Corporation ("MUX").
In connection with this acquisition, the Company paid $1,323,000 in acquisition
costs and issued common stock and assumed options to purchase common stock
valued at $27,260,000 for assets with a fair value of $31,769,000 and assumed
liabilities of $3,186,000.
See notes to consolidated financial statements.
30
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands except per share amounts)
1. Business Acquisitions
(a) CNET, Inc. Acquisition
On January 9, 1997, the Company completed the acquisition of CNET, Inc.
("CNET"), located in Plano, Texas. CNET develops and provides integrated
operational support systems, network management, traffic analysis, and radio
frequency propagation software products and services for the global wireless
communications industry. CNET licenses its products to cellular, paging and
personal communications services operators and wireless equipment manufacturers
worldwide. The purchase price of $7.7 million consisted of 369,983 shares of the
Company's common stock (including 56,620 shares issuable upon exercise of stock
options) valued at $6.5 million, $1.0 million in cash and $194,000 in
acquisition costs. The Company's consolidated financial statements for the year
ended December 31, 1997 include the operating results of CNET for the period
January 9, 1997 to December 31, 1997. The acquisition was accounted for as a
purchase business combination with the purchase price allocated, as follows:
Current assets................................... $1,752
Equipment........................................ 412
Goodwill......................................... 9,343
Other non-current assets......................... 346
Liabilities assumed.............................. (4,118)
------
$7,735
======
In the fourth quarter of 1997, Company management identified significant adverse
changes in the market size for CNET's existing products. These changes were
primarily due to fewer than anticipated end uses of the network management tool
and significant on-going development costs of the radio frequency propagation
software. These conditions led to operating results and forecasted future
results that were substantially less than had been anticipated at the time of
the Company's acquisition of CNET.
The Company has revised its projections and has determined that its projected
results would not fully support the future amortization of the goodwill balance.
In accordance with the Company's policy, management assessed the recoverability
of goodwill using an undiscounted cash flow projection based on the remaining
amortization period of six years. Based on this projection , the cumulative
undiscounted cash flow over the remaining amortization period was insufficient
to fully recover the CNET goodwill balance of $8.1 million. At December 31,
1997, the Company wrote off the short-fall of $5.2 million.
(b) Open Development Corporation Acquisition.
On October 15, 1997, the Company completed the acquisition of Open Development
Corporation ("ODC"), located in Norwood, Massachusetts. ODC is a developer of
enhanced service software and products for telecommunications providers. The
purchase price of $48.0 million consisted of 242,066 shares issuable upon
exercise of stock options of the Company's common stock valued at $3.3 million,
$43.4 million in cash and $1.3 million in acquisition costs. The Company's
consolidated financial statements for the year ended December 31, 1997 include
the operating results of ODC for the period October 15, 1997 to December 31,
1997. The acquisition was accounted for as a purchase business combination with
the purchase price allocated, as follows:
Current assets ...................................... $ 2,979
Equipment ........................................... 3,808
Goodwill ............................................ 2,381
Purchased research and development
charged to operations ............................. 44,300
31
Other intangibles ................................... 4,000
Deferred tax asset .................................. 996
Other non-current assets ............................ 576
Liabilities assumed ................................. (11,009)
--------
$ 48,031
========
(c) Wireless Access, Inc. Acquisition.
On November 3, 1997, the Company completed the acquisition of Wireless Access,
Inc. ("WAI"), located in Santa Clara, California. WAI develops and markets
two-way paging devices. The purchase price of $100.4 million consisted of
1,341,916 shares issuable upon exercise of stock options of the Company's common
stock valued at $16.6 million, $81.9 million in cash and $1.9 million in
acquisition costs. The Company's consolidated financial statements for the year
ended December 31, 1997 include the operating results of WAI for the period
November 3, 1997 to December 31, 1997. The acquisition was accounted for as a
purchase business combination with the purchase price allocated, as follows:
Current assets ............................. $ 13,076
Equipment .................................. 1,354
Purchased research and development
charged to operations .................... 80,900
Other intangibles .......................... 10,935
Deferred tax asset ......................... 2,536
Liabilities assumed ........................ (8,386)
---------
$ 100,415
=========
(d) Western Multiplex Acquisition
On April 25, 1995, the Company acquired Western Multiplex Corporation ("MUX"),
now located in Sunnyvale, California. MUX designs, manufactures and markets
products for use in point-to-point microwave communication systems. The
purchase price of $28.6 million consisted of 1,687,432 shares of the
Company's common stock (including 502,206 shares issuable upon exercise of
stock options) valued at $27.3 million and $1.3 million in acquisition costs.
The Company's consolidated financial statements for the year ended December
31, 1995 include the operating results of MUX for the period April 25, 1995 to
December 31, 1995. The acquisition was accounted for as a purchase business
combination with the purchase price allocated, as follows:
Current assets ............................. $ 7,886
Property, plant and equipment .............. 1,188
Goodwill ................................... 21,991
Deferred tax asset ......................... 704
Liabilities assumed ........................ (3,186)
--------
$ 28,583
========
Pro forma results of operations assuming the acquisitions of CNET, ODC, and WAI
had occurred as of January 1, 1996 and the acquisition of MUX had occurred as of
January 1, 1994, have not been presented because their effect on net sales and
net income would not be significant.
The amounts allocated to purchased research and development for ODC and WAI were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition, because
technological feasibility had not been established and no future alternative
uses existed.
32
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
2. Summary of Significant Accounting Policies
Description of Business
Glenayre is a worldwide provider of telecommunications equipment and related
software used in the wireless personal communications service markets including
wireless messaging, voice processing, mobile data systems and point-to-point
wireless interconnection products. The Company designs, manufactures, markets
and services its products principally under the Glenayre name. These products
include switches, transmitters, receivers, controllers, software, paging devices
and other equipment used in personal communications systems (including paging,
voice messaging, cellular, and message management and mobile data systems),
microwave communication systems and radio telephone systems.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of Glenayre
Technologies, Inc. and its subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
Operating Cycle
Assets and liabilities related to long-term contracts are included in current
assets and current liabilities in the consolidated balance sheets, as they will
be liquidated in the normal course of contract completion.
Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. These investments
generally consist of high-grade commercial paper, bank certificates of deposits,
Treasury bills, notes or agency securities guaranteed by the U.S. Government and
repurchase agreements backed by U.S. Government securities.
The Company maintains cash and cash equivalents and short-term investments with
various financial institutions. These financial institutions are large
diversified entities with operations throughout the U.S. and Company policy is
designed to limit exposure to any one institution. The Company performs periodic
evaluations of the relative credit standing of those financial institutions that
are considered in the Company's investment strategy.
Inventories
Inventories are valued at the lower of average cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally using the straight-line method based on the
estimated useful lives of the related assets (buildings, 20-40 years; furniture,
fixtures and equipment, 3-7 years).
33
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Goodwill
Goodwill represents the excess of cost over assigned fair market value of net
assets acquired and is being amortized on a straight-line basis over estimated
useful lives ranging from 7 to 30 years. Goodwill is shown net of accumulated
amortization of $15.9 million and $12.4 million at December 31, 1997 and 1996,
respectively. The carrying amount of goodwill is reviewed if facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the expected future
undiscounted cash flow of the entity acquired over the remaining amortization
period, the carrying amount of the goodwill is reduced by the estimated
shortfall. In addition, the Company assesses long-lived assets for impairment
under FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. Under those rules, goodwill
associated with assets acquired in a purchase business combination is included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
Foreign Currency Translation
The accounts of foreign subsidiaries have been translated into U.S. dollars
using the current exchange rate in effect at the balance sheet date for monetary
assets and liabilities; and for non-monetary items, the exchange rates in effect
when acquired. Revenues and expenses are translated into U.S. dollars using
average exchange rates, except for depreciation, which is translated at the
exchange rate in effect when the related assets were acquired. The resulting
gains or losses on currency translations, which are not significant, are
included in the consolidated statements of income.
Revenue Recognition
The Company recognizes revenues at the time products are shipped (except for
certain long-term contracts described below) and collection of the resulting
receivable is deemed probable by the Company. Existing customers may purchase
product enhancements and upgrades after such enhancements or upgrades are
developed by the Company. The Company has no obligations to customers after the
date products, product enhancements and upgrades are shipped, except for product
warranties as described below.
The Company recognizes fees from installation and repair services when such
services are provided to customers. Revenues derived from contractual
postcontract support services are recognized ratably over the one-year contract
period of required support.
The Company uses the percentage-of-completion method to recognize revenues on
certain long-term telecommunications hardware and installation contracts.
Earnings are accrued based on the completion of key contract performance
requirements. As long-term contracts extend over one or more years, revisions in
cost and profit estimates are reflected in the accounting period in which the
facts that require the revision become known. At the time a loss on a contract
becomes known, the entire amount of the estimated ultimate loss is accrued.
Software Costs
Product related computer software development costs are expensed as incurred.
Such costs are required to be expensed until the point of technological
feasibility is established. Costs which may otherwise be capitalized after such
point are generally not significant and are therefore expensed as incurred.
Pursuant to Emerging Issues Task Force Issue No. 97-13 ("EITF No. 97-13"),
issued in November 1997, the Company changed its accounting policy in the fourth
quarter of 1997, regarding a project to implement a new business operating
system that it began in 1996 and expects to complete in the second quarter of
1998. Previously,
34
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
substantially all direct costs relating to the project were capitalized,
including the portion related to business process reengineering. Under EITF No.
97-13, the unamortized balance of these reengineering costs as of November 20,
1997 of approximately $1,050,000, or $688,000 after tax benefit ($.01 per
share), was written off as a one-time, non-cash, cumulative effective adjustment
in the fourth quarter of 1997.
Estimated Warranty Costs
The Company warrants its telecommunications products other than certain
transmitters for one year after sale. The majority of the Company's transmitters
are warranted for two years after sale. A provision for estimated warranty costs
is recorded at the time of sale.
Stock-Based Compensation
The Company grants stock options and issues shares under option plans and an
employee stock purchase plan as described in Note 11. The Company accounts for
stock option grants and shares sold under the employee stock purchase plan in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, records compensation expense for options granted and sales
made at prices that are less than fair market value at the date of grant or
sale. No compensation expense is recognized for options granted to employees
with an exercise price equal to the fair value of the shares at the date of
grant.
Calculation of income (loss) per share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.
Income Taxes
Income taxes have been provided using the liability method in accordance with
SFAS 109, Accounting for Income Taxes.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments, trade
accounts and notes receivable, and other current and long-term liabilities
approximates their respective fair values.
Segment Reporting
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information ("SFAS 131"), which is effective for years beginning after
December 15, 1997. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore the
Company will adopt the new
35
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
requirements retroactively in 1998. Management has not completed its review of
SFAS 131, but does anticipate that the adoption of this statement may increase
the Company's reported segments.
3. Short-Term Investments
Short-term investments amounting to $78.0 million at December 31, 1996,
generally consist of highly liquid, 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 greater than three months, but not exceeding
one year. Short-term investments are stated at cost which approximates fair
market value.
4. Accounts and Notes Receivable
Accounts receivable at December 31, 1997 and 1996 consist of:
1997 1996
--------- ---------
Trade receivables .................... $ 151,949 $ 119,657
Retainage receivables ................ 1,028 1,407
Other ................................ 3,796 3,314
--------- ---------
156,773 124,378
Less: allowance for doubtful accounts. (4,542) (4,527)
--------- ---------
$ 152,231 $ 119,851
========= =========
Trade receivables at December 31, 1997 and 1996 included unbilled costs and
estimated earnings under contracts in the amount of approximately $8.3 million
and $17.9 million, respectively. Unbilled amounts are invoiced upon reaching
certain milestones.
Notes receivable at December 31, 1997 and 1996 consist of:
1997 1996
-------- --------
Current .................... $ 8,684 $ 10,236
Non-current ................ 57,092 13,407
-------- --------
65,776 23,643
Less: reserves ............. (4,042) (322)
-------- --------
$ 61,734 $ 23,321
======== ========
Concentrations of credit risk with respect to accounts receivable are generally
limited due to the large number of entities comprising the Company's customer
base. However, as of December 31, 1997 principally all of the Company's
receivables are concentrated in the telecommunications industry. Further,
approximately 72% of notes receivable as of December 31, 1997 consist of
receivables from two customers, one of which accounts for $24.8 million, 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. Approximately 90% of notes receivable are from
customers located in the U.S. with the remaining balance predominately from
customers located in the Pacific Rim and South America. Generally, all notes
receivable are secured by the related equipment.
36
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
5. Inventories
Inventories at December 31, 1997 and 1996 consist of:
1997 1996
------- -------
Raw materials .................... $25,970 $25,656
Work-in-process:
Uncompleted contracts ......... 299 3,757
Other ......................... 10,514 7,603
Finished goods ................... 12,519 13,444
------- -------
$49,302 $50,460
======= =======
6. Property, Plant and Equipment
Property, plant and equipment at December 31, 1997 and 1996 consist of:
1997 1996
--------- ---------
Land ............................. $ 3,746 $ 3,737
Buildings ........................ 41,320 36,987
Equipment ........................ 91,179 58,059
Leasehold improvements ........... 2,586 2,134
--------- ---------
138,831 100,917
Less: Accumulated depreciation ... (35,190) (20,416)
--------- ---------
$ 103,641 $ 80,501
========= =========
7. Accrued Liabilities
Accrued liabilities at December 31, 1997 and 1996 consist of:
1997 1996
------- -------
Accrued project costs ............... $13,290 $ 6,811
Accrued warranty costs .............. 3,814 3,742
Accrued sales commissions ............ 2,185 3,474
Accrued compensation and benefits .... 14,103 8,704
Accrued income taxes ................. 4,134 3,640
Other accruals ....................... 23,832 14,410
------- -------
$61,358 $40,781
======= =======
37
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
8. Income Taxes
The Company's income tax provision consists of the following:
1997 1996 1995
-------- -------- --------
Current provision:
United States Federal ................... $ 25,544 $ 12,978 $ 6,398
Charge equivalent to tax benefit of stock
option exercises ...................... 1,254 16,947 26,433
Foreign ................................. 3,802 2,432 2,658
State and local ......................... 2,160 3,032 962
-------- -------- --------
Total current ......................... 32,760 35,389 36,451
-------- -------- --------
Deferred provision (benefit):
Before valuation allowance adjustment ... (3,192) 845 1,271
Adjustment to valuation allowance ....... (1,713) (10,027) (12,425)
-------- -------- --------
Total deferred benefit ................ (4,905) (9,182) (11,154)
-------- -------- --------
Total provision ............................ $ 27,855 $ 26,207 $ 25,297
======== ======== ========
The sources of income (loss) before income taxes are presented as follows:
1997 1996 1995
-------- -------- --------
United States ...... $(65,583) $ 84,880 $ 87,919
Foreign ............ 16,034 11,771 13,826
-------- -------- --------
$(49,549) $ 96,651 $101,745
======== ======== ========
The consolidated income tax provision was different from the amount computed
using the U.S. statutory income tax rate for the following reasons:
1997 1996 1995
-------- -------- --------
Income tax provision at U.S. statutory rate ......... $(17,342) $ 33,828 $ 35,611
Reduction in valuation allowance .................... (1,713) (10,027) (12,425)
Foreign taxes at rates other than U.S. statutory rate (1,229) (1,201) (2,129)
U.S. research and experimentation credits ........... (953) (977) --
State taxes (net of federal benefit) ................ (1,456) 3,474 3,307
Non-deductible charge for purchased research and
development ....................................... 46,887 -- --
Non-deductible goodwill ............................. 3,661 1,110 933
-------- -------- --------
Income tax provision ................................ $ 27,855 $ 26,207 $ 25,297
======== ======== ========
38
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
The tax effect of temporary differences and net operating loss carryforwards
("NOLs") that gave rise to the Company's deferred tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
1997 1996
-------- --------
Assets:
U.S. net operating loss carryforwards $ 12,318 $ 24,507
State net operating loss carryforwards 2,816 1,559
Other ................................ 22,304 13,748
-------- --------
37,438 39,814
Less: Valuation allowance ............ (18,502) (5,902)
-------- --------
18,936 33,912
Liabilities ............................ (3,905) (4,249)
-------- --------
Deferred tax asset, net ................ $ 15,031 $ 29,663
======== ========
The deferred tax asset is broken down between current and noncurrent amounts in
the accompanying 1997 consolidated balance sheet according to the classification
of the related asset and liability or, in the case of tax loss carryforwards,
based on their expected utilization date.
The increase in the valuation allowance of $12.6 million during the year ended
December 31, 1997 is related primarily to the net operating loss and tax credit
carryforwards of acquired companies. The valuation allowance related
specifically to all carryforwards, including various credits, of acquired
companies is $14.7 million. The Company believes that it is more likely than not
that the net deferred tax asset recorded at December 31, 1997 will be fully
realized.
At December 31, 1997, the Company has U.S. NOLs of $34 million which expire
beginning in 2005. All of these NOLs relate to companies acquired during the
year ended December 31, 1997. The Company's ability to use the NOLs to offset
future income is subject to restrictions enacted in the United States Internal
Revenue Code of 1986 as amended (the "Code"). These restrictions limit the
Company's future use of the NOLs. As a result, the potential tax benefit of the
NOLs has been fully reserved as part of the deferred tax asset valuation
allowance.
As of December 31, 1996, the Company had net operating loss carryforwards of $70
million. All of these NOLs were utilized during the year ended December 31,
1997. Subsequent to the quasi-reorganization completed on February 1, 1988, as
described in Note 11, the benefits derived from the utilization of these 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 these 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 SFAS 96 contained in SAB 86, realized tax benefits
should be reported as a direct addition to contributed capital. Subsequently,
the Company consulted with 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 years ended December 31, 1997, 1996 and 1995 would have been reduced by
the amount of the benefit from utilization of tax net operating loss
carryforwards. Such reduction in net income (increase in net loss in 1997) would
have been $1,713,000 ($.03 per share) in 1997, $10,027,000 ($.16 per share) in
1996, and $12,425,000 ($.20 per share) in 1995.
39
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $30.3 million at December 31, 1997. Those earnings are considered
to be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation;
however, unrecognized foreign tax credit carryforwards would be available to
reduce some portion of the U.S. liability. Withholding taxes of approximately
$1.3 million would be payable upon remittance of all previously unremitted
earnings at December 31, 1997.
9. Operating Lease Commitments
The Company leases office facilities and various equipment under noncancellable
operating leases. Future minimum lease payments under noncancellable operating
leases (with minimum or remaining lease terms in excess of one year) for
calendar years subsequent to December 31, 1997 are as follows:
1998............................. $ 4,632
1999............................. 4,475
2000............................. 3,793
2001............................. 2,544
2002............................. 1,382
Thereafter....................... 2,407
--------
$ 19,233
========
Rent expense amounted to $4,302,000, $3,629,000,and $2,184,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
10. Employee Benefit Plans
(a) Postretirement Health Care Benefits
The Company provides its U.S. employees with certain health care benefits upon
retirement assuming the employees meet minimum age and service requirements. The
Company's policy is to fund benefits as they become due. The Company accounts
for retiree healthcare benefits in accordance with Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions ("SFAS 106"), which requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services.
The Company's accumulated postretirement benefit liability at December 31, 1997
and 1996 is as follows:
1997 1996
------- -------
Retirees .................................... $ 531 $ 527
Fully eligible plan participants ............ 231 227
Other active plan participants .............. 849 666
------- -------
Accumulated postretirement benefit obligation 1,611 1,420
Unrecognized gain ........................... (281) (242)
Unrecognized transition obligation .......... 763 814
------- -------
$ 1,129 $ 848
======= =======
40
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Net postretirement benefit costs for the years ended December 31, 1997, 1996 and
1995 consist of the following components:
1997 1996 1995
----- ----- -----
Service cost ...................................... $ 195 $ 190 $ 105
Interest cost on accumulated postretirement benefit
obligation ........................................ 101 109 84
Amortization of gain .............................. (14) -- (17)
Amortization of transition obligation ............. 51 51 51
----- ----- -----
$ 333 $ 350 $ 223
===== ===== =====
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation as of December 31, 1997 was 9% for 1998,
decreasing linearly each successive year until it reaches 4.75% in 2004, after
which it remains constant. A one-percentage-point increase in the assumed health
care cost trend rate for each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 and the 1997 net postretirement
health care cost by approximately 15.1% and 19.1%, respectively. The assumed
discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1997 and 1996 was 7.25%.
(b) Defined Contribution Plans
The Company has defined contribution plans covering substantially all of its
full-time employees. Under the plans, the employees can contribute a certain
percentage of their compensation and the Company matches a portion of the
employees' contribution. The Company's contributions under these plans amounted
to approximately $2,787,000, $2,210,000, and $1,830,000 during the years ended
December 31, 1997, 1996 and 1995, respectively.
11. 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) Stockholders Rights Agreement
In May 1997, the Company's Board of Directors adopted a Preferred Shares Rights
Agreement. Under the Preferred Shares Rights Agreement, the Board of Directors
declared a dividend of one Right for each outstanding share of common stock to
holders of record as of the close of business on June 12, 1997. Initially, the
Rights will automatically trade with the common stock and will not be
exercisable.
If any person or group acquires beneficial ownership of 15% or more of the
Company's outstanding common stock, or commences a tender or exchange offer that
results in that person or group acquiring such level of beneficial ownership,
each Rights holder (other than Rights owned by such person or group, which
become void) is entitled to purchase, for an exercise price of $80, 1/100th of a
share of Series A Junior Participating Preferred Stock. Each fractional
preferred share will have economic and voting terms similar to those of one
share of common stock. In the event of such a tender offer or 15% or more stock
acquisition, the Rights certificates, after a short period, will trade
separately from the common stock and will be exercisable.
41
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Each Right, under certain circumstances, entitles the holder to purchase the
number of shares of Glenayre common stock (or, at the discretion of the Board of
Directors, shares of Series A Junior Participating Preferred Stock) which have
an aggregate market value equal to twice the exercise price of $80. Under
certain circumstances, the Board of Directors may exchange each outstanding
Right for either one share of Glenayre common stock or 1/100th share of Series A
Junior Participating Preferred Stock. The Board may also redeem the Rights at a
price of $0.01 per Right.
In addition, if any person or group acquires beneficial ownership of 15% or more
of the Company's outstanding common stock and Glenayre either merges with or
into another company or Glenayre sells 50% or more of its assets or earning
power to another company, each Rights holder (other than Rights owned by such
person or group, which become void) is entitled to purchase, for an exercise
price of $80, a number of shares of the surviving company which has a market
value equal to twice the exercise price.
The Rights will expire on May 21, 2007, unless redeemed earlier.
(c) Stock Repurchase Programs
In September 1996, the Board of Directors authorized the purchase of up to 2.5
million shares of the Company's common stock. No shares under this program were
repurchased in 1996 or 1997. In December 1994, the Board of Directors authorized
the purchase of up to 1.7 million shares of the Company's common stock. The 1994
repurchase program was completed in 1996 with the repurchase of 1,684,375 shares
at a total cost of $38.6 million during the term of the program.
(d) Stock Option Plans
The Company maintains two stock option plans (the "1996 Plan" and the "1991
Plan") which were approved by the stockholders, are administered by a committee
of the Board of Directors (the "Committee") and are utilized to promote the
long-term financial interests and growth of the Company. The 1996 and 1991 Plans
authorized the grant of up to 2,200,000 and 11,475,000 shares, respectively, of
the Company's common stock to directors, officers and key employees. Options
granted have an option price of the fair market value of the Company's common
stock on the date of grant. Options under the plans expire no later than ten
years from the grant date.
Activity and price information regarding the Company's stock option plans is
summarized as follows:
Shares Price Range
------ -----------
Outstanding, December 31, 1994.............. 6,025 $1.04--$17.26
Granted..................................... 1,629 16.72 -- 47.67
Assumed..................................... 502 1.84 -- 6.60
Exercised................................... (2,828) 1.17 -- 28.22
Canceled.................................... (21) 12.74 -- 22.44
------- --------------
Outstanding, December 31, 1995 ............. 5,307 1.04 -- 47.67
Granted..................................... 1,247 20.00 -- 48.38
Exercised................................... (1,330) 1.04 -- 44.25
Canceled.................................... (32) 22.44-- 48.38
-------- --------------
Outstanding, December 31, 1996.............. 5,192 1.27-- 47.67
Granted..................................... 586 9.00 -- 21.63
Assumed..................................... 1,641 0.08 -- 23.00
Exercised................................... (470) 0.17 -- 11.11
Canceled.................................... (224) 1.13 -- 44.17
------ --------------
Outstanding, December 31, 1997.............. 6,725 $0.08--$43.59
===== ==============
42
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Of the outstanding options under the Company's stock option plans at December
31, 1997, approximately 5,206,000 are currently exercisable. The
weighted-average exercise price for the outstanding and currently exercisable
options at December 31, 1997 is $7.36 and $7.56, respectively. The
weighted-average exercise price for options granted during the year is $13.62.
In November 1996, due to a significant decline in the market price of the
Company's common stock, the Committee reduced the exercise price to $23.88 per
share on options to purchase 632,667 shares which had been awarded originally at
various dates during 1996 at $32.50 to $51.38 per share to employees of the
Company. In April 1997, as part of a broader market decline of paging industry
stocks, the market value of the Company's stock experienced a further
significant decline. In an effort to ensure retention of key technical and
management employees, the Committee reduced the exercise price to $9.00 per
share on options to purchase 3,005,228 shares which had been awarded originally
at various dates from May 1994 to March 1997 at $10.63 to $47.67 per share to
employees of the Company. The reduced exercise price and the original exercise
prices reflected the fair market value of the Company's common stock on the date
of modification and the dates of the original awards.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized. Pro forma
information regarding net income and earnings per share is required by FAS 123,
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to December 31, 1994
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions (i) for 1997: risk-free interest rates of 5.9% to
6.3%; dividend yields of 0%; a volatility factor of the expected market price of
the Company's common stock of .56; and an expected life of the option of 2 to 6
years; and (ii) for 1996 and 1995: risk-free interest rates of 5.8% to 6.2%;
dividend yields of 0%; a volatility factor of the expected market price of the
Company's common stock of .53; and an expected life of the option of 1.3 to 4
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1997 1996 1995
---- ---- ----
Pro forma income (loss) before cumulative effect of change
in accounting principle .............................................. ($88,482) $59,090 $69,526
Proforma income (loss) before cumulative effect of change in
accounting principle per share:
Income (loss) per weighted average common share ...................... ($ 1.47) $ .98 $ 1.19
Income (loss) per common share - assuming dilution ................... (1.47) .94 1.12
43
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Because FAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect is not fully reflected until 1997.
The 1996 and 1997 award modifications described above resulted in a decrease to
1996 pro forma net income of approximately $906,000 or $.01 per share assuming
dilution and an increase to the 1997 pro forma loss before cumulative effect in
accounting change of approximately $4.4 million or $.07 per share.
Contributed capital was increased $1.3 million, $16.9 million and $26.4 million
in 1997, 1996 and 1995, respectively, which represents the income tax benefits
the Company realized from stock options exercised during these periods.
(d) Employee Stock Purchase Plan
Effective July 1, 1993, the Company established the Glenayre Technologies, Inc.
Employee Stock Purchase Plan (the "ESP Plan") reserving 506,250 shares of common
stock. The purpose of the ESP Plan is to give employees an opportunity to
purchase common stock of the Company through payroll deductions, thereby
encouraging employees to share in the economic growth and success of the
Company.
All regular full-time employees of the Company are eligible to enter the ESP
Plan as of the first day of each six-month period beginning every January 1 and
July 1. The price for common stock offered under the ESP Plan for each six-month
period is equal to 90% of the average market price of the common stock for the
five trading days prior to the first day of the six-month period. For the
January 1, 1998 to June 30, 1998 period, the stock purchase price will be $9.00.
As of December 31, 1997, 172,587 shares had been issued at a purchase price
range of $5.60 to $37.07 with 333,663 shares reserved under the ESP Plan.
(e) Income (loss) per Common Share
The following table sets forth the computation of income (loss) per share:
1997 1996 1995
-------- -------- --------
Numerator:
Income (loss) before cumulative effect of change
in accounting principle ................................. $(77,404) $ 70,444 $ 76,448
Denominator:
Denominator for basic income (loss) per share -
weighted average shares ................................ 60,323 60,597 58,298
Effect of dilutive securities:
stock options .......................................... -- 2,819 4,181
-------- -------- --------
Denominator for diluted income (loss) per share-adjusted
weighted average shares and assumed conversions ........ 60,323 63,416 62,479
======== ======== ========
Income (loss) before cumulative effect of change in accounting
principle per weighted average common share ................ $ (1.28) $ 1.16 $ 1.31
======== ======== ========
Income (loss) before cumulative effect of change in accounting
principle per common share - assuming dilution ............. $ (1.28) $ 1.11 $ 1.22
======== ======== ========
44
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
12. Commitments and Contingencies
The Company entered into a $50 million bank line of credit agreement in October
1997, which expires in October 1998. Interest is computed at the (i) higher of
the bank's prime rate or the Federal funds rate plus 0.5% or (ii) the Eurodollar
rate, at the option of the Company. There is a commitment fee at a per annum
rate of 0.175% to 0.225% paid quarterly on the unused portion of the line of
credit. The line of credit requires the Company to maintain certain financial
ratios and minimum net worth. There were no borrowings under the line of credit
agreement during 1997.
In the normal course of business, the Company issues bid and performance letters
of credit which in the aggregate amounted to approximately $14 million and $20
million as of December 31, 1997 and 1996, respectively. These letters of credit
have terms from approximately 2 to 40 months. The fair value of these letters of
credit is estimated to be the same as the contract values based on the nature of
the fee arrangements with the issuing banks.
The competitive telecommunications market often requires customer financing
commitments. These commitments may be in the form of guarantees, secured debt or
lease financing. At December 31, 1997, the Company had agreements to finance and
arrange financing for approximately $92 million of paging and voice mail
products. Additionally, at December 31, 1997, 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 exercised, the financing arrangements
will be secured by the equipment sold by Glenayre.
On January 31, 1997 an amended class action complaint (the "Complaint") was
filed in the United States District Court for the Southern District of New York
against the Company and certain of its executive officers and directors alleging
the Company artificially inflated the value of its common stock during the
period February 6, 1996 to September 13, 1996 by making false and misleading
statements in its public disclosures. The Complaint was dismissed in November
1997, but the plaintiffs were granted the right to refile. The Complaint was
refiled December 19, 1997. The Complaint consolidates two lawsuits filed in the
fourth quarter of 1996. The plaintiffs seek unspecified damages based upon the
decrease in market value of the Company's stock. On February 20,1997, a
shareholder's derivative complaint (the "Shareholder's Complaint") was filed in
the United States District Court for the Southern District Court of New York
against certain current and former directors and against the Company, as a
nominal defendant, alleging that the directors breached their fiduciary
obligations to the Company by subjecting the Company to the class action
referred to above. The plaintiff seeks unspecified damages on behalf of the
Company. Management intends to defend these actions vigorously. Additionally,
the Company is currently involved in various other disputes and legal actions
related to its business operations. In the opinion of the Company, the ultimate
resolution of these actions will not have a material effect on the Company's
financial position, or future results of operations or cash flows.
13. Line of Business and Operations by Geographic Areas
The Company's operations involve one business segment: the manufacture, sale and
service of telecommunications equipment and related software used by service
providers and other wireless personal communications markets. The Company
markets and services its products in the United States, Canada and other
countries through its own direct sales organization or outside distributors and
agents. Sales to one customer amounted to approximately 11%, 15% and 16% of net
sales for 1997, 1996 and 1995, respectively.
45
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
Sales and operating profits by geographical area are measured by the locale of
the revenue-producing operations and are as follows:
Net Sales Operating Profit (Loss)
----------------------------------- ----------------------------------
Year ended December 31, 1997 1996 1995 1997 1996 1995
- ----------------------- --------- --------- --------- --------- --------- ---------
United States ...................... $ 447,459 $ 389,218 $ 321,184 $ (67,478) $ 80,093 $ 83,245
Canada ............................. 158,758 128,848 82,892 13,252 10,617 13,348
Other countries .................... 26,946 15,424 8,761 2,782 1,271 774
Eliminations ....................... (181,484) (143,244) (91,433) -- -- --
--------- --------- --------- --------- --------- ---------
Geographic totals ................ $ 451,679 $ 390,246 $ 321,404 (51,444) 91,981 97,367
========= ========= =========
Corporate, interest and other income
(expenses) and eliminations ...... 1,895 4,670 4,378
--------- --------- ---------
Income (loss) before income taxes
and cumulative effect of change
in accounting principle .......... ($ 49,549) $ 96,651 $ 101,745
========= ========= =========
The 1997 United States results include a $125.2 million charge for purchased
research and development and a $5.2 million write-off of goodwill as discussed
in Note 1.
Assets
------------------------------------
Year ended December 31, 1997 1996 1995
- ----------------------- -------- -------- --------
United States ........................ $440,668 $330,218 $298,323
Canada ............................... 43,794 49,078 39,940
Other countries ...................... 11,945 16,607 2,813
-------- -------- --------
Geographic totals .................. 496,407 395,903 341,076
General corporate assets ............. 9,411 125,307 106,504
-------- -------- --------
Consolidated totals .................. $505,818 $521,210 $447,580
======== ======== ========
Net sales include product transfers and service revenues between geographic
areas and are generally priced to recover cost plus an appropriate markup for
profit. These are eliminated in consolidation as follows:
Year ended December 31, 1997 1996 1995
- ----------------------- -------- -------- --------
Product transfers - Canada .............. $125,139 $101,652 $ 65,703
Product transfers - United States ....... 495 -- --
Service revenues:
Canada ................................ 33,619 27,196 17,189
Other countries ....................... 22,231 14,396 8,541
-------- -------- --------
Total eliminations .................. $181,484 $143,244 $ 91,433
======== ======== ========
Export sales from the United States by geographic areas to unaffiliated
customers are as follows:
Year ended December 31, 1997 1996 1995
- ----------------------- -------- -------- --------
Canada ............................ $ 10,578 $ 16,270 $ 15,272
Middle East ....................... 3,882 7,617 16,930
Pacific Rim ....................... 151,716 92,109 54,705
Europe ............................ 30,667 16,354 17,793
South America ..................... 29,523 12,211 5,430
Other ............................. 832 9,718 3,723
-------- -------- --------
Total export sales .............. $227,198 $154,279 $113,853
======== ======== ========
46
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands except per share amounts)
14. Interim Financial Data--Unaudited
Quarters Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
1997
Net sales ............................................. $105,771 $110,172 $112,122 $123,614
Gross profit........................................... 55,221 59,601 59,684 59,380
Income (loss) before cumulative effect of change
in accounting principle.............................. 13,446 14,960 15,034 (120,844)
Net income (loss) ..................................... 13,446 14,960 15,034 (121,532)
Income (loss) per weighted average common share:
Before cumulative effect of change in accounting
principle.......................................... 0.22 0.25 0.25 (2.00)
Net income (loss) ................................... 0.22 0.25 0.25 (2.01)
Income (loss) per common share - assuming dilution:
Before cumulative effect of change in accounting
principle.......................................... 0.22 0.24 0.24 (2.00)
Net income (loss) ................................... 0.22 0.24 0.24 (2.01)
1996
Net sales ............................................. $89,378 $105,085 $91,572 $104,211
Gross profit........................................... 49,611 59,253 47,742 53,172
Net income............................................. 17,076 22,863 13,801 16,704
Income per weighted average common share............... 0.28 0.38 0.23 0.28
Income per common share - assuming dilution............ 0.27 0.36 0.22 0.27
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with SFAS 128. The results for the fourth quarter 1997 were
impacted by a $125.2 million charge for purchased research and development and a
$5.2 million write-off of goodwill as discussed in Note 1.
47
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 10 through 13 are incorporated herein by reference to the sections
captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,"
"EXECUTIVE OFFICERS OF THE REGISTRANT," "ELECTION OF DIRECTORS,"
"COMPENSATION--Compensation of Directors," "COMPENSATION--Executive
Compensation," "COMPENSATION--Employment Agreements," "COMPENSATION--
Compensation Committee Interlocks and Insider Participation," "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held May 21, 1998.
48
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
A. Index to Financial Statements and Supplemental Schedule
(i) Financial Statements: Page
----
Report of Ernst & Young LLP Independent Auditors ........................ 25
Consolidated Balance Sheets at December 31, 1997 and 1996 ............... 26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ...................................... 27
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 .......................... 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ...................................... 29
Notes to Consolidated Financial Statements .............................. 31
(ii) Supplemental Schedules:
(For the years ended December 31, 1997, 1996 and 1995)
Schedule II - Valuation and Qualifying Accounts ......................... 53
All other schedules are omitted because they are not applicable or not required.
B. Reports on Form 8-K
During the three months ended December 31, 1997, the Company filed a
Current Report on Form 8-K dated November 3, 1997. Under Item 2, the
Company reported the acquisition of 100% of the outstanding common and
preferredF stock of Wireless Access, Inc., a California corporation.
49
C. Exhibits
Exhibit
Number Description
2.1 Acquisition Agreement among Glenayre, WAI Acquisition Corp. And
Wireless Access, Inc., dated October 1, 1997 ("WAI Acquisition
Agreement") was filed as Exhibit 2 to the Registrant's Current Report
on Form 8-K filed November 11, 1997 and is incorporated herein by
reference.
3.1 Composite Certificate of Incorporation of Glenayre reflecting the
Certificate of Amendment filed December 8, 1995 was filed as Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and is incorporated herein by reference.
3.2 Restated by-laws of Glenayre effective June 7, 1990, as amended
September 21, 1994 was filed as Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and is
incorporated herein by reference.
4.1 Preferred Shares Rights Agreement dated May 21, 1997 between the
Company and American Stock Transfer & Trust Company, incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A, File No. 0-15761.
4.2 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of the Company filed May
23, 1997 was filed as Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997 and is incorporated
herein by reference.
10.1 Agreement, dated December 31, 1996, which terminates the Employment
Agreement, dated December 3, 1990 between the Company and Clarke H.
Bailey was filed as Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and is incorporated
herein by reference.*
10.2 Employment Agreement, dated June 21, 1995, between the Company and
Ramon D. Ardizzone was filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and
is incorporated herein by reference.*
10.3 Amendment, dated December 8, 1995, to the Employment Agreement dated
June 21, 1995 between the Company and Ramon D. Ardizzone was filed as
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and is incorporated herein by reference.*
10.4 Second Amendment, dated December 12, 1996 to the Employment Agreement
dated June 21, 1995 between the Company and Ramon D. Ardizzone was
filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and is incorporated herein by
reference.*
10.5 Termination Agreement, dated September 30, 1997, between the Company
and Ramon D. Ardizzone was filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and is incorporated herein by reference.*
10.6 Employment Agreement, dated August 27, 1996 between the Company and
Gary B. Smith was filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996 and is
incorporated herein by reference.*
50
10.7 Amendment, dated December 12, 1996, to the Employment Agreement dated
August 27, 1996 between the Company and Gary B. Smith was filed as
exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
10.8 Second Amendment, dated May 21, 1997, to the Employment Agreement dated
August 27, 1996 between the Company and Gary B. Smith was filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.*
10.9 Employment Agreement, dated May 21, 1997 between the Company and
Stanley Ciepcielinski was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and
is incorporated herein by reference.*
10.10 Employment Agreement, dated October 1, 1997, between the Company and
Greg L. Reyes was filed as Exhibit G to the WAI Acquisition Agreement
filed as Exhibit 2 to the Registrant's Current Report on Form 8-K filed
November 11, 1997 and is incorporated herein by reference.*
10.11 Executive Severance Benefit Agreement, dated May 21, 1997, between the
Company and Lee M. Ellison (the "Ellison Agreement") was filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.
Executive Severance Benefit Agreements, as amended, between the Company
and individually with Beverley W. Cox dated February 1, 1995 and Eugene
C. Pridgen dated December 16, 1996 and Executive Severance Benefit
Agreements, dated November 1997, between the Company and individually
with Dan H. Case, James W. Marion, Mats Gerschman, and Gregory L. Reyes
are identical, in all material respects, with the Ellison Agreement and
are not filed as exhibits.*
10.12 Termination Agreement, dated March 18, 1997 between the Company and
Kenneth C. Thompson was filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
is incorporated herein by reference.*
10.13 Glenayre Electronics, Inc. Deferred Compensation Plan was filed as
exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
10.14 Glenayre Management By Objective Plan for the year ended December 31,
1996 was filed as Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and is incorporated
herein by reference.*
10.15 Glenayre Technologies, Inc. Management By Objective Plan for the year
ended December 31, 1997 is filed herewith.*
10.16 Glenayre 1996 Incentive Stock Plan, as amended April 18, 1997, was
filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and is incorporated herein by
reference.*
10.17 Glenayre Long-Term Incentive Plan, as amended and restated effective
May 26, 1994, was filed as Exhibit 4 to the Registrant's Form S-8 filed
June 16, 1994 and is incorporated herein by reference.*
10.18 Credit Agreement, dated October 31, 1997, between Glenayre Electronics,
Inc. and NationsBank, N.A. as Agent to the Issuers.#
21 Subsidiaries of the Company is filed herewith.
23 Consent of Ernst & Young LLP is filed herewith.
27.1 Financial Data Schedule for the year ended December 31, 1997. (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.)
51
27.2 Restated Financial Data Schedule for the year ended December 31, 1995.
(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.)
27.3 Restated Financial Data Schedule for the three months ended March 31,
1996. (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.)
27.4 Restated Financial Data Schedule for the six months ended June 30,
1996. (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.)
27.5 Restated Financial Data Schedule for the nine months ended September
30, 1996. (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.)
27.6 Restated Financial Data Schedule for the year ended December 31, 1996.
(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. )
27.7 Restated Financial Data Schedule for the six months ended June 30,
1997. (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.)
27.8 Restated Financial Data Schedule for the nine months ended September
30, 1997. (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.)
99 Cautionary Statement under safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 is filed herewith.
- ----------
* Management Contract
# Indicates that a portion of the document is confidential and has been
omitted and filed separately with the Securities and Exchange Commission in
connection with a request for confidential treatment of such omitted
material.
52
GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1996 and 1995
(dollars in thousands)
Column A Column B Column C Column D Column E
-------- -------- ------------------------- -------- --------
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------- ---------- -----------
Accounts Receivable - Allowance for
Doubtful Accounts :
Year ended December 31, 1997 $ 4,527 $ 1,155 $ 1,192 $ 2,332 $ 4,542
Year ended December 31, 1996 4,072 878 5 428 4,527
Year ended December 31, 1995 3,148 505 483 64 4,072
Notes Receivable - Fair Market
Valuation Allowance:
Year ended December 31, 1997 322 -- (318) -- 4
Year ended December 31, 1996 394 (73) -- -- 322
Year ended December 31, 1995 442 (48) -- -- 394
Notes Receivable - Allowance for
Doubtful Accounts:
Year ended December 31, 1997 -- 120 3,918(1) -- 4,038
Valuation Allowance on
Inventories:
Year ended December 31, 1997 4,365 2,476 1,037 2,367 5,511
Year ended December 31, 1996 4,705 1,904 -- 2,244 4,365
Year ended December 31, 1995 3,153 2,270 (611) 107 4,705
- ----------
(1) Includes amounts reclassified from previously established accrued
liabilities and reserves and collected fee offsets.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 27, 1998.
GLENAYRE TECHNOLOGIES, INC.
By /s/ Gary B. Smith
--------------------------
Gary B. Smith
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1998:
/s/ Ramon D. Ardizzone /s/ Clarke H. Bailey
- ---------------------------------- --------------------------
Ramon D. Ardizzone Clarke H. Bailey
Chairman of the Board and Director Director
/s/ Gary B. Smith /s/ Donald S. Bates
- ---------------------------------- --------------------------
Gary B. Smith Donald S. Bates
President, Chief Executive Officer Director
(Principal Executive Officer)
and Director
/s/ Peter W. Gilson
--------------------------
Peter W. Gilson
/s/ Stan Ciepcielinski Director
- ----------------------------------
Stan Ciepcielinski
Executive Vice President, Chief Financial Officer
(Principal Financial Officer), Treasurer /s/ John J. Hurley
and Director --------------------------
John J. Hurley
Director
/s/ Billy C. Layton
- ----------------------------------
Billy C. Layton /s/ Stephen P. Kelbley
Vice President, --------------------------
Controller and Chief Accounting Officer Stephen P. Kelbley
(Principal Accounting Officer) Director
/s/ Horace H. Sibley
--------------------------
Horace H. Sibley
Director
54
Exhibit
Number Description
2.1 Acquisition Agreement among Glenayre, WAI Acquisition Corp. And
Wireless Access, Inc., dated October 1, 1997 ("WAI Acquisition
Agreement") was filed as Exhibit 2 to the Registrant's Current Report
on Form 8-K filed November 11, 1997 and is incorporated herein by
reference.
3.1 Composite Certificate of Incorporation of Glenayre reflecting the
Certificate of Amendment filed December 8, 1995 was filed as Exhibit
3.1 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and is incorporated herein by reference.
3.2 Restated by-laws of Glenayre effective June 7, 1990, as amended
September 21, 1994 was filed as Exhibit 3.5 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 and is
incorporated herein by reference.
4.1 Preferred Shares Rights Agreement dated May 21, 1997 between the
Company and American Stock Transfer & Trust Company, incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A, File No. 0-15761.
4.2 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of the Company filed May
23, 1997 was filed as Exhibit 4.2 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1997 and is incorporated
herein by reference.
10.1 Agreement, dated December 31, 1996, which terminates the Employment
Agreement, dated December 3, 1990 between the Company and Clarke H.
Bailey was filed as Exhibit 10.5 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996 and is incorporated
herein by reference.*
10.2 Employment Agreement, dated June 21, 1995, between the Company and
Ramon D. Ardizzone was filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and
is incorporated herein by reference.*
10.3 Amendment, dated December 8, 1995, to the Employment Agreement dated
June 21, 1995 between the Company and Ramon D. Ardizzone was filed as
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and is incorporated herein by reference.*
10.4 Second Amendment, dated December 12, 1996 to the Employment Agreement
dated June 21, 1995 between the Company and Ramon D. Ardizzone was
filed as Exhibit 10.10 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996 and is incorporated herein by
reference.*
10.5 Termination Agreement, dated September 30, 1997, between the Company
and Ramon D. Ardizzone was filed as Exhibit 4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
and is incorporated herein by reference.*
10.6 Employment Agreement, dated August 27, 1996 between the Company and
Gary B. Smith was filed as Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996 and is
incorporated herein by reference.*
10.7 Amendment, dated December 12, 1996, to the Employment Agreement dated
August 27, 1996 between the Company and Gary B. Smith was filed as
exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
55
10.8 Second Amendment, dated May 21, 1997, to the Employment Agreement dated
August 27, 1996 between the Company and Gary B. Smith was filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.*
10.9 Employment Agreement, dated May 21, 1997 between the Company and
Stanley Ciepcielinski was filed as Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 and
is incorporated herein by reference.*
10.10 Employment Agreement, dated October 1, 1997, between the Company and
Greg L. Reyes was filed as Exhibit G to the WAI Acquisition Agreement
filed as Exhibit 2 to the Registrant's Current Report on Form 8-K filed
November 11, 1997 and is incorporated herein by reference.*
10.11 Executive Severance Benefit Agreement, dated May 21, 1997, between the
Company and Lee M. Ellison (the "Ellison Agreement") was filed as
Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and is incorporated herein by reference.
Executive Severance Benefit Agreements, as amended, between the Company
and individually with Beverley W. Cox dated February 1, 1995 and Eugene
C. Pridgen dated December 16, 1996 and Executive Severance Benefit
Agreements, dated November 1997, between the Company and individually
with Dan H. Case, James W. Marion, Mats Gerschman, and Gregory L. Reyes
are identical, in all material respects, with the Ellison Agreement and
are not filed as exhibits.*
10.12 Termination Agreement, dated March 18, 1997 between the Company and
Kenneth C. Thompson was filed as Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and
is incorporated herein by reference.*
10.13 Glenayre Electronics, Inc. Deferred Compensation Plan was filed as
exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996 and is incorporated herein by reference.*
10.14 Glenayre Management By Objective Plan for the year ended December 31,
1996 was filed as Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and is incorporated
herein by reference.*
10.15 Glenayre Technologies, Inc. Management By Objective Plan for the year
ended December 31, 1997 is filed herewith.*
10.16 Glenayre 1996 Incentive Stock Plan, as amended April 18, 1997, was
filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997 and is incorporated herein by
reference.*
10.17 Glenayre Long-Term Incentive Plan, as amended and restated effective
May 26, 1994, was filed as Exhibit 4 to the Registrant's Form S-8 filed
June 16, 1994 and is incorporated herein by reference.*
10.18 Credit Agreement, dated October 31, 1997, between Glenayre Electronics,
Inc. and NationsBank, N.A. as Agent to the Issuers.#
21 Subsidiaries of the Company is filed herewith.
23 Consent of Ernst & Young LLP is filed herewith.
27.1 Financial Data Schedule for the year ended December 31, 1997. (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.)
27.2 Restated Financial Data Schedule for the year ended December 31, 1995.
(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.)
27.3 Restated Financial Data Schedule for the three months ended March 31,
1996. (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.)
27.4 Restated Financial Data Schedule for the six months ended June 30,
1996. (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.)
27.5 Restated Financial Data Schedule for the nine months ended September
30, 1996. (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.)
27.6 Restated Financial Data Schedule for the year ended December 31, 1996.
(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. )
27.7 Restated Financial Data Schedule for the six months ended June 30,
1997. (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.)
27.8 Restated Financial Data Schedule for the nine months ended September
30, 1997. (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.)
99 Cautionary Statement under safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 is filed herewith.
- ----------
* Management Contract
# Indicates that a portion of the document is confidential and has been
omitted and filed separately with the Securities and Exchange Commission in
connection with a request for confidential treatment of such omitted
material.