-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WAAp4xej6isnzEg5dRnhGJNXjcHxyWQGPQEPmiecNkp8psJK41HnILYPftP6yFIJ FzjB9j5Huv8jiosaQ9DsJg== 0000950168-96-000522.txt : 19960329 0000950168-96-000522.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950168-96-000522 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLENAYRE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000808918 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 980085742 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15761 FILM NUMBER: 96539894 BUSINESS ADDRESS: STREET 1: 5935 CARNEGIE BOULEVARD CITY: CHARLOTTE STATE: NC ZIP: 28209 BUSINESS PHONE: 7045530038 FORMER COMPANY: FORMER CONFORMED NAME: N W GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP INC DATE OF NAME CHANGE: 19880221 FORMER COMPANY: FORMER CONFORMED NAME: NU WEST GROUP LTD DATE OF NAME CHANGE: 19871126 10-K405 1 GLENAYRE TECHNOLOGIES INC. 10-K405 #42633.1 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 (FEE REQUIRED) For the fiscal year ended DECEMBER 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 SHARES, $.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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 8, 1996 was approximately $1.9 billion. The number of shares of the Registrant's common stock outstanding on March 8, 1996 was 60,688,922. DOCUMENTS INCORPORATED BY REFERENCE: Document Location in Form 10-K Proxy Statement for 1996 Annual Part III Meeting of Stockholders EXCEPT AS NOTED, THE INFORMATION IN THIS FORM 10-K HAS BEEN ADJUSTED TO REFLECT A 3-FOR-2 STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN THE FORM OF A 50% STOCK DIVIDEND DISTRIBUTED JUNE 19, 1995 TO STOCKHOLDERS OF RECORD ON JUNE 5, 1995 AND TO REFLECT A 3-FOR-2 STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN THE FORM OF A 50% STOCK DIVIDEND DISTRIBUTED DECEMBER 29, 1995 TO STOCKHOLDERS OF RECORD ON DECEMBER 22, 1995. 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 leading worldwide supplier of telecommunications equipment and related software used by service providers in the paging and other wireless personal communications markets. The Company designs, manufactures, markets, and services its products principally under the Glenayre name. These products include switches, transmitters, receivers, controllers, software 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. In 1992, the Company acquired the telecommunications equipment and related software business (the "GEMS Business" or "GEMS") of Glentel Inc., a Canadian corporation ("GEL"), for a combination of cash and common stock of the Company (the "Acquisition"). Prior to the Acquisition , the Company had been in the real estate development business and in oil and gas pipeline construction. 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, in order to focus exclusively on the telecommunications industry. In October 1993, the Company sold its interest in the oil and gas pipeline construction operation. The sale of the Company's remaining parcels of undeveloped real estate were completed as of June 30, 1994. On April 25, 1995 the Company completed the acquisition of Western Multiplex Corporation ("MUX"), located in Belmont, 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 product families are grouped in either (i) Wireless Messaging, or (ii) Voice and Data Technologies categories. Additionally, Glenayre provides service and support to its products. WIRELESS MESSAGING PRODUCTS Glenayre's Wireless Messaging products, accounted for approximately 78%, 80% and 81% of net sales for 1995, 1994, and 1993, respectively. Included in this group are paging and narrowband personal communication service products. Major paging products include switches, transmitters, receivers, controllers and related software. 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 2 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 to activate the subscriber's pager (a pocket-sized radio receiver carried by the subscriber). Telephone calls for a subscriber are received by a paging switch. A network of transmitters, that broadcasts a signal over a specific geographic area, then receives information from the paging switch through the controller and a radio signal is sent by the transmitters via antennae to the subscriber's pager. The transmitters manufactured by Glenayre are specifically designed to simulcast, which is the transmission of the same signal over two or more transmitters on the same channel at the same time in an overlap area, resulting in superior voice and data quality and coverage area. The radio signal causes the pager to emit a beep or to vibrate and to provide the subscriber with information from the caller in the form of a voice, tone, numeric or alphanumeric message. A pager has an advantage over a landline telephone in that the pager's reception is not restricted to a single location, and has an advantage over a cellular portable telephone in that a pager is smaller, has a much longer battery life, has excellent coverage, and is less expensive to use. Historically, the principal disadvantage of traditional paging service in comparison to landline telephones or cellular portable telephones has been that paging provided only one-way communication capabilities. However, this limitation may have been overcome in the United States as a result of the auction in 1994 by the FCC of nationwide and regional licenses for designated Narrowband Personal Communication Services ("NPCS") radio frequencies or spectrum to service providers. All of the nationwide license holders and most of the regional license holders are current Glenayre customers, directly or indirectly. Additional licenses may be auctioned in 1996. The cost of the licenses to the NPCS auction winners in 1994 was approximately $1.0 billion. The FCC anticipates that these NPCS licenses will be used to provide such new services as pager location, two-way acknowledgment paging, advanced voice paging and data services. The NPCS radio frequencies or spectrum are located at three separate points within the total radio spectrum, at 901-902 MHz, 930-931 MHz and 940-941 MHz. Initially, the radio frequencies located at 930-931 MHz and 940-941 MHz have been designated for outbound message transmission (to the pager) and the 901-902 MHz have been designated response channels (from the pager). This application is similar to traditional paging except that these license holders have been granted wider frequency band width permitting the user to transmit substantially more information. The NPCS nationwide licenses cover all fifty states, the District of Columbia, American Samoa, Guam, the Northern Marianas Islands, Puerto Rico and the United States Virgin Islands. These licenses are divided into 50 KHz paired and unpaired channel categories. Paired channels permit both outbound and inbound signals while unpaired channels are limited to only outbound signals. Currently, there are 11 nationwide licenses and 6 additional licenses which were auctioned on a regional basis that cover the nation. Remaining to be auctioned are 7 licenses available on a major trading area ("MTA") basis and 2 licenses on a basic trading area ("BTA") basis. The FCC has imposed infrastructure construction or buildout requirements on all NPCS license holders. Each NPCS license holder must establish a minimum service availability for at least 37.5% of the population in its geographic region within five years after receiving the license. After ten years, each NPCS license holder must make the service available to at least 75% of the area's population. If a NPCS license holder fails to achieve these build-out requirements, it risks cancellation by the FCC of its NPCS license and a forfeiture of any auction monies paid. Glenayre's product offering to the NPCS market includes a systems approach similar to its existing paging product line. Glenayre offers its customers an end-to-end solution for NPCS applications. The Company has developed new technology-based products with enhanced architecture and technology from its existing paging systems to accommodate the advanced services available through NPCS. This systems approach includes full product lines of radio frequency network controllers, linear transmitters, satellite receivers, fixed receivers (to receive the response message from the end-user) and switches. The Company will begin shipment of its NPCS products in the first half of 1996 to various beta test sites, based on product development schedules and the build-out requirements of the NPCS license holders. 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 service, including voice, tone, numeric (telephone number display) or alphanumeric messaging (words and numbers display). 3 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 NPCS switch is capable of being upgraded to support new NPCS 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, and has adopted networking specifications developed by the Personal Communications Industry Association ("PCIA"). 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. RADIO FREQUENCY ("RF") EQUIPMENT - TRANSMITTERS AND RECEIVERS. Transmitters are available in frequency ranges of 30MHz to 960MHz and in power levels of 4 watts to 500 watts. 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-T9000 series of transmitters are designed to transmit both ReFLEX and InFLEXion NPCS formats. The design of the GL-T9000 transmitter employs new and advanced techniques including digital signal processing ("DSP") modulation and linearization. With the T9000 a service provider can start at a low power level and upgrade to a higher power level in the field. This minimizes initial investment while still allowing the service provider to grow as the subscriber base grows. The GL-R9000 series of receivers detects the responses sent back from the two-way NPCS 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 antennas at a site). Depending upon frequency, antenna height, topography and power, Glenayre transmitter 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 high speed simulcast networks. 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 three products for transmitter control: (i) the GL5000 control system is a medium-feature transmitter control system used primarily in international markets; (ii) the QT1000 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; and (iii) the newest product, the GL-C2000, supports all existing digital paging formats and will support all currently proposed "high speed" paging and messaging formats with data transmission rates from 200 to 6,400 bits per second when coupled with the appropriate Glenayre RF hardware. 4 Glenayre has extended the technology of its GL-C2000 transmitter controller to control the Glenayre NPCS transmitter. The base station controller has voice and high-speed data capabilities and flexible linking options. Additionally, Glenayre's RF Director is the central control point for a two-way NPCS 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. MESSAGE MANAGEMENT SYSTEMS. Glenayre's message management systems and operator assisted paging systems combine its paging switch hardware with its proprietary software. Glenayre's GL3900S and GL3900A 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 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. VOICE AND DATA TECHNOLOGIES PRODUCTS Glenayre's Voice and Data Technologies products accounted for approximately 12%, 10% and 9% of net sales for 1995, 1994 and 1993, respectively. Included in this group are voice messaging, microwave communication and radio telephone products. Voice Messaging The MVP, a switching product and enhanced services platform designed by Glenayre primarily for paging, cellular and personal communication systems, allows subscribers both to send and receive voice and data messages to and from other subscribers, or to receive these messages from non-subscribers. The MVP is offered in four sizes. The MVP-E, a small starter system, is capable of supporting from 100 to 10,000 subscribers. The medium sized MVP supports 500 to 35,000 subscribers. The large MVP-MAP (Multi Application Platform) accommodates up to 50,000 subscribers. For systems requiring substantial capacity, the MVP-PCS can accommodate in excess of 200,000 subscribers. The MVP is designed to meet the reliability requirements of, and is marketed to, telecommunication service providers. The MVP has the flexibility to provide multiple services to multiple customers simultaneously. In addition to its current applications, the MVP switch is presently approved as a voice switching platform by vendors of cellular, second generation cordless telephones ("CT-2") and broadband personal communication services products in several countries. The MVP, together with the Company's Constant Touch software, provides "one-number access," allowing a subscriber to direct communications to his choice of receiving devices. In addition, it combines the uses of different types of existing communication services such as paging, voice mail, cellular telephone, PCS, CT-2 and facsimile. When a user leaves a voice mail message or facsimile in a subscriber's voice mail box, the MVP switch can automatically locate the subscriber, thereby providing notification of the message. The MVP also allows a subscriber to manage telephone calls using a variety of receiving devices. With the "Meet-Me" feature, a telephone call to a subscriber can be routed through the MVP switch where it can be held while the subscriber is immediately notified through a paging device. The subscriber can then choose to accept the call through a wireline or wireless telephone and be connected immediately. Through the "Direct Call with Call Screening" feature, the MVP answers the call, and the caller is asked to record the caller's name and stay on hold while the subscriber is located through a page or telephone call. Once located, the subscriber has numerous options, including connecting with the waiting call, sending the caller to a voice mail box or another telephone number, disconnecting, or listening to the caller's voice message. Another feature enhancement is "Find-Me," through which the MVP will call a pager, cellular phone or wireline telephone either simultaneously or in a sequence predetermined by the subscriber, to notify the subscriber of an incoming call. In addition to the subscriber's ability to determine these notification priorities, the MVP also allows a subscriber to program a daily schedule of such call destinations, whereby the MVP routes the call to the destinations defined by the subscriber based on the time and day of the week. Finally, the MVP also has integrated facsimile capabilities which can receive an incoming facsimile 5 and notify a subscriber of receipt. The subscriber can select or preprogram the location for fax delivery, forward the fax to another subscriber or broadcast the fax to individuals on a distribution list. The MVP provides an advanced platform as a service enhancement node for integration into an intelligent network. Microwave Communication Through its 1995 acquisition of Western Multiplex Corporation ("MUX"), the Company designs, manufactures and markets products for use in point-to-point microwave communications systems. These products include the microwave radios themselves, both in analog and digital transmission formats, and analog baseband products. In 1994 and 1995, the FCC awarded a number of new PCS licenses for the provision of enhanced services. Encumbants currently utilizing these frequencies will be forced to relocate their existing systems thus providing MUX with additional market opportunities. MUX also provides cellular and PCS operators with wireless cell site and base station interconnect infrastructure. MUX'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. Radio Telephone In past years, the Company has focused on wide-area mobile radio telephone systems utilizing its Improved Mobile Telephone Service (IMTS) technology. This technology has essentially been replaced by the application of cost-effective cellular systems in the markets previously served by IMTS. The Company, utilizing internally developed digital technology, has refocused its products to meet the basic telephone needs of rural areas around the world. Its initial product offers a digital wireless telephone link that provides high quality, full duplex voice and data operation on a single frequency that is capable of operating at distances of up to approximately 45 miles. This product is targeted to serve both remote residential and business subscriber requirements. 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. These revenue generating service activities of Glenayre accounted for approximately 10% of net sales in each of the years 1995, 1994 and 1993. 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; London, England; and Singapore. The Glenayre Care Group, the majority of which are technical specialists, maintain the Company's installed base of equipment and are equipped with an automated field service management system to provide more responsive customer service. 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, and cellular carriers. Internationally, customers include public telephone and telegraph companies, as well as private telecommunication service providers. Sales to a single customer totaled approximately 16% and 13% of 1995 and 1994 net sales, respectively. Sales to two customers were each approximately 10% of 1993 net sales. Although a single customer accounted for more than of 10% of the Company's net sales for the previous two years, the Company believes that the largest amount of business from any single customer should generally change from year to year, resulting from the timing of the development and expansion of its existing customers' and new customers' systems. 6 MARKETING AND SALES The Company markets its products and services in the United States and internationally primarily through a direct sales force. The Company also utilizes distributors and agents to sell its products in certain countries and geographic regions to markets outside of the Company's core markets. The Company maintains sales offices throughout the United States. In an effort to better serve its international customers, Glenayre has established sales offices in various locations worldwide, including Manila, Philippines; New Delhi, India; Singapore; 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; and Seoul, Korea. 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. Additionally, on a selective basis in certain countries and regions, Glenayre utilizes external distributors and agents. See Note 14 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 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. INTERNATIONAL BUSINESS RISKS Approximately 35% of 1995 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 1995 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 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), real-time software, high-speed digital logic, very large scale integrated circuits (VLSI), radio frequency and data network design. 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 products as well as the next generation of 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; Quincy, Illinois; Atlanta, Georgia and Belmont, California facilities. Total research and development costs for the Company were $24.0 million, $16.0 million and $11.8 million or 7.5%, 9.3% and 8.7% of net sales for 1995, 1994 and 1993, respectively. 7 NEW PRODUCTS AND UPGRADES The principal new products and enhancements introduced by the Company in 1995 related to its Wireless Messaging products included the following: (i) Digital signal processing based, low-profile transmitters to support high-speed paging in multiple frequency bands (including the VHF, UHF, 280 MHz and 330 MHz bands) and at multiple output power levels; (ii) advanced features for paging switches provided by software and hardware updates including support for the European ERMES over-the-air protocol, roaming subscribers, voice mailbox improvements and new alphanumeric input capabilities; (iii) increased voice and subscriber capacity for paging switches; (iv) advanced redundancy capability for high speed control systems; (v) support for extended alarming and interfacing on the Company's high speed control product; (vi) a receiver to support NPCS response channel reception in the 901 MHz band; (vii) increased capacity to 300 operators in the Company's Operator Assisted Dispatch system GL 3900; The principal new products and enhancements introduced by the Company in 1995 related to its Voice and Data Technologies products include the following: (i) new software version for the MVP product family which provided enhancements to the Constant Touch service and provided feature enhancements for paging and cellular users; (ii) released new public switch telephone network interface capabilities (SS7) connectivity for the MVP system which provides signaling and messaging protocols for the GSM, ESMR and AIN networks; (iii) released the Terminal Server product for the MVP system providing access for personal computers in a dial up basis to the local area network of the MVP system for sending paging messages; (iv) introduced the System Activation and Administration Module (SAAM) which provides a Graphical User Interface (GUI) via a windows application for administration of the MVP subscriber records; (v) completed development and testing of interface to three Short Message Service Systems, Aldiscon, CMG and Nokia; (vi) released software to support AMIS Analog Networking for messages between multiple vendors' voice mail systems; and (vii) introduction of a new licensed microwave digital radio at 6 GHz. MANUFACTURING Glenayre currently manufactures its products at Company facilities in Quincy, Illinois; Vancouver, British Columbia, Canada; and Belmont, California. 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. Substantially all of the components and parts used in the Company's products are available from multiple sources. In those instances where components are purchased from a single source, the supplier is reviewed frequently for stability and performance. Additionally, as necessary, the Company purchases sufficient quantities of certain components which have long-lead requirements in the world market. The Company ensures that all products are tested, tuned and verified prior to shipment to the customer. The Company has adopted a "Total Quality Management" philosophy 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. 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. In 1995, the Company completed expansions of approximately 68,000 square feet and 50,000 square feet at its Quincy and Vancouver facilities, respectively, in order to accommodate the foreseeable short-term growth in its business. Additionally, the Company is currently evaluating additional facility requirements which may be necessary to accommodate growth in the Company's business beyond 1996. 8 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 some 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 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 trademark "Glenayre" to be a valuable asset. The "Glenayre" trademark is protected through trademark registrations in the United States and various countries throughout the world. BACKLOG The Company's firm backlog at December 31, 1995 and 1994 was approximately $102 million and $67 million, respectively. The Company's growth in its backlog is due to expansion of sales coverage, market growth and increased acceptance of the Company's products. The orders supporting the Company's backlog amounts consist of signed purchase orders and, in general, the Company expects to commence shipment of these orders within six months of the respective backlog dates. 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 services and new markets. The wireless personal communications industry includes equipment manufacturers that serve many of the same personal communications services 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 industry, certain of which are larger and have significantly greater resources than the Company, could elect to enter into the Company's markets and compete with Glenayre's products. Competition in Glenayre's markets is based upon quality, product features, service and price. While equipment and systems of the type sold by Glenayre represent less than one-half 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 products and service 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. 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 paging switches, paging 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 competitors in this market, which are 9 Motorola, Inc. ("Motorola") and L M Ericsson Telephone Company ("Ericsson"). 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. The Company believes sales of transmitter and controllers products by the Company exceeded sales of such products by Motorola in each of the last three years. The Company believes that Motorola remains a substantial competitor with a significant market share in this market. Other competitors in this market include Ericsson and smaller manufacturers that primarily serve small local paging service providers. For sales of voice messaging products, the Company competes in the United States and internationally primarily with Boston Technology, Inc., Octel Communications Corporation, Converse Technologies, Inc., Unisys Corporation and Centigram Communications Corporation. For sales of microwave products, the Company competes in the United States and internationally primarily with Alcatel Alsthom, Harris Corporation, California Microwave Corporation, Digital Microwave Corporation, Siemens A.G., Ericsson and Philips N.V. 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. Additionally, Telelink Corporation is a competitor of the Company in the international paging switch market. 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 Motorola or the Company. The Company competes for sales of certain components of wide-area rural radio telephone systems with companies such as Motorola, Telemobile, Inc., Exicom Corporation, Tait Inc. and Carlson Communications. GOVERNMENT REGULATION Many of Glenayre's products operate on radio frequencies. Radio frequency transmissions and emissions, and certain equipment used in connection therewith, are regulated in the United States and internationally. Regulatory approvals generally must be obtained by Glenayre in connection with the manufacture and sale of its products, and by customers to operate Glenayre's products. There can be no assurance that appropriate regulatory approvals will continue to be obtained, or that approvals required with respect to products being developed for the personal communications services market will be obtained. The enactment by federal, state, local or international governments of new laws or regulations or a change in the interpretation of existing regulations could affect the market for Glenayre's products. Although recent deregulation of international telecommunications industries along with recent radio frequency spectrum allocations made by the FCC have increased the demand for Glenayre's products by providing users of those products with opportunities to establish new paging and other wireless personal communications services, there can be no assurance that the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded personal communications services will continue or that future regulatory changes will have a positive impact on Glenayre. On February 9, 1996, the FCC released a notice of proposed rule making covering a licensing rule and procedure change on the 929 MHz and 931 MHz as well as certain other paging frequencies which included a freeze on its acceptance of new applications for paging system licenses. As the issuance of new paging system licenses stimulates demand for the Company's products, this freeze may adversely affect sales and the timing of sales of the Company's products. EMPLOYEES At December 31, 1995, the Company and its subsidiaries employed approximately 1,850 persons. The Company believes its employee relations to be good. 10 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 158,143 121,144 owned Manufacturing, service, 36,999 leased 1997-1998 accounting, purchasing and training facilities, research and development. Quincy, Illinois 162,356 154,256 owned Manufacturing, service, 8,100 leased 1997 sales, accounting, purchasing and training facilities, research and development. Belmont, California 29,000 leased 1998 Manufacturing, service, sales, accounting, purchasing, research and development. Atlanta, Georgia 37,450 leased 1996 Offices for voice messaging products, sales, service, research and development, and training facilities. Charlotte, North Carolina 45,000 owned Corporate headquarters, marketing, accounting and finance, sales office and training facilities.
In addition to its sales offices in Atlanta, Georgia; Belmont, California; Charlotte, North Carolina; and Quincy, Illinois listed above, the Company also maintains sales offices throughout the United States and internationally. See "Business--Marketing and Sales." In 1995, the Company completed expansions of approximately 68,000 square feet and 50,000 square feet at its Quincy and Vancouver facilities, respectively, along with the acquisition of a 45,000 square feet facility in Charlotte in order to accommodate the foreseeable short-term growth in its business. Additionally, the Company is currently evaluating additional facility requirements which may be necessary to accommodate growth in the Company's business beyond 1996. ITEM 3. LEGAL PROCEEDINGS 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 At the Company's Special Meeting of Stockholders held December 8, 1995, an amendment to the Company's Restated Certificate of Incorporation to increase the number of shares of the Company's common stock which the Company shall have the authority to issue from 50,000,000 to 200,000,000 shares was approved by a vote of 23,485,343 in favor and 11,136,352 against, with 29,251 shares abstaining. The number of shares voted has not been adjusted to reflect the 3-for-2 stock split effected in the form of a stock dividend distributed December 29, 1995. 11 EXECUTIVE OFFICERS OF THE REGISTRANT Following are the persons who were the executive officers of Glenayre as of December 31, 1995, their ages as of December 31, 1995, and their current titles and positions held during the last five years: Gerald B. Cramer; age 65; Chairman of the Board of Directors of the Company since 1986; Chairman and Chief Executive Officer of Cramer Rosenthal McGlynn, Inc. ("CRM"), an investment management firm, since 1973. Clarke H. Bailey; age 41; Vice Chairman of the Company since November 1992; Chairman of the Executive Committee since March 1994; Director of the Company since December 1990; Chief Executive Officer of the Company from December 1990 to March 1994; and Acting Chief Executive Officer of the Company from May 1994 until December 1994. Chairman and Chief Executive Officer of United Acquisition Company and its parent, United Gas Holding Corporation since February 1995; Chairman of Arcus, Inc. since July 1995; and a variety of capacities for the investment banking firm of Oppenheimer & Co., Inc. from March 1984 to December 1990, most recently as Managing Director and head of the Principal Investments Department. John J. Hurley; age 61; Vice Chairman of the Company since December 1994; Director of the Company since November 1992; President of the Company from November 1992 until December 1994; Chief Operating Officer of the Company from November 1992 until March 1994; and Chief Executive Officer of the Company from March 1994 until May 1994. President of GEL from July 1988 to November 1992; Director of GEL from July 1988 to June 1993; Chief Operating Officer of Antenna Specialists Company, a communications antenna manufacturer from 1985 to 1988; and employed by General Electric Company from 1966 to 1985, where he held several positions, including General Manager of General Electric Company's cellular business. Ramon D. Ardizzone; age 58; President of the Company since December 1994; Chief Executive Officer of the Company since May 1995; Acting Chief Executive Officer of the Company from December 1994 until May 1995; Director of the Company since November 1992; Chief Operating Officer of the Company from June 1994 until December 1994; Acting Chief Operating Officer of the Company from May 1994 until June 1994; Executive Vice President of the Company from November 1992 until December 1994; and Executive Vice President of the Company in charge of Sales and Marketing from November 1992 until May 1994. Executive Vice President - Sales and Marketing of GEL from August 1988 to November 1992; President of Aerotron, Inc., a land-mobile radio manufacturing company from 1986 to 1988; and employed by General Electric Company in various management positions from 1956 to 1986. Gary B. Smith; age 36; Executive Vice President of the Company since September 1994; General Manager, Wireless Messaging Group since February 1995; Chief Technical Officer of the Company from September 1994 until February 1995; and various engineering management positions with the Company or GEMS from 1983 to September 1994. Kenneth C. Thompson; age 48; Executive Vice President of the Company and General Manager, Voice and Data Technologies Group since February 1995; and various marketing management positions with the Company or GEMS from December 1990 to February 1995. General Manager of a division of Science Application International Corporation from December 1987 to December 1990. Russ K. Allen; age 55; Executive Vice President, Field Sales and Support Operations of the Company since February 1995; and various sales management positions with the Company or GEMS from 1985 to February 1995. Stanley Ciepcielinski; age 39; Executive Vice President, Finance and Administration Operations of the Company since February 1995; Executive Vice President and Chief Financial Officer of the Company since January 1993; and Secretary and Treasurer since April 1993. Director of Finance for the Transformer Business Unit of Square D Company from 1989 to 1992; and Corporate Accounting Manager of Alcatel, Inc from 1984 to 1989. Beverley W. Cox; age 38; Vice President, Human Resources of the Company since February 1995; Corporate Director-Human Resources with the Company from November 1993 to February 1995. Various human resource management positions with Cadmus Communications, Inc. from July 1989 to November 1993. Billy C. Layton; age 49; Vice President of the Company since December 1995; Controller and Chief Accounting Officer of the Company since November 1992; and various accounting management positions with GEMS from 1990 to November 1992. 12 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, as adjusted to reflect a 3-for-2 stock split effected in the form of a 50% stock dividend distributed on January 5, 1995 to stockholders of record on December 22, 1994, a 3-for-2 stock split effected in the form of a 50% stock dividend distributed on June 19, 1995 to stockholders of record on June 5, 1995 and to reflect a 3-for-2 stock split effected in the form of a 50% stock dividend distributed on December 29, 1995 to stockholders of record on December 22, 1995.
Price Range of Common Stock High Low Year Ended December 31, 1994 First Quarter...................................................... $12.78 $10.16 Second Quarter..................................................... 13.58 9.44 Third Quarter...................................................... 17.64 10.89 Fourth Quarter..................................................... 18.37 14.88 Year Ended December 31, 1995 First Quarter...................................................... 21.18 15.90 Second Quarter..................................................... 36.17 18.70 Third Quarter...................................................... 49.00 32.67 Fourth Quarter..................................................... 49.17 33.00
At March 8, 1996 there were approximately 1,440 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. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) The following Selected Consolidated Financial Data of Glenayre presented below for each of the five years in the period ended December 31, 1995 has been derived from the Company's audited Consolidated Financial Statements. The Company acquired the GEMS Business on November 10, 1992 from GEL. Prior to the Acquisition, the Company had been in the real estate development business and in oil and gas pipeline construction. This Selected Consolidated Financial Data reflects the operating results of the GEMS Business only from November 10, 1992, the date of the Acquisition, thus the operating results for fiscal years 1991 and 1992 are not comparable to the operating results for subsequent years. The year ended December 31, 1991 reflects only the discontinued operations while the year ended December 31, 1992 reflects only 51 days of the operating results of the GEMS Business following the Acquisition. The results for 1995 include the results of MUX from April 25, 1995, the day of its 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. Year Ended December 31, 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- OPERATING DATA: Net sales................................. $321,404 $172,107 $136,139 $ 15,586 $ --- Income (loss) from continuing operations before extraordinary item(1)............................. 76,448 33,095 23,700 865 (183) Discontinued operations(2).............. --- 388 100 (7,990) 687 Extraordinary item...................... --- --- (1,695) --- --- Net income (loss)....................... 76,448 33,483 22,105 (7,125) 504 PRIMARY PER SHARE DATA: Income (loss) from continuing operations before extraordinary item............ 1.22 0.56 0.48 0.02 --- Net income (loss)....................... 1.22 0.57 0.45 (0.19) 0.01 At December 31, 1995 1994 1993 1992 1991 BALANCE SHEET DATA: Working capital(3)..................... $223,487 $135,209 $ 94,898 $ 20,217 $ 48,575 Total assets........................... 447,580 284,961 228,244 169,476 80,650 Long-term debt, including current portion. 2,147 2,019 3,451 67,981 1,751 Minority interest in consolidated subsidiaries........................... --- --- --- 3,565 6,180 Put warrants.............................. --- --- --- 459 --- Stockholders' equity...................... 390,694 245,435 198,708 64,022 59,964
(1) Income (loss) from continuing operations prior to November 10, 1992, resulted primarily from interest income and gains (losses) related to the Company's cash and marketable securities and other income and expenses unrelated to the discontinued operations. (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. See Note 1 to the Consolidated Financial Statements. (3) Working capital includes approximately $2.1 million and $9.5 million attributable to the Company's discontinued oil and gas pipeline construction operations at December 31, 1992 and 1991, respectively. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND In 1992, the Company acquired the telecommunications equipment and related software business of Glentel, Inc., a Canadian corporation ("GEL"). Glenayre designs, manufactures, markets and services telecommunications equipment and software used in wireless personal communications systems throughout the world. The Company's product families are grouped in either (i) Wireless Messaging, or (ii) Voice and Data Technologies categories. Additionally, Glenayre provides service and support to its products. Prior to 1992, the Company was engaged in the real estate development business and the construction of oil and gas pipelines. In order to focus exclusively on the telecommunications industry, Glenayre adopted formal plans to dispose of its oil and gas pipeline construction and real estate operations, effective December 31, 1992 and July 6, 1993, respectively. These business segments are accounted for as discontinued operations for all periods presented and, accordingly, their operating results are excluded from continuing operations. In April 1995, the Company completed the acquisition of Western Multiplex Corporation ("MUX"), located in Belmont, 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 operating results of MUX are included in the consolidated results of the Company since the acquisition date. The market for the wireless personal communications industry remains robust. The Company's diversified customer base and technological competitive advantage should allow the Company to capitalize on the overall industry growth. As the service providers expand their systems to accommodate new subscribers, services, and territories, there should be opportunities for sales of the Company's expansion and enhancement products and related software. Additionally, the Company expects to participate in the delivery of products supporting the development of the more advanced Narrowband Personal Communication Services ("NPCS"). Although the Company will begin shipment of its NPCS products in 1996, the timing of the impact of NPCS products on the Company's revenues in 1996 and subsequent years will be based on product development schedules and build-out requirements of NPCS license holders. The Company's results of continuing operations (tabular amounts in thousands of dollars) and as a percentage of net sales are presented below:
1995 1994 1993 Net sales $ 321,404 100.0% $ 172,107 100.0% $ 136,139 100.0% Cost of sales 138,773 43.2 72,908 42.4 60,561 44.5 Gross profit 182,631 56.8 99,199 57.6 75,578 55.5 Selling, general and administrative expense 56,579 17.6 41,079 23.9 31,638 23.2 Research and development expense 23,968 7.5 15,991 9.3 11,843 8.7 Depreciation and amortization expense 8,571 2.7 5,884 3.4 5,059 3.7 Income from operations 93,513 29.1 36,245 21.1 27,038 19.9 Interest income (expense), net 8,267 2.6 4,450 2.6 (2,828) (2.1) Income from continuing operations before income taxes and extraordinary item 101,745 31.7 40,295 23.4 24,161 17.7 Provision for income taxes 25,297 7.9 7,200 4.2 461 0.3 Income from continuing operations before extraordinary item $ 76,448 23.8% $ 33,095 19.2% $ 23,700 17.4%
15 The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and related Notes. 1995 COMPARED WITH 1994 NET SALES Net sales in 1995 increased to $321.4 million from 1994 net sales of $172.1 million, an increase of $149.3 million, or 87%. This increase was primarily attributable to greater sales of Wireless Messaging products of approximately $114 million, or 83% over 1994, and increased sales of Voice and Data products of approximately $22 million, or 126% over 1994. The increase of Wireless Messaging products was primarily due to: (i) the continued expansion and upgrading of existing systems within the installed customer base; (ii) continuing to expand internationally into new markets, and (iii) growth in market share. The increase in Voice and Data products was comprised of increased voice messaging sales with the remainder principally attributable to the MUX operations included only since its April 1995 acquisition. Net sales to United States customers in 1995 increased by approximately 80% over 1994 while 1995 net sales to international customers increased approximately 100% over 1994. GROSS PROFIT Gross profit increased to $182.6 million, or 56.8% of 1995 net sales, from $99.2 million, or 57.6% of 1994 net sales. The minimal change in the gross profit margin percentage is due to a change in the mix in products shipped and the impact of increased fixed manufacturing costs incurred as additional manufacturing capacity was brought on line during 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense increased to $56.6 million, or 17.6% of 1995 net sales, from $41.1 million, or 23.9% of 1994 net sales. Selling, general and administrative expense increased by $15.5 million from 1994 to 1995. The increase primarily resulted from: (i) increased selling and marketing expenses of approximately $10.8 million (due to increased staffing, commissions, travel expenses, promotional material and new international sales offices openings) required to achieve growth in net sales; (ii) approximately $4.7 million related to increased administrative staffing and travel expenses; and (iii) general increases in employee costs and purchased services. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense increased to $24.0 million, or 7.5% of 1995 net sales, from $16.0 million, or 9.3% of 1994 net sales. These research and development costs were for enhancements to existing products and new product development such as the NPCS products, from which revenue is expected to be realized in 1996 and subsequent years. Both hardware and software development costs are included in research and development costs. All research and development costs are expensed as incurred. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased to $8.6 million for 1995 from $5.9 million for 1994. The increase is primarily attributable to (i) significantly higher incremental purchases of plant and equipment in 1995 compared to 1994 and (ii) goodwill related to the acquisition of MUX in April 1995. In order to provide the equipment and capacity necessary to meet the growth of the business, Glenayre spent approximately $35 million during 1995 for capital expenditures (including approximately $18 million related to the expansion of the Quincy and Vancouver facilities and the purchase of the Charlotte facility). INTEREST INCOME, NET The Company realized net interest income of $8.3 million for 1995 compared to net interest income of $4.5 million for 1994. The increase is primarily attributable to (i) higher average balances in cash and cash equivalents and short-term investments and (ii) higher average rates earned. 16 INCOME TAXES The difference between the combined U.S. federal and state statutory tax rate of approximately 40% and the effective tax rate of 24.9% for 1995 and 17.9% for 1994 is primarily the result of the utilization of the Company's Net Operating Losses ("NOLs") and the application of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"), in computing the Company's tax provision. The difference between the effective tax rate of 24.9% in 1995 and 17.9% in 1994 is primarily the result of a significant variance between the 1995 and 1994 adjustments 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 and "--Financial Condition and Liquidity." 1994 COMPARED WITH 1993 NET SALES Net sales in 1994 increased to $172.1 million from 1993 net sales of $136.1 million, an increase of $36.0 million, or 26.4%. This increase was primarily attributable to greater sales of Wireless Messaging products of approximately $27 million, or 25% over 1993, and increased sales of Voice and Data products of approximately $5 million, or 44% over 1993. The increase in Wireless Messaging products was primarily due to: (i) the continued expansion and upgrading of existing systems within the installed customer base; (ii) the build out of private carrier paging systems which the FCC reallocated from non-exclusive to exclusive in 1993; and (iii) sales of new paging systems both in the United States and internationally. The increase of Voice and Data product sales was principally comprised of additional sales to existing customers in order to upgrade their service to their paging subscribers, sales to resellers and sales to cellular operators. Net sales to United States customers in 1994 increased by approximately 45% over 1993 while 1994 net sales to international customers were comparable to 1993. GROSS PROFIT Gross profit increased to $99.2 million, or 57.6% of 1994 net sales, from $75.6 million, or 55.5% of 1993 net sales. The increase in gross profit margin is primarily a result of a favorable mix in products shipped and services provided, the impact of increased sales volume versus fixed manufacturing costs, and favorable material pricing due to higher volume purchasing levels. The Company's net selling prices realized in 1994 were, on average, equivalent to those realized in 1993. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense increased to $41.1 million, or 23.9% of 1994 net sales, from $31.6 million, or 23.2% of 1993 net sales. Selling, general and administrative expense increased by $9.4 million from 1993 to 1994. The increase primarily resulted from: (i) increased selling and marketing expenses of approximately $7.5 million (due to increased staffing, commissions, travel expenses, promotional material and new international sales offices openings) required to achieve growth in net sales; (ii) approximately $1.2 million related to increased administrative staffing and travel expenses; and (iii) general increases in employee costs and purchased services. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense increased to $16.0 million, or 9.3% of 1994 net sales, from $11.8 million, or 8.7% of 1993 net sales. These research and development costs were for new product development and enhancements to existing products. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased to $5.9 million for 1994 from $5.1 million for 1993. The increase is attributable to higher incremental purchases of equipment in 1994 compared to 1993. 17 INTEREST INCOME, NET Interest income, net increased to $4.5 million, or 2.6% of 1994 net sales, from interest expense, net of $2.8 million or 2.1% of 1993 net sales. The increase is primarily attributable to the October 1993 payoff of the bank debt originally incurred in connection with the acquisition of the telecommunications equipment and related software business of GEL (the "Acquisition") and interest income earned on significant cash and cash equivalents and short-term investments for all of 1994 compared to only the last quarter of 1993. See Note 12 to the Company's Consolidated Financial Statements and "----Financial Condition and Liquidity." INCOME TAXES The difference between the combined U.S. federal and state statutory tax rate of approximately 40% and the effective tax rate of 17.9% for 1994 and 1.9% for 1993 is primarily the result of the utilization of the Company's NOLs and the application of SFAS 109, in computing the Company's tax provision. The difference between the effective tax rate of 17.9% in 1994 and 1.9% in 1993 is primarily the result of a significant variance between the 1994 and 1993 adjustments 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 and "----Financial Condition and Liquidity." GLENAYRE TECHNOLOGIES, INC. DISCONTINUED OPERATIONS Subsequent to the Acquisition, the Company decided to dispose of its oil and gas pipeline construction operations and its real estate operations in order to focus exclusively on the telecommunications industry. Effective December 31, 1992, the Company adopted a formal plan to dispose of its oil and gas pipeline construction operations. The Company sold its interest in the oil and gas pipeline construction business in 1993, receiving approximately $3.3 million in cash and a $3.6 million promissory note. The results of discontinued operations for the year ended December 31, 1993 consisted of a $100,000 gain, net of tax, on the sale of its oil and gas pipeline operations. The $3.6 million note was paid in full in 1995. On July 6, 1993, the Company adopted a formal disposal plan which called for the disposal of its remaining real estate assets. Portions of the four parcels of undeveloped land were sold during 1993. The sales of the remaining parcels were completed as of June 30, 1994 with an aggregate recognized gain in 1994 of $388,000, net of income taxes of $248,000. FINANCIAL CONDITION AND LIQUIDITY FINANCIAL CONDITION AND LIQUIDITY Net cash provided by operations increased to $39.0 million in 1995 compared to $32.4 million in 1994. The Company's working capital at December 31, 1995 was $223.5 million, including cash and cash equivalents and short-term investments of $114.7 million. Accounts receivable, inventories, accounts payable, and accrued liabilities at December 31, 1995 increased from December 31, 1994 primarily as a result of increased levels of operating activities during 1995. Goodwill at December 31, 1995 increased from December 31, 1994 due to the acquisition of MUX in April 1995. During 1995 the Company received cash of $16.1 million from the exercise of stock options and $3.6 million from the payment in full of the note described above. During 1995, the Company spent $34.6 million for capital expenditures (including approximately $18 million related to the expansion of the Quincy and Vancouver facilities and the purchase of the Charlotte facility). These expenditures were necessary in order to provide the equipment and capacity to meet the short-term growth of the business. The Company is currently evaluating additional facility requirements which may be necessary to accommodate growth in the Company's business beyond 1996. 18 The Company's cash and cash equivalents consist of high-grade commercial paper, bank certificates of deposit, U.S. Treasury bills and notes, and repurchase agreements backed by U.S. Government securities with original maturities of three months or less. The Company's short-term investments are comprised of identical types of investments with the exception that their original maturities are greater than three months, but do not exceed one year. The Company expects to use its cash, cash equivalents and short-term investments 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 Company may be requested by certain NPCS license holders to provide equipment financing in order to meet the build-out requirements established by the FCC. The Company believes that funds generated from continuing operations, together with its current cash reserves and short-term investments, will be sufficient to support the short-term and long-term liquidity requirements for current operations (including annual capital expenditures). Company management believes that, if needed, it can establish appropriate borrowing arrangements with lending institutions. INCOME TAX MATTERS The Company presently has a favorable income tax position principally because of the existence of a significant amount of U.S. tax net operating loss carryforwards. These tax loss carryforwards are available to shelter future U.S. taxable income generated by the Company. Under the Company's current operating and business structure, the Company expects that the majority of the worldwide taxable income will be earned in the United States. Therefore, the Company's actual cash outlay for income taxes for the next several years will be limited to U.S. alternative minimum tax and foreign and state income taxes. As described in Note 8 to the Company's Consolidated Financial Statements, the Company at December 31, 1995 had U.S. NOLs aggregating $116.0 million. However, several factors somewhat mitigate the Company's favorable tax position. Approximately $16 million of the Company's NOLs are subject to limitations and are likely to expire unused. Approximately 73% of the $116.0 million of NOLs will expire, if unused, between 1996 and 1998. Accordingly, there is no assurance that the U.S. taxable income will be sufficient to fully use these NOLs. 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. The Company has recorded a deferred tax asset of $35 million, net of a valuation allowance of $17.9 million, at December 31, 1995, 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, primarily include 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. INFLATION For the three fiscal years ended December 31, 1995, the Company does not believe inflation has had a material effect on its results of operations. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and its subsidiaries as of December 31, 1995, 1994 and 1993 and for each of the three years in the period ended December 31, 1995, as well as the independent auditors' reports 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 ................................................ 21 Report of Deloitte & Touche LLP Independent Auditors............................................ 22 Consolidated Balance Sheets at December 31, 1995 and 1994........................................ 23 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993........... 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993.................................................................................. 25 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993....... 26 Notes to Consolidated Financial Statements....................................................... 28 (ii) Supplemental Schedule: (For the years ended December 31, 1995, 1994 and 1993) Schedule II - Valuation and Qualifying Accounts ................................................. 47
All other schedules are omitted because they are not applicable or not required. 20 REPORT OF INDEPENDENT AUDITORS Stockholders Glenayre Technologies, Inc. We have audited the consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. Our audit also included the supplemental schedule listed in the Index of Item 14(a). These financial statements and the supplemental financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the supplemental schedule based on our audit. The consolidated financial statements of Glenayre Technologies, Inc. and subsidiaries for the years ended December 31, 1994 and 1993, were audited by other auditors whose report dated February 3, 1995, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 1995 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, 1995, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related supplemental financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Charlotte, North Carolina January 31, 1996 21 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Glenayre Technologies, Inc. We have audited the accompanying consolidated balance sheet of Glenayre Technologies, Inc. and subsidiaries as of December 31, 1994, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1994. Our audits also included the information for each of the two years in the period ended December 31, 1994 on the supplemental schedule listed in the Index at Item 14(a). These financial statements and the supplemental schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the supplemental schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 financial position of Glenayre Technologies, Inc. and subsidiaries at December 31, 1994, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such supplemental schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein for each of the two years in the period ended December 31, 1994. DELOITTE & TOUCHE LLP Charlotte, North Carolina February 3, 1995 22 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
December 31, 1995 1994 ASSETS Current Assets: Cash and cash equivalents $ 70,600 $ 52,043 Short-term investments 44,054 39,462 Accounts receivable, net 89,265 33,707 Trade notes receivable, current 7,960 8,816 Inventories 50,045 24,261 Deferred income taxes 7,568 6,518 Prepaid expenses and other current assets 7,189 5,526 - ------------------------------------------------------------------------------ -------- -------- Total current assets 276,681 170,333 Trade notes receivable 14,973 12,480 Property, plant and equipment, net 47,920 17,707 Goodwill 80,240 61,436 Deferred income taxes 27,487 22,510 Other assets 279 495 - ------------------------------------------------------------------------------ -------- -------- TOTAL ASSETS $447,580 $284,961 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 15,709 $ 9,871 Accrued liabilities 36,162 25,035 Other current liabilities 1,323 218 - ------------------------------------------------------------------------------ -------- -------- Total current liabilities 53,194 35,124 Other liabilities 3,692 4,402 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: 1995-60,044,752 shares; 1994-55,991,136 shares 1,201 1,120 Contributed capital 297,017 215,862 Retained earnings 92,476 28,453 - ------------------------------------------------------------------------------ -------- -------- Total stockholders' equity $390,694 245,435 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $447,580 $284,961 ======== ========
See notes to consolidated financial statements. 23 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1995 1994 1993 NET SALES $ 321,404 $ 172,107 $ 136,139 COSTS AND EXPENSES: Cost of sales 138,773 72,908 60,561 Selling, general and administrative expense 56,579 41,079 31,638 Research and development expense 23,968 15,991 11,843 Depreciation and amortization expense 8,571 5,884 5,059 Total costs and expenses 227,891 135,862 109,101 INCOME FROM OPERATIONS 93,513 36,245 27,038 OTHER INCOME (EXPENSES): Interest income 8,457 4,750 1,344 Interest expense (190) (300) (4,172) Foreign exchange gain (loss) 94 (220) (137) Other, net (129) (180) 88 Total other income (expenses), net 8,232 4,050 (2,877) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 101,745 40,295 24,161 PROVISION FOR INCOME TAXES 25,297 7,200 461 INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM 76,448 33,095 23,700 GAIN FROM DISCONTINUED OPERATIONS -- 388 100 INCOME BEFORE EXTRAORDINARY ITEM 76,448 33,483 23,800 EXTRAORDINARY LOSS FROM EARLY RETIREMENT OF DEBT -- -- (1,695) NET INCOME $ 76,448 $ 33,483 $ 22,105 PRIMARY INCOME PER COMMON SHARE: Continuing operations $ 1.22 $ .56 $ .48 Discontinued operations -- .01 -- Income before extraordinary item 1.22 .57 .48 Extraordinary item -- -- (.03) NET INCOME PER COMMON SHARE--PRIMARY $ 1.22 $ .57 $ .45 FULLY DILUTED INCOME PER COMMON SHARE: Continuing operations $ 1.22 $ .56 $ .48 Discontinued operations -- .01 -- Income before extraordinary item 1.22 $ .57 .48 Extraordinary item -- -- (.03) NET INCOME PER COMMON SHARE--FULLY DILUTED $ 1.22 $ .57 $ .45
See notes to consolidated financial statements. 24 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
Unrealized Unearned Loss on Retained Stock Marketable Total Common Stock Contributed Earnings Compen- Equity Stockholders' Shares Amount Capital (Deficit) sation Securities Equity Balances, December 31, 1992.......... 42,226 $844 $69,545 $ (5,370) $(986) $(11) $ 64,022 Net income........................... 22,105 22,105 Effect of exercise of put warrants... 459 459 Amortization of unearned stock compensation................. 496 496 Utilization of net operating loss carryforwards ................ 11,898 (11,898) Stock offering....................... 8,437 167 102,763 102,930 Other shares issued.................. 3,128 65 3,198 3,263 Stock options granted................ 822 822 Tax benefit of stock options exercised ........................... 4,600 4,600 Change in net unrealized loss on marketable equity securities.... 11 11 Balances, December 31, 1993.......... 53,791 1,076 192,826 5,296 (490) -- 198,708 Net income........................... 33,483 33,483 Amortization of unearned stock compensation........................ 490 490 Utilization of net operating loss carryforwards..................... 10,326 (10,326) Stock options exercised.............. 2,284 45 4,271 4,316 Tax benefit of stock options exercised ........................... 9,726 9,726 Repurchase of common stock........... (84) (1) (1,287) (1,288) 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
See notes to consolidated financial statements. 25 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
Year Ended December 31, 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................................ $ 76,448 $ 33,483 $ 22,105 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................................... 8,571 5,884 5,059 Write-off of debt issuance costs .................................... -- -- 2,734 Gain on disposal of discontinued operations ......................... -- (388) (100) Changes in deferred income taxes .................................... (4,998) (5,218) (9,782) Loss on disposal of equipment ....................................... 203 65 257 Tax benefit of stock options exercised .............................. 26,433 9,726 4,600 Stock compensation expense .......................................... 169 490 1,318 Other noncash expenses .............................................. 73 222 454 Changes in operating assets and liabilities, net of effects of business acquisitions and the sale of discontinued operations: Restricted cash .................................................. -- -- 510 Accounts receivable .............................................. (54,222) (6,622) (5,132) Notes receivable ................................................. (1,637) (13,174) (1,391) Inventories ...................................................... (23,152) (5,207) 614 Prepaids and other current assets ................................ 227 (802) 1,529 Real estate held for sale ........................................ -- 2,700 1,119 Other assets ..................................................... (3,384) (143) 659 Accounts payable ................................................. 5,406 5,085 (2,908) Accrued liabilities .............................................. 8,811 4,002 (2,594) Other liabilities ................................................ 93 2,337 1,333 NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................................... 39,041 32,440 20,384 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ............................ (34,638) (8,627) (3,447) Proceeds from sale of equipment ....................................... 26 13 1,510 Net proceeds from sale of interest in oil and gas pipeline construction business ...................................... 3,600 -- 903 Maturities of short-term investments .................................. 122,679 29,503 -- Purchases of short-term investments ................................... (127,271) (68,965) -- Cash acquired, net of acquisition costs ................................................................. 396 -- -- NET CASH USED IN INVESTING ACTIVITIES ................................. (35,208) (48,076) (1,034)
26 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (TABULAR AMOUNTS IN THOUSANDS OF DOLLARS)
Year Ended December 31, 1995 1994 1993 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings ........... -- -- 347 Repayments of long-term borrowings ........... (325) (1,448) (64,723) Issuance of common stock ..................... 16,087 4,316 106,193 Common stock repurchases ..................... (1,038) (1,288) -- NET CASH PROVIDED BY FINANCING ACTIVITIES .... 14,724 1,580 41,817 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 18,557 (14,056) 61,167 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,043 66,099 4,932 CASH AND CASH EQUIVALENTS AT END OF YEAR ..... $ 70,600 $ 52,043 $ 66,099 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest ................................... $ 85 $ 144 $ 3,951 Income taxes ............................... 1,843 1,176 1,042
SUPPLEMENTAL INFORMATION OF NONCASH INVESTING AND FINANCING ACTIVITIES: 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 valued at $27,260,000 for assets with a fair value of $31,769,000 and assumed liabilities of $3,186,000. During 1993, the Company sold its interest in the oil and gas pipeline construction business. In connection with this sale the Company received $3,298,000 in cash and a $3,600,000 promissory note for the stock of such business with net assets of $6,798,000 (including $2,395,000 in cash). See notes to consolidated financial statements. 27 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tabular amounts in thousands of dollars except per share amounts) 1. BUSINESS ACQUISITION AND DISCONTINUED OPERATIONS (A) WESTERN MULTIPLEX ACQUISITION On April 25, 1995 Glenayre Technologies, Inc. (the "Company") completed the acquisition of Western Multiplex Corporation ("MUX"), located in Belmont, 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 $1.3 million in acquisition costs. The Company's consolidated financial statements for the year ended December 31, 1995 include the operating results of MUX for the period April 25, 1995 to December 31, 1995. The acquisition was accounted for as a purchase and the purchase price was assigned to the net assets acquired based on the fair values of such assets and liabilities at the date of the acquisition, as follows: Current assets.........................................$ 7,886 Property, plant and equipment.......................... 1,188 Goodwill .............................................. 21,991 Deferred tax asset..................................... 704 Liabilities assumed ................................... (3,186) $ 28,583 The following table summarizes, on an unaudited pro forma basis, the estimated combined results of operations for the years ended December 31, 1995 and 1994 as if the acquisition of MUX had occurred at January 1, 1994, after giving effect to an adjustment to amortization of goodwill related to the acquisition. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made on that date or to reflect the results of operations which may be achieved in the future. 1995 1994 Net sales ........................................ $326,656 $190,920 Income from continuing operations ................ 76,600 34,550 Income from continuing operations per common share ................................. $ 1.22 $ .58 (b) DISCONTINUED OPERATIONS Oil and Gas Pipeline Construction Operations. Effective December 31, 1992, the Company adopted a formal plan to dispose of its oil and gas pipeline construction operations. The Company sold its interest in the oil and gas pipeline construction business on October 22, 1993 for $6.9 million, resulting in a gain of $100,000, net of tax. The Company received $3.3 million in cash and a $3.6 million promissory note (included in other current assets at December 31, 1994). The $3.6 million note was paid in full in March 1995. Revenues of the oil and gas pipeline construction operations amounted to approximately $16.3 million for the period from January 1, 1993 to the date of sale. There was no material operating income or loss from this operation in 1993. Real Estate Operations. In November 1992, the Company restructured its real estate operations headquartered in Phoenix, Arizona. The restructuring plan called for a new real estate sales strategy and the shutdown of the Phoenix real estate office. The Phoenix real estate office was closed on June 30, 1993. 28 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) In July 1993, the Company adopted a formal plan of disposal which called for disposal of its remaining real estate assets (principally four parcels of undeveloped land in the western United States). Adoption of the disposal plan did not result in any further write-downs of the real estate held for sale or any additional reserves related to the shutdown of the Phoenix real estate office. The sales of the remaining parcels were completed as of June 30, 1994, with an aggregate recognized gain in 1994 of $388,000, net of income taxes of $248,000. Revenues from the sale of real estate amounted to approximately $6.5 million and $571,000 for the years ended December 31, 1994 and 1993, respectively. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company designs, manufactures, markets and services switches, transmitters, receivers, controllers, software 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. The Company sells to a range of customers worldwide. In the United States, customers include the regional Bell operating companies, public and private radio common carriers and private carrier paging operators. Internationally, customers include public telephone and telegraph companies, as well as private telecommunication service providers. 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 consist of high-grade commercial paper, bank certificates of deposits, U.S. Treasury bills and notes and repurchase agreements backed by U.S. Government securities. INVENTORIES Inventories are valued at the lower of average cost or market. 29 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) 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). 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 not exceeding 30 years. Goodwill is shown net of accumulated amortization of $8.9 and $5.8 million at December 31, 1995 and 1994, 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 profitability 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. The adoption of this standard did not affect reported earnings because this was essentially the same method used in the past to measure and record asset impairments. 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 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. COMPUTER SOFTWARE DEVELOPMENT COSTS 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. 30 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) 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. 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. RECLASSIFICATIONS Certain 1994 and 1993 amounts have been reclassified to conform with the 1995 financial statement presentation. 3. SHORT-TERM INVESTMENTS Short-term investments amounting to $44.1 million and $39.5 million at December 31, 1995 and 1994, respectively are comprised of highly liquid, high-grade commercial paper, bank certificates of deposit, U.S. Treasury bills and notes 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 RECEIVABLE Accounts receivable at December 31, 1995 and 1994 consist of: 1995 1994 Trade receivables .............................. $ 89,372 $ 34,320 Retainage receivable ........................... 1,364 1,333 Other .......................................... 2,586 1,159 93,322 36,812 Less: allowance for doubtful accounts ......... (4,057) (3,105) $ 89,265 $ 33,707 31 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) 5. INVENTORIES Inventories at December 31, 1995 and 1994 consist of: 1995 1994 Raw materials .............................. $30,191 $10,999 Work-in-process: Uncompleted contracts ................... 604 762 Other ................................... 7,743 6,425 Finished goods ............................. 11,507 6,075 $50,045 $24,261 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1995 and 1994 consist of: 1995 1994 Land ........................................... $ 1,562 $ 1,228 Buildings ...................................... 21,376 5,937 Furniture, fixtures and equipment .............. 34,646 15,899 Leasehold improvements ......................... 1,142 531 58,726 23,595 Less: Accumulated depreciation ................. (10,806) (5,888) $ 47,920 $ 17,707 7. ACCRUED LIABILITIES Accrued liabilities at December 31, 1995 and 1994 consist of: 1995 1994 Accrued project costs .................................... $ 3,310 $ 3,039 Accrued warranty costs .................................... 2,713 4,312 Accrued sales commissions .............................. 1,603 2,274 Accrued compensation and benefits ................................. 10,107 4,402 Accrued income taxes ....................... 5,972 3,220 Other Accruals .............................. 12,457 7,788 $36,162 $25,035 32 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) 8. INCOME TAXES The Company's income tax provision consists of the following:
1995 1994 1993 Current provision: United States Federal................................ $ 6,398 $ -- $1,062 Charge equivalent to tax benefit of stock option exercises................................... 26,433 9,726 4,600 Foreign.............................................. 2,658 2,653 3,509 State and local...................................... 962 40 744 Total current...................................... 36,451 12,419 9,915 Deferred provision (benefit): Before valuation allowance adjustment................ 1,271 5,107 2,444 Adjustment to valuation allowance.................... (12,425) (10,326) (11,898) Total deferred provision (benefit)................. (11,154) (5,219) (9,454) Total provision......................................... $25,297 $ 7,200 $ 461
The sources of income from continuing operations before income taxes and extraordinary item are presented as follows:
1995 1994 1993 United States.............................................. $ 87,919 $35,437 $20,588 Foreign.................................................... 13,826 4,858 3,573 Income from continuing operations.......................... $101,745 $40,295 $24,161
The consolidated income tax provision from continuing operations was different from the amount computed using the U.S. statutory income tax rate for the following reasons:
1995 1994 1993 Income tax provision at US statutory rate ........... $ 35,611 $ 14,104 $ 8,456 Reduction in valuation allowance .................... (12,425) (10,326) (11,898) Foreign taxes at rates other than U.S. statutory rate (2,129) 1,997 2,053 State taxes (net of federal benefit) ................ 3,307 655 909 Non-deductible goodwill amortization ................ 933 770 941 Income tax provision ................................ $ 25,297 $ 7,200 $ 461
33 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) The tax effect of temporary differences and net operating loss carryforwards that gave rise to the Company's deferred tax assets and liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 Assets: U.S. net operating loss carryforwards .... $ 40,612 $ 48,173 State net operating loss carryforwards ... 3,495 2,342 U.S. capital loss carryforwards .......... 439 1,588 Other .................................... 13,822 11,522 58,368 63,625 Less: Valuation allowance ................ (17,861) (33,246) 40,507 30,379 Liabilities ................................ (5,452) (1,351) Deferred tax asset, net .................... $ 35,055 $ 29,028 The reduction in the valuation allowance of $15,385,000 during the year ended December 31, 1995 included $1,149,000 related to the expiration of U.S. capital loss carryforwards as well as $12,425,000 related to the recognition of tax benefits which arose prior to the 1988 quasi-reorganization (see below). The Company believes that it is more likely than not that the net deferred tax asset recorded at December 31, 1995 will be fully realized. At December 31, 1995, the Company has U.S. net operating loss carryforwards and capital loss carryforwards as follows:
Operating Capital Year of Expiration Losses Losses 1996................................................. $15,854 $1,254 1997................................................. 23,820 --- 1998................................................. 45,290 --- 1999................................................. --- --- 2000................................................. 5,318 --- 2001................................................. 5,397 --- 2002................................................. 9,133 --- Thereafter.............................................. 11,223 --- $116,035 $1,254
The deferred tax asset is broken down between current and noncurrent amounts in the accompanying 1995 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. 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. 34 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) If the original guidance in SAB 86 had been applied, the Company's net income for the years ended December 31, 1995, 1994 and 1993 would have been reduced by the amount of the benefit from utilization of tax net operating loss carryforwards. Such reduction in net income would have been $12,425,000 ($.20 per share) in 1995, $10,326,000 ($.18 per share) in 1994, and $11,898,000 ($.24 per share) in 1993. 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, 1995 are as follows: 1996............................. $ 2,895 1997............................. 2,029 1998............................. 1,327 1999............................. 688 2000............................. 372 Thereafter...................... 205 $7,516 Rent expense for continuing operations amounted to $2,184,000, $1,254,000 and $923,000 for the years ended December 31, 1995, 1994 and 1993, 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. Effective January 1, 1993, the Company adopted 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 accumulated amortization of an initial obligation of approximately $1.0 million related to an acquisition in 1992 being amortized over twenty years was $151,000 at December 31, 1995. The Company's accumulated postretirement benefit obligation at December 31, 1995 and 1994 relate to: 1995 1994 Retirees ......................................... $ 532 $ 387 Fully eligible plan participants ................. 379 331 Other active plan participants ................... 607 248 $1,518 $ 966 35 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) Net postretirement benefit cost for the years ended December 31, 1995, 1994 and 1993 consist of the following components:
1995 1994 1993 Service cost .................................................. $ 105 $ 84 $ 68 Interest cost on accumulated postretirement benefit obligation. 84 87 88 Amortization of gain .......................................... (17) -- -- Amortization of transition obligation ......................... 51 51 51 $ 223 $ 222 $ 207
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation as of December 31, 1995 was 12% for 1996, decreasing linearly each successive year until it reaches 4.75% in 2003, 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, 1995 and the 1995 net postretirement health care cost by approximately 14.6% and 13.4%, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation at December 31, 1995 and December 31, 1994 was 7.25% and 8%, respectively. (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 attributable to continuing operations amounted to approximately $1,830,000, $1,159,000 and $1,051,000 during the years ended December 31, 1995, 1994 and 1993, 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) STOCK SPLITS On December 8, 1995, the Board of Directors of the Company adopted a resolution authorizing a three-for-two split of the Company's common stock, effected in the form of a 50% stock dividend distributed on December 29, 1995 to stockholders of record on December 22, 1995. On May 24, 1995, the Board of Directors of the Company adopted a resolution authorizing a three-for-two split of the Company's common stock, effected in the form of a 50% stock dividend distributed on June 19, 1995 to stockholders of record on June 5, 1995. All share and per share amounts have been restated to reflect these stock dividends. (C) INCREASE IN COMMON STOCK AUTHORIZED On December 8, 1995, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation providing for an increase in the number of shares of common stock authorized from 50,000,000 shares to 200,000,000 shares. 36 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) (D) STOCK REPURCHASE PLAN On December 8, 1994, the Board of Directors of the Company adopted a resolution authorizing the repurchase from time-to-time of the Company's common stock not to exceed in the aggregate 1,687,500 shares. The Company repurchased 30,000 shares at a cost of $1.0 million, and 84,375 shares at a cost of $1.3 million (shown as a reduction of common stock and contributed capital) in December 1995 and December 1994, respectively. (E) STOCK OPTION PLANS On May 14, 1991, the Company's stockholders approved the establishment of the 1991 Long-Term Incentive Plan (the "Plan") to promote the long-term financial interests and growth of the Company, reserving 3,847,500 common shares for directors, officers and other key employees of the Company and its subsidiaries. The Plan is administered by a committee of the Board of Directors (the "Committee"). On October 30, 1992, the Company's stockholders approved an amendment to the Plan (i) to increase the number of shares of common stock available for issuance pursuant to awards under the plan from 3,847,500 to 8,100,000; (ii) to permit the Company to sell stock under the Plan at less than fair market value; and (iii) to provide for formula-based awards of stock options to the non-employee directors of the Company based on their years of service. Further, on May 26, 1994, the Company's stockholders approved an amendment to the Plan (i) to change the name to the Long-Term Incentive Plan and (ii) to increase the number of shares of common stock available for issuance pursuant to awards under the plan from 8,100,000 to 11,475,000 shares. During 1995, 1994 and 1993, the Committee granted options to purchase 81,000, 60,750 and 60,750 shares of common stock at $43.59, $11.11 and $1.28 per share, respectively, to five directors pursuant to the formula-based award provision of the Plan. In addition, at various dates during 1995, 1994 and 1993, the Committee granted options to purchase in the aggregate 1,547,723, 2,051,663 and 178,875 shares, respectively, of common stock at the fair market value at the date of grant to certain officers and employees. All these options to purchase shares expire ten years from the date of grant. Since certain options granted in 1993 and 1992 were fully vested immediately and as the exercise price of certain stock options was below the market price at the date of grant, the Company recorded compensation expense for the vested portion of $490,000 and $1,286,000 in 1994 and 1993, respectively, which is included in selling, general and administrative expenses. Activity and price information regarding the Plan is summarized as follows: Price Shares Range Outstanding, December 31, 1992 6,724,559 $ 1.27---$2.47 Granted ...................... 239,625 1.28---11.11 Exercised .................... (1,429,983) 1.28---2.47 Canceled ..................... (253,125) 1.27 Outstanding, December 31, 1993 5,281,076 1.27---11.11 Granted ...................... 2,112,413 11.11---17.26 Exercised .................... (1,989,646) 1.27---12.74 Canceled ..................... (33,750) 12.74 Outstanding, December 31, 1994 5,370,093 1.27---17.26 Granted ...................... 1,628,723 16.72---47.67 Exercised .................... (2,180,558) 1.27---28.22 Canceled ..................... (20,814) 12.74---22.44 Outstanding, December 31, 1995 4,797,444 $1.27---$47.67 Of the outstanding options at December 31, 1995, 3,158,624 are currently exercisable. 37 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) On June 23, 1987, the Company's stockholders approved the establishment of the 1987 Stock Option Plan (the "1987 Plan"), reserving 3,847,500 common shares for directors, officers and other key employees of the Company and its subsidiaries. The 1987 Plan is also administered by the Committee. Effective July 15, 1992, the Board of Directors amended the 1987 Plan to reduce the number of shares reserved to 1,751,625. All options granted under the 1987 Plan expire ten years from the date of grant. Activity and price information regarding the Plan is summarized as follows: Price Shares Range Outstanding, December 31, 1992 1,690,875 $1.02---$1.27 Exercised .................... (779,605) 1.02--- 1.27 Outstanding, December 31, 1993 911,270 1.04--- 1.26 Exercised .................... (256,500) 1.04--- 1.26 Canceled ...................... (20) 1.26 Outstanding, December 31, 1994 654,750 1.04--- 1.26 Exercised .................... (459,000) 1.17--- 1.26 Outstanding, December 31, 1995 195,750 $1.04---$1.26 All outstanding options at December 31, 1995 are currently exercisable. In connection with the April 25, 1995 acquisition of MUX, the Company agreed to issue 502,206 shares of its common stock upon the exercise of certain outstanding options which had previously been granted by MUX to certain of its employees (the "MUX Options"). Activity and price information regarding the MUX Options is summarized as follows: Price Shares Range Outstanding, April 25, 1995 .. 502,206 $1.84---$6.60 Exercised .................... (188,084) 1.84--- 6.60 Outstanding, December 31, 1995 314,122 $1.98---$6.60 All outstanding options at December 31, 1995 are currently exercisable. Contributed capital was increased $26.4 million, $ 9.7 million and $4.6 million in 1995 and 1994 and 1993, respectively, which represents the income tax benefits the Company realized from stock options exercised during these periods. (F) 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. 38 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) All permanent 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, 1996 to June 30, 1996 period, the stock purchase price will be $37.07. As of December 31, 1995, 109,489 shares had been issued at a purchase price range of $5.60 to $15.27 with 396,761 shares reserved under the ESP Plan. Additionally, in January 1996, 33,122 shares at a purchase price of $29.37 were issued. (G) INCOME PER COMMON SHARE Primary income per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding plus the shares that would be outstanding assuming exercise of dilutive stock options, which are considered to be common stock equivalents. The number of common shares that would be issued from the exercise of stock options has been reduced by the number of common shares that could be purchased from the proceeds at the average market price of the Company's stock. The number of shares used to compute primary per share data for the years ended December 31, 1995, 1994 and 1993 was 62,479,480; 58,703,468; and 49,399,106, respectively. For purposes of the fully diluted income per share computations, the number of shares that could be issued from the exercise of stock options outstanding at the end of the period has been reduced by the number of shares which could have been purchased from the proceeds at the higher of the market price of the Company's stock on December 31, 1995,1994 and 1993 or the average market prices during the periods such options were outstanding. For those options exercised during the period, the computation for the period prior to exercise is based on the market price when the option was exercised. The number of shares used to compute fully diluted per share data for the years ended December 31, 1995, 1994 and 1993 was 62,813,289; 58,791,720; and 49,879,503, respectively. 12. EXTRAORDINARY ITEM During 1993, the Company paid off all bank debt incurred in connection with an acquisition and wrote off the entire remaining balance of debt issuance costs of approximately $2.7 million, resulting in an extraordinary loss of $1.7 million after income tax benefit. 13. CONTINGENCIES The Company is currently involved in various 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. 39 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (tabular amounts in thousands of dollars except per share amounts) 14. LINE OF BUSINESS AND OPERATIONS BY GEOGRAPHIC AREAS The Company's continuing operations involve one business segment: the manufacture and sale 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 foreign countries through its own direct sales organization or outside distributors and agents. Information about the Company's operations in different geographic areas at December 31, 1995, 1994 and 1993, and for the years then ended, is presented below:
1995 1994 1993 NET SALES: United States................................................. $321,184 $171,780 $134,562 Canada........................................................ 82,892 42,354 39,272 Other countries............................................... 8,761 5,294 2,916 Eliminations.................................................. (91,433) (47,321) (40,611) $321,404 $172,107 $136,139
Net sales include intergeographic sales ($65,703,000 in Canada during 1995; $30,925,000 in Canada during 1994; and $1,613,000 in the U.S. and $21,197,000 in Canada during 1993) and intergeographic service revenues ($17,189,000 in Canada and $8,541,000 in other countries during 1995; $11,429,000 in Canada and $4,967,000 in other countries during 1994; $2,855,000 in the U.S., $12,126,000 in Canada and $2,820,000 in other countries during 1993) which have been eliminated in consolidation. Net sales and service revenues between geographic areas are generally priced to recover cost plus an appropriate markup for profit. Sales to one customer amounted to approximately 16% and 13% of sales for 1995 and 1994, respectively. Sales to two customers amounted to approximately 10% each of sales for 1993. Export sales from the U.S. to unaffiliated customers were approximately $113,853,000 in 1995 which includes sales of approximately $16,930,000 to the Middle East, $54,705,000 to the Pacific Rim and $17,793,000 to Europe. Export sales from the U.S. to unaffiliated customers were approximately $56,868,000 in 1994, which includes sales of approximately $612,000 to the Middle East, $38,895,000 to the Pacific Rim and $8,306,000 to Europe. Export sales from the U.S. to unaffiliated customers were approximately $50,865,000 in 1993, which includes sales of approximately $4,252,000 to the Middle East and $38,585,000 to the Pacific Rim.
1995 1994 1993 OPERATING PROFIT: United States ....................................... $ 83,245 $ 36,564 $ 28,885 Canada .............................................. 13,348 5,560 4,353 Other countries ..................................... 774 828 143 97,367 42,952 33,381 Corporate, interest and other income (expenses) and eliminations ................................. 4,378 (2,657) (9,220) Income from continuing operations before income taxes and extraordinary item ........................... $ 101,745 $ 40,295 $ 24,161 IDENTIFIABLE ASSETS: United States ....................................... $ 350,860 $ 174,538 $ 150,362 Canada .............................................. 39,940 18,078 17,617 Other countries ..................................... 2,813 1,200 1,460 Geographic totals ................................... 393,613 193,816 169,439 General corporate assets ............................ 53,967 91,145 58,805 Total assets ........................................ $ 447,580 $ 284,961 $ 228,244
40 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED QUARTERLY FINANCIAL DATA (tabular amounts in thousands of dollars except per share amounts) 15. RELATED PARTY TRANSACTION During each of the years 1994 and 1993, the Company paid $200,000 (included in selling, general and administrative expense) for various financial advisory services from an investment management firm, two of the principals of which serve on the Board of Directors of the Company. 16. CONCENTRATIONS OF CREDIT RISK 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. Concentrations of credit risk with respect to trade notes and accounts receivable are limited due to the large number of entities comprising the Company's customer base. However, as of December 31, 1995 the Company's receivables are all concentrated in the telecommunications industry. Notes receivable are from customers located in the U.S. and Pacific Rim with approximately 50% of the December 31, 1995 balance receivable from a single U.S. customer. Principally all notes receivable are secured by the related equipment. 17. INTERIM FINANCIAL DATA--UNAUDITED
Quarters ended March 31 June 30 Sept. 30 Dec. 31 1995 Net sales ....................... $ 59,862 $ 74,979 $ 88,104 $ 98,459 Income from continuing operations 13,782 18,223 21,061 23,382 Net income ...................... 13,782 18,223 21,061 23,382 Primary Income per common share: Continuing operations ......... 0.23 0.29 0.33 0.37 Net income .................... 0.23 0.29 0.33 0.37 Fully diluted per common share: Continuing Operations ......... 0.23 0.29 0.33 0.37 Net income .................... 0.23 0.29 0.33 0.37 1994 Net sales ....................... $ 38,446 $ 41,453 $ 43,892 $ 48,316 Income from continuing operations 7,341 7,725 8,385 9,644 Net income ...................... 7,504 7,950 8,385 9,644 Primary income per common share: Continuing operations ......... 0.13 0.13 0.14 0.16 Net income .................... 0.13 0.14 0.14 0.16 Fully diluted per common share: Continuing operations ......... 0.13 0.13 0.14 0.16 Net income .................... 0.13 0.14 0.14 0.16
41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Deloitte & Touche LLP served as the Company's independent auditors for the years ended December 31, 1994 and 1993 and for prior years. On April 7, 1995, the Company replaced Deloitte & Touche LLP with Ernst & Young LLP as its independent auditors for the year ending December 31, 1995. This change in independent auditors, effective April 7, 1995, was recommended by the Audit Committee of the Company's Board of Directors, approved by the Board of Directors on April 4, 1995 and ratified by the stockholders on May 24, 1995. Deloitte & Touche LLP's reports on the consolidated financial statements of the Company for the years ended December 31, 1994 and 1993 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. Also, during the conduct of the 1994 and 1993 audits (i) there were no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure for which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused them to make reference to the subject matter of the disagreements in their independent auditors' reports, and (ii) no "reportable events" (as defined in Item 304(a)(1)(v) of Regulation S-K) occurred. PART III Items 10 through 13 are incorporated herein by reference to the sections captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," "ELECTION OF DIRECTORS," "COMPENSATION--Compensation of Directors," "COMPENSATION--Executive Compensation," "COMPENSATION--Employment Agreements," "COMPENSATION--Compensation Committee Interlocks and Insider Participation," and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934" in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held May 22, 1996. 42 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................................................. 21 Report of Deloitte & Touche LLP Independent Auditors............................................. 22 Consolidated Balance Sheets at December 31, 1995 and 1994........................................ 23 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993........... 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993................................................................................... 25 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993....... 26 Notes to Consolidated Financial Statements....................................................... 28 (ii) Supplemental Schedule: (For the years ended December 31, 1995, 1994 and 1993) Schedule II - Valuation and Qualifying Accounts................................................... 47
All other schedules are omitted because they are not applicable or not required. B. REPORTS ON FORM 8-K There were no reports on Form 8-K for the three months ended December 31, 1995. 43 C. EXHIBITS Exhibit Number Description 2.1 Purchase and Sale Agreement dated as of July 16, 1992 among Glenayre Electronics Ltd. ("GEL"), as Seller and N-W Group, Inc. ("N-W"), Nu-West, Inc. ("Nu-West") and N-W Group Canada Inc. ("N-W Canada"), as Purchasers, was filed as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on July 27, 1992 and is incorporated herein by reference. 2.2 Amendment to Purchase and Sale Agreement, dated November 10, 1992, among GEL, N-W, Nu-West, Glenayre Manufacturing, Ltd. (formerly called N-W Canada) ("Manufacturing"), and Glenayre R & D, Inc. ("R&D") was filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference. 2.3 Second Amendment to Purchase and Sale Agreement, dated September 21, 1995, among GEL, N-W, Nu-West, Manufacturing, and R&D, is filed herewith. 3.1 Composite Certificate of Incorporation of Glenayre reflecting the Certificate of Amendment filed December 8, 1995 is filed herewith. 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 Pursuant to Item 601(4)(iii) of Regulation S-K, an Indenture, dated September 15, 1981, between Hallcraft Homes, Inc. and U.S. Trust Company of New York, and Supplemental Indentures, dated April 30, 1987 and March 11, 1983, are not filed as exhibits to Annual Report on Form 10-K. The Company hereby agrees to furnish a copy of such instrument to the Commission upon request. 10.1 Employment Agreement, dated December 3, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and is incorporated herein by reference.* 10.2 Stock option agreement, dated December 3, 1990, between the Company and Clarke H. Bailey which, in part, amends the Employment Agreement, dated December 31, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(a)(1) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 and is incorporated herein by reference.* 10.3 First Amendment, dated April 15, 1994, to the Employment Agreement, dated December 3, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(a)(2) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 and is incorporated herein by reference.* 10.4 Amendment Agreement, dated February 1, 1995, which in part, amends the Employment Agreement dated December 3, 1990 and the Stock Option agreement dated December 3, 1990 between the Company and Clarke H. Bailey was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 44 10.5 Employment Agreement, dated November 10, 1992, between N-W and Ramon D. Ardizzone was filed as Exhibit 10(b) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference.* 10.6 Amendment, dated March 9, 1995, to the Employment Agreement dated November 10, 1992 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, 1994 and is incorporated herein by reference.* 10.7 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.* 10.8 Amendment, dated December 8, 1995, to the Employment Agreement dated June 21, 1995 between the Company and Ramon D. Ardizzone is filed herewith.* 10.9 Executive Severance Benefit Agreement, dated February 1, 1995, between the Company and Stan Ciepcielinski (the "Ciepcielinski Agreement") was filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference. Executive Severance Benefit Agreements, dated February 1, 1995 between the Company and individually with Russ K. Allen, Kenneth C. Thompson, and Gary B. Smith are identical, in all material respects, with the Ciepcielinski Agreement and are not filed as exhibits. * 10.10 ET Securities Agreement, dated November 10, 1992, between N-W and seven senior employees of the Company was filed as Exhibit 10(c) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference.* 10.11 First Amendment to ET Securities Agreement, dated December 29, 1992, between the Company and seven senior employees of the Company was filed as Exhibit 25(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and is incorporated herein by reference.* 10.12 Second Amendment to ET Securities Agreement, dated March 17, 1994, between the Company and seven senior employees of the Company was filed as Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.* 10.13 Third Amendment to ET Securities Agreement, dated March 9, 1995, between the Company and seven senior employees of the Company was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 10.14 ET Securities Agreement Releases dated as of June 21, 1994 and August 31, 1994 was filed as Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and is incorporated herein by reference.* 10.15 Glenayre Management By Objective Plan for the year ended December 31, 1994 was filed as Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.* 10.16 Glenayre Management By Objective Plan for the year ended December 31, 1995 was filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 45 10.17 Glenayre Management By Objective Plan for the year ended December 31, 1996 is filed herewith.* 10.18 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. 10.19 N-W 1987 Stock Option Plan (conformed to incorporate first amendment effective as of January 12, 1990, second amendment effective as of May 1, 1991 and third amendment effective as of July 15, 1992) was filed as Exhibit 10(v) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference. 10.20 Investment Advisory Agreement, dated October 7, 1988, between Nu-West, Inc. and Cramer Rosenthal McGlynn, Inc. was filed as Exhibit 28(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and is incorporated herein by reference. 11 Computation of Earnings per Common Share is filed herewith. 21 Subsidiaries of the Company is filed herewith. 23.1 Consent of Ernst & Young LLP is filed herewith. 23.2 Consent of Deloitte & Touche LLP is filed herewith. 27 Financial Data Schedule. (Filed in electronic format only. Pursuant to Rule 402 of Regulation S-T, this schedule shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.) *Management Contract 46 GLENAYRE TECHNOLOGIES, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (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 ALLOWANCE FOR DOUBTFUL ACCOUNTS ON ACCOUNTS AND NOTES RECEIVABLE: Year ended December 31, 1995 $ 3,148 $ 505 $ 483 $ 64 $ 4,072 Year ended December 31, 1994 2,499 129 603 83 3,148 Year ended December 31, 1993 1,560 640 956(1) 657(2) 2,499 VALUATION ALLOWANCE ON NOTES RECEIVABLE - FAIR MARKET VALUE ADJUSTMENT: Year ended December 31, 1995 442 (48) --- --- 394 Year ended December 31, 1994 --- 442 --- --- 442 Year ended December 31, 1993 --- --- --- --- --- VALUATION ALLOWANCE ON INVENTORIES: Year ended December 31, 1995 3,153 2,270 (611) 107 4,705 Year ended December 31, 1994 1,481 2,687 --- 1,015(5) 3,153 Year ended December 31, 1993 --- 1,622 --- 141 1,481 VALUATION ALLOWANCE ON REAL ESTATE HELD FOR SALE: Year ended December 31, 1995 --- --- --- --- --- Year ended December 31, 1994 19,657 --- (1,844)(4) 17,813(3) --- Year ended December 31, 1993 19,503 --- 448 294 19,657
(1) Previously established reserves reclassified from accrued liabilities. (2) Includes amounts written off ($139) and amounts related to discontinued operations ($518). (3) Reduction on real estate assets sold. (4) Previously established reserves reclassified to accrued liabilities. (5) Includes amounts written off ($700) or revalued ($315). 47 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 28, 1996. GLENAYRE TECHNOLOGIES, INC. By /s/ Ramon D. Ardizzone Ramon D. Ardizzone 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 28, 1996: /s/ Gerald B. Cramer /s/ Barry W. Gray Gerald B. Cramer Barry W. Gray CHAIRMAN OF THE BOARD AND DIRECTOR DIRECTOR /s/ Clarke H. Bailey /s/ Thomas C. Israel Clarke H. Bailey Thomas C. Israel VICE CHAIRMAN AND DIRECTOR DIRECTOR /s/ John J. Hurley John J. Hurley VICE CHAIRMAN AND DIRECTOR /s/ Ramon D. Ardizzone /s/ Edward J. Rosenthal Ramon D. Ardizzone Edward J. Rosenthal PRESIDENT, CHIEF EXECUTIVE OFFICER DIRECTOR (PRINCIPAL EXECUTIVE OFFICER), AND DIRECTOR /s/ Stan Ciepcielinski /s/ Thomas E. Skidmore Stan Ciepcielinski Thomas E. Skidmore EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER DIRECTOR (PRINCIPAL FINANCIAL OFFICER), SECRETARY AND TREASURER /s/ Billy C. Layton Billy C. Layton VICE PRESIDENT, CONTROLLER, AND CHIEF ACCOUNTING OFFICER (PRINCIPAL ACCOUNTING OFFICER) EXHIBIT INDEX Exhibit Number Description 2.1 Purchase and Sale Agreement dated as of July 16, 1992 among Glenayre Electronics Ltd. ("GEL"), as Seller and N-W Group, Inc. ("N-W"), Nu-West, Inc. ("Nu-West") and N-W Group Canada Inc. ("N-W Canada"), as Purchasers, was filed as Exhibit 2 to the Registrant's Current Report on Form 8-K filed on July 27, 1992 and is incorporated herein by reference. 2.2 Amendment to Purchase and Sale Agreement, dated November 10, 1992, among GEL, N-W, Nu-West, Glenayre Manufacturing, Ltd. (formerly called N-W Canada) ("Manufacturing"), and Glenayre R & D, Inc. ("R&D") was filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference. 2.3 Second Amendment to Purchase and Sale Agreement, dated September 21, 1995, among GEL, N-W, Nu-West, Manufacturing, and R&D, is filed herewith. 3.1 Composite Certificate of Incorporation of Glenayre reflecting the Certificate of Amendment filed December 8, 1995 is filed herewith. 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 Pursuant to Item 601(4)(iii) of Regulation S-K, an Indenture, dated September 15, 1981, between Hallcraft Homes, Inc. and U.S. Trust Company of New York, and Supplemental Indentures, dated April 30, 1987 and March 11, 1983, are not filed as exhibits to Annual Report on Form 10-K. The Company hereby agrees to furnish a copy of such instrument to the Commission upon request. 10.1 Employment Agreement, dated December 3, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990 and is incorporated herein by reference.* 10.2 Stock option agreement, dated December 3, 1990, between the Company and Clarke H. Bailey which, in part, amends the Employment Agreement, dated December 31, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(a)(1) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 and is incorporated herein by reference.* 10.3 First Amendment, dated April 15, 1994, to the Employment Agreement, dated December 3, 1990, between the Company and Clarke H. Bailey was filed as Exhibit 10(a)(2) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 and is incorporated herein by reference.* 10.4 Amendment Agreement, dated February 1, 1995, which in part, amends the Employment Agreement dated December 3, 1990 and the Stock Option agreement dated December 3, 1990 between the Company and Clarke H. Bailey was filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 10.5 Employment Agreement, dated November 10, 1992, between N-W and Ramon D. Ardizzone was filed as Exhibit 10(b) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference.* 10.6 Amendment, dated March 9, 1995, to the Employment Agreement dated November 10, 1992 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, 1994 and is incorporated herein by reference.* 10.7 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.* 10.8 Amendment, dated December 8, 1995, to the Employment Agreement dated June 21, 1995 between the Company and Ramon D. Ardizzone is filed herewith.* 10.9 Executive Severance Benefit Agreement, dated February 1, 1995, between the Company and Stan Ciepcielinski (the "Ciepcielinski Agreement") was filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference. Executive Severance Benefit Agreements, dated February 1, 1995 between the Company and individually with Russ K. Allen, Kenneth C. Thompson, and Gary B. Smith are identical, in all material respects, with the Ciepcielinski Agreement and are not filed as exhibits. * 10.10 ET Securities Agreement, dated November 10, 1992, between N-W and seven senior employees of the Company was filed as Exhibit 10(c) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference.* 10.11 First Amendment to ET Securities Agreement, dated December 29, 1992, between the Company and seven senior employees of the Company was filed as Exhibit 25(a) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and is incorporated herein by reference.* 10.12 Second Amendment to ET Securities Agreement, dated March 17, 1994, between the Company and seven senior employees of the Company was filed as Exhibit 10(f) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.* 10.13 Third Amendment to ET Securities Agreement, dated March 9, 1995, between the Company and seven senior employees of the Company was filed as Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 10.14 ET Securities Agreement Releases dated as of June 21, 1994 and August 31, 1994 was filed as Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and is incorporated herein by reference.* 10.15 Glenayre Management By Objective Plan for the year ended December 31, 1994 was filed as Exhibit 10(h) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and is incorporated herein by reference.* 10.16 Glenayre Management By Objective Plan for the year ended December 31, 1995 was filed as Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference.* 10.17 Glenayre Management By Objective Plan for the year ended December 31, 1996 is filed herewith.* 10.18 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. 10.19 N-W 1987 Stock Option Plan (conformed to incorporate first amendment effective as of January 12, 1990, second amendment effective as of May 1, 1991 and third amendment effective as of July 15, 1992) was filed as Exhibit 10(v) to the Registrant's Current Report on Form 8-K filed November 25, 1992 and is incorporated herein by reference. 10.20 Investment Advisory Agreement, dated October 7, 1988, between Nu-West, Inc. and Cramer Rosenthal McGlynn, Inc. was filed as Exhibit 28(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and is incorporated herein by reference. 11 Computation of Earnings per Common Share is filed herewith. 21 Subsidiaries of the Company is filed herewith. 23.1 Consent of Ernst & Young LLP is filed herewith. 23.2 Consent of Deloitte & Touche LLP is filed herewith. 27 Financial Data Schedule. (Filed in electronic format only. Pursuant to Rule 402 of Regulation S-T, this schedule shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934.) *Management Contract EX-2 2 EXHIBIT 2.3 EXHIBIT 2.3 SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT THIS SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT (this "Amendment") is made and entered into as of the 21st day of September, 1995 by and among GLENTEL INC., a corporation continued under the laws of Canada and formerly named "Glenayre Electronics Ltd." ("Glentel"), GLENAYRE TECHNOLOGIES, INC., a Delaware corporation formerly named "N-W Group, Inc." ("GTI"), GLENAYRE ELECTRONICS, INC., a Colorado corporation formerly named "Nu-West, Inc." ("GEI"), GLENAYRE MANUFACTURING LTD., a corporation continued under the laws of Canada and formerly named "N-W Group Canada Inc." ("GM") and GLENAYRE R&D, INC., a corporation continued under the laws of Canada ("R&D") (GTI, GEI, GM and R&D are collectively referred to herein as "Glenayre"). Statement of Purpose Glentel and Glenayre entered into a Purchase and Sale Agreement dated as of July 16, 1992, as amended by Amendment to Purchase and Sale Agreement dated as of November 10, 1992 (the Purchase and Sale Agreement, as so amended, is referred to herein as the "Purchase Agreement"). Article 8 of the Purchase Agreement provides certain indemnification obligations of Glentel to Glenayre. The parties believe that it is desirable and in their mutual best interests to amend, as hereinafter set forth, certain provisions of Section 8.3 of the Purchase Agreement pertaining to specified litigation matters. NOW, THEREFORE, in consideration of the foregoing Statement of Purpose and the mutual covenants and agreements contained herein, the parties do hereby agree as follows: Section 1. Indemnification for Certain IP Actions. (a) On or Before November 10, 1995. The provisions of this Section 1 shall apply only to the indemnification obligations of Glentel after November 10, 1995 with respect to Special IP Actions. Nothing in this Section 1 shall in any way modify, limit or restrict the indemnification obligations of Glentel with respect to Special IP Actions on or before November 10, 1995, such indemnification obligations to continue in all respects to be subject to the provisions of Section 8.3 of the Purchase Agreement without regard to this Section 1. (b) After November 10, 1995. With respect to the Special IP Actions, Glentel shall be liable for, shall pay or cause to be paid, and shall indemnify and hold Glenayre and the Acquired Companies and in each case their respective shareholders, directors, officers, employees, agents and Affiliates, harmless from and against 50% of any and all Losses in any way relating to or arising out of the Special IP Actions realized after November 10, 1995 and on or before November 10, 1998; provided, however, that in no event shall Glentel's portion of such Losses exceed CDN $3,000,000. (c) Other Provisions. The provisions of Section 8.3(a), (c), (e) and (f) of the Purchase Agreement shall be applicable to all indemnification obligations of Glentel arising under this Section 1. The obligations of Glentel to provide letters of credit as security for its obligations under Article 8 of the Purchase Agreement shall continue in effect without regard to this Amendment and this Amendment shall not itself effect any extension of the periods during which Glentel is required to provide the Letter of Credit under the Letter of Credit Agreement dated as of November 10, 1992 between Glentel and GTI. (d) Definitions. For purposes of this Section 1, the following terms shall have the following meanings: "Special IP Actions" means any of the actions described on Schedule 1 to this Amendment. "Loss" shall have the meaning set forth in Schedule 1 to the Purchase Agreement. "Affiliates" shall have the meaning set forth in Schedule 1 to the Purchase Agreement. "Acquired Companies" shall have the meaning set forth in Schedule 1 to the Purchase Agreement. Section 2. Non-Applicability of Certain Limitations. The parties acknowledge and agree that the limitations on indemnifications set forth in Section 8.5 of the Purchase Agreement do not apply in any manner whatsoever to (i) any indemnification obligations of Glentel under Section 8.3 of the Purchase Agreement or (ii) any indemnification obligations of Glentel under Section 1 of this Amendment. Section 3. Release. Glenayre hereby releases Glentel from any and all liability for indemnification under the Purchase Agreement with respect to the following claim: claim for infringement of U.S. Patent No. 5,239,671 of PageMart, Inc., and any and all civil actions and other proceedings of any type whatsoever concerning such patent, including but not limited to PageMart, Inc. v. Mobile Media, United States District Court for the Northern District of Texas, Dallas Division, Action No. 3-96CV1048-P. Section 4. Certain Nondisclosed IP Actions. The parties confirm that the following claims are IP Actions which were not Disclosed IP Actions: (i) claim for infringement by Sherman Wolf of U.S. Patent No. 5,151,929, and any and all civil actions and other proceedings of any kind whatsoever relating to such patent, (ii) claim for infringement by Polansky Electronics Ltd. of Australian Patent No. 588943 and Russian Patent Application No. 4742501.09, and any and all civil actions and other proceedings of any type whatsoever relating to such patents and (iii) claim for infringement by Theis Research, Inc. of U.S. Patent Nos. 4,270,024, 4,559,416, 4,747,125, 4,800,583 and 4,982,420, and any and all civil actions and other proceedings of any type whatsoever relating to such patents, including but not limited to Octel Communications Corporation et al. v. Theis Research, Inc. et al., United States District 2 Court for the Northern District of California, San Jose Division, Action Nos. C 92 20217 RMW (PVT), C 93 20287 JW (EAI), C 93 20288 RMW (EAI). The parties agree that each such claim is, therefore, subject to the provisions of Section 8.3(d) of the Purchase Agreement. The terms "IP Action" and "Disclosed IP Action" shall have the meanings set forth in the Purchase Agreement. Section 5. Effect. Except as amended by this Amendment, the Purchase Agreement shall continue in full force and effect to the extent provided therein. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of the day and year first above written. GLENTEL INC. By: /s/ Thomas Skidmore Name: Thomas Skidmore Title: Chairman/CEO GLENAYRE TECHNOLOGIES, INC. By: /s/ Clarke H. Bailey Name: Clarke H. Bailey Title: Vice Chairman GLENAYRE ELECTRONICS, INC. By: /s/ Clarke H. Bailey Name: Clarke H. Bailey Title: Chairman 3 GLENAYRE MANUFACTURING LTD. By: /s/ Clarke H. Bailey Name: Clarke H. Bailey Title: Chairman GLENAYRE R&D, INC. By: /s/ Clarke H. Bailey Name: Clarke H. Bailey Title: Chairman 4 SCHEDULE 1 TO SECOND AMENDMENT TO PURCHASE AND SALE AGREEMENT A. POLANSKY PATENT CLAIM Claim for infringement of the following patents: U.S. Patent No. 4,809,297 and Canadian Patent No. 1,233,059, and any and all civil actions and other proceedings of any type whatsoever relating to those parents, including but not limited to Polansky Electronics Ltd. v. Glenayre Electronics Ltd., Celcom Electronics, Ltd., Glenayre Communications Inc., Clinton Millett, and Cyril Johnson, Queen's Bench of Alberta, Judicial District of Calgary, Action No. 9001-14858, Glenayre Electronics Ltd. v. Polansky Electronics Ltd., Federal Court of Canada, Calgary, Action No. T-618-91, Glenayre Electronics Ltd. v. Polansky Electronics Ltd., United States District Court for the District of Columbia, Civil Action No. 90-1255, and proposed re- examination of U.S. Patent No. 4,809,297 before the United States Patent and Trademark Office. B. Gilbarco Patent Claim Claim for infringement of U.S. Patent No. 4,625,081, and any and all civil actions and other proceedings of any kind whatsoever relating to such patent, including but not limited to Gilbarco Inc. v. Octel Communications Corporation, United States District Court for the Northern District of California, San Jose Division, Action No. C-94 20780 JW. C. THEIS PATENT CLAIM Claim for infringement of the following patents: U.S. Patent Nos. 4,112,384, 4,150,255, 4,152,547, 4,328,396, 4,338,494, 4,439,635, 4,539,436, 4,692,817, 4,719,647 and 4,856,050, and any and all civil actions and other proceedings of any type whatsoever relating to such patents, including but not limited to Octel Communications Corporation et al. v. Theis Research, Inc., et al., United States District Court for the Northern District of California, San Jose Division, Action Nos. C 92 20217 RMW (PVT), C 93 20287JW (EAI), C 93 20288RMW (EAI). 5 EX-3 3 EXHIBIT 3.1 EXHIBIT 3.1 COMPOSITE CERTIFICATE OF INCORPORATION OF GLENAYRE TECHNOLOGIES, INC. FIRST: The name of the Corporation is Glenayre Technologies, Inc. SECOND: The registered office of the Corporation is to be located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 205,000,000 consisting of 200,000,000 Common Shares with a par value of $0.02 per share and 5,000,000 Preferred Shares with a par value of $0.01 per share. The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of the Preferred Shares in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The rights in respect of dividends on the shares of that series, whether dividends shall be cumulative and, if so, from which date or dates and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights in addition to the voting rights provided by law and, if so, the terms and extent of such voting rights. (d) Whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative rights, preferences, limitations and powers of that series. FIFTH: The name and address of the Incorporator are as follows: NAME ADDRESS Diane Flanagan 229 South State Street Dover, Delaware 19901 SIXTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (1) Except as otherwise permitted by any provisions of the Certificate of Incorporation relating to the rights of holders of any class or series of shares, having a preference over the Common Shares as to dividends or upon liquidation, to elect additional directors in certain circumstances, the number of directors of the Corporation shall be fixed from time to time by the vote of a majority of the entire Board of Directors, but such number shall in no case be less than three. Any such determination made by the Board of Directors shall continue in effect unless and until changed by the Board of Directors, but not such changes shall affect the term of any director then in office. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1990 annual meeting of stockholders, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At each succeeding annual meeting of stockholders beginning in 1991, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the authorized number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the 2 annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. Except as otherwise required by law or permitted by any provisions of the Certificate of Incorporation relating to the rights of holders of any class or series of shares, having a preference over the Common Shares as to dividends or upon liquidation, to elect directors in certain circumstances, any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled only by a majority of the Board of Directors then in office provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of shares, having a preference over the Common Shares as to dividends or upon liquidation, issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article SIXTH, Section 1. Any director elected by the stockholders, or by the Board of Directors to fill a vacancy, may be removed only for cause by the affirmative vote of the holders of a majority of the voting power represented by all the shares of stock of the Corporation outstanding and entitled to vote for the election of directors, given at a duly called annual or special meeting of stockholders. (2) In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the by-laws of the Corporation. (3) The directors in their discretion may submit any contract or act for approval or ratification at any annual meeting of the stockholders or at any meeting of the stockholders called for the purpose of considering any such act or contract, and any contract or act that shall be approved or be ratified by the vote of the holders of a majority of the stock of the Corporation which is represented in person or by proxy at such meeting and entitled to vote thereat (provided that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and as binding upon the Corporation and upon all the stockholders is though it had been approved or ratified by every stockholder of the Corporation, whether or not the contract or act would otherwise be open to legal attack because of directors' interest, or for any other reason. (4) In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this Certificate, and to the by-laws as from time 3 to time in effect; provided, however, that no such by-law shall invalidate any prior act of the directors which would have been valid if such by-law had not been made. SEVENTH: (1) No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except (i) for any breach of a director's duty of loyalty to the Corporation or its stockholder, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which a director derived an improper personal benefit. (2) The Corporation shall indemnify, in accordance with and to the full extent now or hereafter permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative (including, without limitation, an action by or in the right of the Corporation), by reason of his acting as a director or officer of the Corporation (and the Corporation, in the discretion of the Board of Directors, may so indemnify a person by reason of the fact that he is or was an employee of the Corporation or is or was serving at the request of the Corporation in any other capacity for or on behalf of the Corporation) against any liability or expense actually and reasonably incurred by such person in respect thereof; provided, however, the Corporation shall be required to indemnify an officer or director in connection with an action, suit or proceeding initiated by such person only if such action, suit or proceeding was authorized by the Board of Directors of the Corporation. Such indemnification is not exclusive of any other right to indemnification provided by law or otherwise. The right to indemnification conferred by this paragraph (2) of Article Seventh shall be deemed to be a contract between the Corporation and each person referred to herein. (3) No amendment to or repeal of these provisions shall apply to or have any effect on the liability or alleged liability of any person for or with respect to any acts or omissions of such person occurring prior to such amendment. EIGHTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by a consent in writing by any such holders. NINTH: Except as otherwise required by law and subject to the rights of the holders of any class or series of shares issued by the Corporation, having a preference over the Common Shares as to dividends or upon liquidation, to elect directors in certain circumstances, special meetings of the stockholders of the Corporation may be called only by (i) the Board of Directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office, (ii) the Chairman of the Board, if one is elected or (iii) the President. Only those matters set forth in the notice of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. 4 TENTH: The Corporation reserves the right to repeal, alter or amend this Certificate of Incorporation in the manner now or hereafter prescribed by statute. No repeal, alteration or amendment of this Certificate of Incorporation shall be made unless the same is first approved by the Board of Directors of the Corporation pursuant to a resolution adopted by the affirmative vote of a majority of the directors then in office and thereafter approved by the stockholders. For purposes of the foregoing sentence and in addition to any other vote required by law, the affirmative vote of the holders of shares of capital stock having at least 80% of the votes which could be cast by the holders of all shares of capital stock entitled to vote thereon (or such greater proportion as may be required by law), voting together as a single class, at a duly constituted meeting of stockholders called expressly for such purpose, shall be required to repeal, alter or amend any provision of, or adopt any provision inconsistent with, Section 1 of Article SIXTH or Article EIGHTH or NINTH or this Article TENTH. ELEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware, may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class or creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. TWELFTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. 5 EX-10 4 EXHIBIT 10.8 EXHIBIT 10.8 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and entered into as of the 8th day of December, 1995 by and between GLENAYRE TECHNOLOGIES, INC., a Delaware corporation (the "Corporation"), and RAMON D. ARDIZZONE. Statement of Purpose The Corporation and the Executive entered into an Employment Agreement dated as of June 21, 1995 (the "Employment Agreement"). The Corporation and the Executive desire to amend the Employment Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing Statement of Purpose and the terms and provisions of this Agreement, the parties hereto agree as follows: I. Paragraph 1(a) of the Employment Agreement is hereby amended to read as follows: "(a) Employment. The Corporation hereby employs the Executive, and the Executive hereby agrees to serve, as President and Chief Executive Officer of the Corporation, provided that at such time as the Board of Directors of the Corporation (the `Board') shall determine, but in no event later than January 1, 1997, the Executive shall become Vice Chairman of the Board and Chief Executive Officer of the Corporation. The Executive shall be nominated for re-election to a new three-year term as a member of the Board at the Corporation's 1996 annual shareholders' meeting." II. Paragraph 2(a) of the Employment Agreement is hereby amended to read as follows: "(a) Term. The initial term of the Executive's employment hereunder shall commence on the Effective Date and shall continue until December 31, 1997. The term of the Executive's employment hereunder shall be renewed for successive one-year renewal terms thereafter unless written notice is given by either party to the other party not less than 90 days prior to the expiration of the initial term or any renewal term. The initial term and each renewal term are referred to collectively in this Agreement as the `Term.'" III. Paragraph 2(b) of the Employment Agreement is hereby amended to add the following Paragraph 2(b)(5): "(5) The Corporation may terminate the Executive's employment hereunder for any reason whatsoever upon 60 days prior written notice of such termination to the Executive during the initial term of his employment hereunder or upon 14 days prior written notice of such termination to the Executive during any renewal term of his employment hereunder, provided that the Corporation complies with the provisions of Paragraph 2(f)(1),(2),(4) and (6) below." IV. Paragraph 2(c)(1) of the Employment Agreement is hereby amended to read as follows: "(1) the Executive's resignation from the office of President and Chief Executive Officer or Vice Chairman of the Board and Chief Executive Officer (as applicable at the time) without the Corporation's prior consent;" V. Paragraph 2(e)(1) of the Employment Agreement is hereby amended to read as follows: "(1) except where such failure or change is specifically approved by the Executive (whether as a member of the Board or individually), failure to elect or reelect or to appoint or reappoint the Executive either to the office of President and Chief Executive Officer of the Corporation or Vice Chairman of the Board and Chief Executive Officer of the Corporation, or any other material change by the Corporation of the Executive's functions, duties or responsibilities which would cause the ranking or level, dignity, responsibility, importance or scope of the Executive's position with the Corporation to become of less dignity, responsibility, importance or scope from the position and attributes thereof described in Paragraph 1 above; provided, however, that the Executive must first (i) provide the Board with written notice specifying the particular failure of the Corporation under this Paragraph 2(e)(1), and (ii) allow the Board 60 days from receipt of notice to cure such failure;" VI. Paragraph 2(e)(7) of the Employment Agreement is hereby amended to read as follows: "(7) Any change in the principal office of the Corporation to a location which is more than 30 miles from its current location at 5935 Carnegie Boulevard, Charlotte, North Carolina." VII. Paragraph 2(f)(2) of the Employment Agreement is hereby amended to read as follows: "(2) In the event that the Executive's employment hereunder is terminated (i) by the Corporation because of the Executive's `Total and Permanent Disability' pursuant to Paragraph 2(b)(2) above, (ii) because of the 2 Executive's death pursuant to Paragraph 2(b)(4) above, (iii) by the Executive for `Good Reason' pursuant to Paragraph 2(b)(3) above or (iv) by the Corporation pursuant to Paragraph 2(b)(5) above, then and in any such event, the Corporation shall also pay to the Executive a pro rata share of his bonus under the Management by Objectives Bonus Plan described in Paragraph 3(b) below for the fiscal year of the Corporation in which such termination occurs, calculated, for purposes of determining whether the targets contained therein have been met, under the assumption that the results of operations and financial condition of the Corporation (or any applicable subsidiary) as of the termination date shall continue on the same basis through the end of such fiscal year." VIII. Paragraph 2(f)(3)(i) of the Employment Agreement is hereby amended to read as follows: "(i) by the Corporation without `Cause'" IX. Paragraph 3(a) of the Employment Agreement is hereby amended to read as follows: "(a) Base Salary. The Corporation shall pay to the Executive an initial Base Salary of $350,000, provided, however, that at such time as the Executive becomes Vice Chairman of the Board and Chief Executive Officer of the Corporation, such Base Salary shall become $150,000 per annum (the applicable Base Salary, with any increases during the Term being referred to herein as the `Base Salary'). The Base Salary shall be payable in equal monthly installments on the last business day of each month, or in such other installments and at such other times as the parties hereto may mutually agree upon. The Base Salary may be increased (but not decreased) in the manner determined by the Board or its Compensation Committee in its absolute discretion." X. Paragraph 3(b) of the Employment Agreement is hereby amended to read as follows: "(b) Management by Objectives Bonus Plan. The Executive shall participate at a 50% level in the Glenayre Management by Objectives Bonus Plan as in effect from time to time (the `MBO Plan'), provided that at such time as the Executive becomes Vice Chairman of the Board and Chief Executive Officer of the Corporation, his annual bonus under the MBO Plan shall be increased to $300,000. In the event that the Executive becomes Vice Chairman of the Board and Chief Executive Officer of the Corporation during a particular fiscal year in the Corporation, the Corporation and the Executive shall agree upon an equitable determination of his bonus under the MBO Plan for such year to take into account the change in the determination of such bonus." 3 XI. Paragraph 3(c) of the Employment Agreement shall be amended to read as follows: "(c) Stock Options. Within 30 days prior to January 1, 1996, January 1, 1997 and each January 1 thereafter during remainder of the Term, the Executive shall be awarded options, under the Corporations's Long-Term Incentive Plan or any similar or substitute option plan (the `Option Plan'), to purchase no fewer than 50,000 shares of the common stock of the Corporation. For each award, the exercise price of such option shall be the `Closing Price' (as defined in the Option Plan) on the day of such award. Each such option shall be vested as follows: one-third of the shares subject to such option shall be vested on the date of such award, an additional one-third of the shares subject to such option shall be vested on the first anniversary of such award and the remaining one-third of the shares subject to such option shall be vested on the second anniversary of such award, provided, however, that such stock option shall be fully vested upon any termination of the Executive's employment hereunder other than for Cause or upon any `Change in Control' of the Corporation (as defined in the Option Plan)." XII. The Executive acknowledges and agrees that no event has occurred prior to the date hereof which constitutes "Good Reason" (as defined in Paragraph 2(e) of the Employment Agreement), including without limitation a "Change in Control", as defined in Paragraph 2(e)(6) of the Employment Agreement), which would entitle the Executive to terminate his employment under the Employment Agreement and to be paid certain payments under Paragraph 2(f) of the Employment Agreement. XIII. Except as expressly amended hereby, the Employment Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. GLENAYRE TECHNOLOGIES, INC. By: /s/ Clarke H. Bailey Title: Vice Chairman /s/ Ramon D. Ardizzone Ramon D. Ardizzone 4 EX-10 5 EXHIBIT 10.17 Glenayre Management By Objective Plan for the year ended December 31, 1996 In accordance with Instruction 2 of Item 402(k) of Regulation S-K, certain information relating to target levels and factors involving confidential business information, the disclosure of which would have an adverse effect on Registrant, has been omitted from this Exhibit. Glenayre Technologies, Inc. Management By Objective (MBO) Plan For the year ended December 31, 1996 The Management By Objectives Plan (the "Plan") is established to motivate and provide incentive to the key operations managers of Glenayre Technologies, Inc. and its wholly-owned subsidiaries around the world ("the Company") to improve profits over budgeted amounts. Minimum and Maximum Performance The focus of the Plan is for "Earnings" to exceed $ US, i.e., the top level of annualized "Earnings" of Glenayre Technologies, Inc. required to maximize the 1996 MBO payment, where "Earnings" is defined as Income from Operations plus Goodwill Amortization Expense.l The 1996 Minimum Annual Target of annualized Earnings for any MBO payments to be made has been set at $ US. These Targets have been established by the Board of Directors. This Plan is only valid and funds will only be paid if the Company's Quarterly and Annual 1996 Earnings exceed the respective quarterly Minimum Targets described below. Employment Term All participants must remain as full-time employees of the Company for the full year ending December 31, 1996. Participants Each Plan participant will have a maximum potential MBO bonus, as established by management, and approved annually by the Board of Directors, ranging from % to % of his/her respective Base Annual Salary. An employee may only participate in one bonus or incentive pay program within the Company. Any additions or changes to the 1996 MBO Plan participants must have advance approval of the President. An individual who becomes eligible to participate in the Plan after the first of the Plan year at any level will be paid on a prorated basis for the period of time that he/she participates in the Plan. Also, if an approved change occurs for a Plan participant, such change will be implemented prospectively from the effective date of the change. Performance Measurement for Bonus Payment An individual's actual Bonus payments will be based on the following two Performance Measurement Segments: * 70% of the Bonus will be based on the Company achieving the Earnings Target used to establish the Payment Pool, as defined below ("Earnings Segment"). 1 "Earnings" does not include the impact of interest income or expense, exchange gain/(loss), other income/(loss), income taxes or investment tax credits, any real estate transactions and expenses, and business unit disposal or acquisition costs. 2 * 30% of the Bonus will be based on achievement of Individual Objectives as provided on the Glenayre Performance Appraisal form ("Performance Segment"). Each individual must have at least three measurable objectives stated on the Glenayre Performance Appraisal form, as established in a partnership manner between the employee and his/her manager, in order for him/her to participate. The achievement of these objectives will be monitored by the employee's respective supervisor. Bonus Payments Bonus payments will be made on a quarterly basis in 1996 based on the following parameters: - Achievement of Board-minimum quarterly cumulative Earnings Targets, as defined below: Calendar Cumulative Target Quarter % of Cumulative Minimum Annual Minimum Target Earnings 1 25% $ US 2 50% $ US 3 75% $ US 4 100% $ US - - If the maximum quarterly cumulative Earnings Targets, as defined below, are not met, all individual bonus payments will be made on a pro rata basis. Calendar Cumulative Target Cumulative Quarter % of Maximum Annual Maximum Target Earnings 1 25% $ US 2 50% $ US 3 75% $ US 4 100% $ US - - No portion of the Performance Segment, (i.e., the 30% portion, as defined under Performance Measurement) is paid out until the year end bonus payment is made, as described below. - - The Earnings Segment of the 1996 bonus payment (i.e., the 70% portion as defined under Performance Measurement) has the following cumulative quarterly limitations on the amount that will actually be paid in a given quarter: 3 Calendar Cumulative Limitation Quarter 1st 50% of cumulative bonus 2nd 50% of cumulative bonus 3rd 70% of cumulative bonus Year End Balance of cumulative bonus Example of Bonus Payment on the Earnings Segment (i.e., the 70% Segment) Before Year End: A Plan participant with a Base Annual Salary of $ per year who is employed for the full year with a maximum potential MBO bonus percentage of Base Annual Salary of 10% has a total 1996 bonus potential of $ , i.e., $ Salary times 10% Maximum potential MBO bonus percentage. This maximum $ bonus potential would be paid out if all Targets are met as follows: --70% (i.e., $ ) on fully achieving the pro rata portion of the top level Earnings Objective of $ US --30% (i.e., $ ) on fully achieving Individual Objectives of the Performance Segment Based on this allocation, the potential bonus available to be paid for the Earnings Segment of the Plan before year end is as follows: Calendar Quarterly Maximum Estimated Quarter Cumulative Cumulative Payment Limitation Calculation Potential(1) Date 1st 50% $ *50%/4 $ May 1996 2nd 50% $ *50%/4*2 August 1996 3rd 70% $ *70%/4*3 November 1996 (1) Assumes 100% of the cumulative top level Earnings Target is achieved. These amounts do not include any amounts for achievement of individual objectives under the Performance Segment which is determined and paid out after year end. Also, each quarter's payment as calculated above is reduced by any previously received payments under the Plan. Year End MBO Bonus Payment The Year End MBO Bonus payment for 1996, as described in the example below, will be made within forty-five (45) days after the audit completion and Board approval of the Company's 1996 year-end financial statements. The Year End MBO Bonus payment will be comprised of two segments. The following formulae reflects achieving 100% of the top level Target Earnings Objective of $ US. If less than 100% of such Objective is achieved, the Year End MBO Bonus will be reduced on a pro rata basis. The formulae are as follows: 4 Target Earnings Segment (i.e., the 70% segment): ((1996 Base Annual Salary) X (Individual's % of Base Pay for Bonus) X (70%) X (% of Target Earnings Achieved)) Less (1996 Bonus Amounts Previously Paid) Equals Final "Earnings Segment" Bonus Individual Performance Segment (i.e., the 30% segment): ((1996 Base Salary) X (Individual's % of Base Pay for Bonus) X (30%) X (Achievement % of Individual Objectives) X (% of Target Earnings Achieved) Equals Final "Performance Segment" Bonus The sum of these two segments represents the total final 1996 Year End MBO Bonus amount to be paid. 5 EX-11 6 EXHIBIT 11 Exhibit 11 GLENAYRE TECHNOLOGIES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE FOR THE THREE YEARS ENDED DECEMBER 31, 1995 (1) (In Thousands Except per Share Amounts) Year Ended December 31, 1995 1994 1993 Income from continuing operations before extraordinary item ...... $ 76,448 $ 33,095 $ 23,700 Gain from discontinued operations . -- 388 100 Income before extraordinary item .. 76,448 33,483 23,800 Extraordinary item ................ -- -- (1,695) Net income ........................ $ 76,448 $ 33,483 $ 22,105 PRIMARY EARNINGS PER SHARE Weighted average shares outstanding during the period .............. 58,298 55,007 45,362 Common stock equivalents .......... 4,182 3,696 4,037 62,480 58,703 49,399 Continuing operations ............. $ 1.22 $ 0.56 $ 0.48 Discontinued operations ........... -- 0.01 -- Income before extraordinary item .. 1.22 0.57 0.48 Extraordinary item ................ -- -- (0.03) Net income per share .............. $ 1.22 0.57 $ 0.45 FULLY DILUTED EARNINGS PER SHARE Weighted average shares outstanding during the period .............. 58,298 55,007 45,362 Common stock equivalents .......... 4,515 3,785 4,518 62,813 58,792 49,880 Continuing operations ............. $ 1.22 $ 0.56 $ 0.48 Discontinued operations ........... -- 0.01 -- Income before extraordinary item .. 1.22 0.57 0.48 Extraordinary item ................ -- -- (0.03) Net income per share .............. $ 1.22 $ 0.57 $ 0.45 (1) Financial information contained in this report has been adjusted for a three-for-two common stock split distributed on June 19, 1995 and a three-for-two common stock split distributed on December 29, 1995. EX-21 7 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF GLENAYRE The following subsidiaries are wholly-owned, directly or indirectly through wholly-owned subsidiaries of Glenayre. Name of Subsidiary Jurisdiction of Incorporation Glenayre Electronics, Inc. Colorado, U.S.A. Glenayre Manufacturing Ltd. Canada Glenayre R & D, Inc. Canada Glenayre Electronics Singapore PTE Ltd. Singapore Glenayre Electronics (U.K.) Limited United Kingdom Glenayre Digital Systems, Inc. North Carolina, U.S.A. Glenayre Services Ltd. Canada Glenayre de Mexico SA de CV Mexico Glenayre Administracion SA de CV Mexico Glenayre Electronics South America Ltda. Brazil Glenayre Electronics Europe B.V. Netherlands Glenayre Electronics (Hong Kong) Limited Hong Kong Glenayre Electronics Philippines, Inc. Philippines Genera Hawaii Commerce Corp. Hawaii, U.S.A. Headway Colorado, Inc. Colorado, U.S.A. Headway Hawaii, Inc. Hawaii, U.S.A. Headway Texas, Inc. Texas, U.S.A. Sunway Financial Services, Inc. Texas, U.S.A. Sunway Management, Inc. Texas, U.S.A. Western SCC, Inc. California, U.S.A. Western Multiplex Corporation California, U.S.A. The names of other subsidiaries have been omitted because, considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary. EX-23 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Glenayre Technologies, Inc.'s Registration Statements No. 33-43797 on Form S-8, No. 33-43798 on Form S-8, No. 33-68766 on Form S-8, No. 33-80464 on Form S-8 and No. 33-88818 on Form S-4, as amended by Post-Effective Amendment No. 1 on Form S-8 of our report dated January 31, 1996, with respect to the consolidated financial statements and schedule of Glenayre Technologies, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Charlotte, North Carolina March 27, 1996 EX-23 9 EXHIBIT 23.2 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Glenayre Technologies, Inc.'s Registration Statements No. 33-43797 on Form S-8, No. 33-43798 on Form S-8, No. 33-68766 on Form S-8, No. 33-80464 on Form S-8 and No. 33-88818 on Form S-4, as amended by Post-Effective Amendment No. 1 on Form S-8 of our report dated February 3, 1995, appearing in the Annual Report on Form 10-K of Glenayre Technologies, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Charlotte, North Carolina March 27, 1996 EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 114,654 0 112,305 4,057 50,045 276,681 47,920 10,806 447,580 53,194 0 0 0 298,218 92,476 447,580 321,404 321,404 138,773 138,773 89,118 0 190 101,745 25,297 76,448 0 0 0 76,448 1.22 1.22
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