SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30,2000 Commission file number 1-9802 SYMBOL TECHNOLOGIES, INC.__________________ (Exact name of registrant as specified in its charter) Delaware 11-2308681______ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Symbol Plaza, Holtsville, NY 11742_________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 631-738-2400 Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at September 30,2000 Common Stock, 137,606,481 shares par value $0.01 SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PAGE PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 2 Condensed Consolidated Statements of Earnings Three and Nine Months Ended September 30, 2000 and 1999 3 Condensed Consolidated Statements of Cash Flows Three and Nine Months Ended September 30, 2000 and 1999 4 - 5 Notes to Condensed Consolidated Financial Statements 6 - 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 17 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION 18 - 23 SIGNATURES 24 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (All amounts in thousands, except stock par value) September 30, December 31, ASSETS 2000 1999____ (Unaudited) CURRENT ASSETS: Cash and temporary investments $ 50,268 $ 30,128 Accounts receivable, less allowance for doubtful accounts of $12,894 and $11,924, respectively 364,575 252,140 Inventories 305,924 216,709 Deferred income taxes 54,199 44,794 Prepaid and refundable income taxes 14,462 - Other current assets 71,336 40,430 TOTAL CURRENT ASSETS 860,764 584,201 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $149,966 and $116,930, respectively 234,658 206,116 INTANGIBLE AND OTHER ASSETS, net of accumulated amortization of $139,325 and $115,149, respectively 262,490 257,627 $1,357,912 $1,047,944 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $186,743 $188,178 Current portion of long-term debt 14,881 10,046 Income taxes payable - 15,559 Deferred revenue 17,371 18,805 TOTAL CURRENT LIABILITIES 218,995 232,588 LONG-TERM DEBT, less current maturities 204,807 99,623 OTHER LIABILITIES AND DEFERRED REVENUES 68,574 75,273 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $1.00; authorized 10,000 shares, none issued or outstanding - - Common stock, par value $0.01; authorized 300,000 shares; issued 155,945 shares and 101,788 shares, respectively 1,559 1,018 Retained earnings 585,427 479,806 Treasury stock, at cost, 18,339 shares and 13,116 shares, respectively (220,443) (200,861) Other stockholders' equity 498,993 360,497 865,536 640,460 $1,357,912 $1,047,944 See notes to condensed consolidated financial statements -2- SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (All amounts in thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30,__ 2000 1999 2000 1999_ NET REVENUE $373,249 $293,030 $1,034,658 $826,823 COST OF REVENUE 212,600 163,322 588,528 460,919 AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS 6,602 4,601 17,930 13,236 GROSS PROFIT 154,047 125,107 428,200 352,668 OPERATING EXPENSES: Engineering 24,832 21,112 69,902 60,173 Selling, general and administrative 64,770 55,485 187,589 161,048 Amortization of excess of cost over fair value of net assets acquired 1,397 1,254 4,196 3,724 90,999 77,851 261,687 224,945 EARNINGS FROM OPERATIONS 63,048 47,256 166,513 127,723 INTEREST EXPENSE, net (3,562) (1,316) (7,155) (3,984) EARNINGS BEFORE PROVISION FOR INCOME TAXES 59,486 45,940 159,358 123,739 PROVISION FOR INCOME TAXES 19,036 15,160 50,995 40,834 NET EARNINGS $ 40,450 $ 30,780 $108,363 $ 82,905 EARNINGS PER SHARE: Basic $0.29 $0.23 $0.79 $0.63 Diluted $0.28 $0.22 $0.74 $0.59 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 137,541 132,653 136,423 132,452 Diluted 146,907 141,378 146,881 141,182 See notes to condensed consolidated financial statements -3- SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands) (Unaudited) Three Months Ended September 30, 2000 1999____ Cash flows from operating activities: Net earnings $40,450 $30,780 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization of property, plant and equipment 11,993 11,581 Other amortization 8,673 7,058 Provision for losses on accounts receivable 854 621 Changes in assets and liabilities net of effects of acquisitions & divestitures: Accounts receivable (70,433) (17,985) Inventories (21,597) (3,201) Other current assets (991) (2,398) Accounts payable and accrued expenses 19,165 31,153 Other liabilities and deferred revenues (4,839) (1,645) Tax benefits from exercise of stock options 5,960 6,553 Net cash (used in)/provided by operating activities (10,765) 62,517 Cash flows from investing activities: Purchases of property, plant and equipment (21,818) (18,474) Investments in intangible and other assets (221) (18,977) Acquisition of subsidiaries (2,154) (1,844) Purchase of available for sale securities - (1,000) Net cash used in investing activities (24,193) (40,295) Cash flows from financing activities: Net proceeds from issuance and repayment of notes payable and long term debt 50,644 (13,007) Exercise of stock options and warrants 5,786 6,120 Dividends paid (1,377) (1,330) Purchase of treasury shares (8,063) (13,319) Net cash provided by/(used in) financing activities 46,990 (21,536) Effects of exchange rate changes on cash (1,317) 591 Net increase in cash and temporary investments 10,715 1,277 Cash and temporary investments, beginning of period 39,553 24,240 Cash and temporary investments, end of period $50,268 $25,517 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,325 $ 1,233 Income taxes $ 8,503 $ 3,446 See notes to condensed consolidated financial statements -4- SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (All amounts in thousands) (Unaudited) Nine Months Ended September 30, 2000 1999__ Cash flows from operating activities: Net earnings $108,363 $82,905 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization of property, plant and equipment 35,461 28,933 Other amortization 24,176 19,851 Provision for losses on accounts receivable 2,022 2,591 Changes in assets and liabilities net of effects of acquisitions & divestitures: Accounts receivable (120,111) (30,269) Inventories (90,118) 12,938 Other current assets (36,530) (8,485) Accounts payable and accrued expenses (1,992) 4,689 Other liabilities and deferred revenues (38,154) 17,620 Tax benefits from exercise of stock options 52,758 13,011 Net cash (used in)/provided by operating activities (64,125) 143,784 Cash flows from investing activities: Purchases of property, plant and equipment (64,707) (55,834) Investments in intangible and other assets (37,103) (49,082) Acquisition of subsidiaries (3,752) (8,068) Purchase of available for sale securities - (1,000) Net cash used in investing activities (105,562) (113,984) Cash flows from financing activities: Net proceeds from issuance and repayment of notes payable and long term debt 110,019 4,717 Exercise of stock options and warrants 27,393 11,142 Dividends paid (2,742) (2,508) Purchase of treasury shares (42,500) (32,005) Reissuance of treasury shares 100,000 - Net cash provided by/(used in) financing activities 192,170 (18,654) Effects of exchange rate changes on cash (2,343) (1,913) Net increase in cash and temporary investments 20,140 9,233 Cash and temporary investments, beginning of period 30,128 16,284 Cash and temporary investments, end of period $50,268 $25,517 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6,854 $ 3,448 Income taxes $23,429 $ 6,099 See notes to condensed consolidated financial statements -5- SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands, except per share data) 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all necessary adjustments (consisting of normal recurring accruals) and present fairly the Company's financial position as of September 30, 2000, and the results of its operations and its cash flows for the three and nine months ended September 30, 2000 and 1999, in conformity with generally accepted accounting principles for interim financial information applied on a consistent basis. The results of operations for the three and nine months ended September 30, 2000, are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. Certain reclassifications have been made to prior consolidated financial statements to conform with current presentations. 2. Basic earnings per share are based on the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share are based on the weighted average number of shares of Common Stock and Common Stock equivalents (options and warrants) outstanding during the period, computed in accordance with the treasury stock method. On February 14, 2000 the Board of Directors approved a three for two split of the Company's Common Stock to be effected as a 50 percent stock dividend payable on April 5, 2000 to shareholders of record on March 13, 2000. In these financial statements, all earnings per share amounts and the weighted average number of Common Shares outstanding have been retroactively restated to reflect the stock split. In addition, the number of Common Stock issued has been adjusted to reflect the stock split and an amount equal to the par value of the additional shares issued has been transferred from additional paid in capital to Common Stock. 3. Classification of inventories is: September 30, 2000 December 31, 1999 (Unaudited) Raw materials $173,038 $102,637 Work-in-process 15,314 15,120 Finished goods 117,572 98,952 $305,924 $216,709 -6- 4. The Company's total comprehensive earnings were as follows: Three Months Ended Nine Months Ended September 30, September 30,__ (Unaudited) (Unaudited) 2000 1999 2000 1999 Net earnings $ 40,450 $ 30,780 $108,363 $ 82,905 Other comprehensive earnings(losses), net of tax: Change in equity due to foreign currency translation adjustments (5,503) 2,511 (10,162) (2,610) Change in equity due to unrealized gains (losses) on marketable securities (1,965) 101 (8,035) 101 Comprehensive earnings $ 32,982 $ 33,392 $ 90,166 $ 80,396 5. The Company is currently involved in matters of litigation arising from the normal course of business. Management is of the opinion that such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. On February 8, 2000, the United States District Court in Rochester, New York issued a decision in the suit between PSC and the Company commenced in 1996. PSC sought to have the Court declare that two license agreements between PSC and the Company were terminated and that PSC was only obligated to pay royalties to the Company on sales of its hand-held laser scanners in accordance with the much lower rates contained in an agreement which PSC had acquired from Spectra-Physics in 1996. The Court held that PSC's two agreements with the Company have not been terminated and that PSC was obligated to pay the Company the higher royalty rates under these agreements rather than the much lower rates contained in the Spectra agreements. This decision means that PSC has an obligation to the Company for back royalties from October 23, 1998. PSC has not, however, made any payment to the Company under the PSC agreements but has taken a charge of $6.4 million for the period ending December 31, 1999 which was increased by an additional $729,000 for the quarter ended March 31, 2000 and by an additional $705,000 for the quarter ended June 30,2000 for royalties owed under the PSC agreements. The Court also held that the Company had purged the patent misuse, which the Court had earlier found. On February 23, 2000, PSC moved for reconsideration of that portion of the Court's decision which held that PSC must pay royalties to the Company under the higher rates contained in PSC's agreements with the Company. PSC moved in the alternative for permission to appeal the decision immediately to the United States Court of Appeals for the Federal Circuit. -7- The Company filed a motion seeking to have PSC held in contempt for not complying with the February 8 decision, as well as a Consent Judgment entered into by the parties in 1991, and an Order requiring PSC to begin to pay royalties in accordance with the PSC agreements. PSC moved the Court to stay the effect of its February 8 decision, and to dispense with any requirement that PSC post security in lieu of paying the higher royalties to the Company. On September 29, 2000, the Court ruled on all pending motions and denied them all. Specifically, the Court denied PSC's motion for reconsideration and affirmed its February 8, 2000 Decision and Order. The Court also denied PSC's request to be permitted to immediately appeal the February 8 decision to the Court of Appeals. At the same time, the Court denied the Company's motion that PSC be held in contempt for failure to pay royalties in accordance with the February 8, 2000 Decision and Order because that Decision was not a final judgment in the case. The Court did not consider Company's motion that PSC be held in contempt for violating the 1991 Consent Judgment on procedural grounds. The Company can renew this motion at a later time. On July 21, 1999, the Company and six other leading members of the Automatic Identification and Data Capture industry jointly initiated a litigation against the Lemelson Medical, Educational, & Research Foundation, Limited Partnership (the "Lemelson Partnership"). The suit, which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships, was commenced in the U.S. District Court, District of Nevada in Reno, Nevada. In the litigation, the Auto ID companies seek, among other remedies, a declaration that certain patents, which have been asserted by the Lemelson Partnership against end users of bar code equipment, are invalid, unenforceable and not infringed. The Company has agreed to bear approximately half of the legal and related expenses associated with the litigation, with the remaining portion being borne by the other Auto ID companies. Although no claim is now or has ever been asserted by the Lemelson Partnership for direct infringement against the Company or, to our knowledge any other Auto ID company, the Lemelson Partnership has contacted many of the Auto ID companies' customers demanding a one- time license fee for certain so-called "bar code" patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson. The Company and the other Auto ID companies have received many requests from their customers asking that they undertake the defense of these claims using their knowledge of the technology at issue. Certain of these customers have requested indemnification against the Lemelson Partnership's claims from the Company and the other Auto ID companies, individually and/or collectively with other equipment suppliers. -8- The Company, and we understand, the other Auto ID companies believe that generally they have no obligation to indemnify their customers against these claims and that the patents being asserted by the Lemelson Partnership against their customers with respect to bar code equipment are invalid, unenforceable and not infringed. However, the Company and the other Auto ID companies believe that the Lemelson claims do concern the Auto ID industry at large and that it is appropriate for them to act jointly to protect their customers against what they believe to be baseless claims being asserted by the Lemelson Partnership. The Lemelson Partnership filed a motion to dismiss the lawsuit, or in the alternative, to stay proceedings or to transfer the case to the U.S. District Court in Arizona where there are pending cases involving the Lemelson Partnership and other companies in the semiconductor and electronics industries. The Lemelson Partnership's motion was primarily based on grounds that there was no legally justiciable case or controversy between the Auto ID companies and the Lemelson Partnership because (1) the Lemelson Partnership's asserted method claims do not apply against the bar code equipment itself; and (2) the Lemelson Partnership had never asserted its patent claims against the Auto ID companies. On March 21, 2000, the U.S. District Court in Nevada denied the Lemelson Partnership's motion to dismiss, transfer, or stay the action. It also struck one of the four counts. On April 12, 2000, the Lemelson Partnership filed its Answer to the Complaint in the Symbol et al. v. Lemelson Partnership case. In the Answer, the Lemelson Partnership included a counterclaim against the Company and the other plaintiffs seeking a dismissal of the case. Alternatively, the Lemelson Partnership's counterclaim seeks a declaration that the Company and the other plaintiffs have contributed to, or induced infringement of particular method claims of the patents-in-suit by the plaintiffs' customers. The Company believes there is no merit to the Lemelson Partnership's counterclaim. On May 15, 2000, the Auto ID companies filed a motion seeking permission to file an interlocutory appeal of the Court's decision to strike the fourth count of the complaint (which alleged that the Lemelson Partnership's delays in obtaining its patents rendered them unenforceable for laches). The motion was granted by the Court on July 14, 2000. The Court entered a clarifying, superseding order on July 25, 2000. On September 1, 2000, the U.S. Court of Appeals for the Federal Circuit granted the petition of the Auto ID companies for permission to pursue this interlocutory appeal. -9- On July 24, 2000, the Auto ID companies filed a motion for partial summary judgment arguing that almost all of the claims of the Lemelson Partnership's patents are invalid for lack of written description. On August 8, 2000, the Lemelson Partnership filed a motion seeking an extension of approximately ten weeks in which to file an answer to this motion. On August 31, 2000, the Court granted the Lemelson Partnership's motion for such an extension. 6. During the quarter ended June 30, 2000, the Company announced its intention to form a new company with Motorola Inc., Airclic, Inc., Connect Things, Inc. (an affiliate of Telefon AB L.M. Ericsson) and others to support the use of scanners with cellular phones, T.V. remote controls, and other consumer devices to enhance electronic commerce. The definitive agreements are currently being negotiated but have not yet been finalized. The Company currently anticipates that the agreements will be finalized before the end of 2000. The Company's percentage interest in the new company and its corresponding financial commitment to it have not yet been finalized although it may approximate as much as $200 million over time and with conditions still to be negotiated. 7. During the quarter ended March 31, 2000 the Company entered into a multi-year joint development agreement with Intel Corporation to create advanced wireless networking capabilities and products. In connection with this agreement the Company sold 2,119,434 (stock split effected) treasury shares of Common Stock to Intel Corporation for $100 million. 8. On July 26, 2000, the Company announced the signing of a definitive merger agreement with Telxon Corporation ("Telxon"). The merger agreement provides for the exchange of 0.5 shares of the Company's common stock for each common share of Telxon. Telxon currently has approximately 17.5 million common shares outstanding and 2.5 million options which the Company will assume. In addition, Telxon has $107 million in convertible debt which the Company will also assume if it is not converted. Telxon is a designer and manufacturer of wireless networks for mobile computing solutions and information systems. Following completion of the merger, Telxon's business will be substantively integrated into the Company. This transaction will be accounted for as a purchase. The proposed transaction is subject to Telxon shareholder approval and regulatory approvals and customary closing conditions. The closing date for this transaction is expected to take place on or about November 30, 2000. 9. The Company manages its business on a geographic basis. The Company's reportable segments have been aggregated into three geographic reportable business segments, The Americas (which includes North and South America), EMEA (which includes Europe, Middle East and Africa) and Asia Pacific (which includes Japan, the Far East and Australia). -10- Summarized financial information concerning the Company's reportable segments is shown in the following table. Sales are allocated to each of the reportable segments based upon the location of the use of the products and services. The "Corporate" column includes corporate related expenses (primarily various indirect manufacturing operations costs, engineering and general and administrative expenses) not allocated to reportable segments. This has the effect of increasing reportable operating profit for The Americas, EMEA and Asia Pacific. Identifiable assets are those tangible and intangible assets used in operations in each geographic area. Corporate assets are principally temporary investments and the excess of cost over fair value of net assets acquired. -11- The Asia/ Americas EMEA Pacific Corporate Consolidated (in thousands) Three Months ended September 30, 2000: Sales to unaffiliated customers $263,259 $ 89,749 $20,241 $ - $373,249 Transfers between geographic areas 228,107 - - (228,107) - Total net revenue $491,366 $ 89,749 $20,241 $(228,107) $373,249 Earnings before provision for income taxes $ 96,094 $ 23,661 $ 7,521 $(67,790) $ 59,486 Identifiable assets $1,085,705 $143,965 $24,459 $103,783 $1,357,912 Three Months ended September 30, 1999: Sales to unaffiliated customers $186,078 $ 87,774 $19,178 $ - $293,030 Transfers between geographic areas 66,820 - - (66,820) - Total net revenue $252,898 $ 87,774 $19,178 $(66,820) $293,030 Earnings before provision for income taxes $ 71,856 $ 23,143 $ 7,397 $(56,456) $ 45,940 Identifiable assets $664,317 $133,100 $20,508 $117,676 $935,601 Nine Months ended September 30, 2000: Sales to unaffiliated customers $713,632 $262,782 $58,244 $ - $1,034,658 Transfers between geographic areas 461,234 - - (461,234) - Total net revenue $1,174,866 $262,782 $58,244 $(461,234) $1,034,658 Earnings before provision for income taxes $254,575 $ 66,852 $20,834 $(182,903) $159,358 Nine Months ended September 30, 1999: Sales to unaffiliated customers $521,835 $257,376 $47,612 $ - $826,823 Transfers between geographic areas 178,865 - - (178,865) - Total net revenue $700,700 $257,376 $47,612 $(178,865) $826,823 Earnings before provision for income taxes $194,682 $ 71,545 $17,746 $(160,234) $123,739 -12- Safe harbor for forward looking statements under securities litigation act of 1995; certain cautionary statements This report contains forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include price and product competition, dependence on new product development, reliance on major customers, customer demand for the Company's products and services, control of costs and expenses, international growth, general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations. For a further list and description of such risks and uncertainties, see the reports filed by the Company with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net revenue of $373,249,000 and $1,034,658,000 for the three and nine months ended September 30, 2000 increased 27.4 percent and 25.1 percent, respectively, over the comparable prior year periods. The increase in net revenue for the three and nine months ended September 30, 2000 is primarily due to increased equipment sales partially offset by the decrease in the nine months ended September 30, 2000 in revenue associated with the Company's contract with the United States Postal Service which was substantially completed during the quarter ended March 31, 1999. Foreign exchange rate fluctuations unfavorably impacted net revenue by approximately 2.4 percent and 2.2 percent for the three and nine months ended September 30, 2000, respectively. Foreign exchange rate fluctuations unfavorably impacted net revenue by approximately 0.4 percent for the three months ended September 30, 1999, but did not have a material impact on net revenue for the nine months ended September 30, 1999. Geographically, The Americas revenue increased 41.5 percent and 36.8 percent, respectively, for the three and nine months ended September 30, 2000 over the comparable prior year periods. EMEA revenue increased 2.3 percent and 2.1 percent, respectively and Asia Pacific revenue increased 5.5 percent and 22.3 percent, respectively, over the comparable prior year periods. The Americas, EMEA and Asia Pacific revenue represent approximately 71 percent, 24 percent and 5 percent of net revenue, respectively for the three months ended September 30, 2000 and 69 percent, 25 percent and 6 percent of net revenue, respectively for the nine months ended September 30, 2000. -13- Cost of revenue (as a percentage of net revenue) of 57.0 percent and 56.9 percent for the three and nine months ended September 30, 2000 increased from 55.7 percent for the comparable prior year periods due to a shift in product mix in the fastest growing proportion of the Company's business to lower margin products versus the historical mix of products coupled with the continued unfavorable impact of foreign exchange rate fluctuations on net revenue as well as increased costs resulting from shortages and delivery delays for the limited quantities of components and subassemblies procured from suppliers partially offset by increased royalty income. Amortization of software development costs of $6,602,000 and $17,930,000 for the three and nine months ended September 30, 2000 increased from $4,601,000 and $13,236,000 in the comparable prior year periods due to new product releases. Engineering expenses for the three and nine months ended September 30, 2000 increased to $24,832,000 and $69,902,000 from $21,112,000 and $60,173,000, respectively, for the comparable prior year periods. In absolute dollars engineering expenses increased 17.6 percent and 16.2 percent, respectively, from the prior year periods. As a percentage of net revenue such expenses decreased to 6.7 percent and 6.8 percent for the three and nine months ended September 30, 2000 compared to 7.2 percent and 7.3 percent, respectively, for the comparable prior year periods. The increase in absolute dollars is due to additional expenses incurred in connection with the continuing research and development of new products and the improvement of existing products as well as a decrease in the amount of capitalized costs incurred for internally developed product software where economic and technological feasibility has been established. Selling, general and administrative expenses of $64,770,000 and $187,589,000 for the three and nine months ended September 30, 2000 increased from $55,485,000 and $161,048,000, respectively, for the comparable prior year periods. While in absolute dollars, selling, general and administrative expenses increased 16.7 percent and 16.5 percent, respectively, from the prior year periods, as a percentage of net revenue such expenses decreased to 17.4 percent and 18.1 percent for the three and nine months ended September 30, 2000 from 18.9 percent and 19.5 percent, respectively, in the comparable prior year periods due to ongoing cost containment programs. The increase in absolute dollars reflects expenses incurred to support a higher revenue base. Amortization of excess of cost over fair value of net assets acquired of $1,397,000 and $4,196,000 for the three and nine months ended September 30, 2000, increased from $1,254,000 and $3,724,000, respectively for the comparable prior year periods due to the acquisition of a subsidiary subsequent to March 31, 1999, as well as additional contingent acquisition related payments which increased the value of excess cost over net assets acquired. -14- Net interest expense increased to $3,562,000 and $7,155,000 for the three and nine months ended September 30, 2000 from $1,316,000 and $3,984,000 for the comparable prior year periods primarily due to increased borrowings under the Company's revolving credit facility, partially offset by a reduction in interest expense due to annual mandatory repayments of indebtedness. The Company's effective tax rate of 32.0 percent for the three and nine months ended September 30, 2000 decreased from 33.0 percent in the comparable prior year periods primarily due to an increase in federal tax credits and exempt earnings of the foreign sales corporation. Liquidity and Capital Resources The Company utilizes a number of measures of liquidity including the following: September 30, December 31, 2000 1999_____ Working Capital (in thousands) $641,769 $351,613 Current Ratio (Current Assets to Current Liabilities) 3.9:1 2.5:1 Long-Term Debt to Capital 19.1% 13.5% (Long-term debt to long-term debt plus equity) Current assets increased by $276,563,000 from December 31, 1999 principally due to an increase in accounts receivable as a result of the increase in net revenue, inventories and other current assets due to increased operating levels and prepaid and refundable income taxes resulting from the tax benefits of stock option exercises. Current liabilities decreased $13,593,000 from December 31, 1999 primarily due to decreases in income taxes payable. The aforementioned activity resulted in a working capital increase of $290,156,000 for the nine months ended September 30, 2000. The Company's current ratio at September 30, 2000 increased to 3.9:1 compared with 2.5:1 as of December 31, 1999. Property, plant and equipment expenditures for the nine months ended September 30, 2000 totaled $64,707,000 compared to $55,834,000 for the nine months ended September 30, 1999. During the fourth quarter of 1999 the Company entered into a construction commitment to expand capacity by constructing a 140,000 square foot manufacturing and distribution facility in Reynosa, Mexico. The addition of this facility is part of the Company's global logistics strategy of supply chain management through vertical manufacturing integration. The project -15- cost, including land and building, is estimated at approximately $10,000,000 and is anticipated to be completed in the fourth quarter of 2000. Total construction in process to date related to this project is $8,700,000 as of September 30, 2000. The Company also continues to make capital investments in major systems and networks conversions but does not have any other material commitments for capital expenditures. The Company's long-term debt to capital ratio increased to 19.1 percent at September 30, 2000 from 13.5 percent at December 31, 1999 primarily due to increased borrowings under the Company's revolving credit facility and issuance of foreign-denominated promissory notes, which exceeded the payment of the annual installments of the Company's long-term indebtedness, treasury stock repurchases, and the change in equity due to foreign currency translation adjustments and unrealized losses on marketable securities. Partially offsetting this are the benefits realized by stock option exercises and the Company's sale in the first quarter of 2000 of 2,119,434 (stock split effected) treasury shares of Common Stock to Intel Corporation for $100 million in connection with a multi-year joint development agreement and increased equity from results of profitable operations. The Company maintains a revolving credit facility with a syndicate of U.S. and International banks of $350 million for which the terms extend to 2004. As of September 30, 2000 the Company had outstanding borrowings of $175,000,000 under this facility as compared to $57,000,000 outstanding as of December 31, 1999. The Company used $10,765,000 in operating activities for the three months ended September 30, 2000, but experienced an overall increase in cash of $10,715,000 for the period. The positive cash flow provided by the issuance and repayments of notes payable and long term debt and cash flow generated from the exercise of stock options was offset by cash used in operations, investing activities, dividends paid and treasury stock repurchases of 214,261 shares of the Company's Common Stock. During the quarter ended June 30, 2000, the Company announced its intention to form a new company with Motorola Inc., Airclic, Inc., Connect Things, Inc. (an affiliate of Telefon AB L.M. Ericsson) and others to support the use of scanners with cellular phones, T.V. remote controls, and other consumer devices to enhance electronic commerce. The definitive agreements are currently being negotiated but have not yet been finalized. The Company currently anticipates that the agreements will be finalized before the end of the year. The Company's percentage interest in the new company and its corresponding financial commitment to it have not yet been finalized although the Company believes it may approximate $200 million over time and with conditions still to be negotiated. -16- The Company believes that it has adequate liquidity to meet its current and anticipated needs from working capital, results of its operations, and existing credit facilities. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company is evaluating the impact of SAB 101 currently and expects to adopt the provisions during the quarter ended December 31, 2000. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Refer to ITEM 7, in the Company's annual report on Form 10-K for the year ended December 31, 1999 for required disclosure. -17- PART II - OTHER INFORMATION ITEM 1. Legal Proceedings The Company is currently involved in matters of litigation arising from the normal course of business including matters described below. Management is of the opinion that such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. On April 1, 1996, PSC, Inc. (PSC) commenced suit against the company in Federal District court for the Western District of New York, asserting claims against the Company for alleged violations of the federal antitrust laws, unfair competition and also seeking a declaratory judgment of non-infringement and invalidity as to certain of the Company's patents. PSC served a Third Amended Complaint, which asserted essentially the same antitrust and unfair competition claims against the Company, and also sought a declaratory judgment of alleged non-infringement and invalidity of nine of the Company's patents, and a declaratory judgment that PSC had not breached its two agreements with the Company and that those agreements had been terminated. The Company also sued Data General Corporation (Data General), a manufacturer of portable integrated scanning terminals which incorporate scan engines from PSC, for infringement of the same four patents and five additional patents. The nine patents asserted against Data General were the same nine of the Company's patents as to which PSC was seeking declaratory relief. On October 9, 1996, the Court granted the Company's motion, to sever and stay PSC's antitrust, unfair competition and related claims. On the same day, the Court denied Data General's motion to stay the Company's claims against it. On April 13, 1998, the Court, with the consent of the parties, lifted the stay previously in effect with the respect to the contract issues in the litigation. On September 12, 1998, PSC filed a motion for partial summary judgment alleging that the Company was guilty of patent "misuse" since PSC is obligated under a 1991 Agreement with the Company to pay royalties to the Company on sales of scan engines to certain PSC customers who also pay royalties to the Company when they incorporate these scan engines into their integrated scanning terminals. In this motion, PSC claimed that this practice should have barred the Company from collecting past royalties which the Company alleged were owed by PSC under the 1991 Agreement. Since July 1996, PSC has not paid the Company royalties under the 1991 Agreement and has instead been paying -18- royalties under the agreement it obtained in connection with the acquisition of Spectra-Physics Scanning Systems in 1996. On October 22, 1998, the Court issued a decision and order granting PSC's motion, which decision was subsequently reconfirmed by the Court on April 30, 1999. On November 16, 1999, both parties filed motions for partial summary judgment. The Company's motion contended that (a) its two agreements with PSC had not been terminated; (b) PSC is obligated to pay royalties to the Company pursuant to these agreements in those circumstances in which the agreements overlap with an agreement the Company had entered into with Spectra- Physics, and; (c) the Company had purged the misuse found by the Court. PSC's motion claimed that (a) its agreements with the Company had been terminated; (b) if the agreements had not been terminated, PSC was entitled to operate under the more favorable terms of the Spectra Agreement, and; (c) Symbol had not purged the misuse found by the Court. On February 8,2000, the Court granted the Company's motion in its entirety and issued a decision that PSC's two agreements with the Company have not been terminated and that PSC was obligated to pay the Company the higher royalty rates under those agreements rather than the much lower royalty rates contained in the Spectra Agreements. This decision results in an obligation by PSC for back royalties from October 23, 1998. The Court also held that on October 23, 1998 the Company had purged the patent misuse previously found by the Court. PSC has continued to make royalty payments to the Company only in accordance with the lower royalty rates contained in the Spectra Agreement, rather than at the higher royalty rates set forth in the PSC Agreements as ordered by the Court. PSC has however, publicly reported that the past-due royalties to the Company amounted to $7.8 million for the period ending June 30, 2000. On February 23, 2000, PSC moved for reconsideration of that portion of the Court's decision which held that PSC must pay royalties to the Company under the higher rates contained in PSC's Agreements with the Company. PSC moved in the alternative for permission to appeal the decision immediately to the United States Court of Appeals for the Federal Circuit. The Company filed a motion seeking to have PSC held in contempt for not complying with the February 8 decision, as well as a Consent Judgment entered into by the parties in 1991, and an Order requiring PSC to begin to pay royalties in accordance with the PSC Agreements. PSC moved the Court to stay the effect of its February 8 decision, and to dispense with any requirement that PSC post security in lieu of paying the higher royalties to the Company. -19- On September 29, 2000, the Court ruled on all pending motions and denied them all. Specifically, the Court denied PSC's motion for reconsideration and affirmed its February 8, 2000 Decision and Order. The Court also denied PSC's request to be permitted to immediately appeal the February 8, 2000 decision to the Court of Appeals. At the same time, the Court denied the Company's motion that PSC be held in contempt for failure to pay royalties in accordance with the February 8, 2000 Decision and Order, because that Decision was not a final judgment in the case. The Court did not consider Company's motion that PSC be held in contempt for violating the 1991 Consent Judgment on procedural. The Company can renew this motion at a later time. As a result of these rulings, the parties will have to adjudicate all the other pending issues in the case prior to the issuance of a final judgment with respect to the February 8, 2000 Decision and Order. On July 21, 1999, the Company and six other leading members of the Automatic Identification and Data Capture industry jointly initiated litigation against the Lemelson Medical, Educational, & Research Foundation, Limited Partnership (the "Lemelson Partnership"). The suit, which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships, was commenced in the U.S. District Court, District of Nevada in Reno, Nevada. In the litigation, the Auto ID companies seek, among other remedies, a declaration that certain patents, which have been asserted by the Lemelson Partnership against end users of bar code equipment, are invalid, unenforceable and not infringed. The other six Auto ID companies who are plaintiffs in the lawsuit are Accu-Sort Systems, Inc., Intermec Technologies Corporation, a wholly-owned subsidiary of UNOVA, Inc., Metrologic Instruments, Inc., PSC Inc., Psion Teklogix Corporation, a wholly-owned U.S. subsidiary of Psion Teklogix International, Inc. and Zebra Technologies Corporation. The Company has agreed to bear approximately half of the legal and related expenses associated with the litigation, with the remaining portion being borne by the other Auto ID companies. Although no claim for direct infringement is now or has ever been asserted by the Lemelson Partnership against the Company or, to our knowledge any other Auto ID company, the Lemelson Partnership has contacted many of the Auto ID companies' customers demanding a one-time license fee for certain so-called "bar code" patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson. The Company and the other Auto ID -20- companies have received many requests from their customers asking that they undertake the defense of these claims using their knowledge of the technology at issue. Certain of these customers have requested indemnification against the Lemelson Partnership's claims from the Company and the other Auto ID companies, individually and/or collectively with other equipment suppliers. The Company, and we understand, the other Auto ID companies believe that generally they have no obligation to indemnify their customers against these claims and that the patents being asserted by the Lemelson Partnership against their customers with respect to bar code equipment are invalid, unenforceable and not infringed. However, the Company and the other Auto ID companies believe that the Lemelson claims do concern the Auto ID industry at large and that it is appropriate for them to act jointly to protect their customers against what they believe to be baseless claims being asserted by the Lemelson Partnership. The Lemelson Partnership filed a motion to dismiss the lawsuit, or in the alternative, to stay proceedings or to transfer the case to the U.S. District Court in Arizona where there are pending cases involving the Lemelson Partnership and other companies in the semiconductor and electronics industries. The Lemelson Partnership's motion was primarily based on grounds that there is no legally justiciable case or controversy between the Auto ID companies and the Lemelson Partnership because (1) the Lemelson Partnership's asserted method claims do not apply against the bar code equipment itself; and (2) the Lemelson Partnership has never asserted its patent claims against the Auto ID companies. On March 21, 2000, the U.S. District Court in Nevada denied the Lemelson Partnership's motion to dismiss, transfer or stay the Auto ID action. It also struck one of the four counts of the complaint and ordered the action consolidated with an action against the Lemelson Partnership brought by Cognex Corp. pending in the same Court. On March 31, 2000, the Lemelson Partnership moved (1) to have a new magistrate appointed and (2) to transfer the case from Reno, Nevada to the unofficial southern division of Nevada in Las Vegas. The motion was denied by the Court on April 10, 2000. On April 12, 2000, the Lemelson Partnership filed its Answer to the Complaint in the Symbol et al. v. Lemelson Partnership case. In the Answer, the Lemelson Partnership included a counterclaim against the Company and the other plaintiffs seeking a dismissal of the case. Alternatively, the Lemelson Partnership's counterclaim seeks a declaration that the Company and the other plaintiffs have contributed to, or induced -21- infringement of particular method claims of the patents-in-suit by the plaintiffs' customers. The Company believes there is no merit to the Lemelson Partnership's counterclaim. On May 10, 2000, the Lemelson Partnership filed a second motion with the Court to stay the Auto ID action pending the resolution of United States Metals Refining Co. ("US Metals") v. Lemelson Medical, Education & Research Foundation, LP et al., an action in Nevada state court where in the plaintiff is challenging the Lemelson Partnership's ownership of the patents at issue in the Auto ID action. The Auto ID companies opposed the motion. The Court has not yet ruled on this motion, but the Nevada state court dismissed the complaint of US Metals on July 5, 2000. On May 15, 2000, the Auto ID companies filed a motion seeking permission to file an interlocutory appeal of the Court's decision to strike the fourth count of the complaint (which alleged that the Lemelson Partnership's delays in obtaining its patents rendered them unenforceable for laches). The motion was granted by the Court on July 14, 2000. The Court entered a clarifying, superseding order on July 25, 2000. On September 1, 2000, the U.S. Court of Appeals for the Federal Circuit granted the petition of the Auto ID companies for permission to pursue this interlocutory appeal. On July 24, 2000, the Auto ID companies filed a motion for partial summary judgment arguing that almost all of the claims of the Lemelson Partnership's patents are invalid for lack of written description. On August 8, 2000, the Lemelson Partnership filed a motion seeking an approximate ten week extension of time in which to file an answer to this motion. On August 31, 2000, the Court granted the Lemelson Partnership's motion for such an extension. ITEM 5. Other Events On July 26, 2000, the Company announced the signing of a definitive merger agreement with Telxon Corporation ("Telxon"). The merger agreement provides for the exchange of 0.5 shares of the Company's common stock for each common share of Telxon. Telxon currently has approximately 17.5 million common shares outstanding and 2.5 million options which the Company will assume. In addition, Telxon has $107 million in convertible debt which the Company will also assume if it is not converted. Telxon is a designer and manufacturer of wireless networks for mobile computing solutions and information systems. Following completion of the merger, Telxon's business will be substantively integrated into the Company. -22- This transaction will be accounted for as a purchase. The proposed transaction is subject to Telxon shareholder approval and regulatory approvals and customary closing conditions. The closing date for this transaction is expected to take place on or about November 30, 2000. -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYMBOL TECHNOLOGIES, INC. Dated: October 26, 2000 By: /s/ Tomo Razmilovic________ Tomo Razmilovic, President and Chief Executive Officer Dated: October 26,2000 By: /s/ Kenneth V. Jaeggi Kenneth V. Jaeggi Senior Vice President - Chief Financial Officer -24-