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 March 31, 2002
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 March 31, 2002
Common Stock, 229,293,048 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
March 31, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Earnings
Three Months Ended March 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial
Statements 5
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
ITEM 3.
Quantitative and Qualitative Disclosures about
Market Risk 28
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings 29
SIGNATURES 37
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)
March 31, December 31,
ASSETS 2002 2001____
(Unaudited)
CURRENT ASSETS:
Cash and temporary investments $ 72,074 $80,967
Accounts receivable, less allowance for doubtful
accounts of $32,588 and $31,348, respectively 279,459 307,576
Inventories 306,751 310,924
Deferred income taxes 183,840 182,964
Prepaid and refundable income taxes 17,112 22,498
Other current assets 90,441 95,279
TOTAL CURRENT ASSETS 949,677 1,000,208
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $153,289 and
$146,881, respectively 239,195 241,226
DEFERRED INCOME TAXES 18,527 24,153
INVESTMENT IN MARKETABLE SECURITIES 71,243 76,004
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $167,221 and $202,011,
respectively 552,912 551,083
$1,831,554 $1,892,674
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $259,482 $279,615
Current portion of long-term debt 6,563 6,548
Deferred revenue 31,149 34,641
Accrued restructuring expenses 15,088 18,929
TOTAL CURRENT LIABILITIES 312,282 339,733
CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES 45,089 85,052
LONG-TERM DEBT, less current maturities 236,955 225,168
OTHER LIABILITIES AND DEFERRED REVENUE 59,688 61,932
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized
10,000 shares, none issued or outstanding - -
Series A Junior Participating preferred stock,
par value $1.00; authorized 500 shares, none
issued or outstanding - -
Common stock, par value $0.01; authorized
600,000 shares; issued 255,434 shares and
253,313 shares, respectively 2,554 2,533
Retained earnings 349,854 350,393
Treasury stock, at cost, 26,141 shares
and 24,532 shares, respectively (238,908) (217,959)
Other stockholders' equity 1,064,040 1,045,822
1,177,540 1,180,789
$1,831,554 $1,892,674
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
March 31,_______
2002 2001__
REVENUE $228,455 $373,883
Product, net 72,857 76,282
Services, net 301,312 450,165
COST OF REVENUE:
Product costs 139,160 216,871
Amortization of software development costs 4,188 4,242
Product cost of revenue 143,348 221,113
Services cost of revenue 52,620 58,676
195,968 279,789
GROSS PROFIT 105,344 170,376
OPERATING EXPENSES:
Engineering 26,773 31,017
Selling, general and administrative 64,113 90,262
Non-recurring compensation charge 8,597 -
Amortization of excess of cost over
fair value of net assets acquired - 3,957
99,483 125,236
EARNINGS FROM OPERATIONS 5,861 45,140
INTEREST EXPENSE, net (4,117) (4,044)
EARNINGS BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEM 1,744 41,096
PROVISION FOR INCOME TAXES 558 13,151
EARNINGS BEFORE EXTRAORDINARY ITEM 1,186 27,945
EXTRAORDINARY GAIN ON REPURCHASE OF
CONVERTIBLE NOTES AND DEBENTURES, NET
OF $266 IN INCOME TAXES 566 -
NET EARNINGS $ 1,752 $ 27,945
BASIC EARNINGS PER SHARE:
Earnings before extraordinary item $0.01 $0.12
Extraordinary gain on repurchase of
convertible notes and debentures - -
Net earnings $0.01 $0.12
DILUTED EARNINGS PER SHARE:
Earnings before extraordinary item $0.01 $0.12
Extraordinary gain on repurchase of
convertible notes and debentures - -
Net earnings $0.01 $0.12
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 229,178 225,459
Diluted 234,583 239,395
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 March 31,
2002 2001____
Cash flows from operating activities:
Net earnings $ 1,752 $27,945
Adjustments to reconcile net earnings
to net cash provided by/(used in) operating
activities:
Depreciation and amortization of property,
plant and equipment 10,220 13,170
Other amortization 7,219 8,916
Provision for losses on accounts receivable 1,624 816
Tax benefit on exercise of stock
options and warrants 6,781 25,520
Gain on repurchase of convertible notes
and debentures, net of tax (566) -
Changes in assets and liabilities
net of effects of acquisitions & divestitures:
Accounts receivable 26,022 (11,490)
Inventories 3,991 (33,430)
Other assets 8,986 (15,565)
Accounts payable and accrued expenses (19,133) (13,444)
Income taxes payable 5,386 (17,822)
Accrued restructuring expenses (3,841) (29,036)
Other liabilities and deferred revenue (5,736) 3,587
Net cash provided by/(used in)
operating activities 42,705 (40,833)
Cash flows from investing activities:
Proceeds from termination of collar arrangement - 88,046
Purchases of property, plant and equipment (9,351) (21,284)
Investments in intangible and other assets (9,048) (5,933)
Net cash (used in)/provided by in investing
activities (18,399) 60,829
Cash flows from financing activities:
Net proceeds from issuance and repayment
of notes payable and long-term debt 15,827 (15,389)
Repurchase of convertible notes and debentures (39,131) -
Exercise of stock options and warrants 13,785 20,130
Dividends paid (2,291) (1,510)
Purchase of treasury shares (20,949) (14,050)
Net cash used in financing activities (32,759) (10,819)
Effects of exchange rate changes on cash (440) (1,937)
Net (decrease)/ increase in cash and temporary
investments (8,893) 7,240
Cash and temporary investments, beginning
of period 80,967 63,411
Cash and temporary investments, end of
period $ 72,074 $70,651
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 5,289 $ 4,147
Income taxes $ 3,368 $ 4,214
See notes to condensed consolidated financial statements
-4-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(All dollar 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 March 31, 2002, and the results of
its operations and its cash flows for the three months ended March 31,
2002 and 2001, in conformity with generally accepted accounting
principles for interim financial information applied on a consistent
basis. The results of operations for the three months ended March 31,
2002 and 2001 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, 2001. Certain reclassifications have been made to prior
consolidated financial statements to conform with current
presentations.
2. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under
SFAS No. 142, goodwill and some intangible assets will no longer be
amortized, but rather reviewed for impairment on a periodic basis. The
Company adopted the provisions of this Statement effective January 1,
2002. This Statement is required to be applied at the beginning of
the Company's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date.
Impairment losses for goodwill and certain intangible assets that
arise due to the initial application of this Statement are to be
reported as resulting from a change in accounting principle. Goodwill
and intangible assets acquired after June 30, 2001, were subject
immediately to the provisions of this Statement. The Company has not
completed an analysis of the potential impact upon adoption of the
impairment test of goodwill, however amortization of existing goodwill
has ceased effective January 1, 2002.
Pro forma financial information assuming SFAS No. 142 had been adopted
as of January 1, 2001 is as follows:
-5-
Three Months Ended
March 31,_______
2002 2001__
Reported earnings before extraordinary items $1,186 $27,945
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 2,691
Pro forma income before extraordinary items $1,186 $30,636
Reported net earnings $1,752 $27,945
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 2,691
Pro forma net earnings $1,752 $30,636
Basic Earnings Per Share:
EPS as reported $0.01 $0.12
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 0.01
Pro forma EPS $0.01 $0.14(1)
Diluted Earnings Per Share:
EPS as reported $0.01 $0.12
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 0.01
Pro forma EPS $0.01 $0.13(1)
(1) Basic and Diluted EPS are reported separately. In addition, in the basic
earnings per share calculation above, EPS as reported, amortization of excess
of cost over fair value of net assets acquired, and pro forma EPS are
calculated independently. Therefore, the sum of EPS as reported and the
per share amount of amortization of excess of cost over fair value of net
assets acquired may differ from pro forma EPS as presented above.
Basic and diluted earnings per share amounts before extraordinary items are not
materially different than the basic and diluted earnings per share amounts
shown above. Therefore, the per share effect of the amortization of excess
of cost over fair value of net assets acquired on earnings per share before
extraordinary items has not been presented.
3. 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. For the three months ended March 31, 2002 and
2001, the effect of convertible subordinated notes and debentures has
not been included in the net earnings per share calculations since
their effect would be antidilutive.
-6-
4. Classification of inventories is:
March 31, 2002 December 31, 2001
(Unaudited)
Raw materials $161,977 $178,431
Work-in-process 17,695 16,108
Finished goods 127,079 116,385
$306,751 $310,924
5. The Company's total comprehensive(loss)earnings were as follows:
Three Months Ended
March 31,____
(Unaudited)
2002 2001_
Net earnings $1,752 $27,945
Other comprehensive losses,
net of tax:
Change in equity due to foreign
currency translation adjustments (1,255) (6,235)
Change in equity due to net unrealized
losses on marketable securities (1,072) (9,994)
Comprehensive (loss) earnings ($575) $11,716
6. During the quarter ended March 31, 2002, Telxon purchased in the open
market $34,790 of its 5.75 percent convertible subordinated notes for
$34,127 in cash, and $5,173 of its 7.5 percent convertible
subordinated debentures for $5,004 in cash. This resulted in an
extraordinary gain of $566, net of income taxes of $266.
7. a.) In September 2001, the Company's management approved and adopted a
formal plan of restructuring related to the reorganization of its
manufacturing facilities. The plan includes a transition of volume
manufacturing away from its Bohemia, New York facility to lower cost
locations, primarily its Reynosa, Mexico facility and Far East
contract manufacturing partners. In connection with this
reorganization, the Company accrued for restructuring and impairment
charges at September 30, 2001 for workforce reduction and asset
impairment costs. The Company's restructuring plan is expected to be
substantially completed by June 30, 2002. Under this plan, the Company
recorded a workforce reduction charge related to the termination of
approximately 375 employees, primarily manufacturing associates. As of
March 31, 2002, approximately 110 employees had been terminated.
Details of the restructuring charges as of March 31, 2002 are as
follows:
December 31,
2001 March 31, 2002
Accrual Utilized Accrual___
Workforce reductions $8,976 $1,360 $7,616
Impaired fixed asset
and other writeoffs 4,423 893 3,530
$13,399 $2,253 $11,146
-7-
b.) In December 2000, the Company's management approved and adopted a
formal plan of restructuring as a result of the Telxon acquisition. In
connection with this acquisition, the Company accrued for restructuring,
impairment and integration related charges at December 1, 2000. The
accrual represented costs anticipated for workforce reductions, asset
impairments and lease terminations. The Company's exit plan, which
focused on the consolidation of manufacturing operations, including
plant closings and elimination of redundant activities, was
substantially completed by June 30, 2001. The amount accrued for
workforce reductions related to the termination of 1,251 employees,
primarily in manufacturing, management, sales and administrative
support, all of whom have been terminated. During the three months
ended March 31, 2002, the Company utilized $156 in fixed asset and other
impairment charges, and $1,432 in lease cancellation costs. As a
result, the remaining unutilized restructuring expense balance is
$3,942, all of which pertains to ongoing lease commitments.
The accrued restructuring expenses of $3,942 combined with accrued
restructuring expenses of $11,146 related to the reorganization of the
Company's manufacturing facilities (as discussed above) result in a
total accrued restructuring expense of $15,088 remaining as of March
31, 2002.
8. In February 2002, the Company's former President and Chief Executive
Officer announced his retirement. In connection therewith, the
Company recorded a pre-tax non-recurring compensation and related
benefits charge of $8,597 for the three months ended March 31, 2002.
9. In February 2002, the Company loaned $1,000 to its current President
and Chief Operating Officer. This loan bears interest at an annual
rate of LIBOR plus 100 basis points, which approximated 2.9 percent at
March 31, 2002. This loan is payable upon the earlier of: (1) the
date he ceases to be an employee of the Company, (2) the date of sale
of his California residence, or (3) February 19, 2007. In addition, if
this officer or his wife sell any shares of common stock of the Company
now owned by either of them or hereafter acquired (other than shares
sold to pay the exercise price and taxes resulting from the exercise of
any options originally granted to this officer by the Company) 100
percent of the net proceeds of such sales shall be applied immediately
to reduce any outstanding indebtedness under this loan. In addition,
the Company loaned $500 to this officer in October 1999. This loan
bears interest at an annual rate of 7 percent through October 2004, and
2.75 percent above the One Year Treasury Rate through maturity. It is
payable upon the earlier of: (1) the date he ceases to be an employee
of the Company, (2) the date of sale of his California residence, or
(3) October 5, 2006. In addition, if this officer or his wife sell any
shares of common stock of the Company now owned by either of them or
hereafter acquired (other than shares sold to pay the exercise price
and taxes resulting from the exercise of any options originally granted
to this officer by the Company) 100 percent of the net proceeds of such
sales shall be applied immediately to reduce any outstanding
indebtedness under this loan.
-8-
These loans plus the accrued interest thereon, are included in other
assets at March 31, 2002.
10.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.
In March 2001, Proxim Incorporated ("Proxim") sued the Company, 3
Com Corporation, Wayport Incorporated and SMC Networks
Incorporated in the United States District Court in the District
of Delaware for allegedly infringing three patents owned by
Proxim. Proxim did not identify any specific products of the
Company that allegedly infringe these three patents. Proxim also
filed a similar lawsuit in March 2001 in the United States
District Court in the District of Massachusetts against Cisco
Systems, Incorporated and Intersil Corporation. The complaint
against the Company seeks, among other relief, unspecified damages
for patent infringement, treble damages for willful infringement,
and a permanent injunction against the Company from infringing
these three patents. In a press conference held after the filing
of the complaints, Proxim indicated that it was interested in
licensing the patents that are the subject of the lawsuit against
the Company.
On May 1, 2001, the Company filed an answer and counterclaim in
response to Proxim's suit. The Company has responded by asserting its
belief that Proxim's asserted patents are invalid and not infringed by
any of the Company's products. In addition, the Company has asserted
its belief that Proxim's claims are barred under principles of equity,
estoppel and laches. The Company has also filed counterclaims against
Proxim, asserting that Proxim's RF product offerings infringe four of
the Company's patents relating to wireless LAN technology. The
Company has requested the Court grant an unspecified amount of damages
as well as a permanent injunction against Proxim's sale of its
wireless LAN product offerings. The Court has severed the Company's
counterclaim against Proxim involving the four of the Company's
patents relating to wireless LAN technology from Proxim's initial
case.
On May 14, 2001, the Company announced that an agreement had been
reached with Intersil Corporation, a supplier of key wireless LAN
chips to the Company. Under this agreement, Intersil will
generally indemnify and defend the Company against Proxim's
infringement suit.
On December 4, 2001, the Company filed a complaint against Proxim
in the United States District Court in the District of Delaware
asserting that Proxim's RF product offerings infringe four of the
Company's patents relating to wireless LAN technology. This
complaint asserts the same four patents that were asserted in the
Company's counterclaim against Proxim in the initial Proxim case
prior to the severance of this counterclaim by the Court. On
December 18, 2001, Proxim filed an answer and counterclaims
seeking declaratory judgments for non-infringement, invalidity
-9-
and unenforceability of the four patents asserted by the Company,
injunctive and monetary relief for the Company's alleged
infringement of one additional Proxim patent involving wireless
LAN technology, monetary relief for the Company's alleged false
patent marking, and injunctive and monetary relief for the
Company's alleged unfair competition under the Lanham Act, common
law unfair competition and tortious interference.
On January 31, 2002, the Company filed an answer in response to
Proxim's counterclaim. The Company has responded by asserting
its belief that Proxim's asserted patent is invalid and not
infringed by any of the Company's products. In addition, the
Company has asserted its belief that Proxim's patent claims are
barred under principles of equity, estoppel and laches. Also on
January 31, 2002, the Company filed a motion to dismiss Proxim's
claims regarding false patent markings, Lanham Act, common law
unfair competition and tortious interference. This motion is
currently pending.
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 Partnership, was
commenced in the U.S. District Court, District of Nevada in Reno,
Nevada, but was subsequently transferred to the Court in Las Vegas,
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.
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. 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
-10-
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. 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. The Federal Circuit
Court heard oral arguments on this appeal on October 4, 2001. On
January 24, 2002, the Federal Circuit found for the Auto ID companies,
holding that the defense of prosecution laches exists as a matter of
law. On March 20, 2002 the Federal Circuit denied Lemelson's petition
for rehearing in banc. Accordingly, the issue has been remanded to
the Court in Nevada to consider whether the laches defense is
applicable to the Lemelson case.
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. On October 25, 2000, the
Lemelson Partnership filed a combined opposition to the motion of the
Auto ID companies for partial summary judgment and its own cross-
motion for partial summary judgment that many of the claims of the
Lemelson Partnership's patents satisfy the written description
requirement. On July 12, 2001, the District Court denied both the
Auto ID companies' motion and Lemelson's cross-motion. In doing so,
-11-
the Court did not rule on the merits of the matters raised in the
motions, but instead held that there remain triable issues of material
fact that preclude granting summary judgment in favor of either party.
On May 14, 2001, the Auto ID companies filed another motion for
summary judgment arguing that Lemelson's patents at issue are
unenforceable because of Lemelson's inequitable conduct before the
U.S. Patent and Trademark Office. On June 19, 2001, the Lemelson
Partnership filed a combined opposition to the motion of the Auto ID
companies for summary judgment and its own cross-motion for partial
summary judgment that no such inequitable conduct occurred. On
November 13, 2001, the District Court denied both the Auto ID
companies' motion and Lemelson's cross-motion. In doing so, the Court
did not rule on the merits of the matters raised in the motions, but
instead held that there remain triable issues of material fact that
preclude granting summary judgment in favor of either party.
On August 1, 2001, the Auto ID companies filed another motion for
partial summary judgment arguing that the Lemelson Partnership is not
entitled, as a matter of law, to rely on a now-abandoned Lemelson
patent application filed in 1954 to provide a filing date or
disclosure for the claims of the patents-in-suit. On November 13,
2001, the District Court denied the Auto ID companies' motion. In
doing so, the Court did not rule on the merits of the matters raised
in the motion, but instead held that there remain triable issues of
material fact that preclude granting summary judgment.
On July 25, 2001, the Court entered an order setting a schedule that
culminates with a trial scheduled for August 2002. On April 12, 2002,
the Court entered a superseding scheduling order setting a schedule
that culminates with a trial scheduled for November 2002. Under this
timetable, the Auto ID companies' arguments relating to laches,
invalidity, unenforceability and/or non-infringement of the so-called
bar code patents will be briefed by motion at the appropriate time, or
at trial.
From December 1998 through March 1999, a total of 27 class actions
were filed in the United States District Court, Northern District of
Ohio, by certain alleged stockholders of Telxon on behalf of
themselves and purported classes consisting of Telxon stockholders,
other than the defendants and their affiliates, who purchased stock
during the period from May 21, 1996 through February 23, 1999 or
various portions thereof, alleging claims for "fraud on the market"
arising from alleged misrepresentations and omissions with respect to
Telxon's financial performance and prospects and an alleged violation
of generally accepted accounting principles by improperly recognizing
revenues. The named defendants are Telxon, its former President and
Chief Executive Officer, Frank E. Brick, and its former Senior Vice
President and Chief Financial Officer, Kenneth W. Haver. The actions
were referred to a single judge. On February 9, 1999, the plaintiffs
filed a motion to consolidate all of the actions and the Court heard
motions on naming class representatives and lead class counsel on
April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their
counsel, ordered the filing of an amended complaint, and dismissed 26
-12-
of the 27 class action suits without prejudice and consolidated those
26 cases into the first filed action. The lead plaintiffs appointed
by the Court filed an amended class action complaint on September 30,
1999. The amended complaint alleges that the defendants engaged in a
scheme to defraud investors through improper revenue recognition
practices and concealment of material adverse conditions in Telxon's
business and finances. The amended complaint seeks certification of
the identified class, unspecified compensatory and punitive damages,
pre- and post-judgment interest, and attorneys' fees and costs.
Various appeals and writs challenging the District Court's August 25,
1999 rulings were filed by two of the unsuccessful plaintiffs but have
all been denied by the Court of Appeals.
On November 8, 1999, the defendants jointly moved to dismiss the
amended complaint, which was denied on September 29, 2000. Following
the denial, the parties filed a proposed joint case schedule,
discovery commenced, and the parties each filed their initial
disclosures. On October 30, 2000, defendants filed their answer to
the plaintiffs' amended complaint as well as a motion for
reconsideration or to certify the order denying the motion to dismiss
for interlocutory appeal and request for oral argument, and a
memorandum of points and authorities in support of that motion. On
November 14, 2000, plaintiffs filed a memorandum in opposition of
defendants' motion. This motion was denied on January 19, 2001. On
November 1, 2000, defendants filed a motion for application of the
Amended Federal Rules of Civil Procedure to the case, and on November
16, 2000, the Court granted this motion in part and held that the
Court will apply the new rules of evidence and new rules of civil
procedure except to the extent those rules effectuate changes to Rule
26 of the Federal Rules for Civil Procedure. Discovery is in its
preliminary stages.
On February 20, 2001, Telxon filed a motion for leave to file and
serve instanter a summons and third-party complaint against third-
party defendant PricewaterhouseCoopers LLP ("PWC") in shareholders'
class action complaints. Telxon's third-party complaint against PWC
concerns PWC's role in the original issuance and restatements of
Telxon's financial statements for its fiscal years 1996, 1997, 1998
and its interim financial statements for its first and second quarters
of fiscal year 1999, the subject of the class action litigation
against Telxon. Telxon states causes of action against PWC for
contribution under federal securities law, as well as state law claims
for accountant malpractice, fraud, constructive fraud, fraudulent
concealment, fraudulent misrepresentation, negligent
misrepresentation, breach of contract, and breach of fiduciary duty.
With respect to its federal claim against PWC, Telxon seeks
contribution from PWC for all sums that Telxon may be required to pay
in excess of Telxon's proportionate liability, if any, and attorney
fees and costs. With respect to its state law claims against PWC,
Telxon seeks compensatory damages, punitive damages, attorney fees and
costs, in amounts to be determined at trial. Thereafter Plaintiffs
sued PWC directly and that action was consolidated. PWC filed a
motion to dismiss both Telxon's third party complaint and the PWC
action.
On March 25, 2002, the Court ruled on the pending motions. As to
Telxon's third-party complaint against PWC, the Court ruled that
-13-
it was timely filed, and that Telxon's allegations of scienter by PWC
under the Federal securities laws were sufficiently pled, that
Telxon's state law fraud claims were sufficiently pled, and that
Telxon's breach of fiduciary duty, constructive fraud and fraudulent
concealment claims against PWC should not be dismissed at the pleading
stage. The Court denied PWC's motion to dismiss Telxon's claims for
contribution under the Federal securities laws with respect to
Telxon's restatements of its 1996, 1997 and 1998 audited financial
statements, and granted PWC's motion to dismiss Telxon's contribution
claims with respect to the restatements of its unaudited first and
second quarter 1999 financial statements. The Court also granted
Telxon's motion for leave to file and serve the third party complaint
instanter on February 20, 2001. The Court also denied PWC's motion to
dismiss the separate action filed against it by the plaintiffs. PWC
has subsequently filed an answer denying liability, asserting numerous
defenses and a third party complaint against Telxon for contribution
and indemnity.
By letter dated December 18, 1998, the Staff of the Division of
Enforcement of the Securities and Exchange Commission (the
"Commission") advised Telxon that it was conducting a preliminary,
informal inquiry into trading of the securities of Telxon at or about
the time of Telxon's December 11, 1998 press release announcing that
Telxon would be restating the revenues for its second fiscal quarter
ended September 30, 1998. On January 20, 1999, the Commission issued
a formal Order Directing Private Investigation and Designating
Officers To Take Testimony with respect to the referenced trading and
specified accounting matters, pursuant to which subpoenas have been
served requiring the production of specified documents and testimony.
By letter dated March 9, 2001, the Division of Enforcement of the
Commission informed Telxon that it had made a preliminary
determination to recommend that the Commission initiate an action
against Telxon for violation of various sections of the federal
securities laws and regulations and to seek permanent injunctive
relief and appropriate monetary penalties against Telxon. The
Division of Enforcement also indicated that it intended to recommend
similar action against three former employees of Telxon. On March 6,
2002, Telxon accepted an offer of settlement resolving this
investigation.
Pursuant to the settlement, Telxon neither admitted nor denied
certain findings by the Commission, and consented to the entry of an
administrative Cease and Desist Order prohibiting Telxon from
committing or causing any violation, and any future violation of
certain reporting, record-keeping and internal control provisions of
the Securities Exchange Act of 1934. Two former employees of Telxon
also settled administrative proceedings without admitting or denying
certain findings by the Commission and by consenting to the entry of
an administrative cease and desist order prohibiting them from
committing or causing any violation and any future violation of
certain reporting, record-keeping and internal control provisions of
the Securities Exchange Act of 1934. The Commission on March 5, 2002
also filed suit against Kenneth W. Haver, former Chief Financial
Officer of Telxon, for fraud in connection with Telxon's financial
statements and earnings press release for the quarter
-14-
ended September 30, 1998. On April 24,2002, Mr. Haver settled this
suit without admitting or denying the allegations of the
Commission's complaint and by consenting to the entry of a final
judgment permanently enjoining him from violating and aiding and
abetting any violation of certain antifraud and reporting, record
keeping and internal control provisions of the Securities and
Exchange Act of 1934. In addition, Mr. Haver agreed to pay a
monetary penalty of $75,000, for which he was indemnified by Telxon.
On March 5,2002, a separate purported class action lawsuit was
filed, entitled Pinkowitz v. Symbol Technologies, Inc., et al.
in the United States District Court for the Eastern District of New
York, on behalf of purchasers of the common stock of Symbol
Technologies, Inc. between October 19, 2000 and February 13, 2002,
inclusive, against the Company, Tomo Razmilovic, Jerome Swartz and
Kenneth Jaeggi.
The complaint alleges that defendants violated the federal
securities laws by issuing materially false and misleading
statements, throughout the Class Period that had the effect of
artificially inflating the market price of the Company's securities.
Specifically, the complaint alleges that defendants engaged in the
following conduct which had the effect of increasing the Company's
reported revenue and profits: (1) the Company booked as profit in
the third quarter of 2000 a one-time royalty payment in excess of
$10 million, enabling the Company to make its third quarter
projections; (2) the Company used expenses associated with its
acquisition of Telxon to mask the fact that its sales were declining
and (3) the Company booked as having shipped in the first quarter of
2001 more than $40 million in inventory that included side
provisions allowing customers to delay payments or return
merchandise, or included products that "never left the warehouse."
Subsequently, a number of additional purported class actions
containing substantially similar allegations have also been filed
against the Company and certain of its officers in the Eastern
District of New York. The Company believes that all of these
actions will be consolidated into one lawsuit. The Company believes
that these litigations are without merit and intends to defend them
vigorously.
11. The Company's business consists of the design, manufacture and
marketing of scanner integrated mobile and wireless information
management systems, and the servicing of, customer support for and
professional services related to these systems. During the fourth
quarter of 2001, the Company reorganized its services activities and
formed a new global services organization. This change allows the
Company to focus on the delivery of all services to its customers.
These activities will be coordinated under one global services
organization. As a result, the Company now presents two reportable
operating segments as Products and Services.
The Products segment sells bar code capture and verification
equipment, mobile computing devices and other peripheral products.
The Services segment provides wireless communication solutions that
connect the Company's bar code reading equipment and mobile computing
devices to wireless networks. This segment also provides worldwide
-15-
comprehensive repair and maintenance integration and support in the
form of service contracts or repairs on an as-needed basis.
Management uses many factors to measure performance and allocate
resources to these two reportable segments. The primary measurement
is gross profit. The accounting policies of the two reportable
segments are essentially the same as those applied to the
consolidated financial statements but management is continuing to
monitor its cost of revenue allocations between the products and
services segments. Changes in cost allocations between segments may
be required which could materially change the reported gross profit
of the segments. Summarized financial information concerning the
Company's reportable operating segments is shown in the following
table. Prior years' data has been reclassified to reflect the
current segment structure. Identifiable assets are those tangible
and intangible assets used by each operating segment. Corporate
assets are principally cash and temporary investments, deferred,
prepaid and refundable income taxes, the excess of cost over fair
value of net assets acquired, marketable securities, and various
other assets which can not appropriately be allocated to either
reportable segment. Intersegment transactions are minimal and any
intersegment profit is eliminated in consolidation.
REPORTABLE SEGMENTS
Products Services Corporate Consolidated
Three Months ended March 31, 2002
External revenue $228,455 $72,857 - $301,312
Cost of revenue 143,348 52,620 - 195,968
Gross profit $85,107 $20,237 $ - $105,344
Identifiable assets $931,570 $97,504 $802,480 $1,831,554
Three months ended March 31, 2001
External revenue $373,883 $76,282 - $450,165
Cost of revenue 221,113 58,676 - 279,789
Gross profit $152,770 $17,606 - $170,376
Identifiable assets $1,133,738 $86,696 $826,636 $2,047,070
12.The Company's internal structure is in the form of a matrix
organization whereby certain managers are held responsible for
Products and Services worldwide while other managers are responsible
for specific geographic areas. The operating results of both
components are reviewed on a regular basis. Supplemental
information about geographic areas is as follows:
The Company operates its business in three main geographic
regions; 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).
Summarized financial information concerning the Company's
-16-
geographic regions is shown in the following table. Sales are
allocated to each region 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 geographic regions. This has the effect
of increasing operating profit for The Americas, EMEA and Asia
Pacific. Indentifiable assets are those tangible and intangible
assets used in operations in each geographic region. Corporate
assets are principally temporary investments and the excess of cost
over fair value of net assets acquired. Certain assets which have
been allocated to each geographic region could not be allocated to
either of the Company's two reportable operating segments.
Therefore, corporate assets as shown in the following table are
different from corporate assets as previously shown in the segment
disclosure.
The Asia/
Americas EMEA Pacific Corporate Consolidated
Three Months ended
March 31, 2002:
Sales to unaffiliated
customers $209,639 $76,348 $15,325 $ - $301,312
Transfers between
geographic areas 65,076 - - (65,076) -
Total net revenue $274,715 $76,348 $15,325 ($65,076) $301,312
Earnings before
income taxes and
extraordinary item $68,638 $15,915 $5,410 ($88,219) $ 1,744
Identifiable assets $1,166,983 $279,798 $36,247 $348,526 $1,831,554
Three Months ended
March 31, 2001:
Sales to unaffiliated
customers $325,126 $104,678 $20,361 $ - $450,165
Transfers between
geographic areas 92,295 - - (92,295) -
Total net revenue $417,421 $104,678 $20,361 $(92,295) $450,165
Earnings before
income taxes $114,321 $ 25,855 $ 7,728 ($106,808) $ 41,096
Identifiable assets $1,514,426 $175,268 $31,754 $ 325,622 $2,047,070
13. On April 15, 2002, Telxon redeemed the remaining $25,849 of its
5.75 percent notes and the remaining $19,240 of its 7.5 percent
notes for $26,061 and $19,240 respectively. This represented a
redemption price of 100.8214 percent of the outstanding principal
amount for the 5.75 percent notes and 100 percent of the
outstanding principal amount for the 7.5 percent debentures.
-17-
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 as well as the effect of the current international political
situation, which is impossible to predict. 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.
-18-
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(All dollar amounts in thousands, except per share data)
Results of Operations
Net product revenue of $228,455 for the three months ended March
31, 2002 decreased 38.9 percent from the comparable prior year period.
The decrease in net product revenue is due to a global slowdown in
information technology spending which resulted in a reduction in the
quantity of units sold. Net services revenue of $72,857 for the three
months ended March 31, 2002 decreased 4.5 percent from the comparable
prior year period primarily due to a decrease in professional service
revenue resulting from fewer project management and software
development projects, partially offset by additional customer service
revenue from contract revenue. Foreign exchange fluctuations
unfavorably impacted the growth in total net revenue by approximately
1.6 percentage points and 2.6 percentage points for the three months
ended March 31, 2002 and 2001, respectively.
Geographically, The Americas, EMEA and Asia Pacific revenue
decreased 35.5 percent, 27.1 percent, and 24.7 percent, respectively,
from the comparable prior year period. The Americas, EMEA, and Asia
Pacific revenue represent approximately 70 percent, 25 percent, and 5
percent, respectively, of net revenue for the three months ended
March 31, 2002.
The Company has forecasted revenue to be approximately $1,300,000
for the full year 2002. This forecast is based on expectations for
sequential quarterly growth at a slower pace and off a lower base than
was previously forecasted. Attainment of this forecast is dependent
on many factors, some of which are beyond the Company's control,
including those previously enumerated as well as the assumption that
there is a general improvement in the level of economic activity as
well as increased information technology spending.
Based on the aforementioned forecast level of revenue, the
Company expects diluted earnings per share in the range of $0.20 to
$0.25 for the full year 2002, excluding the compensation related
charge of $8,597 recorded in the first quarter of 2002. The forecast
is contingent upon, among other factors, attainment of the revenue
level previously discussed. As such, the Company has limited
visibility to these numbers and there can be no assurance they will be
achieved.
Management of the Company has prepared the aforementioned
prospective financial information with respect to financial
performance in 2002. This prospective financial information was not
prepared with a view toward complying with the guidelines established
by the American Institute of Certified Public Accountants with respect
to prospective financial information, but, in the view of the
Company's management, was prepared on a reasonable basis. However,
this information is not fact and should not be relied upon as being
necessarily indicative of future results, and one should not place
undue reliance on the accuracy of the prospective financial
information.
-19-
Neither the Company's independent auditors, nor any other
independent accountants, have compiled, examined, or performed any
procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any other
form of assurance on such information or its achievability, and assume
no responsibility for, and disclaim any association with, the
prospective financial information.
Product cost of revenue (as a percentage of net product revenue) was
62.7 percent for the three months ended March 31, 2002 as compared to
59.1 percent in the comparable prior year period. This increase is 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, reduced manufacturing absorption due to lower sales volumes and
the continued unfavorable impact of foreign exchange rate fluctuations on
net revenue. Amortization of software development costs for the three
months ended March 31, 2002 of $4,188 were comparable to the same prior
year period.
Services cost of revenue (as a percentage of net services revenue)
was 72.2 percent for the three months ended March 31, 2002 as compared to
76.9 percent in the comparable prior year period. The decrease in
services cost of revenue as a percentage of services revenue resulted
primarily from customer service realizing the benefits of additional cost
containment activities in the first quarter of 2002, coupled with higher
selling prices on certain customer service orders.
Engineering costs for the three months ended March 31, 2002
decreased to $26,773 from $31,017 for the comparable prior year
period. This represents a decrease of 13.7 percent, from the prior
year period due to an increase in the amount of capitalized costs
incurred for internally developed product software where economic and
technological feasibility has been established, coupled with overall
lower expenditures incurred in connection with the continuing research
and development of new products and the improvement of existing
products reflecting the positive effect of the Company's expense
control programs. As a percentage of total net revenue, engineering
expenses increased to 8.9 percent for the three months ended March 31,
2002 compared to 6.9 percent for the comparable prior year period due
to lower revenue levels.
Selling, general and administrative expenses of $64,113 for the
three months ended March 31, 2002 decreased from $90,262 for the
comparable prior year period. In absolute dollars, selling, general
and administrative expenses decreased 29.0 percent from the prior year
period. The decrease is a result of cost containment efforts
implemented during the last half of 2001. As a percentage of net
revenue, such expenses increased to 21.3 percent for the three months
-20-
ended March 31, 2002 from 20.1 percent in the comparable prior year
period due to expenses incurred to support a revenue base that is
lower than that originally planned for.
In February 2002, the Company's former President and Chief Executive
Officer announced his retirement. In connection therewith, the Company
recorded a pre-tax non-recurring compensation and related benefits charge
of $8,597 for the three months ended March 31, 2002.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under SFAS
No. 142, goodwill and some intangible assets are no longer amortized,
but rather reviewed for impairment on a periodic basis. The provisions
of this Statement have been adopted by the Company beginning January 1,
2002. The Company has not completed an analysis of the potential impact
upon adoption of the impairment test of goodwill, however, amortization
of existing goodwill has ceased effective January 1, 2002. Pro forma
financial information assuming SFAS No. 142 had been adopted as of
January 1, 2001 is as follows:
Three Months Ended
March 31,_______
2002 2001__
Reported earnings before extraordinary items $1,186 $27,945
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 2,691
Pro forma income before extraordinary items $1,186 $30,636
Reported net earnings $1,752 $27,945
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 2,691
Pro forma net earnings $1,752 $30,636
Basic Earnings Per Share:
EPS as reported $0.01 $0.12
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 0.01
Pro forma EPS $0.01 $0.14(1)
Diluted Earnings Per Share:
EPS as reported $0.01 $0.12
Amortization of excess of cost over fair value
of net assets acquired, net of tax effects - 0.01
Pro forma EPS $0.01 $0.13(1)
(1) Basic and Diluted EPS are reported separately. In addition, in the basic
earnings per share calculation above, EPS as reported, amortization of excess
of cost over fair value of net assets acquired, and pro forma EPS are calculated
calculated independently. Therefore, the sum of EPS as reported and the per
share amount of amortization of excess of cost over fair value of net assets
acquired may differ from pro forma EPS as presented above.
Basic and diluted earnings per share amounts before extraordinary items are not
materially different than the basic and diluted earnings per share amounts
shown above. Therefore, the per share effect of the amortization of excess
of cost over fair value of net assets acquired on earnings per share
before extraordinary items has not been presented.
-21-
Net interest expense increased to $4,117 for the three months
ended March 31, 2002 from $4,044 for the comparable prior year period.
This net increase is comprised of an increase in interest expense due
to additional borrowings under the Company's credit facility and a
decrease in interest income due to lower interest rates and a lower
average investment balance, partially offset by a decrease in interest
expense due to the repurchase of a portion of Telxon's convertible
debt.
The Company's effective tax rate of 32 percent for the three
months ended March 31, 2002 remained consistant with the comparable
prior year period.
During the quarter ended March 31, 2002, Telxon purchased in the
open market $34,790 of its 5.75 percent convertible subordinated
notes for $34,127 in cash and $5,173 of its 7.5 percent convertible
subordinated debentures for $5,004 in cash. This resulted in an
extraordinary gain of $566 net of income taxes of $266.
Liquidity and Capital Resources
The Company utilizes a number of measures of liquidity including
the following:
March 31, December 31,
2002 _____ 2001_____
Working Capital $637,395 $660,475
Current Ratio (Current Assets
to Current Liabilities) 3.0:1 2.9:1
Long-Term Debt to Capital 19.3% 20.8%
(Convertible subordinated notes
and debentures plus long-term
debt to convertible subordinated
notes and debentures plus
long-term debt plus equity)
Current assets decreased by $50,531 from December 31, 2001
principally due to a decrease in accounts receivable resulting from
lower revenue and increased cash collections, and decreases in prepaid
and refundable income taxes and other current assets.
Current liabilities decreased $27,451 from December 31, 2001
primarily due to the decrease in accounts payable and accrued expenses
due to lower revenue levels, the utilization of accrued restructuring
expenses, and lower deferred revenue.
The aforementioned activity resulted in a working capital
decrease of $23,080 for the three months ended March 31, 2002. The
Company's current ratio at March 31, 2001 increased to 3.0:1 compared
with 2.9:1 as of December 31, 2001.
-22-
The Company generated $42,705 positive cash flow from operating
activities for the three months ended March 31, 2002, but experienced an
overall decrease in cash of $8,893 for the period. The positive cash flow
provided by operating activities, net proceeds from the issuance and
repayment of notes payable and long-term debt, and the exercise of stock
options and warrants was offset by cash used to repurchase Telxon's
convertible notes and debentures, and the repurchase of 1,609,000 shares of
the Company's common stock.
Property, plant and equipment expenditures for the three months
ended March 31, 2002 totaled $9,351 compared to $21,284 for the three
months ended March 31, 2001. In February 2001, the Company began a
150,000 square foot expansion of its 140,000 square foot manufacturing
and distribution facility in Reynosa, Mexico. The total cost for this
project is estimated to be $8,500 and is scheduled to be completed
during 2002. Additionally, in February 2001, the Company began
construction of a new 334,000 square foot distribution center and data
center in McAllen, Texas. The total cost for this project is estimated
to be $33,000 and is scheduled to be completed in the first half of
2002. The Company continues to make capital investments in major
systems and network conversions but does not have any other material
commitments for capital expenditures.
During the year ended December 31, 2000, the Company established a
special purpose entity ("SPE") for the purpose of entering into a
$50,000 lease receivable securitization agreement with a highly rated
financial institution. The SPE is a consolidated entity and,
accordingly, its results are included in the consolidated financial
statements of the Company. During the three months ended March 31,
2002, the Company did not securitize any of its lease receivables.
During the year ended December 31, 2001, the Company securitized
approximately $32,227 of its lease receivables, which resulted in
proceeds of $18,700. The Company does not consider its securitization
of lease receivables a significant dependency on its continued
liquidity.
The Company had long-term debt outstanding, excluding current
maturities, as follows:
March 31, December 31,
2002 2001____
Revolving Credit Facililty $147,618 $125,439
Senior Notes 6,349 12,698
SAILS Exchangeable Debt 89,180 93,206
Other 371 373
243,518 231,716
Less Current Maturities 6,563 6,548
$236,955 $225,168
-23-
The Company has a $350 million revolving credit facility with a
syndicate of U.S. and International banks (the "Credit Agreement"). The
terms of the Credit Agreement extend to 2004. Use of the borrowings is
unrestricted and the borrowings are unsecured. These borrowings bear
interest at either LIBOR plus 100 basis points or the base rate of the
syndication agent bank which approximated 2.9 percent and 4.8 percent at
March 31, 2002 and December 31, 2001, respectively. At March 31, 2002,
the Company had $147,618 of borrowings outstanding under the Credit
Agreement, as compared to $125,439 outstanding at December 31, 2001.
These borrowings have been classified as long-term obligations in each
respective period.
In March 1993, the Company issued $25,000 of its 7.76 percent Series A
Senior Notes due February 15, 2003, and $25,000 of its 7.76 percent
Series B Senior Notes due February 15, 2003 to two insurance companies
for working capital and general corporate purposes. The Series A Senior
Notes are being repaid in equal annual installments of $2,778, which
began in February 1995. The Series B Senior Notes are being repaid in
equal annual installments of $3,571, which began February 1997. The
remaining balance of the Senior Notes is classified as current at March
31, 2002.
In January 2001, the Company entered into a private SAILS
arrangement with a highly rated financial institution. The securities
which underlie the SAILS contract represent the Company's investment in
Cisco common stock, which was acquired in connection with the Telxon
acquisition. The 4,160,000 shares of Cisco common stock had a market
value of $70,429 at March 31, 2002 and are held as collateral to secure
the debt instrument associated with the SAILS and are included in the
balance of Investment in Marketable Securities. This debt has a seven-
year maturity and pays a cash coupon of 3.625 percent. The SAILS
contain an embedded equity collar, which effectively manages a large
portion of the Company's exposure to fluctuations in the fair value of
its holdings in Cisco common stock. At maturity, the SAILS will be
exchangeable for shares of Cisco common stock, or at the Company's
option, cash in lieu of shares. Net proceeds from the issuance of the
SAILS and termination of an existing freestanding collar agreement were
approximately $262,246 which were used for general corporate purposes,
including the repayment of debt outstanding under its revolving credit
facility. The Company accounts for the embedded equity collar as a
derivative financial instrument in accordance with the requirements of
Statement of Financial Accounting Standards No. 133, "Accounting for
Certain Derivative Instruments and Hedging Activities." The change in
fair value of this derivative between reporting dates is recognized
-24-
through earnings but has been mitigated by the changes in market value
of Cisco shares classified as trading securities which resulted in a net
effect on earnings which is not material. The derivative has been
combined with the debt instrument in long-term debt in an appropriate
presentation of the Company's overall future cash outflows for that debt
instrument under Financial Accounting Standards Board Interpretation No.
39, "Offsetting of Amounts Related to Certain Contracts" for the legal
right of offset for accounting purposes. The SAILS liability, net of
the derivative asset, represents $89,180 of the total long-term debt
balance outstanding at March 31, 2002. The Company has the option to
terminate the SAILS arrangement prior to its scheduled maturity. Such
early termination would require the Company to pay an amount based on
the fair value of the embedded equity collar and the underlying stock,
which would be recorded in the Company's Statement of Operations in the
period of termination. Such amount, however, will never exceed the
present value of the Company's future coupon payments at the time of
termination. At the present time, the Company does not anticipate
terminating the SAILS arrangement prior to its scheduled maturity date.
The remaining portion of long-term debt outstanding relates to
various other loans maturing through 2008.
The combined aggregate amount of long-term debt maturities for the
nine months ended December 31, 2002 and each of the subsequent years
ended December 31 are as follows:
2002 $ 214
2003 6,379
2004 147,648
2005 31
2006 32
Thereafter 89,214
$243,518
The Company's long-term debt to capital ratio decreased to 19.3
percent at March 31, 2002 from 20.8 percent at December 31, 2001
primarily due to Telxon's repurchase of a portion of its convertible
subordinated notes and debentures, the increase in equity due to stock
option exercises, partially offset by net borrowings under the Company's
credit facility (increase resulting from financing of Telxon convertible
notes and debentures repurchase partially offset by repayments), and the
repurchase of treasury shares.
The Company has loan agreements with various banks pursuant to
which, the banks have agreed to provide lines of credit totaling
$55,000. As of March 31, 2002 the Company has $88 outstanding under
these lines as compared to $19 outstanding at December 31, 2001. These
agreements continue until such time as either party terminates the
agreements.
-25-
At the time of the Telxon acquisition, Telxon had oustanding
$82,500 of 5.75 percent convertible subordinated notes (the "5.75
percent notes"), and $24,413 of 7.5 percent convertible subordinated
debentures (the "7.5 percent debentures"). During the year ended
December 31, 2001, Telxon purchased in the open market $21,861 of its
5.75 percent notes for $20,665. During the quarter ended March 31,
2002, Telxon repurchased $34,790 of its 5.75 percent notes for $34,127
in cash and $5,173 of its 7.5 percent debentures for $5,004 in cash.
This resulted in an extraordinary gain of $566, net of income taxes of
$266. On April 15, 2002, Telxon redeemed the remaining balance of its
5.75 percent notes and 7.5 percent debentures at a redemption price of
100.8214 percent of the outstanding principal amount plus accrued and
unpaid interest for the 5.75 percent notes and 100 percent of the
outstanding principal amount plus accrued and unpaid interest for the
7.5 percent debentures. The aggregate principal amount redeemed was
$45,089.
The Company continues to enter into obligations and commitments to
make future payments under lease agreements. The future obligations
related to capital lease obligations is not material.
The combined aggregate amount of required future minimum rental
payments under non-cancelable operating leases for the nine months ended
December 31, 2002 and each of the subsequent years ended December 31,
are as follows:
2002 $11,947
2003 13,578
2004 11,317
2005 9,824
2006 9,084
Thereafter 33,008
$88,758
The Company has a balance of accrued purchase commitments of
$11,296 at March 31, 2002, compared to $13,822 at December 31, 2001.
Payments are due within one year and such balances are included in the
balance of accounts payable and accrued expenses in each respective
period.
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 the opinion of management, inflation has not had a material
effect on the operations of the Company.
-26-
Critical Accounting Policies
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, asset
impairment, intangible assets and derivative instrument valuation.
Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Note 1 to the
Company's consolidated financial statements "Summary of Significant
Accounting Policies" summarizes each of its significant accounting
policies. Management believes the following critical accounting
policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial
statements.
Revenue Recognition
Revenue related to sales of the Company's products and systems is
generally recognized when products are shipped or services are rendered,
the title and risk of loss has passed to the customer, the sales price
is fixed or determinable, and collectibility is reasonably assured. The
Company accrues related product return reserves and warranty expenses at
the time of sale. Service and maintenance sales are recognized over the
contract term. In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue
Recognition in Financial Statements". Accordingly, if products,
services or maintenance are bundled in a single contract, revenue will
be recognized once all elements of the contract are completed unless the
following criteria are met: (1) the product has been delivered; (2) the
undelivered services or maintenance are not essential to the delivered
products; (3) the fee for the product is not subject to forfeiture,
refund or concession based on performance of the services or
maintenance; (4) the fair value of services and maintenance are
determined based on the price charged by the Company, or the price
charged by competitors when similar services or maintenance are sold
separately; and (5) the revenue related to any element of the contract
is not subject to customer acceptance; in which case the revenue for
each element will be recognized independently.
-27-
Long-Lived Assets
The Company assesses the impairment of its long-lived assets,
including property, plant and equipment, identifiable intangible assets
and software development costs whenever events or changes in
circumstances indicate the carrying value may not be recoverable.
Factors the Company considers important which could trigger an impairment
review include significant changes in the manner of our use of the
acquired asset, changes in historical or projected operating performance
and significant negative economic trends.
Research and Development/Software Development Costs
The Company expenses all research and development costs as incurred.
Research and development expenses may fluctuate due to the timing of
expenditures for the varying stages of research and product development
and the availability of capital resources. The Company capitalizes costs
incurred for internally developed product software where economic and
technological feasibility has been established and for qualifying
purchased product software. The Company assesses the recoverability of
its software development costs against estimated future revenue over the
remaining economic life of the software.
Derivative Instruments, Hedging Activities and Foreign Currency
The Company utilizes derivative financial instruments to foreign
exchange rate risk exposures related to foreign currency denominated
payments from its international subsidiaries. The Company also utilizes
a derivative financial instrument to hedge fluctuations in the fair value
of its investment in Cisco common shares. These derivatives qualify for
hedge accounting. The Company does not participate in speculative
derivatives trading. While the Company intends to continue to meet the
conditions for hedge accounting, if hedges did not qualify as highly
effective, or if the Company did not believe the forecasted transactions
would occur, the changes in fair value of the derivatives used as hedges
would be reflected in earnings. The Company does not believe it is
exposed to more than a nominal amount of credit risk in its hedging
activities as the counterparties are established, well capitalized
financial institutions.
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, 2001 for required disclosure.
-28-
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
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.
In March 2001, Proxim Incorporated ("Proxim") sued the Company, 3
Com Corporation, Wayport Incorporated and SMC Networks
Incorporated in the United States District Court in the District
of Delaware for allegedly infringing three patents owned by
Proxim. Proxim did not identify any specific products of the
Company that allegedly infringe these three patents. Proxim also
filed a similar lawsuit in March 2001 in the United States
District Court in the District of Massachusetts against Cisco
Systems, Incorporated and Intersil Corporation. The complaint
against the Company seeks, among other relief, unspecified damages
for patent infringement, treble damages for willful infringement,
and a permanent injunction against the Company from infringing
these three patents. In a press conference held after the filing
of the complaints, Proxim indicated that it was interested in
licensing the patents that are the subject of the lawsuit against
the Company.
On May 1, 2001, the Company filed an answer and counterclaim in
response to Proxim's suit. The Company has responded by asserting
its belief that Proxim's asserted patents are invalid and not
infringed by any of the Company's products. In addition, the
Company has asserted its belief that Proxim's claims are barred
under principles of equity, estoppel and laches. The Company
believes Proxim's claims are without merit. The Company has also
filed counterclaims against Proxim, asserting that Proxim's RF
product offerings infringe four of the Company's patents relating
to wireless LAN technology. The Company has requested the Court
grant an unspecified amount of damages as well as a permanent
injunction against Proxim's sale of its wireless LAN product
offerings. The Court has severed the Company's counterclaim
against Proxim involving the four of the Company's patents
relating to wireless LAN technology from Proxim's initial case.
On May 14, 2001, the Company announced that an agreement had been
reached with Intersil Corporation, a supplier of key wireless LAN
chips to the Company. Under this agreement, Intersil will
generally indemnify and defend the Company against Proxim's
initial infringement suit.
-29-
On December 4, 2001, the Company filed a complaint against Proxim
in the United States District Court in the District of Delaware
asserting that Proxim's RF product offerings infringe four of the
Company's patents relating to wireless LAN technology. This
complaint asserts the same four patents that were asserted in the
Company's counterclaim against Proxim in the initial Proxim case
prior to the severance of this counterclaim by the Court. On
December 18, 2001, Proxim filed an answer and counterclaims
seeking declaratory judgments for non-infringement, invalidity and
unenforceability of the four patents asserted by the Company,
injunctive and monetary relief for the Company's alleged
infringement of one additional Proxim patent involving wireless
LAN technology, monetary relief for the Company's alleged false
patent marking, and injunctive and monetary relief for the
Company's alleged unfair competition under the Lanham Act, common
law unfair competition and tortious interference.
On January 31, 2002, the Company filed an answer in response to
Proxim's counterclaim. The Company has responded by asserting its
belief that Proxim's asserted patent is invalid and not infringed
by any of the Company's products. In addition, the Company has
asserted its belief that Proxim's patent claims are barred under
principles of equity, estoppel and laches. Also on January 31,
2002, the Company filed a motion to dismiss Proxim's claims
regarding false patent markings, Lanham Act, common law unfair
competition and tortious interference. This motion is currently
pending. The Company believes these claims to be without merit.
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 Partnership, was commenced in the U.S.
District Court, District of Nevada in Reno, Nevada but was
subsequently transferred to the Court in Las Vegas, 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.
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
-30-
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. 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. 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 these claims to be without merit.
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. The Federal Circuit heard oral argument on this appeal on
-31-
October 4, 2001. On January 24, 2002, the Federal Circuit found
for the Auto ID companies, holding that the defense of prosecution
laches exists as a matter of law. On March 20, 2002 the Federal
Circuit denied Lemelson's petition for rehearing in banc.
Accordingly, the issue has been remanded to the Court in Nevada to
consider whether the laches defense is applicable to the Lemelson
case.
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.
On October 25, 2000, the Lemelson Partnership filed a combined
opposition to the motion of the Auto ID companies for partial
summary judgment and its own cross-motion for partial summary
judgment that many of the claims of the Lemelson Partnership's
patents satisfy the written description requirement. On January 8,
2001, the Auto ID companies filed a combined reply in support of
their partial summary judgment motion and opposition to the
Lemelson Partnership's partial summary judgment cross-motion. On
June 15, 2001, the District Court heard oral arguments on this
motion. On July 12, 2001, the District Court denied both the Auto
ID companies' motion and Lemelson's cross-motion. In doing so,
the Court did not rule on the merits of the matters raised in the
motions, but instead held that there remain triable issues of
material fact that preclude granting summary judgment in favor of
either party.
On May 14, 2001, the Auto ID companies filed another motion for
summary judgment arguing that Lemelson's patents at issue are
unenforceable because of Lemelson's inequitable conduct before the
U.S. Patent and Trademark Office. On June 19, 2001, the Lemelson
Partnership filed a combined opposition to the motion of the Auto
ID companies for summary judgment and its own cross-motion for
partial summary judgment that no such inequitable conduct
occurred. On July 10, 2001, the Auto ID companies filed a
combined reply in support of their summary judgment motion and
opposition to the Lemelson Partnership's partial summary judgment
cross-motion. On November 13, 2001, the District Court denied
both the Auto ID companies' motion and Lemelson's cross-motion.
In doing so, the Court did not rule on the merits of the matters
raised in the motions, but instead held that there remain triable
issues of material fact that preclude granting summary judgment in
favor of either party.
-32-
On August 1, 2001, the Auto ID companies filed another motion for
partial summary judgment arguing that the Lemelson Partnership is
not entitled, as a matter of law, to rely on a now-abandoned
Lemelson patent application filed in 1954 to provide a filing date
or disclosure for the claims of the patents-in-suit. On November
13, 2001, the District Court denied the Auto ID companies' motion.
In doing so, the Court did not rule on the merits of the matters
raised in the motion, but instead held that there remain triable
issues of material fact that preclude granting summary judgment.
On July 25, 2001 the Court entered an order setting a schedule
that culminates with a trial scheduled for August 2002. On April
12, 2002, the Court entered a superseding scheduling order setting
a schedule that culminates with a trial scheduled for November
2002. Under this timetable, the Auto ID companies' arguments
relating to laches, invalidity, unenforceability and/or non-
infringement of the so-called "bar code" patents will be briefed
by motion at the appropriate time, or at trial.
From December through March 1999, a total of 27 class actions were
filed in the United States District Court, Northern District of
Ohio, by certain alleged stockholders of Telxon on behalf of
themselves and purported classes consisting of Telxon stockholders,
other than the defendants and their affiliates, who purchased stock
during the period from May 21, 1996 through February 23, 1999 or
various portions thereof, alleging claims for "fraud on the market"
arising from alleged misrepresentations and omissions with respect
to Telxon's financial performance and prospects and an alleged
violation of generally accepted accounting principles by improperly
recognizing revenues. The named defendants are Telxon, its former
President and Chief Executive Officer, Frank E. Brick, and its
former Senior Vice President and Chief Financial Officer, Kenneth
W. Haver. The actions were referred to a single judge. On
February 9, 1999, the plaintiffs filed a Motion to consolidate all
of the actions and the Court heard motions on naming class
representatives and lead class counsel on April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their
counsel, ordered the filing of an Amended Complaint, and dismissed
26 of the 27 class action suits without prejudice and consolidated
those 26 cases into the first filed action. The lead plaintiffs
appointed by the Court filed an Amended Class Action Complaint on
September 30, 1999. The Amended Complaint alleges that the
defendants engaged in a scheme to defraud investors through
improper revenue recognition practices and concealment of material
adverse conditions in Telxon's business and finances. The Amended
Complaint seeks certification of the identified class, unspecified
compensatory and punitive damages, pre- and post-judgment interest,
and attorneys' fees and costs. Various appeals and writs
challenging the District Court's August 25, 1999 rulings were filed
by two of the unsuccessful plaintiffs but have all been denied by
the Court of Appeals.
-33-
On November 8, 1999, the defendants jointly moved to dismiss the
Amended Complaint, which was denied on September 29, 2000.
Following the denial, the parties filed a proposed joint case
schedule, discovery commenced, and the parties each filed their
initial disclosures. On October 30, 2000, defendants filed their
answer to the plaintiffs' amended complaint as well as a Motion for
Reconsideration or to Certify the Order Denying the Motion to
Dismiss for Interlocutory Appeal and request for oral argument, and
a memorandum of points and authorities in support of that motion.
On November 14, 2000, Plaintiffs filed a Memorandum in Opposition
of Defendants Motion. This Motion was denied on January 19, 2001.
On November 1, 2000, defendants filed a Motion for Application of
the Amended Federal Rules of Civil Procedure to the case, and on
November 16, 2000, the Court granted this Motion in part and held
that the Court will apply the new rules of evidence and new rules
of civil procedure except to the extent those rules effectuate
changes to Rule 26 of the Federal Rules for Civil Procedure.
Discovery is in its preliminary stages.
On February 20, 2001, Telxon filed a motion for leave to file and
serve instanter a summons and third-party complaint against third-
party defendant PricewaterhouseCoopers LLP ( "PWC")in shareholders'
class action complaints. Telxon's third-party complaint against
PWC concerns PWC's role in the original issuance and restatements
of Telxon's financial statements for its fiscal years 1996, 1997,
1998 and its interim financial statements for its first and second
quarters of fiscal year 1999, the subject of the class action
litigation against Telxon. Telxon states causes of action against
PWC for contribution under federal securities law, as well as state
law claims for accountant malpractice, fraud, constructive fraud,
fraudulent concealment, fraudulent misrepresentation, negligent
misrepresentation, breach of contract, and breach of fiduciary
duty. With respect to its federal claim against PWC, Telxon seeks
contribution from PWC for all sums that Telxon may be required to
pay in excess of Telxon's proportionate liability, if any, and
attorney fees and costs. With respect to its state law claims
against PWC, Telxon seeks compensatory damages, punitive damages,
attorney fees and costs, in amounts to be determined at trial.
Thereafter plaintiffs sued PWC directly and that action was
consolidated. PWC filed a motion to dismiss both Telxon's third
party complaint and the PWC action.
-34-
On March 25, 2002, the Court ruled on the pending motions. As to
Telxon's third-party complaint against PWC, the Court ruled that it
was timely filed, and that Telxon's allegations of scienter by PWC
under the Federal securities laws were sufficiently pled, that
Telxon's state law fraud claims were sufficiently pled, and that
Telxon's breach of fiduciary duty, constructive fraud and
fraudulent concealment claims against PWC should not be dismissed
at the pleading stage. The Court denied PWC's motion to dismiss
Telxon's claims for contribution under the Federal securities laws
with respect to Telxon's restatements of its 1996, 1997 and 1998
audited financial statements, and granted PWC's motion to dismiss
Telxon's contribution claims with respect to the restatements of
its unaudited first and second quarter 1999 financial statements.
The Court also granted Telxon's motion for leave to file and serve
the third party complaint instanter on February 20, 2001. The
Court also denied PWC's motion to dismiss the separate action filed
against it by the plaintiffs. PWC has subsequently filed an answer
denying liability, asserting numerous defenses and a third party
complaint against Telxon for contribution and indemnity.
By letter dated December 18, 1998, the Staff of the Division of
Enforcement of the Securities and Exchange Commission (the
"Commission") advised Telxon that it was conducting a preliminary,
informal inquiry into trading of the securities of Telxon at or
about the time of Telxon's December 11, 1998 press release
announcing that Telxon would be restating the revenues for its
second fiscal quarter ended September 30, 1998. On January 20,
1999, the Commission issued a formal Order Directing Private
Investigation and Designating Officers To Take Testimony with
respect to the referenced trading and specified accounting matters,
pursuant to which subpoenas have been served requiring the
production of specified documents and testimony.
By letter dated March 9, 2001, the Division of Enforcement of the
Commission informed Telxon that it had made a preliminary
determination to recommend that the Commission initiate an action
against Telxon for violation of various sections of the federal
securities laws and regulations and to seek permanent injunctive
relief and appropriate monetary penalties against Telxon. The
Division of Enforcement also indicated that it intended to
recommend similar action against three former employees of Telxon.
On March 6, 2002 Telxon accepted an offer of settlement resolving
this investigation.
Pursuant to the settlement, Telxon neither admitted nor denied
certain findings by the Commission, and consented to the entry of
an administrative Cease and Desist Order prohibiting Telxon from
committing or causing any violation, and any future violation of
certain reporting, record-keeping and internal control provisions
of the Securities Exchange Act of 1934. Two former employees of
Telxon also settled administrative proceedings without admitting or
-35-
denying certain findings by the Commission and by consenting to the
entry of an administrative cease and desist order prohibiting them
from committing or causing any violation and any future violation
of certain reporting, record-keeping and internal control
provisions of the Securities Exchange Act of 1934. The Commission
on March 5, 2002 also filed suit against Kenneth W. Haver, former
Chief Financial Officer of Telxon, for fraud in connection with
Telxon's financial statements and earnings press release for the
quarter ended September 30, 1998. On April 24,2002, Mr. Haver
settled this suit without admitting or denying the allegations of
the Commission's complaint and by consenting to the entry of a
final judgment permanently enjoining him from violating and aiding
and abetting any violation of certain antifraud and reporting,
record keeping and internal control provisions of the Securities
and Exchange Act of 1934. In addition, Mr. Haver agreed to pay a
monetary penalty of $75,000, for which he was indemnified by
Telxon.
On March 5, 2002, a purported class action lawsuit was filed,
entitled Pinkowitz v. Symbol Technologies, Inc. et.al. in the
United States District Court for the Eastern District of New York,
on behalf of purchasers of the common stock of Symbol between
October 19, 2000 and February 13, 2002, inclusive, against the
Company, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi.
The complaint alleges that defendants violated the federal
securities laws by issuing materially false and misleading
statements, throughout the class period that had the effect of
artificially inflating the market price of the Company's
securities. Specifically, the complaint alleges that defendants
engaged in the following conduct which had the effect of increasing
the Company's reported revenue and profits: (1) the Company booked
as profit in the third quarter of 2000 a one-time royalty payment
in excess of $10 million, enabling the Company to make its third
quarter projections; (2) the Company used expenses associated with
its acquisition of Telxon to mask the fact that its sales were
declining; and (3) the Company booked as having shipped in the
first quarter of 2001 more than $40 million in inventory that
included side provisions allowing customers to delay payments or
return merchandise, or included products that "never left the
warehouse".
Subsequently, a number of additional purported class actions
containing substantially similar allegations have also been filed
against the Company and certain of its officers in the Eastern
District of New York. The Company believes that all of these
actions will be consolidated into one lawsuit. The Company
believes that these litigations are without merit and intends to
defend them vigorously.
-36-
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: May 13, 2002 By: /s/ Jerome Swartz_______
Jerome Swartz
Chief Executive Officer,
Chairman of the Board
of Directors
Dated: May 13, 2002 By: /s/ Kenneth V. Jaeggi
Kenneth V. Jaeggi
Senior Vice President -
Chief Financial Officer
-37-