AS FILED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION ON JUNE 10,
2005
REGISTRATION NO. 333-119076
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SYMBOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<Table>
DELAWARE 11-2308681 3577
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification No.) Classification Code Number)
</Table>
---------------------
ONE SYMBOL PLAZA
HOLTSVILLE, NEW YORK 11742-1300
(631) 738-2400
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------------
PETER M. LIEB, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
SYMBOL TECHNOLOGIES, INC.
ONE SYMBOL PLAZA
HOLTSVILLE, NEW YORK 11742-1300
(631) 738-2400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPY TO:
STEVEN DELLA ROCCA, ESQ.
LATHAM & WATKINS LLP
885 THIRD AVENUE
SUITE 1000
NEW YORK, NEW YORK 10022
(212) 906-1200
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this registration statement, as determined
by the Registrant.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
(Calculation of Registration Fee on next page)
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(3) REGISTRATION FEE(4)
- -------------------------------------------------------------------------------------------------------------------------------
Debt Securities, Preferred Stock,
Common Stock, and such indeterminate
amount of Debt Securities, Preferred
Stock and Common Stock as may be
issued upon conversion or exchange
for any other securities registered
hereunder that provides for
conversion or exchange into Debt
Securities, Preferred Stock or Common
Stock.............................. $250,000,000 (2) $250,000,000 $36,490
- -------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Purchase Rights(5)... N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
Total................................ $250,000,000 100% $250,000,000 $36,490
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) In United States dollars or the equivalent thereof in any other currency,
currency unit or units, or composite currency or currencies at the dates of
issuance.
(2) The proposed maximum offering price per unit will be determined from time to
time by the registrant in connection with the issuance by the registrant of
the securities registered hereunder.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as
amended.
(4) Previously paid in connection with the initial filing of this registration
statement.
(5) Each share of common stock includes one preferred stock purchase right
pursuant to the Rights Agreement, dated as of August 13, 2001, between the
registrant and The Bank of New York, as rights agent. The preferred stock
purchase rights initially will trade together with the common stock. The
value attributable to the preferred rights, if any, will be reflected in the
offering price of the common stock.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 10, 2005.
PROSPECTUS
(SYMBOL LOGO)
SYMBOL TECHNOLOGIES, INC.
$250,000,000
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
We may from time to time offer up to $250,000,000 in aggregate initial offering
price of:
-- debt securities;
-- shares of preferred stock; and
-- shares of common stock.
Our common stock is traded on the New York Stock Exchange under the symbol
"SBL." We will make applications to list any shares of common stock sold
pursuant to a supplement to this prospectus on the NYSE. We have not determined
whether we will list any other securities we may offer on any exchange or
over-the-counter market. If we decide to seek listing of any securities, the
supplement to this prospectus will disclose the exchange or market.
When we offer securities, we will provide specific terms of such securities in
supplements to this prospectus. The securities offered by this prospectus may be
offered directly or to or through underwriters or dealers. If any underwriters
are involved in the sale of any securities offered by this prospectus, their
names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the information set forth, in the applicable prospectus supplement.
INVESTING IN OUR SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
11 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 2005
TABLE OF CONTENTS
<Table>
About this prospectus....................................... ii
Prospectus summary.......................................... 1
Risk factors................................................ 11
Forward-looking statements.................................. 28
Market and industry data.................................... 28
Use of proceeds............................................. 29
Ratio of earnings to fixed charges.......................... 29
Price range of common stock................................. 30
Dividend policy............................................. 31
Capitalization.............................................. 32
Unaudited pro forma financial information................... 33
Selected historical financial data.......................... 35
Management's discussion and analysis of financial condition
and results of operations................................ 37
Business.................................................... 68
Management.................................................. 98
Security ownership of certain beneficial owners and
management............................................... 115
Certain relationships and related transactions.............. 117
Description of new credit facility.......................... 118
Description of debt securities.............................. 120
Description of capital stock................................ 129
Plan of distribution........................................ 134
Legal matters............................................... 136
Change in and disagreements with accountants on accounting
and financial disclosure................................. 136
Experts..................................................... 137
Where you can find more information......................... 138
Index to financial statements............................... F-1
</Table>
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the U.S.
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this shelf registration process, we may sell any combination of the
securities described in this prospectus in one or more offerings up to a total
dollar amount of $250,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities, we
will provide a prospectus supplement that will contain specific information
about the terms of that offering. The prospectus supplement may also add, update
or change information contained in this prospectus.
ii
PROSPECTUS SUMMARY
This summary is not complete and does not contain all the information you should
consider before investing in our securities. You should read the entire
prospectus carefully, including the section entitled "Risk factors" in this
prospectus, our consolidated financial statements and related notes, the
consolidated financial statements of Matrics, Inc. and the notes thereto and all
of the information set forth in any accompanying prospectus supplement, before
making an investment decision.
SYMBOL TECHNOLOGIES, INC.
OUR BUSINESS
We are a global leader in designing, developing, manufacturing and servicing
products and systems used in end-to-end enterprise mobility solutions. Our
products and solutions capture, move and manage information in real time to
assist our customers in making more efficient business decisions. Our products
include advanced data capture products, mobile computing platforms, wireless
infrastructure, radio frequency identification ("RFID") infrastructure and tags
and mobility software and services, and are sold as both integrated solutions
and individual devices.
Our customers use our enterprise mobility solutions in business operations such
as merchandise ordering and price control, inventory management, point-of-sale,
production control, delivery confirmation, route accounting and military
logistics and in various healthcare applications. Our customers purchase our
products because they are designed to increase workforce productivity, reduce
operating costs, drive operational efficiencies and enhance quality control and
customer service.
Our products and services are sold worldwide to a diverse set of customers in
markets such as retail, transportation and logistics, manufacturing, wholesale
and distribution, government and healthcare. For the year ended December 31,
2004, we generated $1,732.1 million in revenue and $81.8 million in net
earnings. For the three months ended March 31, 2005, we generated $457.5 million
in revenue and $22.2 million in net earnings.
We operate in two reportable business segments: (1) the design, development,
manufacture and marketing of advanced data capture, mobile computing, wireless
infrastructure, RFID and mobility software products and systems ("Product
Segment"); and (2) the servicing of, customer support for and professional
services related to these products and systems ("Services Segment").
PRODUCT SEGMENT
Our products and solutions are designed to capture, move and manage information
in real time to and from the point of business activity.
-- Capture. Our advanced data capture products fall into three categories: (1)
handheld and hands-free laser bar code scanners, imagers and kiosks; (2)
enterprise mobile computing systems, including "rugged" handheld, wearable
and vehicle-mounted mobile computers and durable personal digital
assistants; and (3) RFID infrastructure and tags. "Rugged" mobile devices
are typically used in industrial and field settings and offer higher
resistance to vibration, shock and temperature variations than their typical
commercial-grade counterparts.
1
-- Move. We offer mobility infrastructure solutions that provide wireless local
area networks ("wireless LAN") connectivity. Our mobility devices also offer
support for wireless LAN, wireless wide area networks ("wireless WAN"),
personal area wireless networks and complementary standards and
technologies, including Bluetooth(TM), WiFi, IEEE 802.11, CDMA, GPRS and
GSM.
-- Manage. Our Mobility Services Platform ("MSP") is a suite of software
products that includes our MSP Server and our MSP Studio, which are designed
to enhance the performance, efficiency and productivity of mobility
solutions. Our MSP was announced in May 2004, but was not available for
shipping until the fourth quarter of 2004. As a result, we began recognizing
revenue from sales of our MSP products in the fourth quarter of 2004. For
the three months ended March 31, 2005, revenues from sales of our MSP
products were immaterial.
For the year ended December 31, 2004, Product Segment net revenue was $1,433.7
million, which represented 82.8% of total revenues. For the three months ended
March 31, 2005, Product Segment revenue was $384.2 million, which represented
84.0% of total revenue.
SERVICES SEGMENT
Our Global Services Division offers our customers a range of services from
system planning and design for emerging technologies to comprehensive product
maintenance and support. Our services, marketed under the Symbol Enterprise
Mobility Services brand, have been designed to support our customers'
investments in information technology solutions and are sold and delivered via
our global direct sales and services organization or through our Symbol
PartnerSelect(TM) or SymbolCertified(TM) Professional Services certification
programs. For the year ended December 31, 2004, Services Segment revenue was
$298.5 million, which represented 17.2% of total revenue. For the three months
ended March 31, 2005, Services Segment revenue was $73.2 million, which
represented 16.0% of total revenue.
OUR STRENGTHS
We believe that we possess many of the attributes that will be necessary for
long-term success in our industry, including the following:
-- unique end-to-end enterprise mobility solutions;
-- leading market positions;
-- technology and intellectual property leadership;
-- a global presence;
-- long-term customer relationships and knowledge of vertical markets;
-- a channel-centric and alliance-centric sales model;
-- customer service and support; and
-- an experienced management team.
OUR STRATEGY
Our strategy is to deliver to our customers enterprise mobility products,
solutions and services, which are designed to increase cost-effectiveness,
enhance efficiency and promote faster
2
execution of critical business processes. We intend to pursue this goal by
applying the following strategies:
-- expand our leadership position in enterprise mobility products and
solutions;
-- target key vertical markets and penetrate new markets;
-- continue to improve and streamline operations;
-- build upon our strong foundation of intellectual property;
-- rationalize product lines and pursue platform-based products; and
-- expand our sales and channel capabilities.
MANAGEMENT AND BOARD OF DIRECTORS CHANGES AND OTHER REMEDIAL ACTIONS RESULTING
FROM ACCOUNTING MISCONDUCT BY OUR FORMER MANAGEMENT
Beginning in May 2001, we began a series of internal investigations with respect
to certain accounting matters, principally concerning the timing and amount of
revenue recognized during the period from January 1, 2000 to December 31, 2001,
as well as the accounting for certain reserves, restructurings, certain option
programs and several categories of cost of revenue and operating expenses. The
United States Securities and Exchange Commission ("SEC") and the United States
Attorney's Office for the Eastern District of New York ("Eastern District")
commenced separate but related investigations. These investigations led to the
resignation of, and the filing of criminal indictments against, several of our
former senior executives, including Tomo Razmilovic, one of our former
Presidents, Chief Executive Officers and directors, and Kenneth Jaeggi, our
former Senior Vice President and Chief Financial Officer, and the restatement of
certain of our previously filed financial statements. Robert Asti, our former
Vice President -- North America Sales and Service -- Finance, Robert Korkuc, our
former Chief Accounting Officer, and Brian Burke, our former Senior Vice
President of Worldwide Operations and Chief Accounting Officer, have pled guilty
to two counts of securities fraud in connection with the government
investigations described above and four of our former employees, including
Leonard Goldner, our former Executive Vice President and General Counsel, have
pled guilty to various conspiracy charges. Indictments are still pending in the
Eastern District against Tomo Razmilovic and five other members of our former
management, and complaints have been filed by the SEC against eleven members of
our former management for securities fraud and other violations of the federal
securities laws.
On June 3, 2004, we announced that we resolved the investigation by the Eastern
District by entering into a non-prosecution agreement with the Eastern District.
As a result of this non-prosecution agreement, no criminal complaint will be
filed against us by the Eastern District. On that date, we also announced an
agreement with the SEC that resolved the investigation being conducted by the
SEC. Pursuant to the agreements with the Eastern District and the SEC, we have
paid $37 million in cash to a restitution fund for members of the class
consisting of purchasers of our common stock from February 15, 2000 to October
17, 2002 and $3 million to the United States Postal Inspection Service Consumer
Fraud Fund. In addition to these payments, we have acknowledged responsibility
for previous misconduct by certain of our former employees and agreed to
continue our cooperation with the Eastern District and the SEC, have retained an
independent, government-approved examiner to review our internal controls,
financial reporting practices and our compliance with the settlement agreements
and established and maintain an annual training and education program designed
to diminish the possibility of future violations of the federal securities laws.
Pursuant to the agreement with the SEC, the SEC
3
filed, and the court has approved, a Final Consent Judgment in the Eastern
District of New York providing for injunctive relief, enjoining us from further
violations of the antifraud, reporting, books and records and internal control
provisions of the federal securities laws, and a civil penalty in the amount of
$37 million, as described above. For more information on the Eastern District
and SEC investigations, see "Business--Legal proceedings--Government
investigations."
In addition to the resolution of the investigations by the SEC and the Eastern
District, we have resolved three class action lawsuits that alleged violations
of federal securities laws, including allegations that we issued materially
false and misleading statements that had the effect of artificially inflating
the market price of our common stock. Under the settlement, we agreed to pay to
the class members an aggregate of $1.75 million in cash and to issue an
aggregate number of shares of common stock equal to a market value of $96.25
million, subject to a minimum and maximum number of shares as set forth in the
settlement agreement. For example, the total number of shares issuable pursuant
to the settlement agreement would have been approximately 8.4 million shares on
June 8, 2005. On November 17, 2004, we delivered 586,533 shares, or 10% of the
settlement amount (at $16.41 per share), as satisfaction of the plaintiffs'
attorneys' fees, pursuant to the court's order. We expect to deliver the balance
of the shares required to be issued under the settlement in the late second or
third quarter of 2005. We believe that the shares to be issued under the
approved settlement will not have a material effect on our earnings per share.
For more information, see "Business--Legal proceedings--Securities litigation
matters."
In response to the investigations by the SEC and the Eastern District, our board
of directors assembled a new senior management team. Since mid-2002, we replaced
31% of management with job titles of "director" and above and appointed the
following individuals:
-- William R. Nuti, President, Chief Executive Officer and Director (formerly
Senior Vice President of Cisco Systems, Inc.);
-- Todd Abbott, Senior Vice President--Worldwide Operations (formerly Group
Vice President of EMEA Service Provider Sales of Cisco Systems, Inc.);
-- Mark T. Greenquist, Senior Vice President--Finance and Chief Financial
Officer (formerly Executive Vice President and Chief Financial Officer of
Agere Systems, Inc.);
-- Salvatore Iannuzzi, Senior Vice President, Chief Administrative and Control
Officer (formerly Chief Administrative Officer of CIBC World Markets, Inc.);
and
-- Peter M. Lieb, Senior Vice President, General Counsel and Secretary
(formerly Deputy General Counsel of International Paper Company).
Since mid-2002, we have also reconstituted our board of directors to include
four new independent members, none of whom has a prior association with our
former senior management, including:
-- Robert J. Chrenc (formerly Executive Vice President and Chief Administrative
Officer of ACNielsen);
-- Edward Kozel (formerly a Managing Director of Integrated Finance Ltd., an
advisory firm);
-- George Samenuk (Chief Executive Officer and Chairman of McAfee, Inc.); and
-- Melvin A. Yellin (President of Stone Point Corporation, an advisory firm
that concentrates on risk management and corporate governance issues).
4
In 2003 and 2004, we have implemented and continue to implement various
initiatives, conducted with the oversight of our audit committee, to address the
material weaknesses and deficiencies in our internal controls identified by our
prior auditors and our own internal investigations. These initiatives, along
with the initiatives related to our compliance with the Sarbanes-Oxley Act of
2002, address our control environment, organization and staffing, policies,
procedures, documentation and information systems and are intended to
continuously improve our internal controls and procedures, address systems and
personnel issues and help ensure a corporate culture that emphasizes integrity,
honesty and accurate financial reporting.
THIRD QUARTER 2004
In November 2004, during our inventory testing (including a planned physical
inventory at a company-owned distribution center), two unrelated errors were
discovered. These errors were the result of two discrete events. One event
involved inaccurate inventory levels reported to us by a large distribution
partner. The second discrepancy was the result of errors that occurred at a
company-owned distribution facility that serves one of our large retail
customers. Based on these findings, management believed there were significant
deficiencies relating to its controls for receiving, shipping and ultimately
reporting the amount of inventory. The errors reported as described above led to
(i) an overstatement of our revenues in our earnings release on October 26, 2004
for the three- and nine-month periods ended September 30, 2004 and (ii) the
delayed, but timely, filing of our quarterly report on Form 10-Q as of and for
the three- and nine-month periods ended September 30, 2004.
Since the discovery of the significant deficiencies in November 2004 as
described above, we have taken steps to ensure that the financial results for
the fiscal year ending December 31, 2004 are fairly presented in all material
respects. We have also taken various measures to improve the effectiveness of
our internal controls.
The non-prosecution agreement between us and the United States Attorney's Office
for the Eastern District of New York, described previously, provides that should
we violate the agreement or commit a crime in the future, we would be subject to
prosecution for any offense, including any offense related to our past
accounting practices. We have retained outside counsel to investigate the facts
and circumstances surrounding the erroneous numbers included in the October 26,
2004 press release and to assist with responding to requests made by the Eastern
District and the SEC regarding this matter, including whether we complied with
the injunction issued in connection with the June 2004 settlement with the SEC
and non-prosecution agreement with the Eastern District. There can be no
assurance that these events will not give rise to an enforcement action or other
proceeding, or the imposition of fines or other penalties, by the SEC or the
Eastern District.
ACQUISITION OF MATRICS
On September 9, 2004, we acquired privately held Matrics, Inc. ("Matrics") for
$230 million in cash. We financed the acquisition of Matrics with a portion of a
$250 million borrowing under a short-term credit facility, which was refinanced
on December 29, 2004 with our credit facility. See "--Our credit facility." In
this prospectus, we refer to the acquisition of Matrics and the related
borrowing under the short-term credit facility together as the "Acquisition."
For the six months ended June 30, 2004, Matrics generated $4.7 million in
revenue.
Based in Rockville, Maryland, Matrics is a leader in developing Electronic
Product Code ("EPC")-compliant RFID systems. RFID is a next generation data
capture technology that utilizes small tags attached to products or assets that
emit radio signals that can be read at a distance. This
5
allows for remote reading of information relevant to the asset, similar to that
contained in bar codes. Because RFID does not require physical contact between
the reader and the tag, or even a line of sight, it provides the ability to
capture more data more efficiently and is beneficial in areas such as supply
chain management, asset tracking and security.
Matrics has focused its strategic RFID solutions efforts on Electronic Product
Code standards, which are the emerging global RFID standards. Matrics has
developed EPC-compliant RFID systems for retail, defense, transportation and
other vertical markets. The Matrics product portfolio features RFID systems
including multi-protocol, EPC-compliant fixed readers; readers designed for
embedded applications, such as RFID printers and mobile computers; high-
performance antennas for RFID tag reading; and EPC labels that can be attached
to items such as containers, pallets, cartons and more. The RFID tag family
includes both read-only and read/write functionality that addresses a wide range
of asset visibility applications. Matrics is also developing a proprietary
manufacturing process that is expected to provide for higher volume and more
cost effective manufacturing of tags.
We believe the acquisition of Matrics is an important step in executing our plan
to be a leader in RFID, and will expand our offerings in the advanced data
capture industry. Prior to the acquisition of Matrics, we had been internally
developing a handheld RFID reader and a services and support business focused on
the deployment of RFID systems. Our revenues from our internal RFID business
were insignificant. The Matrics acquisition has allowed us to offer complete
RFID systems by adding commercially ready, fixed RFID reader systems and tag
products to our current offerings. We believe RFID technology is a new
generation of advanced data capture and is complementary to our offering of bar
code scanners and rugged handheld computers.
For the year ended December 31, 2004, the acquisition of Matrics had a $26.8
million negative impact on net earnings and a $0.11 negative impact on earnings
per share, primarily as a result of a $12.8 million write-off of in-process
research and development costs, the interest expense and amortization of fees
associated with the short-term credit facility used to fund the acquisition and
the refinancing thereof with our new credit facility on December 29, 2004.
Although the RFID market is in the early stages of development, we paid a
significant premium for Matrics, and thus allocated a significant portion of the
purchase price to goodwill, because we believe that EPC-based technology will be
a material area of investment for our customers in our retail, manufacturing,
transportation and logistics, wholesale distribution, healthcare and government
vertical markets. We believe that Matrics is an early market leader with its
commercial tag and reader products based on its trial deployments and full
implementations with its customers in retail, transportation, healthcare, and
government vertical markets. We currently believe that the costs we will incur
during the product life cycle for both existing technology and future,
replacement RFID technology will be consistent with the expenditures we have
incurred in developing and maintaining our existing enterprise mobility
solutions. Our goal is to obtain a significant share of the market by combining
our expertise in sales and support for enterprise mobility solutions along with
our engineering resources and Matrics' expertise in this emerging market, which
is a market that is projected to grow rapidly in the next three to five years.
If we are unable to develop or enhance the Matrics technology within the
timeframe outlined, we may not meet our revenue and profitability projections.
Furthermore, we believe that a number of our existing customers intend to deploy
RFID systems utilizing technology such as that provided by Matrics and if we
fail to deliver those products, those customers may be less
6
willing to purchase our other existing products, further negatively impacting
revenue and profitability. If we do not develop or enhance the Matrics
technology in line with our projections, we may be required to incur higher than
expected operating and capital expenses in order to address these issues and
meet projections.
OUR CREDIT FACILITY
On December 29, 2004, we entered into our credit facility (i) to repay in full
our outstanding senior indebtedness comprised of the short-term credit facility
and our prior revolving credit facility, dated as of November 17, 2003 ("Prior
Revolving Credit Facility"); (ii) for working capital and general corporate
purposes; and (iii) to pay certain fees and expenses incurred in connection with
such transactions. Pursuant to our credit facility, the lenders severally agreed
to provide us the following: (a) a senior secured term loan facility in an
aggregate principal amount of $100 million and (b) a senior secured revolving
credit facility in an aggregate principal amount of up to $150 million with a
$20 million sublimit available for letters of credit. Our credit facility is
secured on a first priority basis by (i) a pledge of all of the capital stock or
other equity interests of our domestic subsidiaries, (ii) a pledge of 65% of the
capital stock or other equity interests of selected overseas subsidiaries
located in the United Kingdom, the Netherlands and Japan, (iii) 100% of the
capital stock of the manufacturing entity in Reynosa, Mexico and all of its
other assets and (iv) all our other assets (other than real estate) of our
domestic subsidiaries. On December 29, 2004, we borrowed $100 million under the
term loan facility and $100 million under the revolving credit facility.
CORPORATE INFORMATION
We are a Delaware corporation and the successor by merger in 1987 to Symbol
Technologies, Inc., a New York corporation that commenced operations in 1975.
Our principal executive offices are located at One Symbol Plaza, Holtsville, New
York 11742-1300. Our telephone number is (631) 738-2400. Our website address is
www.symbol.com. Information contained on our website is not part of this
prospectus.
7
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA
The following table presents our summary historical and unaudited pro forma
consolidated financial data for the periods presented. The summary historical
consolidated financial data as of December 31, 2004 and 2003 and for the years
ended December 31, 2004, 2003 and 2002 are derived from our audited consolidated
financial statements included elsewhere in this prospectus. The summary
unaudited historical financial data as of March 31, 2005 and for the three
months ended March 31, 2005 and 2004 are derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. These unaudited
consolidated financial statements include, in the opinion of our management, all
adjustments necessary for a fair presentation of the results for those periods.
The results of operations for interim periods are not necessarily indicative of
the operating results for the full year.
The summary unaudited pro forma statement of operations data give effect to the
Acquisition as if it had occurred as of January 1, 2004. The summary unaudited
pro forma financial data is not intended to represent our financial position,
results of operations or cash flows had the Acquisition been completed as of
such date or to project our financial position, results of operations or cash
flows for any future period or date.
The summary historical financial data and unaudited pro forma consolidated
financial data set forth below should be read in conjunction with "Management's
discussion and analysis of financial condition and results of operations,"
"Unaudited pro forma financial information" and our historical consolidated
financial statements and the notes thereto and the historical consolidated
financial statements of Matrics and the notes thereto included elsewhere in this
prospectus.
8
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------
HISTORICAL UNAUDITED
---------------------------------------------------------- PRO FORMA
THREE MONTHS ------------
YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED
------------------------------------ ------------------- DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2003 2004 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
REVENUE:
Product.................................... $1,103,070 $1,223,853 $1,433,671 $348,239 $384,242 $ 1,440,856
Services................................... 298,547 306,425 298,452 71,412 73,245 298,452
-------------------------------------------------------------------------
1,401,617 1,530,278 1,732,123 419,651 457,487 1,739,308
COST OF REVENUE:
Product cost of revenue.................... 693,980 635,103 709,967 170,739 197,866 719,260
Services cost of revenue................... 219,985 219,926 213,118 53,984 54,060 213,118
-------------------------------------------------------------------------
913,965 855,029 923,085 224,723 251,926 932,378
-------------------------------------------------------------------------
Gross profit............................... 487,652 675,249 809,038 194,928 205,561 806,930
-------------------------------------------------------------------------
OPERATING EXPENSES:
Engineering................................ 142,602 156,328 167,543 41,559 42,351 174,677
Selling, general and administrative........ 343,971 421,132 502,331 121,680 138,887 510,434
Stock-based compensation
expense/(recovery)....................... (68,084) 17,087 2,234 2,234 - 2,234
Provision/(recovery) for legal
settlements.............................. 98,300 72,000 (21,400) - - (21,400)
Restructuring and impairment charges....... 2,590 1,181 5,170 - - 5,170
Write off of acquired in process research
and development(1)....................... - - 12,800 - - -
-------------------------------------------------------------------------
Total operating expenses................... 519,379 667,728 668,678 165,473 181,238 671,115
-------------------------------------------------------------------------
Earnings/(loss) from operations............ (31,727) 7,521 140,360 29,455 24,323 135,815
-------------------------------------------------------------------------
OTHER (EXPENSE)/INCOME:
Interest income............................ 2,322 2,969 3,507 603 1,030 3,601
Interest expense........................... (16,801) (10,590) (20,032) (1,378) (4,133) (36,796)
Impairment of investments.................. (32,200) (3,550) - - - -
Other income (expense), net................ 16,676 7,551 (66) 1,781 (3,465) (311)
-------------------------------------------------------------------------
(30,003) (3,620) (16,591) 1,006 (6,568) (33,506)
-------------------------------------------------------------------------
Earnings/(loss) before income taxes........ (61,730) 3,901 123,769 30,461 17,755 102,309
Provision for/(benefit from) income
taxes.................................... (16,815) 606 41,922 23,633 (4,413) 33,660
-------------------------------------------------------------------------
Net earnings/(loss)........................ $ (44,915) $ 3,295 $ 81,847 $ 6,828 $ 22,168 $ 68,649
-------------------------------------------------------------------------
EARNINGS/(LOSS) PER SHARE:
Basic...................................... $ (0.20) $ 0.01 $ 0.34 $ .03 $ .09 $ 0.28
Diluted.................................... $ (0.20) $ 0.01 $ 0.33 $ .03 $ .09 $ 0.28
-------------------------------------------------------------------------
Cash dividends declared per common share... $ 0.02 $ 0.02 $ 0.02 $ .01 $ .01 $ 0.02
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic...................................... 229,593 230,710 242,469 231,685 247,404 242,469
Diluted.................................... 229,593 236,449 246,166 239,401 251,286 246,166
- ----------------------------------------------------------------------------------------------------------------------
</Table>
9
<Table>
<Caption>
HISTORICAL
------------------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
(IN THOUSANDS) 2003 2004 2005
- --------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents................................... $ 150,017 $ 217,641(2) $ 218,218(3)
Total assets................................................ 1,646,518 1,930,369 1,871,268
Long-term debt, less current portion(4)..................... 99,012 176,087 162,709
Total stockholders equity................................... 920,598 1,072,519 1,099,792
- --------------------------------------------------------------------------------------------------------
</Table>
(1) Upon consummation of the Matrics acquisition, we immediately expensed
in-process research and development of $12.8 million, representing a portion of
the total value of the acquired assets. See Note 2.f. of our consolidated
financial statements as of December 31, 2004 and 2003 and for the years ended
2004, 2003 and 2002 included elsewhere in this prospectus.
(2) Does not include restricted cash of $51.4 million as of December 31, 2004,
which is comprised of two deposits. One amount of $50.4 million is an
interest-bearing court escrow account as security for a trial court judgment on
appeal. The second amount of $1.0 million is an interest-bearing letter of
credit pledged as a supplier bond.
(3) Does not include restricted cash of $51.6 million as of March 31, 2005,
which is comprised of two deposits. One amount of $50.6 million is an
interest-bearing court escrow account as security for a trial court judgment on
appeal. The second amount of $1.0 million is an interest bearing letter of
credit pledged as a supplier bond.
(4) The total long-term debt includes SAILS exchangeable debt in the amount of
$98.9 million as of December 31, 2003, $83.7 million as of December 31, 2004 and
$81.5 million as of March 31, 2005. The securities that underlie the SAILS
contract represent our investment in Cisco Systems, Inc.'s common stock, which
was acquired in connection with the Telxon acquisition. In January 2008, the
SAILS debt will be exchangeable for shares of Cisco Systems, Inc.'s common stock
or, at our option, for cash in lieu of shares.
10
RISK FACTORS
You should carefully consider the material risks described below, together with
the other information in this prospectus and all of the information set forth in
any accompanying prospectus supplement, before you make a decision to invest in
our securities. If any of the following risks actually occur, our business,
operating results, financial condition or prospects could be materially and
adversely affected. This could cause the value of our securities to decline and
you may lose all or part of your investment.
RISKS RELATING TO THE INVESTIGATIONS
WE RECENTLY SETTLED SEPARATE INVESTIGATIONS BY THE SEC AND THE EASTERN DISTRICT
RELATING TO THE ACCOUNTING MISCONDUCT OF OUR PRIOR MANAGEMENT. A VIOLATION OF
THESE SETTLEMENT AGREEMENTS COULD RESULT IN FURTHER PROSECUTION BY THE SEC AND
THE EASTERN DISTRICT.
On June 3, 2004, we announced that the SEC and the Eastern District concluded
separate investigations relating to certain of our prior accounting practices
and the prior administration of certain of our stock option plans. These
investigations arose in response to an inquiry from the SEC in 2001. As a result
of the SEC inquiry, we conducted an initial internal investigation in May 2001,
with the assistance of a law firm. We subsequently discovered that this
investigation was hindered by certain of our former employees. As a result of
the actions by these former employees, the SEC expressed dissatisfaction with
the investigation. In March 2002, we undertook a second internal investigation
that lasted approximately 18 months, with the assistance of a different law firm
and an independent forensic accounting team. The results of that internal
investigation gave rise to the restatement of our financial statements that
affected our selected data for 1998, 1999, 2000 and 2001, our financial
statements for the years ended December 31, 2000 and 2001 and our unaudited
selected quarterly information for each of the four quarters in 2001 and the
first three quarters of 2002.
We have resolved the investigations by the SEC and the Eastern District and have
entered into a settlement agreement with the SEC, in connection with which we
were issued an injunction, and a non-prosecution agreement with the Eastern
District. As previously described, we have engaged outside counsel to assist
with the investigation of the events leading to the discrepancies discovered at
our company-owned distribution facility in November 2004 and in responding to
requests made by the Eastern District and the SEC regarding this matter,
including whether we have complied with the injunction issued in connection with
the June 2004 settlement with the SEC and non-prosecution agreement with the
Eastern District. There can be no assurance that these events will not give rise
to an enforcement action or other proceeding brought by the Eastern District or
the SEC. If we are found to have violated the injunction issued in connection
with the June 2004 settlement with the SEC or the non-prosecution agreement with
the Eastern District or if we commit other violations, such as accounting
offenses that were not the subject of the investigations, we have waived
defenses that may have otherwise been available to us, including the statute of
limitations, and will be subject to prosecution for any offense, including any
offense that was the subject of the non-prosecution agreement. This could have a
material adverse effect on us. In addition, the agreements with the SEC and the
Eastern District required us to pay $37 million in cash to a restitution fund
for members of a class consisting of purchasers of our stock from February 15,
2000 to October 17, 2002 and $3 million to the United States Postal Inspection
Service Consumer Fraud Fund. We paid both amounts prior to June 30, 2004. For a
discussion of the
11
SEC and the Eastern District investigations, please see "Business--Legal
proceedings--Government investigations."
PENDING LITIGATION RELATING TO THE ACCOUNTING MISCONDUCT OF OUR PRIOR MANAGEMENT
COULD GENERATE NEGATIVE PUBLICITY FOR US. THIS COULD RESULT IN A DECLINE IN OUR
STOCK PRICE AND CAUSE YOU TO LOSE PART OF YOUR INVESTMENT.
In March and June 2003 and February 2005, Robert Asti, our former Vice
President -- North America Sales and Service -- Finance, Robert Korkuc, our
former Chief Accounting Officer, and Brian Burke, our former Senior Vice
President of Worldwide Operations and Chief Accounting Officer, respectively,
pled guilty to two counts of securities fraud in connection with the government
investigations described above. The SEC has filed civil complaints against
Messrs. Asti, Korkuc and Burke based upon similar facts. Since June 2004, the
Eastern District has announced that four additional former employees, including
Leonard Goldner, our former Executive Vice President and General Counsel, have
pled guilty to various conspiracy charges.
In addition, Symbol, certain members of our former senior management team and
certain former members of our board of directors were named defendants in two
derivative actions, one alleging violations of federal securities laws and other
claims similar to the class actions, and the second relating to the distribution
of proxy statements by former directors. On July 27, 2004, the court approved a
settlement in which Symbol would be realigned as plaintiff in the first
derivative action, re-positioning us to proceed against Tomo Razmilovic, one of
our former Presidents, Chief Executive Officers and directors, and other members
of our former management and certain former members of our board of directors.
In September 2004, the court approved a settlement in which Symbol would be
realigned as the plaintiff in the second derivative suit related to the proxy
statements.
The guilty pleas of the seven individuals mentioned above; the resolution of
these civil complaints with the SEC; the continued prosecution by the Eastern
District of Tomo Razmilovic and five other members of our former management
team; or the SEC's filing of complaints against eleven members of our former
management team for securities fraud and other violations of the federal
securities laws could generate negative publicity for us and result in a decline
in our stock price.
OUR INDEMNIFICATION OF OUR FORMER MANAGEMENT OBLIGATES US TO INDEMNIFY AND
ADVANCE LEGAL EXPENSES TO THEM, INCLUDING WITH RESPECT TO THE PENDING CRIMINAL
AND CIVIL LITIGATION FOR ACCOUNTING MISCONDUCT, IN ACCORDANCE WITH THE TERMS OF
OUR CERTIFICATE OF INCORPORATION, BYLAWS, OTHER APPLICABLE AGREEMENTS AND
DELAWARE LAW. OUR INSURANCE COVERAGE MAY NOT BE SUFFICIENT TO COVER OUR
LIABILITIES RELATED TO SUCH LITIGATION AND THE SETTLEMENT OF THE SECURITIES
FRAUD CLASS ACTION LAWSUITS. TO THE EXTENT OUR INSURANCE COVERAGE IS
INSUFFICIENT TO COVER OUR LIABILITIES, WE MAY INCUR A MATERIAL EXPENSE TO
SATISFY SUCH OBLIGATIONS, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS, FINANCIAL POSITION AND CASH FLOWS.
We may be obligated to indemnify and advance legal expenses to our former
directors, officers or employees in accordance with the terms of our certificate
of incorporation, bylaws, other applicable agreements and Delaware law. Our
certificate of incorporation and bylaws provide for the indemnification of our
directors and officers to the fullest extent permitted under Delaware law. Under
Delaware law, we may generally indemnify directors, officers and other employees
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with specified actions, suits and proceedings,
whether civil, criminal, administrative or investigative (other than in
derivative actions), if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the
12
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. We have settled all
claims relating to the indemnification and payment of legal expenses for our
former directors, officers and employees with our insurance carriers for $10.2
million. To the extent that the final settlement of all claims against our
former directors, officers and employees exceeds $10.2 million, we may be
obligated to pay such excess amount, which could have a material adverse effect
on our results of operations, financial position and cash flows. For a
discussion of the SEC and Eastern District investigations and related class
action and derivative litigation, see "Business--Legal proceedings."
We do not expect our insurance coverage to cover our total liabilities and
related litigation costs in the actions discussed above, including with respect
to the securities fraud class action lawsuits, and the total liabilities and
costs are still uncertain. We have currently accrued approximately $86.6 million
related to the settlement of the class action lawsuits. The plaintiffs have yet
to specify the amount of damages being sought in the civil actions against our
former management and our former board of directors, and, therefore, we are
unable to estimate what our ultimate liability under our indemnification
obligations in such lawsuits may be. Our indemnification obligations discussed
above may have a material adverse effect on our results of operations, financial
condition and cash flows.
SENIOR MANAGEMENT HAS BEEN REQUIRED TO DEVOTE A SIGNIFICANT AMOUNT OF TIME ON
MATTERS ARISING FROM ACTIONS OF OUR PRIOR MANAGEMENT. IF SENIOR MANAGEMENT IS
UNABLE TO DEVOTE A SIGNIFICANT AMOUNT OF TIME IN THE FUTURE TOWARD DEVELOPING
AND EXECUTING OUR STRATEGIC BUSINESS INITIATIVES AND MANAGING ONGOING BUSINESS
OPERATIONS, WE MAY NOT BE ABLE TO REMAIN COMPETITIVE AND OUR REVENUES MAY
DECLINE.
Our senior management team has devoted a significant amount of time conducting
internal investigations, restating our financial statements, reviewing and
improving our internal controls and procedures, developing effective corporate
governance procedures and responding to government inquiries and the related
class action lawsuits arising from the actions of our prior management. If
senior management is unable to devote a significant amount of time in the future
toward developing and executing our strategic business initiatives and managing
ongoing business operations, we may not be able to remain competitive and our
revenues may decline. In addition, much of our middle management is new and may
require a substantial amount of time building customer relationships and
learning about and familiarizing themselves with Symbol's products, operations
and business culture.
A FAILURE TO IMPLEMENT EFFECTIVELY AND EFFICIENTLY OUR PLAN TO REMEDIATE
DEFICIENCIES IN OUR INTERNAL CONTROLS AND PROCEDURES COULD RESULT IN ACCOUNTING
ERRORS AND IN VIOLATIONS OF OUR SETTLEMENT AGREEMENT WITH THE SEC AND OUR
NON-PROSECUTION AGREEMENT WITH THE EASTERN DISTRICT.
As previously reported in our consolidated financial statements for the fiscal
year ended December 31, 2003, we reported that a material weakness existed
related to the manner in which we processed transactions to record revenue.
Additionally, we reported that deficiencies existed relating to the adequacy and
timeliness of account reconciliations, formalized worldwide policies and
procedures, the amount of manual journal entries required to record transactions
and the updating of documents with customers. We also reported that for the
fiscal year ended December 31, 2002, we had other material weaknesses that have
since been remediated. For information on the material weaknesses and
deficiencies reported for the fiscal
13
years ended December 31, 2002 and 2003, see "Change in and disagreements with
accountants on accounting and financial disclosure."
In addition, in November 2004, during our inventory testing (including a planned
physical inventory at a company-owned distribution center), two unrelated errors
were discovered. These errors were the result of two discrete events. One event
involved inaccurate inventory levels reported to us by a large distribution
partner. The under-reported inventory levels resulted in us inaccurately
reporting $3.3 million in revenues in our earnings release on October 26, 2004
for the three- and nine-month periods ended September 30, 2004. No previous
periods were affected. This was an oversight on the part of the distribution
partner, which made us aware of the reporting error as soon as it was
discovered. The second discrepancy was the result of errors that occurred at a
company-owned distribution facility that serves one of our large retail
customers. The distribution center relies on its own internal reporting system
and misreported inventory. As a result of this second discrepancy, we over-
reported revenue by $10.3 million for the three- and nine-month periods ended
September 30, 2004 in our earnings release on October 26, 2004. Based on these
findings, management believed there were significant deficiencies relating to
the controls for receiving, shipping and ultimately reporting the amount of
inventory. We are investigating the events leading to the discrepancies
discovered at our company-owned distribution facility. We have engaged outside
counsel to assist with the investigation and in responding to requests made by
the Eastern District and the SEC regarding this matter, including whether Symbol
has complied with the injunction issued in connection with the June 2004
settlement with the SEC and non-prosecution agreements with the Eastern
District. There can be no assurance that these events will not give rise to an
enforcement action or other proceeding, or to the imposition of fines or other
penalties, by the Eastern District or the SEC. The errors reported as described
above led to the delayed, but timely, filing of our quarterly report on Form
10-Q as of and for the three- and nine-month periods ended September 30, 2004.
In 2003 and continuing in 2004 as disclosed in certain of our periodic filings,
we have implemented and continue to implement various initiatives to address the
material weaknesses and deficiencies in our internal controls as identified by
our prior auditors and our own internal investigations, conducted with the
oversight of our audit committee. In response to the two errors in November
2004, we believe we have taken appropriate steps to ensure the financial results
are fairly presented in all material respects, including:
- - re-performed a physical inventory at this distribution center;
- - performed a roll back of inventory amounts from the results of our physical
counts to each quarter end;
- - re-performed cut-off procedures at March 31, 2004, June 30, 2004 and September
30, 2004 to determine proper inventory amounts; and
- - re-confirmed inventory amounts with the distributor.
Additionally, we have taken various initiatives to improve the effectiveness of
our internal controls, including:
- - placed qualified individuals in the distribution center to manage the movement
of inventory within the distribution center; and
- - developed physical inventory procedures to be performed on a quarterly basis
at certain of our distributors and our company-owned distribution center to
ensure the value of consigned
14
inventory at our distributors and our company-owned distribution center are
accurately recorded.
We believe these initiatives, along with the initiatives related to our
compliance with the Sarbanes-Oxley Act of 2002, address our control environment,
organization and staffing, policies, procedures, documentation and information
systems and are intended to continuously improve our internal controls and
procedures, address systems and personnel issues and help ensure a corporate
culture that emphasizes integrity, honesty and accurate financial reporting.
The implementation of these initiatives is one of our highest priorities. Our
board of directors, in coordination with our audit committee, continually
assesses the progress and sufficiency of our initiatives related to our internal
controls and make adjustments necessary. A failure of our internal controls and
procedures could result in mistakes in our reported results and in violations of
the injunction issued in connection with the June 2004 settlement with the SEC
and our non-prosecution agreement with the Eastern District and could have a
material adverse effect on our business, revenues or financial condition.
WE HAVE EXPERIENCED MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS. IF WE FAIL TO
MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO PROVIDE
TIMELY AND ACCURATE FINANCIAL STATEMENTS. THIS COULD CAUSE INVESTORS TO LOSE
CONFIDENCE IN OUR REPORTED FINANCIAL RESULTS AND HAVE A NEGATIVE EFFECT ON THE
TRADING PRICE OF OUR SECURITIES.
During the past two years, we have identified a number of "material weaknesses"
and "reportable conditions" in our internal financial controls. Some of these
weaknesses resulted in errors in our historical financial statements, which in
turn resulted in a restatement of our financial statements that affected our
selected data for 1998, 1999, 2000 and 2001, our financial statements for the
years ended December 31, 2000 and 2001 and our unaudited selected quarterly
information for each of the four quarters in 2001 and the first three quarters
of 2002.
Although we have taken significant steps to correct the internal control
deficiencies that resulted in the restatement of our financial statements,
during our inventory testing conducted in connection with the reporting of our
financial results for the three- and nine-month periods ended September 30,
2004, we have identified significant deficiencies relating to the controls for
receiving, shipping and ultimately reporting the amount of our inventory.
We have taken and continue to take steps to correct previously identified
internal control deficiencies. We cannot be certain that these measures will
ensure that we implement and maintain adequate controls over our financial
processes and reporting in the future. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations. In addition, we cannot assure you that we will not in the future
identify further material weaknesses or significant deficiencies in our internal
control over financial reporting that we have not discovered to date.
Beginning with the year ending December 31, 2004, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, our management is required to deliver a report as
part of our annual report on Form 10-K that assesses the effectiveness of our
internal controls over financial reporting. Additionally, we are required to
file with the SEC an attestation report of our auditors on our management's
assessment of and operating effectiveness of internal controls. If a material
weakness were identified with respect to our internal control over financial
reporting, we would not be able to conclude that our internal controls over
financial reporting were effective, which could result in the inability of our
external auditors to deliver an unqualified
15
report, or any report, on our internal controls. Inferior internal controls
could also cause investors to lose confidence in our reported financial
information, which could have a negative effective on the trading price of our
securities.
RISKS RELATED TO OUR BUSINESS
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS AND ENHANCEMENTS TO OUR EXISTING
PRODUCTS. IF WE FAIL TO PREDICT AND RESPOND TO EMERGING TECHNOLOGICAL TRENDS AND
OUR CUSTOMERS' CHANGING NEEDS OR IF WE ARE UNABLE TO REDUCE OUR MANUFACTURING
COSTS OVER TIME AS ANTICIPATED, WE MAY NOT BE ABLE TO REMAIN COMPETITIVE.
We are active in the research and development of new products and technologies
and enhancing our current products. However, research and development in the
enterprise mobility industry is complex and filled with uncertainty. If we
expend a significant amount of resources and our efforts do not lead to the
successful introduction of new or improved products, there could be a material
adverse effect on our business, operating results, financial condition and
market share. In addition, it is common for research and development projects to
encounter delays due to unforeseen problems, resulting in low initial volume
production, fewer product features than originally considered desirable and
higher production costs than initially budgeted, which may result in lost market
opportunities. In addition, new products may not be commercially well received.
There could be a material adverse effect on our business, operating results,
financial condition and market share due to such delays or deficiencies in the
development, manufacturing and delivery of new products.
We have made significant investments to develop enterprise mobility products
because we believe enterprise mobility is a new and developing market in the
information technology industry. One example of our investments is our
acquisition of Matrics, a leader in developing EPC-compliant RFID systems. If
the RFID market or other markets in which we are investing do not grow,
retailers and consumers do not react enthusiastically to enterprise mobility, we
are unable to sell our enterprise mobility products and services at projected
rates or the market adopts a standard for RFID technology that is different than
that offered by Matrics, then there could be a material adverse effect on our
business and operating results. Our efforts in enterprise mobility are also
dependent, in part, on applications developed and infrastructure deployed by
third parties. If third parties do not develop robust, new or innovative
applications or create the appropriate infrastructure for enterprise mobility
products and offer them to us or our customers on commercially reasonable terms,
then there could be a material adverse effect on our business and operating
results.
Once a product is in the marketplace, its selling price usually decreases over
the life of the product, especially after a new competitive product is publicly
announced, because customers often delay purchases of existing products until
the new or improved versions of those products are available. To lessen the
effect of price decreases, our research and development teams attempt to reduce
manufacturing costs of existing products in order to maintain or improve our
margins on such products. However, if cost reductions do not occur in a timely
manner, there could be a material adverse effect on our operating results and
market share.
A COURT HAS RENDERED A JUDGMENT AGAINST US IN THE AMOUNT OF $218 MILLION, WHICH,
IF UPHELD ON APPEAL, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR LIQUIDITY.
On September 17, 2003, a jury awarded approximately $218 million in damages
against our wholly-owned subsidiary, Telxon Corporation ("Telxon"), for claims
relating to an alleged
16
contract between Telxon and Smart Media of Delaware, Inc. ("SMI"). This sum
included an award of approximately $6 million to an individual. Telxon made
certain post-verdict motions seeking, among other things, a judgment in its
favor notwithstanding the verdict, a new trial or a reduction in the amount of
the jury verdicts. The court denied all of these motions. The court also
rejected Telxon's motion for a stay of entry of the judgment, and on May 6,
2004, the court entered judgment against Telxon for approximately $218 million
in damages, plus statutory interest from the date of the verdicts. The court
also granted the individual's motion to add Symbol as an additional counterclaim
defendant. While SMI withdrew its motion to add Symbol as a counterclaim
defendant, there can be no assurance that Symbol will not ultimately be held
liable for the full amount of the jury verdicts, plus statutory interest from
the date of the verdicts. Symbol and Telxon have filed notices of appeal of
these rulings and the related verdicts. Symbol and Telxon have deposited
approximately $50 million into an interest-bearing court escrow account to stay
the execution of the judgment against both Symbol and Telxon pending resolution
of the appeal. The parties completed the submission of briefs on this appeal in
March 2005. Oral arguments on the appellate briefs were heard on June 3, 2005.
Our available cash, including cash available under our existing lines of credit,
may not be sufficient to pay jury verdicts of this size, and we may need to
obtain additional financing in order to pay the judgment entered against Telxon
in this matter. There can be no assurance that we would be able to obtain
financing on terms favorable to us, or at all. In the event that such a judgment
remained unpaid, we would be in violation of the terms of our credit facility.
In addition, we currently have not recorded any liability in our consolidated
financial statements with respect to the jury verdicts and judgment entered as
we believe that, in accordance with the relevant guidance set forth in Statement
of Financial Accounting Standards No. 5, "Accounting for Contingencies," an
unfavorable outcome of this litigation is not probable at this time.
Nevertheless, while we are still vigorously defending against this lawsuit, we
may ultimately be liable for the full amount of the judgment, plus statutory
interest from the date of the verdicts, the payment of which would have a
material adverse effect on our results of operations, financial condition and
liquidity. For more information on this litigation and the new credit facility,
see "Business--Legal proceedings--Smart Media litigation" and "Description of
our credit facility."
OUR BUSINESS, OPERATING RESULTS AND GROWTH RATES MAY BE ADVERSELY AFFECTED BY
UNFAVORABLE ECONOMIC AND MARKET CONDITIONS, AS WELL AS THE VOLATILE GEOPOLITICAL
ENVIRONMENT.
Our current business and operating plan assumes that economic activity in
general, and information technology ("IT") spending in particular, will at least
remain at current levels; however, we cannot be assured of the level of IT
spending, the deterioration of which could have a material adverse effect on our
results of operations and growth rates. Our business is especially affected by
the economic success of the retail sector, which accounts for a significant
portion of our business, and our results of operations may be adversely affected
if the global economic and market conditions in the retail sector do not
improve. For the three months ended March 31, 2005, direct sales to the retail
sector accounted for approximately 25% of our revenue. In addition, our reseller
customers sell our products to the retail sector, which may represent a
substantial portion of our reseller customers' sales. If historically low
interest rates rise, consumer demand could be further dampened and related
retail IT spending may be reduced.
17
WE HAVE MADE STRATEGIC ACQUISITIONS AND ENTERED INTO ALLIANCES AND JOINT
VENTURES IN THE PAST AND INTEND TO DO SO IN THE FUTURE. IF WE ARE UNABLE TO FIND
SUITABLE ACQUISITIONS OR PARTNERS OR TO ACHIEVE EXPECTED BENEFITS FROM SUCH
ACQUISITIONS OR PARTNERSHIPS, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, GROWTH RATES AND RESULTS OF OPERATIONS.
As part of our ongoing business strategy to expand product offerings and acquire
new technology, we frequently engage in discussions with third parties
regarding, and enter into agreements relating to, possible acquisitions,
strategic alliances and joint ventures. If we are unable to identify future
acquisition opportunities or reach agreement with such third parties, there
could be a material adverse effect on our business, growth rates and results of
operations.
Even if we are able to complete acquisitions or enter into alliances and joint
ventures that we believe will be successful, such transactions, especially those
involving technology companies like Matrics, are inherently risky. Significant
risks to these transactions, including the acquisition of Matrics, include the
following:
-- integration and restructuring costs, both one-time and ongoing;
-- maintaining sufficient controls, policies and procedures;
-- diversion of management's attention from ongoing business operations;
-- establishing new informational, operational and financial systems to meet
the needs of our business;
-- losing key employees;
-- failing to achieve anticipated synergies, including with respect to
complementary products; and
-- unanticipated and unknown liabilities.
THE ACQUISITION OF MATRICS HAD AN IMMEDIATE DILUTIVE EFFECT ON OUR 2004 EARNINGS
PER SHARE. IN ADDITION, THE ACQUISITION OF MATRICS MAY NOT PRODUCE THE REVENUE,
EARNINGS, BUSINESS SYNERGIES OR TECHNOLOGICAL ADVANCES THAT WE ANTICIPATE. THIS
COULD HAVE AN ADVERSE EFFECT ON OUR COMPETITIVE POSITION, REVENUES AND PROSPECTS
FOR GROWTH.
For the year ended December 31, 2004, the acquisition of Matrics had a $26.8
million negative impact on net earnings and a $0.11 negative impact on earnings
per share, primarily as a result of a $12.8 million write-off of in-process
research and development costs, the interest expense and amortization of fees
associated with the short-term credit facility used to fund the acquisition and
the refinancing thereof with our credit facility on December 29, 2004. Moreover,
the RFID market may not perform as expected for a variety of reasons, including
the failure in the development and acceptance of EPC-compliant RFID systems,
higher than expected implementation costs associated with RFID and the
unreliability of unproven technology. In addition, a competitor of Symbol
commenced a patent infringement lawsuit against Matrics, which has since been
merged with and into Symbol. Any one or a combination of these factors may cause
our revenue or earnings to be further negatively impacted.
We allocated $194.4 million of the total $237.9 million purchase price of the
Matrics acquisition to goodwill. The goodwill arose as the excess of the
purchase price over the fair value of net assets acquired from Matrics. We
perform annual evaluations for the potential impairment of the carrying value of
goodwill in accordance with SFAS No. 142. If the financial performance of
18
our businesses were to decline significantly, we could incur a non-cash charge
to our income statement for the impairment of goodwill.
Although the RFID market is at the early stages of development, we paid a
significant premium for Matrics because we believe that EPC-based technology
will be a material area of investment for our customers in our retail,
manufacturing, transportation and logistics, wholesale distribution, healthcare
and government vertical markets. We believe that Matrics is an early market
leader with its commercial tag and reader products based on its trial
deployments and full implementations with its customers in retail,
transportation, healthcare, and government vertical markets. Our goal is to
obtain a significant share of the market by combining our expertise in sales and
support for enterprise mobility solutions along with our engineering resources
and the Matrics, expertise in this emerging market, which is a market that is
projected to grow rapidly in the next three to five years. We currently believe
that the costs we will incur during the product life cycle for both existing
technology and future, replacement RFID technology will be consistent with the
expenditures we have incurred in developing and maintaining our existing
enterprise mobility solutions.
If we are unable to develop or enhance the Matrics technology within the
timeframe expected, we may not meet our revenue and profitability projections.
Furthermore, we believe that a number of our existing customers intend to deploy
RFID systems utilizing technology such as that provided by Matrics and if we
fail to deliver those products, those customers may be less willing to purchase
our other existing products, further negatively impacting revenue and
profitability. If we do not develop or enhance the Matrics technology in line
with our projections, we may be required to incur higher operating and capital
expenses than expected in order to address these issues and meet projections.
THE ENTERPRISE MOBILITY INDUSTRY IS HIGHLY COMPETITIVE, AND COMPETITIVE
PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIALLY ADVERSE EFFECT
ON OUR BUSINESS, REVENUES, GROWTH RATES AND MARKET SHARE.
The enterprise mobility industry is a highly competitive industry that is
influenced by the following:
-- advances in technology;
-- new product introductions;
-- evolving industry standards;
-- product improvements;
-- rapidly changing customer needs;
-- intellectual property invention and protection;
-- marketing and distribution capabilities;
-- competition from highly capitalized companies;
-- entrance of new competitors;
-- ability of customers to invest in information technology; and
-- price competition.
If we do not keep pace with product and technology advances, there could be a
material adverse effect on our competitive position, revenues and prospects for
growth. There is also
19
likely to be continued pricing pressure as competitors attempt to maintain or
increase market share.
The products manufactured and marketed by us and our competitors in the
enterprise mobility industry are becoming more complex. As the technological and
functional capabilities of future products increase, these products may begin to
compete with products being offered by traditional computer, network and
communications industry participants that have substantially greater financial,
technical, marketing and manufacturing resources than we do. We may not be able
to compete successfully against these new competitors, and competitive pressures
may result in a material adverse effect on our business or operating results.
WE ARE SUBJECT TO RISKS RELATED TO OUR OPERATIONS OUTSIDE THE UNITED STATES.
UNPREDICTABLE FOREIGN SALES AND MANUFACTURING ENVIRONMENTS MAY HAVE A MATERIALLY
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND REVENUES.
A substantial portion of our revenue has been generated from sales outside the
United States. For the three months ended March 31, 2005, non-U.S. sales
accounted for 36.8% of our revenue. We also manufacture most of our products
outside the United States, and we anticipate that an increasing percentage of
new products and subassemblies will be manufactured outside the United States.
Overall margins for our products increased throughout 2003 and 2004, partially
as a result of increased efficiencies due to the transfer of internal
manufacturing to our Reynosa, Mexico facility and external manufacturing to
lower cost producers in China, Taiwan and Singapore. For the three months ended
March 31, 2005, overall margins decreased compared to the three months ended
March 31, 2004 as a result of the strengthening U.S. dollar against foreign
currencies as well as a greater than normal mix of large customer, lower margin
revenue.
These sales and manufacturing activities are subject to the risks of foreign
operations, including the following:
-- increased security requirements;
-- political uncertainties;
-- transportation delays and interruptions;
-- the impact of recessionary or inflationary foreign economies;
-- adapting to different regulatory requirements; and
-- different technology standards or customer expectations.
Many of these risks have affected our business in the past and may in the future
have a material adverse effect on our business, financial condition and
revenues. We cannot predict whether the United States or any other country will
impose new quotas, tariffs, taxes or other trade barriers upon the importation
of our products or supplies, any of which could have a material adverse effect
on our results of operations and financial condition.
OUR SALES AND MANUFACTURING ACTIVITIES IN FOREIGN COUNTRIES MAY BE SUBJECT TO
LENGTHY RECEIVABLES COLLECTION PERIODS. A SIGNIFICANT INCREASE IN OUR
UNCOLLECTED RECEIVABLES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR EARNINGS AND
FINANCIAL CONDITION.
Economic conditions in foreign countries where obligors under our receivables
reside may affect our ability to collect our receivables. Such economic
conditions include, but are not limited to:
-- unemployment;
20
-- interest rates;
-- exchange rates;
-- inflation rates; and
-- consumer perceptions of the economy.
If a large number of our obligors located in a foreign country experience any of
the above-mentioned conditions, or other conditions, or if we otherwise
experience a significant increase in the length of our receivables collection
periods or the amount of our uncollected receivables, we may experience a
material adverse effect on our earnings and financial condition. At March 31,
2005, our percentage of non-U.S. receivables was approximately 47%. In addition,
at March 31, 2005, our percentage of doubtful accounts for customers outside the
United States was approximately 24% of our total allowance for doubtful
accounts.
WE MAY FACE TRADE BARRIERS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATIONS AND RESULT IN A LOSS OF CUSTOMERS OR SUPPLIERS.
Trade barriers erected by the United States or other countries may interfere
with our ability to offer our products and services in those markets. We cannot
predict whether the United States or any other country will impose new quotas,
tariffs, taxes or other trade barriers upon the importation or exportation of
our products or supplies, any of which could have a material adverse effect on
our results of operations and financial condition. Competition and trade
barriers in those countries could require us to reduce prices, increase spending
on marketing or product development, withdraw from or not enter certain markets
or otherwise take actions adverse to us.
In all jurisdictions in which we operate, we are also subject to the laws and
regulations that govern foreign investment and foreign trade, which may limit
our ability to repatriate cash as dividends or otherwise to the United States.
FLUCTUATIONS IN THE EXCHANGE RATE OF THE U.S. DOLLAR AND OTHER FOREIGN
CURRENCIES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, INCLUDING OUR SALES AND MARGINS.
Most of our equipment sales in Western Europe and Asia are billed in foreign
currencies and are subject to currency exchange fluctuations. In prior years,
changes in the value of the U.S. dollar compared to foreign currencies have had
an impact on our sales and margins. We have a formal policy that permits the use
of financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates that may arise in the normal course of our business.
This policy prohibits the use of currency derivatives or other financial
instruments for trading or speculative purposes. However, we cannot predict the
direction or magnitude of future currency fluctuations. A weakening of the
currencies in which we generate sales relative to the currencies in which our
costs are denominated may lower our results of operations and impair our
financial condition. For example, we purchase a large number of parts,
components and third-party products from Japan. The value of the yen in relation
to the U.S. dollar strengthened during 2002, 2003 and 2004. If the value of the
yen continues to strengthen relative to the dollar, there could be a material
adverse effect on our results of operations.
We enter into forward foreign exchange contracts and foreign currency loans
principally to hedge the currency fluctuations in transactions denominated in
foreign currencies, thereby limiting our risk that would otherwise result from
changes in exchange rates. During 2003 and
21
2004, the principal transactions hedged were short-term intercompany sales. The
periods of the forward foreign exchange contracts and foreign currency loans
correspond to the periods of the hedged transactions.
In all jurisdictions in which we operate, we are subject to the laws and
regulations that govern currency exchange transactions, which may limit our
ability to convert foreign currency cash flows into U.S. dollars.
WE RELY ON OUR MANUFACTURING FACILITY IN REYNOSA, MEXICO TO MANUFACTURE A
SIGNIFICANT PORTION OF OUR PRODUCTS. ANY PROBLEMS AT THE REYNOSA FACILITY COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, COSTS OF REVENUE AND FINANCIAL
CONDITION.
For the three months ended March 31, 2005, 59% of our product cost of revenue
can be attributed to our facility in Reynosa, and we estimate that such
percentage will be similar or higher for the remainder of 2005. Approximately
60% of the products manufactured in this facility represent scanners and
approximately 40% represent mobile computer products. In the past, we have
experienced manufacturing problems in the ordinary course of business, such as
equipment breakdowns and short-term employee shortages, that have caused
delivery delays. While these past delays have not been material, we may
experience material production difficulties and product delivery delays in the
future as a result of the following:
-- changing process technologies;
-- ramping production;
-- installing new equipment at our manufacturing facilities;
-- ability to hire and retain skilled employees; and
-- shortage of key components.
If manufacturing problems in our Reynosa facility were to arise or if use of our
manufacturing facility in Reynosa were to be interrupted by natural disaster or
any other event, and we are unable to develop alternative sources for our
production needs, we may not be able to meet customer demand for our products,
which could have a material adverse effect on our business, costs of operations
and financial condition.
SOME COMPONENTS, SUBASSEMBLIES AND PRODUCTS ARE PURCHASED FROM A SINGLE SUPPLIER
OR A LIMITED NUMBER OF SUPPLIERS. THE LOSS OF ANY OF THESE SUPPLIERS MAY CAUSE
US TO INCUR ADDITIONAL SET-UP COSTS, RESULT IN DELAYS IN MANUFACTURING AND
DELIVERING OUR PRODUCTS OR CAUSE US TO CARRY EXCESS OR OBSOLETE INVENTORY.
While components and supplies are generally available from a variety of sources,
we currently depend on a limited number of suppliers for several components for
our equipment, and certain subassemblies and products. Some components,
subassemblies and products are purchased from a single supplier or a limited
number of suppliers. For example, we have a long-term strategic relationship
with Olympus Optical, Inc. of Japan pursuant to which Olympus and Symbol jointly
develop selected products that are manufactured by Olympus exclusively for sale
by us in the field of our business and prospective businesses. The percentage of
our product sales that include products or contain components manufactured by
Olympus historically has ranged from approximately 10% to 20% in any given
quarterly period. We have estimated that the temporary adverse impact if we lost
Olympus as a manufacturer would be approximately 40% of the product sales that
include products or contain components manufactured by Olympus or a temporary
adverse impact of approximately 4% to 8% of total product sales. In addition,
for certain components, subassemblies and products for which we
22
may have multiple sources, we are still subject to significant price increases
and limited availability due to market demand for such components, subassemblies
and products. In the past, unexpected demand for communication products caused
worldwide shortages of certain electronic parts, which had an adverse impact on
our business. While we have entered into contracts with suppliers of parts that
we anticipate may be in short supply, there can be no assurance that additional
parts will not become the subject of such shortages or that such suppliers will
be able to deliver the parts in fulfillment of their contracts. In addition, on
occasion, we increase our component inventory in anticipation of supply
shortages, which may result in our carrying excess or obsolete components if we
do not properly anticipate customer demand and could have a material adverse
effect on our business and results of operations.
If shortages or delays exist, we may not be able to secure an adequate number of
components at reasonable prices and acceptable quality and, therefore, may not
be able to meet customer demand for our products, which could have a material
adverse effect on our business and results of operations. Although the
availability of components did not materially impact our business in 2003 or
2004, we cannot predict when and if component shortages will occur.
WE OUTSOURCE THE MANUFACTURING OF MANY OF OUR COMPONENTS AND PRODUCTS, AND IF
THIRD-PARTY MANUFACTURERS LACK SUFFICIENT QUALITY CONTROL OR IF THERE ARE
SIGNIFICANT CHANGES IN THE FINANCIAL OR BUSINESS CONDITION OF SUCH THIRD-PARTY
MANUFACTURERS, OUR ABILITY TO SUPPLY QUALITY PRODUCTS TO OUR CUSTOMERS MAY BE
DISRUPTED.
We increasingly depend on outsourced manufacturing, primarily by manufacturers
located outside the United States. Our increasing dependence on third-party
manufacturers for outsourced components subjects us to the risk of supplier
failure and customer dissatisfaction with the quality or performance of our
products containing such purchased components. Quality or performance failures
by our third-party manufacturers or changes in their financial or business
condition could disrupt our ability to supply quality products to our customers
and thereby have a material adverse effect on our business, revenues and
financial condition.
In addition, third-party manufacturers for outsourced components are
consolidating in the electronic component industry. The consolidation of our
third-party manufacturers for outsourced components may give the remaining and
larger third-party manufacturers greater leverage to increase the prices that
they charge and thereby increase our cost of component parts.
MANAGEMENT OF OUR INVENTORY WILL BE COMPLEX AS WE CONTINUE TO SELL A SIGNIFICANT
MIX OF PRODUCTS THROUGH DISTRIBUTORS. FLUCTUATIONS IN DISTRIBUTOR DEMAND MAY
CAUSE US TO REDUCE OUR PRICES AND WRITE DOWN INVENTORY, WHICH COULD RESULT IN
LOWER GROSS MARGINS.
We must manage inventory effectively, particularly with respect to sales to
distributors. Our gross inventory at the end of 2002 was $431 million with an
estimated valuation allowance of $170 million or 39%. As of March 31, 2005,
gross inventory has been reduced to $230.3 million with an estimated valuation
allowance of $58.0 million or 25.2%. Management, during this time period, has
improved its management of inventory, particularly its management of its supply
chain as well as through its distribution channel. However, distributors may
increase orders during periods of product shortages, cancel orders if their
inventory is too high or delay orders in anticipation of new products.
Distributors also may adjust their orders in response to the supply of our
products and the products of our competitors and seasonal fluctuations in
end-user demand. If we have excess inventory, we may have to reduce our prices
and write down inventory, which in turn could result in a lower gross margin.
23
WE SELL A MAJORITY OF OUR PRODUCTS THROUGH RESELLERS, DISTRIBUTORS AND ORIGINAL
EQUIPMENT MANUFACTURERS ("OEMS"). IF THE THIRD-PARTY DISTRIBUTION SOURCES ON
WHICH WE RELY DO NOT PERFORM THEIR SERVICES ADEQUATELY OR EFFICIENTLY OR IF THEY
EXIT THE INDUSTRY, AND WE ARE NOT ABLE TO QUICKLY FIND ADEQUATE REPLACEMENTS,
THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR REVENUE.
We sell a majority of our products through resellers, distributors and OEMs.
Some of our third-party distribution sources may have insufficient financial
resources and may not be able to withstand changes in worldwide business
conditions, including economic downturn, or abide by our inventory and credit
requirements. If the third-party distribution sources on which we rely do not
perform their services adequately or efficiently or exit the industry, and we
are not able to quickly find adequate replacements, there could be a material
adverse effect on our revenue and market share. In addition, we do not have
third-party distribution sources in certain parts of the world. If we are unable
to effectively and efficiently supply and service customers outside our current
geographic scope, there may be a material adverse effect on our growth rates and
result of operations.
In 2003, we implemented a new distribution system called the Symbol
PartnerSelect(TM) Program that is designed to increase our business and the
business of our resellers, distributors and OEMs and improve the quality of
service and products offered to end users of our products and services. For
example, under the Symbol PartnerSelect(TM) Program, resellers are selected for
a program track and level based on a number of different criteria such as
hardware, software, and service offerings, number and level of Symbol
certifications, level of partnership commitment and level of customer support.
If the new program does not continue to be well received by our resellers,
distributors and OEMs, or end users of our products and services, there could be
a material adverse effect on our operating results. For example, one of our
former resellers was not selected to participate in the Symbol PartnerSelect(TM)
Program and has sued us for unfair competition in Europe. See "Business--Legal
proceedings--Other litigation--Bruck Technologies Handels GmbH European
Commission Complaint."
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF THIRD PARTIES
ASSERT WE ARE IN VIOLATION OF THEIR INTELLECTUAL PROPERTY RIGHTS, THERE COULD BE
A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND OUR ABILITY TO
ATTRACT NEW CUSTOMERS AND RETAIN CURRENT CUSTOMERS.
We protect our proprietary information and technology through licensing
agreements, third-party nondisclosure agreements and other contractual
provisions, as well as through patent, trademark, copyright and trade secret
laws in the United States and similar laws in other countries. There can be no
assurance that these protections will be available in all cases or will be
adequate to prevent our competitors from copying, reverse engineering or
otherwise obtaining and using our technology, proprietary rights or products.
Furthermore, there can be no assurance that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology or design around our proprietary rights. In addition, an
important scanner-integrated computer patent will expire in July 2005. In each
case, our ability to compete and to receive licensing revenues could be
significantly impaired. To prevent substantial unauthorized use of our
intellectual property rights, it may be necessary to prosecute actions for
infringement and/or misappropriation of our proprietary rights against third
parties. Any such action could result in significant costs and diversion of our
resources and management's attention, and there can be no assurance that we will
be successful in such action. In addition, third parties may seek to challenge,
invalidate or circumvent our patents, trademarks, copyrights and trade secrets,
or applications for any of the foregoing. Furthermore,
24
the laws of certain countries in which our products are or may be licensed do
not protect our proprietary rights to the same extent as the laws of the United
States.
Third parties have, and may in the future, assert claims of infringement of
intellectual property rights against us or against our partners for which we may
be liable under certain terms of indemnification. Due to the rapid pace of
technological change in our industry, much of our business and many of our
products rely on proprietary technologies of third parties, and we may not be
able to obtain, or continue to obtain, licenses from such third parties on
reasonable terms. We have received, and have currently pending, third-party
claims and may receive additional notices of such claims of infringement in the
future. To date, such activities have not had a material adverse effect on our
business and we have either prevailed in all litigation, obtained a license on
commercially acceptable terms or otherwise been able to modify any affected
products or technology. However, there can be no assurance that we will continue
to prevail in any such actions or that any license required under any such
patent or other intellectual property would be made available on commercially
acceptable terms, if at all. In addition, any such claim of infringement could
result in an injunction that prevents us from distributing certain products or
performing certain services. The failure to obtain a license on commercially
reasonable terms or the entry of an injunction that impairs our ability to
market certain products or services could have a material adverse affect on our
business, results of operations or financial condition. Since we and third
parties hold a significant number of U.S. and foreign patents and patent
applications related to our business, we believe that there is likely to
continue to be significant litigation regarding patent and other intellectual
property rights, which could have a material adverse effect on our business and
our ability to compete. For example, Intermec IP Corp., a subsidiary of Intermec
Technologies Corporation ("Intermec"), filed suit against Matrics (prior to the
announcement of our acquisition of Matrics), asserting infringement of four
patents owned by Intermec IP Corp. relating to RFID readers, chips, RFID tag
operation and the integration of tags with wireless memory devices. On October
29, 2004, Matrics was merged with and into Symbol and now Symbol is defending
the case. On March 10, 2005, Symbol filed a lawsuit alleging patent infringement
against Intermec, and Intermec has counterclaimed alleging infringement of
Intermec's intellectual property by certain of Symbol's products. Additionally,
Nanopower Technologies, Inc. ("Nanopower") filed suit against Matrics and us
asserting, among other things, breach of an intellectual property license
agreement, breach of a confidentiality agreement and misappropriation of trade
secrets relating to a low voltage RFID tag startup technology. For more details
on the Intermec litigation, the Nanopower litigation and other intellectual
property litigation, see "Business--Legal proceedings--Pending patent and
trademark litigation."
NEW SAFETY REGULATIONS OR CHANGES IN EXISTING SAFETY REGULATIONS RELATED TO OUR
PRODUCTS MAY RESULT IN UNANTICIPATED COSTS OR LIABILITIES, WHICH COULD HAVE A
MATERIALLY ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FUTURE
SALES AND COULD PLACE ADDITIONAL BURDENS ON THE OPERATIONS OF OUR BUSINESS.
Radio emissions and the use of lasers are subject to regulation in the United
States and in other countries in which we do business. In the United States,
various federal agencies including the Center for Devices and Radiological
Health of the Food and Drug Administration, the Federal Communications
Commission, the Occupational Safety and Health Administration and various state
agencies have promulgated regulation that concern the use of lasers and/or
radio/electromagnetic emissions standards. Member countries of the European
community have
25
enacted standards concerning electrical and laser safety and electromagnetic
compatibility and emissions standards.
If any of our products becomes subject to new regulations or if any of our
products becomes specifically regulated by additional government entities,
compliance with such regulations could become more burdensome and there could be
a material adverse effect on our business and our results of operations.
In addition, our wireless communication products operate through the
transmission of radio signals. Currently, operation of these products in
specified frequency bands does not require licensing by regulatory authorities.
Regulatory changes restricting the use of frequency bands or allocating
available frequencies could become more burdensome and could have a material
adverse effect on our business, results of operations and future sales.
COMPLIANCE WITH ENVIRONMENTAL MATTERS AND WORKER HEALTH AND SAFETY LAWS COULD BE
COSTLY AND NONCOMPLIANCE WITH THESE LAWS COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR RESULTS OF OPERATIONS, EXPENSES AND FINANCIAL CONDITION.
Some of our operations use substances regulated under various federal, state,
local and international laws governing the environment and worker health and
safety, including those governing the discharge of pollutants into the ground,
air and water, the management and disposal of hazardous substances and wastes
and the cleanup of contaminated sites. Certain of our products are subject to
various federal, state, local and international laws governing chemical
substances in electronic products. We could be subject to increased costs,
fines, civil or criminal sanctions, third-party property damage or personal
injury claims if we violate or become liable under environmental and/or worker
health and safety laws.
In January 2003, the European Union ("EU") issued two directives relating to
chemical substances in electronic products. The Waste Electrical and Electronic
Equipment Directive requires producers of electrical goods to pay for specified
collection, recycling, treatment and disposal of past and future covered
products. EU governments were required to enact and implement legislation that
complies with this directive by August 13, 2004 (such legislation together with
the directive, the "WEEE Legislation"), and certain producers are to be
financially responsible under the WEEE Legislation beginning in August 2005. The
EU has issued another directive that requires electrical and electronic
equipment placed on the EU market after July 1, 2006 to be free of lead,
mercury, cadmium, hexavalent chromium (above a threshold limit) and brominated
flame retardants. EU governments were required to enact and implement
legislation that complies with this directive by August 13, 2004 (such
legislation together with this directive, the "RoHS Legislation"). If we do not
comply with these directives, we may suffer a loss of revenue, be unable to sell
in certain markets and/or countries, be subject to penalties and enforced fees
and/or suffer a competitive disadvantage. Similar legislation could be enacted
in other jurisdictions, including in the United States. Costs to comply with the
WEEE Legislation, RoHS Legislation and/or similar future legislation, if
applicable, could include costs associated with modifying our products,
recycling and other waste processing costs, legal and regulatory costs and
insurance costs. We may also be required to take reserves for costs associated
with compliance with these regulations. We cannot assure you that the costs to
comply with these new laws, or with current and future environmental and worker
health and safety laws will not have a material adverse effect on our results of
operation, expenses and financial condition.
26
IF WE ARE UNABLE TO RECRUIT AND RETAIN KEY EMPLOYEES, THIS COULD AFFECT OUR
ABILITY TO SUCCESSFULLY GROW OUR BUSINESS.
In order to be successful, we must retain and motivate our executives and other
key employees, including those in managerial, technical, marketing and
information technology support positions. In particular, our product generation
efforts rely on hiring and retaining qualified engineers. Attracting and
retaining skilled solutions providers in the IT support business and qualified
sales representatives are also critical to our success. With the exception of
Mr. Nuti, our President and Chief Executive Officer, none of our current
employees has entered into an employment agreement with us and all such
individuals are "at will" employees. See "Management--Executive
compensation--Employment agreement."
Experienced management and technical, marketing and support personnel in the
information technology industry are in high demand, and competition for their
talents is intense. The loss of, or the inability to recruit, key employees
could have a material adverse effect on our business.
COVENANTS IN OUR CREDIT FACILITY MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS,
WHICH IN TURN COULD ADVERSELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION, AND
MAY LIMIT OUR ABILITY TO TAKE ADVANTAGE OF POTENTIAL BUSINESS OPPORTUNITIES AS
THEY ARISE.
Our credit facility contains covenants that restrict our ability to make
distributions or other payments to our investors and creditors unless we satisfy
certain financial tests or other criteria. We must also comply with certain
specified financial ratios and tests. Our material U.S. subsidiaries are subject
to similar restrictions which may restrict their ability to make certain
distributions to us. Our credit facility contains additional affirmative and
negative covenants, including limitations on our ability to incur additional
indebtedness, limitations to entering into certain acquisitions, limitations on
making capital expenditures, limitations on payment of dividends and limitations
on repurchases of common stock under the employee stock purchase program. As of
March 31, 2005, we were in compliance with the covenants under our credit
facility. All of these restrictions could affect our ability to operate our
business, which in turn could adversely affect our earnings and financial
condition, and may limit our ability to take advantage of potential business
opportunities as they arise.
If we do not comply with these covenants and restrictions, we would be in
default under our credit facility, and the debt incurred thereunder, together
with accrued interest, could then be declared immediately due and payable. If we
default under our credit facility, the lenders could cause all of our
outstanding debt obligations under our credit facility to become due and
payable, require us to apply all of our cash to repay the indebtedness under our
credit facility or prevent us from making debt service payments on our other
indebtedness. If we are unable to repay any borrowings when due, the lenders
under our credit facility could proceed against their collateral, which includes
most of the assets we own. In addition, any default under our credit facility
could lead to an acceleration of debt under other debt instruments that contain
cross acceleration or cross-default provisions. If the indebtedness under our
credit facility and our other debt instruments is accelerated, we may not have
sufficient assets to repay amounts due under our credit facility or indebtedness
under our other debt instruments. Our ability to comply with these provisions of
our credit facility may be affected by changes in the economic or business
conditions or other events beyond our control. See "Description of our credit
facility."
27
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements as defined in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements may be identified by their
use of words such as "anticipate," "estimates," "should," "expect," "guidance,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning in connection with any discussion of our future business, results of
operations, liquidity and operating or financial performance or results. Such
forward-looking statements involve significant material known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward looking statements. These
and other important risk factors are included in the "Risk factors" section of
this prospectus. In light of the uncertainty inherent in such forward-looking
statements, you should not consider the inclusion of such forward-looking
statements to be a representation that such forward-looking events or outcomes
will occur.
Because the information herein is based solely on data currently available, it
is subject to change and should not be viewed as providing any assurance
regarding our future performance. Actual results and performance may differ from
our current projections, estimates and expectations, and the differences may be
material, individually or in the aggregate, to our business, financial
condition, results of operations, liquidity or prospects. Additionally, we are
not obligated to make public indication of changes in our forward-looking
statements unless required under applicable disclosure rules and regulations.
MARKET AND INDUSTRY DATA
In the "Business" section of this prospectus, we rely on and refer to
information and statistics regarding the industries and the sectors in which we
compete. We obtained this information and these statistics from various
third-party sources. We believe that these sources and the estimates contained
therein are reliable, but have not independently verified them. Such information
involves risks and uncertainties and is subject to change based on various
factors, including those discussed under the caption "Risk factors" in this
prospectus.
References in this prospectus to "Symbol," "we," "us" or "our" refer to Symbol
Technologies, Inc. and its subsidiaries, unless the context specifically states
or implies otherwise.
28
USE OF PROCEEDS
Unless we indicate otherwise in the applicable prospectus supplement, we
anticipate that any net proceeds will be used for general corporate purposes,
including repaying or refinancing of existing indebtedness, working capital,
capital expenditures and acquisitions. The factors which we will consider in any
refinancing will include the amount and characteristics of any debt securities
issued and may include, among others, the impact of such refinancing on our
interest coverage, debt-to-capital ratio, liquidity and earnings per share. We
will set forth in the prospectus supplement our intended use for the net
proceeds received from the sale of any securities.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for the periods indicated are as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- -------------
2000 2001 2002 2003 2004 2005
- ---------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges(1)...... - - - 1.3x 5.9x 4.3x
- ---------------------------------------------------------------------------------------------
</Table>
(1) For purposes of calculating the ratio of earnings to fixed charges, earnings
consist of pre-income tax earnings from continuing operations, and fixed charges
consists of interest, whether expensed or capitalized, and the interest
component of rental expense. For the years ended December 31, 2000, 2001 and
2002, earnings were inadequate to cover fixed charges. The deficiency was $191.3
million, $17.6 million, and $61.7 million, respectively.
29
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the New York Stock Exchange under the symbol
"SBL." The following table sets forth the high and low sales prices per share of
our common stock as reported on the New York Stock Exchange with respect to the
periods indicated:
<Table>
<Caption>
- ------------------------------------------------------------------------------
HIGH LOW
- ------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
First Quarter............................................ $ 10.95 $ 8.01
Second Quarter........................................... 14.93 8.62
Third Quarter............................................ 14.88 11.54
Fourth Quarter........................................... 17.70 11.94
YEAR ENDED DECEMBER 31, 2004:
First Quarter............................................ 19.37 11.89
Second Quarter........................................... 15.89 11.30
Third Quarter............................................ 14.75 11.55
Fourth Quarter........................................... 17.50 12.59
YEAR ENDED DECEMBER 31, 2005
First Quarter............................................ 19.12 14.10
Second Quarter (through June 8, 2005).................... 14.47 10.74
- ------------------------------------------------------------------------------
</Table>
On June 8, 2005, the last reported sale price of our common stock on the New
York Stock Exchange was $11.00 per share. As of June 8, 2005, there were 1,609
stockholders of record of our common stock, which did not include beneficial
owners of shares registered in nominee or street name.
30
DIVIDEND POLICY
The following table sets forth the dividend payments declared by the board of
directors and paid by Symbol with respect to the periods indicated:
<Table>
<Caption>
- ----------------------------------------------------------------------
DIVIDEND
- ----------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
First Quarter............................................ -
Second Quarter........................................... $ .01
Third Quarter............................................ .01
Fourth Quarter........................................... -
YEAR ENDED DECEMBER 31, 2004:
First Quarter............................................ .01
Second Quarter........................................... -
Third Quarter............................................ .01
Fourth Quarter........................................... -
YEAR ENDED DECEMBER 31, 2005
First Quarter............................................ -
Second Quarter (through June 8, 2005).................... .01
- ----------------------------------------------------------------------
</Table>
We intend to pay semi-annual cash dividends on our common stock at an annual
rate of $0.02 per share. However, there can be no assurance that we will declare
or pay any cash dividends. Payment of future dividends is subject to approval by
our board of directors. Recurrent declaration of dividends will be dependent on
our future earnings, capital requirements and financial condition. The terms of
our credit facility may also restrict us from paying cash dividends on our
common stock under some circumstances. See "Description of our credit facility."
31
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization
as of March 31, 2005.
The information in this table should be read in conjunction with "Management's
discussion and analysis of financial condition and results of operations" and
our consolidated financial statements and related notes thereto included
elsewhere in this prospectus.
<Table>
<Caption>
MARCH 31, 2005
- ------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------
Cash and cash equivalents(1)................................ $ 218,218
==========
Debt:
Senior secured revolving credit facility................. $ 50,000(4)
Senior secured term loan facility........................ 100,000
Secured installment loan................................. 10,369
SAILS exchangeable debt(2)............................... 81,463
Other.................................................... 60
----------
Total debt............................................... $ 241,892
----------
Stockholders' equity:
Preferred stock, par value $1.00; 10,000 shares
authorized, none issued or outstanding................. -
Common stock, par value $0.01; 600,000 shares authorized;
272,657 shares issued (242,273 shares
outstanding)(3)........................................ 2,727
Additional paid-in capital............................... 1,491,037
Accumulated other comprehensive earnings, net............ 10,976
Deferred compensation.................................... (14,365)
Accumulated deficit...................................... (92,824)
Treasury stock, at cost, 29,634 shares................... (297,759)
----------
Total stockholders' equity............................... 1,099,792
----------
Total capitalization.................................. $1,871,268
- ------------------------------------------------------------------------
</Table>
(1) Does not include restricted cash of $51.6 million, which is comprised of two
deposits. One amount of $50.6 million is an interest-bearing court escrow
account as security for a trial court judgment on appeal. The second amount of
$1.0 million is an interest bearing letter of credit pledged as a supplier bond.
(2) SAILS exchangeable debt was $81.5 million. The securities that underlie the
SAILS contract represent our investment in Cisco Systems, Inc.'s common stock,
which was acquired in connection with the Telxon acquisition. In January 2008,
the SAILS debt will be exchangeable for shares of Cisco Systems, Inc.'s common
stock or, at our option, for cash in lieu of shares.
(3) Does not include the remaining number of shares of common stock to be issued
pursuant to the settlement agreement relating to certain securities fraud class
action lawsuits. For example, the number of additional shares issuable on June
8, 2005 pursuant to the settlement agreement would have been approximately 7.8
million shares.
(4) Subsequent to March 31, 2005, we paid $35.0 million of borrowings under our
revolving credit facility.
32
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information has been derived by the
application of pro forma adjustments to our historical consolidated financial
statements included elsewhere in this prospectus. Our unaudited pro forma
statements of operations for the year ended December 31, 2004 give pro forma
effect to the Acquisition as if it had occurred as of January 1, 2004. The
adjustments, which are based upon available information and upon assumptions
that management believes to be reasonable, are described in the accompanying
notes. The unaudited pro forma financial information is for informational
purposes only and should not be considered indicative of actual results that
would have been achieved had the Acquisition occurred on the date indicated and
do not purport to be indicative of the results of operations as of any future
date or for any future period. The unaudited pro forma financial information
should be read in conjunction with "Management's discussion and analysis of
financial condition and results of operations" and our historical consolidated
financial statements and the notes thereto and the historical consolidated
financial statements of Matrics and the notes thereto included elsewhere in this
prospectus.
The acquisition of Matrics was accounted for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, "Business Combinations," and the resulting goodwill and other intangible
assets are accounted for under Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets." The total purchase price was
allocated to the tangible and intangible assets acquired and liabilities assumed
based upon valuation estimates made by management and certain assumptions that
management believes are reasonable.
33
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------
MATRICS
(HISTORICAL
FROM
JANUARY 1,
2004 THROUGH
(IN THOUSANDS, SYMBOL SEPTEMBER 8, PRO FORMA
EXCEPT PER SHARE DATA) (HISTORICAL) 2004) ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------------------------
REVENUE:
Product..................................................... $1,433,671 $ 7,185 $ $1,440,856
Services.................................................... 298,452 - 298,452
--------------------------------------------------------
1,732,123 7,185 1,739,308
COST OF REVENUE:
Product cost of revenue..................................... 709,967 8,224 1,069(a) 719,260
Services cost of revenue.................................... 213,118 - 213,118
--------------------------------------------------------
923,085 8,224 1,069 932,378
--------------------------------------------------------
Gross profit/(loss)......................................... 809,038 (1,039) (1,069) 806,930
OPERATING EXPENSES:
Engineering, research & development......................... 180,343 6,478 (12,144)(a) 174,677
Selling, general and administrative......................... 488,335 7,198 905(a) 496,438
--------------------------------------------------------
668,678 13,676 (11,239) 671,115
--------------------------------------------------------
Earnings/(loss) from operations............................. 140,360 (14,715) 10,170 135,815
Other (expense)/income, net................................. (16,591) (151) (16,764)(b) (33,506)
--------------------------------------------------------
Earnings/(loss) before income taxes......................... 123,769 (14,866) (6,594) 102,309
Provision for/(benefit from) income taxes................... 41,922 - (8,262)(c) 33,660
--------------------------------------------------------
NET EARNINGS/(LOSS) $ 81,847 $ (14,866) $ 1,668 $ 68,649
--------------------------------------------------------
EARNINGS/(LOSS) PER SHARE:
Basic.................................................... $ 0.34 - $ 0.28
Diluted.................................................. $ 0.33 - $ 0.28
--------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic....................................................... 242,469 - 242,469
Diluted..................................................... 246,166 - 246,166
- ----------------------------------------------------------------------------------------------------------------------
</Table>
(a) To record amortization expense for the period related to acquired intangible
assets. In addition, included in the December 31, 2004 pro forma adjustments is
the elimination of the $12,800 non-recurring write off of the
acquired-in-process research and development.
(b) To record financing costs of $16,764 for the year ended December 31, 2004 on
the $250,000 short-term credit facility, consisting of interest expense that
would have been incurred had the Acquisition occurred as of January 1, 2004
based on the three month LIBOR plus 400 basis points, increased by 100 basis
points after 2 months and increased by an additional 50 basis points at the end
of each month thereafter not to exceed 11.5%, pursuant to the short-term credit
facility. If the current three month LIBOR rate was 0.125% greater, pro forma
interest expense for the year ended December 31, 2004 would have increased by
$317.
(c) To adjust the income tax provision for the net impact of the pro forma
adjustments for this offering using a tax rate of 38.5%.
See accompanying notes to unaudited pro forma condensed consolidated financial
information.
34
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial and other data as
of and for each of the years in the five-year period ended December 31, 2004.
The unaudited condensed consolidated financial statements as of March 31, 2005
and for the three month periods ended March 31, 2005 and 2004 include, in the
opinion of our management, all adjustments, consisting only of normal and
recurring adjustments, necessary for a fair presentation of the results for
those periods. The results of operations for interim periods are not necessarily
indicative of operating results for the full year. The following selected
historical consolidated financial data shown below should be read in conjunction
with "Management's discussion and analysis of financial condition and results of
operations" and our historical consolidated financial statements and related
notes included elsewhere in this prospectus.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002(1) 2003 2004 2004 2005
- ---------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
REVENUE:
Product............................ $1,005,787 $1,206,176 $1,103,070 $1,223,853 $1,433,671 $348,239 $384,242
Services........................... 207,476 281,280 298,547 306,425 298,452 71,412 73,245
------------------------------------------------------------------------------------
1,213,263 1,487,456 1,401,617 1,530,278 1,732,123 419,651 457,487
COST OF REVENUE:
Product cost of revenue............ 658,149 826,766 693,980 635,103 709,967 170,739 197,866
Services cost of revenue........... 162,709 219,310 219,985 219,926 213,118 53,984 54,060
------------------------------------------------------------------------------------
820,858 1,046,076 913,965 855,029 923,085 224,723 251,926
------------------------------------------------------------------------------------
Gross profit....................... 392,405 441,380 487,652 675,249 809,038 194,928 205,561
------------------------------------------------------------------------------------
OPERATING EXPENSES:
Engineering........................ 127,740 149,523 142,602 156,328 167,543 41,559 42,351
Selling, general and administrative.. 326,117 329,044 343,971 421,132 502,331 121,680 138,887
Stock-based compensation
expense/(recovery).............. 9,402 (92,760) (68,084) 17,087 2,234 2,234 -
Provision/(recovery) for legal
settlements..................... - - 98,300 72,000 (21,400) - -
Restructuring and impairment
charges......................... 4,761 10,218 2,590 1,181 5,170 - -
In-process research and
development..................... 87,600 - - - 12,800 - -
Merger integration charges......... 6,785 9,238 - - - - -
Amortization of goodwill........... 6,347 14,823 - - - - -
------------------------------------------------------------------------------------
Total operating expenses........... 568,752 420,086 519,379 667,728 668,678 165,473 181,238
------------------------------------------------------------------------------------
Earnings/(loss) from operations.... (176,347) 21,294 (31,727) 7,521 140,360 29,455 24,323
------------------------------------------------------------------------------------
</Table>
35
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002(1) 2003 2004 2004 2005
- ---------------------------------------------------------------------------------------------------------------------------
OTHER (EXPENSE)/INCOME:
Interest income.................... 4,484 2,876 2,322 2,969 3,507 603 1,030
Interest expense................... (19,405) (22,145) (16,801) (10,590) (20,032) (1,378) (4,133)
Impairment of investments.......... - (23,757) (32,200) (3,550) - - -
Other income (expense), net........ - 4,177 16,676 7,551 (66) 1,781 (3,465)
------------------------------------------------------------------------------------
(14,921) (38,849) (30,003) (3,620) (16,591) 1,006 (6,568)
------------------------------------------------------------------------------------
Earnings/(loss) before income
taxes........................... (191,268) (17,555) (61,730) 3,901 123,769 30,461 17,755
Provision for/(benefit from) income
taxes........................... (53,602) 214 (16,815) 606 41,922 23,633 (4,413)
------------------------------------------------------------------------------------
Net earnings/(loss)................ $ (137,666) $ (17,769) $ (44,915) $ 3,295 $ 81,847 $ 6,828 $ 22,168
------------------------------------------------------------------------------------
EARNINGS/(LOSS) PER SHARE:
Basic.............................. $ (0.67) $ (0.08) $ (0.20) $ 0.01 $ 0.34 $ 0.03 $ 0.09
Diluted............................ $ (0.67) $ (0.08) $ (0.20) $ 0.01 $ 0.33 $ 0.03 $ 0.09
------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic.............................. 206,347 227,173 229,593 230,710 242,469 231,685 247,404
Diluted............................ 206,347 227,173 229,593 236,449 246,166 239,401 251,286
</Table>
<Table>
<Caption>
DECEMBER 31, MARCH 31,
-------------------------------------------------------------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 2001 2002 2003 2004 2005
- -------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents.......... $ 52,624 $ 70,365 $ 76,121 $ 150,017 $ 217,641 $ 218,218
Total assets....................... 2,009,041 1,705,371 1,572,195 1,646,518 1,930,369 1,871,268
Long-term debt, less current
portion......................... 201,144 220,521 135,614 99,012 176,087 162,709
Total stockholders equity.......... 1,092,588 999,115 887,739 920,598 1,072,519 1,099,792
Cash dividends per share(2)........ $ 0.0144 $ 0.0167 $ 0.02 $ 0.02 $ 0.02 $ 0.01
- -------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Symbol changed its method of accounting for goodwill and other intangibles
effective January 1, 2002.
(2) Adjusted to reflect three-for-two stock splits that became effective on
April 5, 2000 and April 16, 2001.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
OVERVIEW
We are a recognized worldwide leader in enterprise mobility, delivering products
and solutions that capture, move and manage information in real time to and from
the point of business activity. Symbol enterprise mobility solutions integrate
advanced data capture products, mobile computing platforms, wireless
infrastructure, mobility software and services programs under the Symbol
Enterprise Mobility Services brand. Our goal is to be one of the world's
preeminent suppliers of mission-critical mobile computing solutions to both
business and industrial users. For the three months ended March 31, 2005, we
generated $457,487 of revenue.
Symbol manufactures products and provides services to capture, move and manage
data using five core technologies: bar code reading and image recognition,
mobile computing, wireless networking systems, RFID and mobility software
applications. Our products and services are sold to a broad and diverse base of
customers on a worldwide basis and in diverse markets such as retail,
transportation, parcel and postal delivery services, warehousing and
distribution, manufacturing, healthcare, hospitality, security, education and
government.
We operate in two reportable business segments: (1) the design, manufacture and
marketing of advanced data capture, mobile computing, wireless infrastructure,
RFID and mobility software ("Product Segment") and (2) the servicing of,
customer support for and professional services related to these systems
("Services Segment"). Each of our operating segments uses its core competencies
to provide building blocks for mobile computing solutions.
We are focused on delivering to our customers our enterprise mobility products,
solutions and services, which are designed to increase cost-effectiveness,
enhance efficiency and promote faster execution of critical business processes.
We have been focused on the following objectives:
-- Expanding our position in enterprise mobility products and solutions. We
believe our ability to deliver innovative, end-to-end enterprise mobility
systems gives us a competitive advantage. Accordingly, we plan to continue to
invest in product developments. In September 2004, we made a significant
strategic acquisition of Matrics, and during 2004, we entered into alliances to
expand our capabilities in enterprise mobility solutions with companies such as
AT&T Wireless and Nextel.
-- Continuing to improve and streamline our operations. Over the past two
years, we have restructured and reorganized our major business functions to
improve and streamline our business processes. As part of our restructurings, we
have combined our product marketing, research and development and product
engineering teams into a single Global Products Group, moving from a product
focus to a customer- and market-centric focus and have embarked on a program to
enhance our core product lines, which is substantially complete. In addition, we
have taken significant steps to improve our manufacturing efficiencies by moving
the majority of our manufacturing to lower cost, company-owned and contract
production facilities outside the United States. We plan to continue to work to
improve and streamline our business processes. We have announced that we are
developing a comprehensive action plan to reduce our operating expenses and
overall cost structure.
37
-- Building upon our strong foundation of intellectual property. We have and
intend to continue to invest in research and development to enable us to
continue to offer high quality, differentiated and cost-effective products to
our customers. We have expended approximately $31,500 for research and
development during the three months ended March 31, 2005.
-- Rationalizing product lines and pursuing platform-based products. We
believe that pursuing high value-added, platform-based products allows us to
increase our sales and margins. For example, on March 31, 2003, we offered
17,012 active product configurations, which we reduced to 4,693 as of March 31,
2005. We believe this trend will continue as we further rationalize our product
lines and pursue platform based products. We believe this sets the foundation of
our segmented, or "bracketed" product strategy. This strategy is designed to
address all market segments available to us. Our goal is to fill out each
product line with a high-end model, a mid-range device and an entry-level unit
to appeal to the lower end of the market. We believe this gives both legacy and
new customers product choice along a price-feature-performance continuum.
Management continuously evaluates its financial condition and operational
performance by monitoring key performance measures such as revenue growth, gross
profit and gross profit percent, operating income and margin, cash flow from
operations, days sales outstanding and inventory turns.
In addition to these financial and operational measures, management has
established certain other key measures to evaluate its future business
performance, such as product bookings and product backlog as well as product
sales through its indirect channel from both value added resellers ("VARs") and
distributors, and original equipment manufacturers ("OEMs"). In addition,
management has a strong focus on its customer satisfaction ratings in its
service business.
By evaluating our product bookings, we are able to gain visibility into the
momentum of our expected future sales volumes. This evaluation helps us to
identify areas where we may need to adjust our sales and marketing efforts and
inventory management. Our goal is to maintain our quarterly product bookings to
our actual product revenue recognized ratio above 1.0.
In addition, we evaluate the amount of backlog of products that we have shipped
but have not recognized as revenue, as well as those products that are awaiting
shipment. This evaluation, we believe, assists us in improving our quarterly
linearity of shipments, and improves our operational efficiencies and overall
inventory management. Our goal is to continually grow our backlog.
We also believe that we need to build a strong partner ecosystem, which is a key
aspect in our ability to scale our business and important in our efforts to
penetrate new markets as well as boost our presence in our existing vertical
markets. In 2002, we began migrating to a channel-centric business model and
introduced our PartnerSelect(TM) Program. Our goal is to have over 80% of our
products shipped through our indirect channels, consisting of our VARs,
distributors and OEMs.
In our Services Segment, a key measure we monitor is customer satisfaction,
particularly for technical assistance and depot service delivery. We continually
conduct independent customer satisfaction surveys, with an overall goal of
achieving ratings consistently above a 4.0 on a scale of 1.0 to 5.0, with 5.0
being the highest level of satisfaction.
We also monitor the attach rates of our service maintenance contracts to our
product sales, which we believe gives us visibility into future growth of our
services segment.
38
OVERVIEW OF PERFORMANCE
Our total revenue for the three months ended March 31, 2005 was $457,487, an
increase of 9.0% from the total revenue of $419,651 in the comparable prior year
period. The increase in revenue is primarily attributable to growth in our
mobile computing division.
Our gross profit as a percentage of total revenue was 44.9% for the three months
ended March 31, 2005, a decrease from 46.5% for the three months ended March 31,
2004. The reduction is primarily due to a strengthening of the U.S. Dollar
against foreign currencies as well as a greater than normal mix of large
customer, lower margin revenue in the three months ended March 31, 2005.
We are committed to and continue to invest in engineering new products and in
investing in our people, processes and systems to expand our product offerings,
to improve our control environment and our effectiveness with our customers and
our operational efficiencies. Accordingly, our operating expenses were $181,238
for the three months ended March 31, 2005, an increase of 9.5% from the total
operating expenses of $165,473 in the comparable prior year period.
Our operating margins for the three months ended March 31, 2005 was 5.3%
compared to 7.0% for the three months ended March 31, 2004. This decrease in
margin resulted from our continued investment in our people, processes and
systems and the decrease in our gross margin.
Our cash balances remained relatively consistent with a cash balance of $218,218
as of March 31, 2005 compared to $217,641 as of December 31, 2004, an increase
of $577, even though the first quarter of 2005 included a $50,000 payment to
reduce our borrowings on our short-term revolving credit facility.
We continue to focus on effectively managing our accounts receivables. At March
31, 2005, receivables were $111,143, a decrease of $2,515 from $113,658 as of
December 31, 2004. Our days sales outstanding at March 31, 2005 were 22 days as
compared to 23 days at December 31, 2004.
Our inventory turns increased to 5.8 from 4.2 for the three months ended March
31, 2005 as compared to the comparable period in 2004 primarily due to the
one-time transfer of inventory to one of our larger retail customer's facilities
and improved efficiencies within operations.
Our gross product bookings were approximately $382,500 in the quarter ending
March 31, 2005, an increase of approximately 8.7% from the quarter ending March
31, 2004.
The ratio of our product bookings to product revenue was 1.0 for the quarter
ended March 31, 2005. Our product backlog, which is another measure we monitor,
increased in the quarter ending March 31, 2005 to approximately $328,700 as
compared to product backlog as of March 31, 2004 of approximately $300,000.
Essentially all of the reported backlog is expected to be shipped to the
customer in six months.
Our percent of product revenue that was shipped through our indirect channel in
the three months ended March 31, 2005 was approximately 75%. This is up
approximately 24 percentage points from 2002, when we began our migration to a
channel-centric business model.
Current results of customer satisfaction surveys from our services business have
demonstrated improvement towards our goal of a consistent rating greater than
4.0. Our most current results
39
were a score of 3.96 and 3.61, relating to satisfaction with our technical
assistance and depot service delivery, respectively.
While our service attach rates have been improving in our sales in the Americas,
overall we believe we can achieve better attach rates and are making changes in
our business process and restructuring certain of our service activities to help
improve these attach rates in the future.
RESULTS OF OPERATIONS
The following table sets forth for the years ended December 31, 2002, 2003 and
2004 and the three months ended March 31, 2004 and 2005, certain revenue and
expense items expressed as a percentage of total revenue:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
2002 2003 2004 2004 2005
- --------------------------------------------------------------------------------------------
REVENUE:
Product revenue.................................. 78.7% 80.0% 82.8% 83.0% 84.0%
Services revenue................................. 21.3 20.0 17.2 17.0 16.0
-----------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
-----------------------------------------
COST OF REVENUE:
Product cost of revenue.......................... 49.5 41.5 41.0 40.7 43.3
Services cost of revenue......................... 15.7 14.4 12.3 12.8 11.8
-----------------------------------------
65.2% 55.9% 53.3% 53.5% 55.1%
-----------------------------------------
Gross profit..................................... 34.8 44.1 46.7 46.5 44.9
OPERATING EXPENSES:
Write-off of acquired in-process research &
development................................... - - 0.7 - -
Engineering...................................... 10.2 10.2 9.7 9.9 9.3
Selling, general and administrative.............. 24.5 27.5 29.0 29.0 30.3
Stock based compensation expenses/(recovery)..... (4.9) 1.1 0.1 0.5 -
(Recovery)/provision for legal settlements....... 7.0 4.7 (1.2) - -
Restructuring and impairment charges............. 0.2 0.1 0.3 - -
-----------------------------------------
37.0% 43.6% 38.6% 39.4% 39.6%
-----------------------------------------
Earnings/(loss) from operations.................. (2.3) 0.5 8.1 7.1 5.3
Other income (expense), net...................... (2.1) (0.2) (1.0) 0.2 (1.4)
-----------------------------------------
Earnings/(loss) before income taxes.............. (4.4) 0.3 7.1 7.3 3.9
Provisions for/(benefit from) income taxes....... (1.2) 0.1 2.4 5.6 (1.0)
-----------------------------------------
Net earnings/(loss).............................. (3.2)% 0.2% 4.7% 1.7% 4.9%
- --------------------------------------------------------------------------------------------
</Table>
40
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004
REVENUE
The following table summarizes our revenue by geographic region and then by
reportable segment and geographic region for which we use to manage our
business:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
VARIANCE IN VARIANCE IN
2004 2005 $ PERCENT
- ----------------------------------------------------------------------------------------------
Total Revenue
The Americas............................... $274,371 $312,095 $37,724 13.7%
EMEA....................................... 112,201 116,370 4,169 3.7
Asia Pacific............................... 33,079 29,022 (4,057) (12.3)
---------------------------------
Total Revenue........................... $419,651 $457,487 $37,836 9.0%
---------------------------------
Product Revenue
The Americas............................... $229,094 $263,833 $34,739 15.2%
EMEA....................................... 89,241 94,293 5,052 5.7
Asia Pacific............................... 29,904 26,116 (3,788) (12.7)
---------------------------------
Total Product Revenue................... $348,239 $384,242 $36,003 10.3%
---------------------------------
Service Revenue
The Americas............................... $ 45,277 $ 48,262 $ 2,985 6.6%
EMEA....................................... 22,960 22,077 (883) (3.8)
Asia Pacific............................... 3,175 2,906 (269) (8.5)
---------------------------------
Total Service Revenue................... $ 71,412 $ 73,245 $ 1,833 2.6%
- ----------------------------------------------------------------------------------------------
</Table>
The following table summarizes our product revenue by product division:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
VARIANCE IN VARIANCE IN
2004 2005 $ PERCENT
- ----------------------------------------------------------------------------------------------
Product Division
Mobile Computing............................. $206,517 $246,919 $40,402 19.6%
Advanced Data Capture........................ 109,898 100,127 (9,771) (8.9)
Wireless Infrastructure...................... 34,111 35,879 1,768 5.2
RFID......................................... -- 8,176 8,176 100.0
Other, net................................... (2,287) (6,859) (4,572) 200.0
---------------------------------
Total...................................... $348,239 $384,242 $36,003 10.3%
- ----------------------------------------------------------------------------------------------
</Table>
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
41
Product revenue for the three months ended March 31, 2005 was $384,242, an
increase of $36,003 or 10.3% from the comparable prior year period. This
increase included $8,176 of RFID revenue related to RFID products available
because of our Matrics acquisition, which was consummated September 9, 2004. In
addition, in the three months ended March 31, 2005, we transferred inventory
held at our own facility with a sales value of $27,100 to a customer owned
facility and believe the incremental increase in product revenue due to the
transfer of this inventory to be approximately $13,000. We continue to
experience growth in sales of our mobile computing product offerings, our
largest product line, which experienced growth of $40,402 or 19.6% from the
comparable prior year period. The increase in mobile computing is primarily due
to the growth from our MC9000 gun and enterprise digital assistant mobile
computing devices. In addition, wireless product revenue increased by $1,768 or
5.2% from the comparable prior year period due to the introduction of a new
wireless switch during 2004. Partially offsetting these increases was a decline
of $9,771 or 8.9% in our advanced data capture division from the comparable
prior year period which was primarily driven by a large rollout of wireless
point-of-sale scanners to a nationwide U.S. retailer during the three months
ended March 31, 2004. In addition, other, net increased by $4,572 for the three
months ended March 31, 2005 from the comparable prior year period, primarily due
to changes to the PartnerSelect model that increased rebates within our
distribution partners combined with their sales volume.
Services revenue for the three months ended March 31, 2005 was $73,245, an
increase of $1,833 or 2.6% from the comparable prior year period. The increase
for the three months ended March 31, 2005 as compared to the comparable prior
year period was primarily due to an increase in maintenance and support services
of approximately $5,500, which was positively impacted by $1,200 as a result of
recording new contracts on an accrual basis from a billed and collected basis.
This was partially offset by lower professional service revenue resulting from
our continued drive to utilize third party service providers for the lower
margin professional service activities.
Geographically, the Americas revenue increased 13.7% for the three months ended
March 31, 2005 from the comparable prior year period primarily due to growth in
mobile computing product offerings. Europe, Middle East and Africa ("EMEA")
revenue increased 3.7% for the three months ended March 31, 2005 from the
comparable prior year period due to growth in all product divisions. Asia
Pacific revenue decreased 12.3% for the three months ended March 31, 2005
compared to the comparable prior year period which was primarily the result of
decreased revenue in our advanced data capture and wireless infrastructure
product offerings. The Americas, EMEA and Asia Pacific represent approximately
68.2, 25.4 and 6.4% of revenue, respectively, for the three months ended March
31, 2005. The Americas, EMEA and Asia Pacific represent approximately 65.4, 26.7
and 7.9% of revenue, respectively, for the three months ended March 31, 2004.
Product gross profit for the three months ended March 31, 2005 was $186,376, an
increase of $8,876 or 5.0% from the comparable prior year period. The increase
in product gross profit was mainly attributed to an increase in revenue which
accounted for approximately $18,400 of the increase for the three months ended
March 31, 2005. Offsetting the increase in product revenue was a decrease in
gross profit percentage of 2.5% or approximately $9,500 for the three months
ended March 31, 2005 mainly driven by a greater than normal mix of large
customer, lower margin revenue and sales of our RFID product at low single digit
margins during the three months ended March 31, 2005 as compared with the
comparable prior year period.
42
Service gross profit for the three months ended March 31, 2005 was $19,185 an
increase of $1,757 or 10.1% from the comparable prior year period. The increase
in service gross profit was mainly attributed to a change in mix from low margin
professional services to higher margin maintenance and support services which
approximated $1,400. The remaining increase in service gross profit was
attributed to higher revenues which accounted for an increase of approximately
$400.
OPERATING EXPENSES
Total operating expenses of $181,238 increased 9.5% for the three months ended
March 31, 2005 from $165,473 for the comparable prior year period.
Operating expenses consist of the following for the three months ended March 31:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
VARIANCE IN VARIANCE IN
2004 2005 $ PERCENT
- ----------------------------------------------------------------------------------------------
Engineering.................................. $ 41,559 $ 42,351 $ 792 1.9%
Selling, general and administrative.......... 121,680 138,887 17,207 14.1
Stock-based compensation expense............. 2,234 -- (2,234) 100.0
---------------------------------
$165,473 $181,238 $15,765 9.5%
- ----------------------------------------------------------------------------------------------
</Table>
Engineering expenses increased $792 or 1.9% for the three months ended March 31,
2005 as compared to the comparable prior year period, mainly due to our
increased investment in our research and development.
Selling, general and administrative expenses increased $17,207 or 14.1% for the
three months ended March 31, 2005 as compared to the comparable prior year
period, mainly due to increased investment in technology, infrastructure and
financial systems, increased costs associated with the defense of former Symbol
associates and higher compensation costs and related benefits, partially offset
by a decrease in external consulting expenses associated with the Sarbanes Oxley
Act of 2002 and decreased severance costs relating to former executives.
Included in total operating expenses for the three months ended March 31, 2004
is stock-based compensation associated with certain portions of our stock option
plans. Due to our inability to make timely filings with the SEC of our financial
statements through the nine months ended September 30, 2003, our stock option
plans were held in abeyance, meaning that our employees could not exercise their
options until we became current with our filings. As an accommodation to both
current and former Symbol associates whose options were impacted by this
suspension, the Compensation Committee of the Board approved an abeyance program
that allowed associates whose options were affected during the suspension period
the right to exercise such options up to 90 days after the end of the suspension
period. This resulted in a new measurement date for those options, which led to
a non-cash accounting compensation charge for the intrinsic value of those
vested options when the employee either terminated employment during the
suspension period or within the 90 day period after the end of the suspension
period. Stock based compensation related to the abeyance program was $2,234
during the three months ended March 31, 2004. On February 25, 2004, the date on
which we became current with our regulatory filings with the SEC, this
suspension period ended and,
43
accordingly, there was no further stock-based compensation recognized in the
three months ended March 31, 2005 related to this matter.
OTHER (EXPENSE)/INCOME, NET
Other (expense)/income, net consists of the following:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2005 VARIANCE
- ------------------------------------------------------------------------------------------
Cisco SAILS(a).............................................. $ 1,713 $(3,475) $(5,188)
Interest Expense............................................ (1,378) (4,133) (2,755)
Interest Income............................................. 603 1,030 427
Other....................................................... 68 10 (58)
-----------------
$ 1,006 $(6,568) $(7,574)
- ------------------------------------------------------------------------------------------
</Table>
(a) In accordance with the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", the gain or loss on the
change in fair value of the portion of our investment in CISCO common stock,
coupled with the gain or loss on the change in fair value of the embedded
derivative has been recorded as a component of other income or loss in each
reporting period.
PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended March 31, 2005 is a benefit of
(24.85)%. This differs from the statutory rate of 35% primarily due to benefits
in the three months ended March 31, 2005 attributable to nonrecurring refunds
and settlements relating to foreign and domestic tax issues and the receipt of
favorable rulings from tax authorities as well as the allocable portion of the
annual forecast of the tax benefits of research credits. Excluding the
nonrecurring items, the effective tax rate would have been 33.8%.
Due to a change in New York State Tax law in April 2005, our deferred tax assets
must be re-valued in the second quarter of 2005. Although we expect future
substantial tax savings as a result of the law change, a charge of approximately
$5,000 in the three months ended June 30, 2005, reflecting the reduction of
certain deferred tax assets, will increase our effective tax rate for the second
quarter and year ended December 31, 2005.
On October 22, 2004, the President signed the American Jobs Creation Act of 2004
("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85% dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the AJCA. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the United
States. Based on analysis to date, we expect to repatriate up to $95,000 in
accordance with this temporary incentive. The resulting tax impact of
repatriation cannot be reasonably estimated at this time. We expect to finalize
our assessment of this new provision by September 30, 2005.
44
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
REVENUE
The following table summarizes our revenue by reportable business segments and
geographic regions:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
------------------------ VARIANCE IN VARIANCE IN
2003 2004 DOLLARS PERCENTAGE
- -----------------------------------------------------------------------------------------------
Total Revenue
The Americas........................... $ 979,099 $1,116,229 $137,130 14.0%
EMEA................................... 438,615 487,221 48,606 11.1
Asia Pacific........................... 112,564 128,673 16,109 14.3
--------------------------------------
Total Revenue....................... 1,530,278 1,732,123 201,845 13.2
--------------------------------------
Product Revenue
The Americas........................... $ 777,105 $ 921,975 $144,870 18.6%
EMEA................................... 345,983 394,747 48,764 14.1
Asia Pacific........................... 100,765 116,949 16,184 16.1
--------------------------------------
Total Product Revenue............... 1,223,853 1,433,671 209,818 17.1
--------------------------------------
Services Revenue
The Americas........................... $ 201,994 $ 194,254 $ (7,740) (3.8)%
EMEA................................... 92,632 92,474 (158) (0.2)
Asia Pacific........................... 11,799 11,724 (75) (0.6)
--------------------------------------
Total Services Revenue.............. $ 306,425 $ 298,452 $ (7,973) (2.6)
- -----------------------------------------------------------------------------------------------
</Table>
The following table summarizes our product revenue by product division:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
----------------------- VARIANCE IN VARIANCE IN
2003 2004 DOLLARS PERCENTAGE
- -----------------------------------------------------------------------------------------------
Product Division:
Mobile Computing.......................... $ 755,559 $ 885,469 $129,910 17.2%
Advanced Data Capture..................... 352,410 407,697 55,287 15.7
Wireless Infrastructure................... 128,357 150,663 22,306 17.4
RFID...................................... - 5,610 5,610 100.0
Other, net................................ (12,473) (15,768) (3,295) (26.4)
-------------------------------------
Total................................... $1,223,853 $1,433,671 $209,818 17.1
- -----------------------------------------------------------------------------------------------
</Table>
Other, net represents royalty revenues and rebates which we do not assign to a
product division.
45
Product revenue for the year ended December 31, 2004 was $1,433,671, an increase
of $209,818 or 17.1% from the prior year. This increase included $5,610 of
revenue related to Matrics from September 9, 2004, the date we acquired Matrics.
The increase was primarily due to continued growth in sales volume of our mobile
computing product offerings, our largest product line, which experienced growth
of $129,910, an increase of 17.2% from the prior year. Contributing to this
increase is the growth in sales volume of both our next generation mobile gun
and rugged handheld mobile computing devices. Also contributing to the product
revenue increase was growth in sales volume of our advanced data capture product
line of $55,287, an increase of 15.7% from the prior year, which was primarily
driven by continued growth in next generation scanners, which included a large
rollout of wireless point-of-sale scanners to a nationwide U.S. retailer. In
addition, there was a significant purchase of point of sale terminals by a
nationwide U.S. retailer during the year ended December 31, 2004. Wireless
product revenue increased by $22,306, an increase of 17.4% for the year ended
December 31, 2004, respectively, from the prior year primarily due to the
introduction of a new wireless switch. The increase in revenue within the mobile
computing, advanced data capture and wireless infrastructure product divisions
for the year ended December 31, 2004 was primarily driven by increased sales
volume as the pricing structure remained relatively consistent as compared to
the prior year. The decrease in other, net for the year ended December 31, 2004
was primarily due to increased rebates to our distribution partners due to
changes to the PartnerSelect(TM) model combined with their increased sales
volume. This was partially offset by an increase in royalty revenue.
Services revenue for the year ended December 31, 2004 was $298,452, a decrease
of 2.6% from the prior year. The decrease for the year ended December 31, 2004
as compared to the prior year was due to our continued drive to utilize third
party service providers for lower margin professional service activities and a
lower level of cash collections compared to the prior year as a portion of our
U.S. service revenue is recognized on a billed and collected basis. This was
partially offset by a positive impact of $5,823 which was the result of
recording a majority of new contracts on an accrual basis from a billed and
collected basis effective July 1, 2004.
Geographically, the Americas revenue increased 14.0% for the year ended December
31, 2004, from the prior year. Europe, Middle East and Africa ("EMEA") revenue
increased 11.1%, for the year ended December 31, 2004, from 2003. The increases
in the Americas and EMEA revenues are mainly attributable to strong growth in
all of our product offerings. Asia Pacific revenue increased 14.3% for the year
ended December 31 2004, compared to the prior year primarily as a result of
continued penetration of all of our product offerings into this marketplace. The
Americas, EMEA and Asia Pacific represented 64.5%, 28.1% and 7.4% of revenue,
respectively, for the year ended December 31, 2004.
Product gross profit for the year ended December 31, 2004 was $723,704 an
increase of $134,954 or 22.9% from the prior year. The increase in product gross
profit was mainly due to an increase in revenue which accounted for $100,936 of
the increase. The remaining increase to product gross profit of approximately
$34,018 was due to an increase in gross profit percentage of 2.4%, for the year
ended December 31, 2004. The increase in our gross profit percentage was
primarily due to a change in our product mix and increased efficiencies gained
in our manufacturing operations.
Service gross profit for the year ended December 31, 2004 was $85,334, a
decrease of $1,165 from the prior year. The decrease in service gross profit for
the year ended December 31, 2004 was primarily due to restructuring charges
relating to lease obligation costs and further
46
workforce reductions, coupled with the decline in revenues partially offset by a
change in mix from low margin professional services to higher margin maintenance
and support services.
OPERATING EXPENSES
Total operating expenses of $668,678 increased 0.1% for the year ended December
31, 2004 from $667,728 for the prior year.
Operating expenses consisted of the following for the years ended December 31:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
------------------- VARIANCE IN VARIANCE IN
2003 2004 DOLLARS PERCENTAGE
- ----------------------------------------------------------------------------------------------
Write-off of acquired in-process research and
development................................ $ - $ 12,800 $ 12,800 100.0%
Engineering.................................. 156,328 167,543 11,215 7.2
Selling, general and administrative.......... 421,132 502,331 81,199 19.3
(Recovery)/provision for legal settlements... 72,000 (21,400) (93,400) (129.7)
Stock based compensation expense............. 17,087 2,234 (14,853) (86.9)
Restructuring and impairment charges......... 1,181 5,170 3,989 337.8
-----------------------------------------------
$667,728 $668,678 $ 950 0.1%
- ----------------------------------------------------------------------------------------------
</Table>
The write-off of acquired in-process research and development ("IPR&D") costs of
$12,800 for the year ended December 31, 2004 is in connection with our
acquisition of Matrics. Such amount allocated to IPR&D represented a portion of
the total value of the acquired assets. We believe the Matrics acquisition is an
important step in executing our plan to be a leader in RFID and will expand our
offerings in the advanced data capture industry.
Our assumptions for IPR&D were based on our estimate of the present value of the
cash flows arising from each of the material research and development projects
in which Matrics was investing at the time of closing. Each project was
evaluated based on the income approach. With the exception of the proprietary
manufacturing process, this was achieved by discounting cash flows to be derived
from the sales of the products to their present value. For the proprietary
manufacturing process, the income approach was used by estimating the gross
margin benefit from the technology and discounting the cash flows from that
gross margin benefit. The values prescribed to the IPR&D and the technology
assets acquired were based upon several factors including the generation of the
technology acquired, the estimated lives and future revenue and costs associated
with the technology.
The products included in IPR&D ranged from the early stages of development to
the latter stages of development at the time of acquisition. A discount rate
ranging from 23% to 30% was used for the projects to account for various risks,
including the technical risk, the risk that customers will not desire to
purchase the product, the risk around significant price erosion, the risk of
commercializing the technology, the risk that even once successfully
commercialized the technology may not yield the gross margin benefit and for the
broader market risk associated with the adoption of RFID. While RFID technology
is in a relatively early stage of development, we currently believe that the
costs we will incur during the product life cycle for both existing
47
technology and future, replacement RFID technology will be consistent with the
expenditures we have incurred in developing and maintaining our current
enterprise mobility solutions.
Engineering expenses increased $11,215 or 7.2% for the year ended December 31,
2004 as compared to the prior year, mainly due to our increased investment in
our research and development.
Selling, general and administrative expenses increased $81,199 or 19.3% for the
year ended December 31, 2004 as compared to the prior year. The increase was
attributable to higher compensation costs and related benefits (particularly in
our sales force), representing approximately $53,000, investment in technology,
infrastructure and financial systems, representing approximately $11,000,
external consulting costs associated with our compliance efforts under the
Sarbanes-Oxley Act of 2002, representing approximately $9,000, as well as higher
costs throughout the general and administrative functions to support the
increase in revenues, partially offset by a decrease in expenses associated with
our restatement activities of approximately $35,000 and legal fees associated
with litigation activities representing approximately $2,900.
Legal settlements for the year ended December 31, 2004 decreased $93,400. This
decrease is driven by the fact that the year ended December 31, 2004 included
recoveries of $21,400 related to our various legal matters, while the prior year
ended December 31, 2003 included a provision related to certain legal
settlements of $72,000.
Also included in total operating expenses is stock based compensation associated
with certain portions of our stock option plans. As of March 31, 2003, due to
our inability to make timely filings with the SEC, our stock option plans were
held in abeyance, meaning that our employees could not exercise their options
until we became current with our filings. As an accommodation to both current
and former Symbol associates whose options were impacted by this suspension, the
Compensation Committee of the Board approved an abeyance program that allowed
associates whose options were affected during the suspension period the right to
exercise such options up to 90 days after the end of the suspension period. This
resulted in a new measurement date for those options, which led to a non-cash
accounting compensation charge for the intrinsic value of those vested options
when the employee either terminated employment during the suspension period or
within the 90 day period after the end of the suspension period. Stock based
compensation related to the abeyance program was $2,234 during the year ended
December 31, 2004. On February 25, 2004, the date on which we became current
with our regulatory filings with the SEC, this suspension period ended.
The stock based compensation expense during 2003 are amounts associated with the
variable portion of our stock option plans.
In the second quarter of 2004, we announced a restructuring of certain of our
EMEA general and administrative functions, whereby we are consolidating certain
functions centrally in Brno, Czech Republic. For the year ended December 31,
2004 we charged $5,025, the majority of such costs were related to severance
costs.
48
OTHER (EXPENSE)/INCOME, NET
Other (expense)/income, net consists of the following:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------
2003 2004 VARIANCE
- --------------------------------------------------------------------------------------------
SAILS(a).................................................... $ 2,817 $ (5,559) $ (8,376)
Interest Expense(b)......................................... (10,590) (20,032) (9,442)
Interest Income............................................. 2,969 3,507 538
Impairment of Investments................................... (3,550) - 3,550
Other....................................................... 4,734 5,493 759
------------------------------
$ (3,620) $(16,591) $(12,971)
- --------------------------------------------------------------------------------------------
</Table>
(a) In accordance with the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," the gain or loss on the
change in fair value of the portion of our investment in Cisco Systems, Inc.
("Cisco") common stock, coupled with the gain or loss on the change in fair
value of the embedded derivative, has been recorded as a component of other
income or loss in each reporting period.
(b) Included in 2004 interest expense are $6,675 of financing costs associated
with a $250 million short-term facility entered into in September 2004,
which was refinanced in December 2004.
PROVISION FOR INCOME TAXES
Our effective income tax rate for the year ended December 31, 2004 was 33.9%.
This differs from the statutory rate of 35.0% for several reasons. The rate is
increased by the non-deductible portion of the class action settlement reached
in 2004 and write-off of IPR&D associated with the acquisition of Matrics. The
rate is reduced by the tax benefits of research credits, the reduction of
valuation allowances primarily associated with our foreign tax credit
carryforwards and export sales benefits. Without the Matrics acquisition, the
tax rate for the year ended December 31, 2004 would have been 31.2%.
As part of determining the our annual income tax provision, we evaluated the
need for valuation allowances against our deferred tax assets. A valuation
allowance is recorded when it is more likely than not that all, or a portion of,
a deferred tax asset will not be realized. In assessing the likelihood of
realization, management considers estimates of future taxable income, the
character of income and other available evidence.
Three forecasts of future sources of taxable income were prepared based on
various assumptions concerning the growth of our business operations that are
subject to income tax in the United States. The reversal of all significant
timing differences was considered in calculating the forecasted taxable income
under each scenario. The estimated income tax payable was then calculated based
on the tax rates in effect as of December 31, 2004. Tax credits (including a
forecast of expected tax credits that will arise in each year of the forecast)
were then applied to reduce the tax, subject to existing limitations under the
applicable tax laws. Based on these forecasts, substantially all of the deferred
tax assets would be utilized well before the underlying tax attributes'
expiration periods.
In addition, we prepared an historical analysis of our taxable income and cash
tax liability position for the years 1994 through 2003. During this time period,
we generated net taxable income of $266,000, which resulted in over $93,000 of
tax before credits.
49
Based on the strength of the evidence, we have concluded that no valuation
allowance is required with respect to the deferred tax assets that were included
in the analyses. However, a valuation allowance has been recorded for the
potential future income tax attributes associated with certain state and local
income tax net operating loss and tax credit carryforwards at December 31, 2004.
These carryforwards relate to legal entities required to file separate company
state and local income tax returns and thus such entities cannot rely on the
above consolidated forecasts.
We expect to settle all or a substantial part of its income tax audit with the
Internal Revenue Service for tax years 1999 through 2001 during 2005.
On October 22, 2004 the President signed the American Jobs Creation Act of 2004
("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85% dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the Act. As
such, we are not yet in a position to decide whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S.
Based on our analysis to date, we expect to repatriate up to $95,000 in
accordance with this temporary incentive. The resulting tax impact of
repatriation cannot be reasonably estimated at this time. We expect to finalize
our assessment of this new provision by September 30, 2005.
50
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
REVENUE
The following table summarizes our revenue by geographic region and by
reportable business segments and geographic regions:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
----------------------- VARIANCE IN VARIANCE IN
2002 2003 DOLLARS PERCENTAGE
- -----------------------------------------------------------------------------------------------
TOTAL REVENUE:
The Americas........................... $ 934,170 $ 979,099 $ 44,929 4.8%
EMEA................................... 382,846 438,615 55,769 14.6
Asia Pacific........................... 84,601 112,564 27,963 33.1
-------------------------------------
Total Revenue....................... $1,401,617 $1,530,278 $ 128,661 9.2%
-------------------------------------
PRODUCT REVENUE:
The Americas........................... $ 728,294 $ 777,105 $ 48,811 6.7%
EMEA................................... 300,130 345,983 45,853 15.3
Asia Pacific........................... 74,646 100,765 26,119 35.0
-------------------------------------
Total Product Revenue............... $1,103,070 $1,223,853 $ 120,783 10.9%
-------------------------------------
SERVICES REVENUE:
The Americas........................... $ 205,876 $ 201,994 $ (3,882) (1.9)%
EMEA................................... 82,716 92,632 9,916 12.0
Asia Pacific........................... 9,955 11,799 1,844 18.5
-------------------------------------
Total Services Revenue.............. $ 298,547 $ 306,425 $ 7,878 2.6%
- -----------------------------------------------------------------------------------------------
</Table>
The following table summarizes our product revenue by product division:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
----------------------- VARIANCE IN VARIANCE IN
2002 2003 DOLLARS PERCENTAGE
- -----------------------------------------------------------------------------------------------
Product Division:
Mobile Computing.......................... $ 695,353 $ 755,559 $ 60,206 8.7%
Advanced Data Capture..................... 317,091 352,410 35,319 11.1
Wireless Infrastructure................... 103,285 128,357 25,072 24.3
Other, net................................ (12,659) (12,473) 186 (1.5)
-------------------------------------
Total............................... $1,103,070 $1,223,853 $ 120,783 10.9%
- -----------------------------------------------------------------------------------------------
</Table>
Other, net represents royalty revenues and rebates which we do not assign to a
product division.
Product revenue for the year ended December 31, 2003 was $1,223,853, an increase
of 10.9% from $1,103,070 in 2002. The increase in product revenue of $120,783
was primarily due to continued growth in our mobile computing product offerings,
our largest product line,
51
representing $60,206 or 49.8% of the total product revenue growth. Also
contributing to the product revenue growth was growth in our advanced data
capture and wireless network systems product line.
Services revenue of $306,425 for the year ended December 31, 2003 increased 2.6%
from $298,547 in 2002, due to increased services revenue related to our overall
product growth, particularly in our EMEA and Asia Pacific regions.
Geographically, the Americas revenue for the year ended December 31, 2003 was
$979,099, an increase of 4.8% from the $934,170 in 2002. EMEA revenue of
$438,615 increased 14.6% for the year ended December 31, 2003 from $382,846 in
2002. Asia Pacific revenue of $112,564 increased 33.1% for the year ended
December 31, 2003 from $84,601 in 2002. The Americas, EMEA and Asia Pacific
represented 64.0%, 28.6% and 7.4% of total revenue, respectively, for the year
ended December 31, 2003.
The table below summarizes cost of revenue and gross profit by business segment:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
----------------------- VARIANCE IN VARIANCE IN
2002 2003 DOLLARS PERCENTAGE
- -----------------------------------------------------------------------------------------------
Product Revenue........................... $1,103,070 $1,223,853 $ 120,783 10.9%
Product Cost of Revenue................... 693,980 635,103 (58,877) (8.5)
-------------------------------------
Product Gross Profit................... $ 409,090 $ 588,750 $ 179,660 43.9%
-------------------------------------
Product Cost of Revenue as a Percentage of
Product Revenue........................ 62.9% 51.9%
Product Gross Profit Percentage........... 37.1% 48.1%
Services Revenue.......................... $ 298,547 $ 306,425 $ 7,878 2.6%
Services Cost of Revenue.................. 219,985 219,926 (59) -
-------------------------------------
Services Gross Profit.................. $ 78,562 $ 86,499 $ 7,937 10.1%
-------------------------------------
Services Cost of Revenue as a Percentage
of Services Revenue.................... 73.7% 71.8%
Services Gross Profit Percentage.......... 26.3% 28.2%
- -----------------------------------------------------------------------------------------------
</Table>
Product cost of revenue as a percentage of product revenue was 51.9% for the
year ended December 31, 2003, as compared to 62.9% in 2002. This decrease was
due to an overall shift in product mix to higher margin products, increased
manufacturing absorption due to higher sales volumes and increased efficiencies
gained in our manufacturing operations. Contributing to the improved gross
profit was the absence of the following 2002 charges: an $11,800 impairment
charge related to manufacturing equipment software, a $4,900 provision for a
loss contract, severance charges of $4,500, additional warranty costs of $1,900
and other restructuring-related costs of $2,300. Also contributing to the lower
costs as a percentage of product revenue was the sale in the fourth quarter of
2003 of approximately $10,000 of inventory that had previously been reserved
for.
Services cost of revenue as a percentage of services revenue was 71.8% for the
year ended December 31, 2003, as compared to 73.7% in 2002. The majority of the
decrease was due to
52
the efficiencies gained from the consolidation and elimination of repair centers
as well as increased revenue, particularly in the EMEA and Asia Pacific regions.
OPERATING EXPENSES
Operating expenses of $667,728 increased 28.6% for the year ended December 31,
2003 from $519,379 in 2002. These increases were largely driven by the
accounting treatment related to our stock-based compensation plans which
resulted in additional costs of $17,087 for the year ended December 31, 2003, as
compared to a recovery of $68,084 in 2002. Also contributing to the increased
operating expenses were costs associated with our restatement and the government
investigation as further described below.
In connection with the exercise of stock options, an informal practice began in
or around the early 1990s, whereby certain stock option plan participants
(including certain officers and directors) were afforded a look-back period (no
more than 30 days) for purposes of determining the market price to be used in
connection with the specific exercise. In addition, these individuals were given
an extended period of time in which to pay for their option exercises. These
practices were contrary to the terms of the relevant option plans. As this
practice allowed certain participants to choose exercise dates outside of the
approved plan terms and also allowed these participants to extend the period of
time in which to pay for their option exercise, the price of the option at grant
date was not fixed and determinable. Accordingly, in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," our
financial statements reflect as compensation expense the change in market price
of the common stock underlying these options granted to plan participants that
could have participated in this practice from the date of grant until the
options either expired or were exercised. Effective July 30, 2002, this practice
of options exercise ended resulting in ceasing the accounting for such options
under variable plan accounting. The $68,084 represents the change in market
price of common stock underlying these options granted through the seven-month
period ended July 30, 2002.
As of March 31, 2003, due to the inability of Symbol to make timely filings with
the SEC, our stock option plans were held in abeyance, meaning that our
employees could not exercise their options until we became current with our
filings. As an accommodation to both current and former Symbol employees whose
options were impacted by this suspension, the compensation committee of the
board of directors approved an abeyance program that allowed employees whose
options were affected during the suspension period the right to exercise such
options up to 90 days after the end of the suspension period. This resulted in a
new measurement date for those options, which led to a non-cash accounting
compensation charge for the intrinsic value of those vested options when the
employee either terminated employment during the suspension period or within the
90 day period after the end of the suspension period. On February 25, 2004, the
date on which we became current with our regulatory filings with the SEC, this
suspension period ended. In addition, due to our delinquent filings with the
SEC, we incurred non-cash compensation expenses associated with our Employee
Stock Purchase Plan ("ESPP") as the ESPP lost its exempt tax status.
53
Engineering and selling, general and administrative expenses are summarized in
the following table:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
-------------------- VARIANCE IN VARIANCE IN
2002 2003 DOLLARS PERCENTAGE
- ----------------------------------------------------------------------------------------------
Engineering................................. $142,602 $156,328 $ 13,726 9.6%
Percentage of total revenue.............. 10.2% 10.2%
Selling, general and administrative......... $343,971 $421,132 $ 77,161 22.4%
Percentage of total revenue.............. 24.5% 27.5%
- ----------------------------------------------------------------------------------------------
</Table>
Engineering costs for the year ended December 31, 2003 increased 9.6% to
$156,328 from $142,602 for 2002. The increase was due to the acquisition of
Covigo to expand our software solutions offerings, and continued investment in
our product offerings. The increase was consistent with projected and actual
revenue growth as engineering spending as a percentage of revenue remained
relatively constant in the 10% range. The increased spending was spread across
all product lines.
Selling, general and administrative expenses for the year ended December 31,
2003 increased 22.4% to $421,132 from $343,971 for 2002. The increase was
attributable to additional professional fees associated with our internal
investigation as well as higher variable costs due to a 9.2% increase in
revenue, partially offset by the absence of a $8,597 pre-tax severance charge
recorded in 2002 for Tomo Razmilovic, one of our former Presidents and Chief
Executive Officers. In early 2002 we initiated a series of investigations into
the accounting misconduct of our former management with the assistance of an
independent counsel and an outside accounting firm. As a result of this internal
investigation, the SEC and Eastern District investigations and the related class
action lawsuits against us, we incurred additional professional fees of $35,900
in 2003 as compared with $9,200 incurred in 2002. The increase was also
attributable to severance costs incurred during 2003 aggregating $13,208
primarily for the reorganization and releveling of the international sales
organization.
Reflected in our operating expenses for the year ended December 31, 2003 was a
$72,000 loss provision for legal settlements related to the then-ongoing SEC and
Eastern District investigations and the then-outstanding class action lawsuits
against us. This compared to charges totaling $98,300 recorded in 2002, of which
$70,000 related to the then-ongoing SEC and Eastern District investigations and
the then-outstanding class action lawsuits against us and $28,300 related to a
securities fraud class action litigation related to Telxon, one of our wholly-
owned subsidiaries.
OTHER (EXPENSE)/INCOME
Interest expense for the year ended December 31, 2003 decreased to $10,590 or
37.0% from $16,801 in 2002 primarily due to reduced debt levels as a result of
the repurchase in 2002 of Telxon's remaining convertible debt, net repayments
under our revolving credit facility and annual mandatory repayments of other
indebtedness, without incurring any new borrowings in 2002 or 2003.
54
Interest income for the year ended December 31, 2003 increased 27.9% to $2,969
from $2,322 for 2002, primarily due to the investments of additional cash from
operations into overnight deposits with local banks, primarily in our non-U.S.
locations.
We periodically evaluate the carrying value of our investments for impairment.
As part of this evaluation, we reviewed our investment in AirClic, Inc.
("AirClic"). In consideration of the then-current financial outlook of AirClic's
business, the general decline in the economy and the decline in information
technology spending, it was determined that the decline in the value of our
investment in AirClic was other than temporary during the quarter ended June 30,
2002. We recorded a pre-tax impairment charge of $32,200, which was included in
the impairment of investments as a component of other (expense)/income in the
consolidated statements of operations at December 31, 2002 and wrote down the
carrying amount of the investment to its estimated fair value of $2,800. During
2003, we invested another $750 in AirClic, bringing our investment to $3,550. We
determined in 2003 that this investment would not be recoverable and wrote off
this investment in its entirety in 2003.
In accordance with the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the gain or loss on the change in fair
value of the portion of our investment in Cisco common stock classified as
trading securities, coupled with the gain or loss of the change in fair value of
the embedded derivative, was recorded as a component of other (expense)/income
in each reporting period. The net impact of these fair value adjustments
resulted in other (expense)/income of $(1,140) for 2003 and $16,275 for 2002. On
April 1, 2003 we designated a portion of the embedded equity collar as a fair
value hedge of our Cisco shares classified as available for sale securities.
Since the collar was effective, the change in the fair value of Cisco shares
classified as available for sale of $8,379 was recorded as other income.
PROVISION FOR INCOME TAXES
Our effective income tax rate was 15.5% for 2003. The effective tax rate each
year was largely impacted by the ratio of items receiving different treatment
for tax and accounting purposes to profit/(loss) before taxes. In 2003, the
effective rate was reduced by the impact of research and experimentation credits
and export sales benefits partially offset by valuation allowances and
non-deductible items. Our effective income tax rate was (27.2)% for 2002 as the
favorable impact of tax credits was more than offset by additional valuation
allowances and the unfavorable impact of non-deductible compensation expenses.
LIQUIDITY AND CAPITAL RESOURCES
Currently, our primary sources of liquidity are cash flow from operations and
our credit facility. See "--Existing indebtedness." Our primary liquidity
requirements continue to be for working capital, engineering costs, and
financing and investing activities. Based on our current level of operations,
cash flow from operations has been sufficient to meet our liquidity needs to
fund operations as well as our liquidity needs created by changes in working
capital. We believe our cash and cash equivalents and cash flow from operations
will be sufficient for at least the next 12 months. In addition, we will, from
time to time, consider cash outlays for acquisitions of or investments in
complementary businesses that might affect liquidity requirements and cause us
to pursue additional financing.
55
The following table summarizes our cash and cash equivalent balances as of March
31, 2005 and December 31, 2004 and the results of our statement of cash flows
for the three months ended March 31, 2005 and March 31, 2004:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, VARIANCE IN
2004 2005 DOLLARS
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents........................... $217,641 $218,218(1) $ 577
- ----------------------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31, VARIANCE IN
2004 2005 DOLLARS
- ----------------------------------------------------------------------------------------------
Net cash provided by/(used in):
Operating activities........................ $ 40,789 $ 72,652 $ 31,863
Investing activities........................ (15,221) (22,804) (7,583)
Financing activities........................ 4,082 (44,954) (49,036)
Effect of exchange rate changes on cash and
cash equivalents......................... (634) (4,317) (3,683)
---------------------------------------------
Net increase in cash and cash equivalents... $ 29,016 $ 577 $ (28,439)
- ----------------------------------------------------------------------------------------------
</Table>
(1) Does not include restricted cash of $51.6 million as of March 31, 2005,
which is comprised of two deposits. One amount of $50.6 million is an
interest-bearing court escrow account as security for a trial court judgment on
appeal. The second amount of $1.0 million is an interest bearing letter of
credit pledged as a supplier bond.
Net cash provided by operating activities during the three months ended March
31, 2005 was $72,652 as compared to $40,789 for the same period last year. Net
cash provided by operating activities increased $31,863 during the three months
ended March 31, 2005 as compared to the comparable prior year period primarily
due to an increase in net earnings of $15,340 and an increase in cash provided
by inventory of approximately $33,039, based on a decrease in inventory for the
three months ended March 31, 2005, and a decrease in cash used in accounts
payable and accrued expenses of $44,897. These increases were offset by
decreases in other operating assets and liabilities during the first quarter of
2005.
Net cash used in investing activities for the three months ended March 31, 2005
was $22,804 as compared to $15,221 for the same period last year. The increase
in cash used in investing activities of $7,583 during the three months ended
March 31, 2005, when compared to the same period last year, was primarily due to
$9,906 in additional capital expenditures, primarily related to our investment
in technology, infrastructure and financial systems.
Net cash used in financing activities during the three months ended March 31,
2005 was $44,954, as compared to net cash provided by financing activities of
$4,082 during the same period last year. The $49,036 increase in cash used in
financing activities during the three months ended March 31, 2005 primarily
consists of a $50,000 pay down of our revolving credit facility during the three
months ended March 31, 2005. Additionally, there was a reduction of $13,825 of
proceeds from long-term debt and a reduction in proceeds from stock option
exercises of $4,980 offset by a $19,956 decrease in the purchases of treasury
stock during the three months ended March 31, 2005. In May and June 2005, we
paid down $25,000 and $10,000 of our revolving credit facility, respectively.
56
The following table presents selected key performance measurements we use to
monitor our business for the three months ended March 31:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
2004 2005
- ---------------------------------------------------------------------------------------
Days sales outstanding (DSO)................................ 26 22
Inventory turnover.......................................... 4.2 5.8
- ---------------------------------------------------------------------------------------
</Table>
Our DSO and inventory turnover numbers are useful in understanding the
management of our balance sheet. However, the DSO numbers shown above may not be
directly comparable to those of other companies because our DSO numbers are
improved by the timing of our revenue recognized for our distributors, cash
received in advance of revenue recognition, part of our service revenue in the
Americas and our value-added resellers that lack economic substance, which we
recognize on a billed and collected basis.
We continue to effectively manage our net accounts receivables, ending March 31,
2005 with receivables of $111,143, a decrease of $2,515 from $113,658 at
December 31, 2004. Through aggressive collection strategies we have been able to
reduce our average days sales outstanding to 22 days during the three months
ended March 31, 2005 from an average of 26 days for the three months ended March
31, 2004.
Our inventory turns increased to 5.8 from 4.2 for the three months ended March
31, 2005 as compared to the comparable period in 2004 primarily due to the
one-time transfer of inventory to one of our larger retail customer's facilities
and improved efficiencies.
OTHER LIQUIDITY MEASURES
Other measures of our liquidity including the following:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
2004 2005
- ---------------------------------------------------------------------------------------
Working capital............................................. $ 135,985 $161,776
(current assets minus current liabilities)
Current ratio (current assets to current liabilities)....... 1.2:1 1.3:1
Long-term debt to capital................................... 14.1% 12.9%
(Long-term debt as a percentage of long term debt plus
equity)..................................................
- ---------------------------------------------------------------------------------------
</Table>
Current assets as of March 31, 2005 decreased by $33,612 from December 31, 2004,
primarily due to a decrease in inventory. Inventory decreased due to the one
time transfer of inventory to one of our larger retail customer's facilities and
improved efficiencies in operations. Current liabilities as of March 31, 2005
decreased $59,403 from December 31, 2004 primarily due to a $38,889 decrease in
the current portion of long-term debt based upon repayments during the three
months ended March 31, 2005. Included in our current liabilities at March 31,
2005 is $86,625 related to an amount due to our settlement of certain
litigation. We anticipate this amount will be paid through the issuance of
shares of stock, not cash. Our current ratio was 1.3:1 at March 31, 2005 and
1.2:1 at December 31, 2004.
57
FINANCING ARRANGEMENTS
During 2000, we entered into a $50,000 lease receivable securitization
agreement, which has been extended until March 31, 2006. During the three months
ended March 31, 2005 and 2004, we did not securitize any additional lease
receivables. As of March 31, 2005, we had the ability to securitize $44,154
under the lease receivable securitization agreement. Factors that are reasonably
likely to affect our ability to continue using these financing arrangements
include the ability to generate lease receivables that qualify for
securitization and the ability of the financial institution to obtain an
investment grade rating from either of the two major credit rating agencies. We
do not consider the securitization of lease receivables to be a significant
contributing factor to our continued liquidity.
EXISTING INDEBTEDNESS
At December 31, 2004 and March 31, 2005, our short-term financing and long-term
debt outstanding, excluding current maturities, was as follows:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
2004 2005
- -----------------------------------------------------------------------------------------
Senior Secured Revolving Credit Facility.................... $100,000 $ 50,000
Senior Secured Term Loan Facility........................... 100,000 100,000
Secured installment loan.................................... 10,369 10,369
SAILS exchangeable debt..................................... 83,727 81,463
Other....................................................... 63 60
---------------------------
Total debt.................................................. 294,159 241,892
Less: current maturities.................................... 118,072 79,183
---------------------------
Long-term debt.............................................. $176,087 $ 162,709
- -----------------------------------------------------------------------------------------
</Table>
On December 29, 2004, we entered into a credit facility to be used (i) to repay
in full our then outstanding senior indebtedness, comprised of a short-term
credit facility and a prior revolving credit facility; (ii) for working capital
and general corporate purposes; and (iii) to pay certain fees and expenses
incurred in connection with such transactions. Pursuant to our credit facility,
the lenders severally agreed to provide us the following: (a) a senior secured
term loan facility in an aggregate principal amount of $100,000 and (b) a senior
secured revolving credit facility in an aggregate principal amount of up to
$150,000 with a $20,000 sublimit available for letters of credit. Our credit
facility is secured on a first priority basis by (i) a pledge of all of the
capital stock or other equity interests of our domestic subsidiaries, (ii) a
pledge of 65% of the capital stock or other equity interests of selected
overseas subsidiaries located in the United Kingdom, the Netherlands and Japan,
(iii) 100% of the capital stock of the manufacturing entity in Reynosa, Mexico
and all of its other assets and (iv) all our other domestic assets (other than
real estate) and the stock of our domestic subsidiaries.
On December 29, 2004, we borrowed $100,000 under the term loan facility and
$100,000 under the revolving credit facility. The term loan facility is payable
at $11,111 per quarter, which commences on December 15, 2005 through the term
loan maturity date of December 30, 2007. The revolving credit facility matures
on December 30, 2009. On February 3, 2005, we paid $50,000 of the outstanding
balance under the revolving credit facility. The interest rate on the
58
credit facility is the greater of (i) the prime rate and (ii) the federal funds
rate plus 0.5%, plus, in both cases, the applicable margin for U.S.-based loans.
For Eurodollar-based loans, the rate is the adjusted LIBO rate (defined as the
LIBO rate multiplied by the statutory reserve rate) plus the applicable margin.
The applicable margin is based upon our leverage ratio (defined as the ratio of
our total indebtedness to our consolidated EBITDA for the period of the most
recent four fiscal quarters) plus 0.25% to 1% for U.S.-based loans and 1.25% to
2% for Eurodollar-based loans. The interest rates on our outstanding borrowings
at March 31, 2005 for the $100,000 term loan facility was 4.50% for $50,000 and
4.41% for $50,000. The interest rate on the $50,000 revolving credit facility as
of March 31, 2005 was 4.47%. In May and June 2005, we paid down $25,000 and
$10,000, respectively, of our revolving credit facility.
Under our credit facility, there are a number of security and financial covenant
provisions. Our credit facility contains customary negative covenants and
restrictions on our ability to engage in specified activities, including, but
not limited to:
- - limitations on indebtedness, except, among others, permitted subordinated debt
and unsecured debt not to exceed $30,000 at any time, indebtedness to finance
capital expenditures not to exceed $20,000 at any time;
- - restrictions on liens, mergers and acquisitions, transactions with affiliates
and guarantees;
- - limitations on investments, except, among others, permitted investments,
investments by the company and its subsidiaries in equity interests in their
subsidiaries not to exceed $25,000 at any time, intercompany loans not to
exceed $25,000 at any time, permitted acquisitions not to exceed $50,000 at
any time, and other investments not to exceed $15,000 in the aggregate;
- - limitations on sales of assets, among others, to persons other than affiliates
not to exceed $25,000 at any time, and sales or transfers of lease contracts
under the Bank of Tokyo securitization not to exceed $15,000 in any fiscal
year;
- - limitations on sale and leaseback transactions not to exceed $20,000 at any
time; and
- - restrictions on payments of dividends in an amount not to exceed $8,000 in any
year including limitations on repurchases of common stock under employee stock
purchase plans in an amount not to exceed $5,000 in any year plus the amount
received from employees during such year in payment of the purchase price of
shares acquired by them under such stock purchase plan.
Our credit facility contains customary affirmative covenants that require us to
perform certain activities, including, but not limited to:
- - furnish the administrative agent and each lender with certain periodic
financial reports;
- - furnish the administrative agent and each lender notice of certain events,
including, but not limited to, the occurrence of any default or any other
occurrence that could reasonably be expected to result in material adverse
effect;
- - furnish the administrative agent with notice regarding any changes to the
collateral; and
- - pay taxes and other material obligations, maintain insurance and keep proper
books and records.
59
Under provisions of our credit facility, at our option, we may seek to obtain
investment grade ratings from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group, Inc. If these ratings are obtained, all collateral
securing our credit facility will be released.
Our credit facility contains financial covenants that (a) restrict our total
leverage ratio (debt to adjusted EBITDA) to a ratio no greater than 2.5 times
total debt at any time, (b) require that we maintain the maximum senior leverage
ratio to 2.0 to 1.0 (after January 1, 2006, maximum senior leverage is 1.75x at
any time total leverage exceeds 2.0x), (c) require that we maintain minimum
fixed charge coverage ratio of 1.5x and (d) minimum unrestricted domestic cash
requirement of $25,000 at all times prior to September 30, 2005 and $50,000 at
all times thereafter. As of March 31, 2005, we are in compliance with the
covenants under our credit facility.
On March 31, 2004, we entered into a purchase money secured installment loan
with a bank for $13,825. The loan is payable in four semiannual installments of
$3,655, including interest which commenced October 1, 2004. The proceeds
received under the loan were used to finance the purchases of certain software.
In January 2001, we entered into a private Mandatorily Exchangeable Securities
Contract for Shared Appreciation Income Linked Securities ("SAILS") with a
highly rated financial institution. The securities that underlie the SAILS
contract represent our investment in Cisco common stock, which was acquired in
connection with the Telxon acquisition. The 4,160 shares of Cisco common stock
had a market value of $74,547 at March 31, 2005 and $80,288 at December 31,
2004. Such shares are held as collateral to secure the debt instrument
associated with the SAILS and are included in Investments in Marketable
Securities in the condensed consolidated balance sheets. This debt has a
seven-year maturity and we pay interest at a cash coupon rate of 3.625%.
In January 2008, the SAILS debt will be exchangeable for shares of Cisco common
stock or, at our option, cash in lieu of shares. Net proceeds from the issuance
of the SAILS and termination of an existing freestanding collar arrangement were
approximately $262,246, which were used for general corporate purposes,
including the repayment of debt under the then outstanding revolving credit
facility. The SAILS contain an embedded equity collar, which effectively hedges
the exposure to fluctuations in the fair value of our holdings in Cisco common
stock. We account for the embedded equity collar as a derivative financial
instrument in accordance with the requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The gain or loss on changes in
the fair value of the derivative is recognized through earnings in the period of
change together with a substantial offsetting gain or loss on the Cisco shares.
The derivative has been combined with the debt instrument in long-term debt in
the condensed consolidated balance sheets and presented on a net basis as
permitted under FASB Interpretation No. 39, "Offsetting of Amounts Related to
Certain Contracts," as there exists a legal right of offset. The SAILS
liability, net of the derivative asset, represents $81,463 at March 31, 2005.
Other long-term debt of $60 and $63 at March 31, 2005 and December 31, 2004,
respectively, represent capital lease obligations and various other loans
maturing through 2007.
60
CONTRACTUAL CASH OBLIGATIONS
The following is a summary of the contractual commitments associated with our
obligations as of March 31, 2005:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------
TOTAL 2005 2006 2007 2008 2009 THEREAFTER
- -----------------------------------------------------------------------------------------------------------------
Long-term debt.................... $241,844 $ 68,027 $47,906 $44,449 $81,462 $ - $ -
Capital lease commitments......... 48 48 - - - - -
Co-marketing commitments.......... 400 400 - - - - -
Purchase obligations.............. 187,000 187,000 - - - - -
Operating lease commitments....... 103,836 16,774 18,990 16,602 13,680 10,442 27,348
-----------------------------------------------------------------------------
Total............................. $533,128 $ 272,249 $66,896 $61,051 $95,142 $10,442 $ 27,348
- -----------------------------------------------------------------------------------------------------------------
</Table>
The purchase obligations above do not include purchase obligations recorded on
the balance sheet as current liabilities. Purchase obligations for the purchase
of goods or services are defined as agreements that are enforceable and legally
binding on Symbol and that specify all significant terms, including fixed or
minimum quantities to be purchased, fixed, minimum or variable prices
provisions, and the appropriate timing of the transaction. Our purchase orders
are based on our current manufacturing needs and are generally fulfilled by our
vendors within a short time frame.
Currently, our primary source of liquidity is cash flow from operations and our
credit facility. Our primary liquidity requirements continue to be working
capital, engineering costs, and financing and investing activities.
Our ability to fund planned capital expenditures and to make payments on and to
refinance our indebtedness will depend on our ability to generate cash in the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Based on our current level of operations, we believe our cash flow from
operations, available cash and available borrowings under our new credit
facility will be adequate to meet our future liquidity needs for the next 12
months.
We may also be required to make future cash outlays in connection with
outstanding legal contingencies. These potential cash outlays could be material
and might affect liquidity requirements and cause us to pursue additional
financing. We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us under our new credit facility in an amount sufficient to enable us to fund
these and other liquidity needs or pay our indebtedness.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires us to make judgments, assumptions and estimates that affect the
reported amounts of assets, liabilities, revenue and expenses, as well as the
disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments, including those
related to product return reserves, allowance for doubtful accounts, legal
contingencies, inventory valuation, warranty reserves, useful lives of
long-lived assets, goodwill, derivative instrument valuations and income taxes.
We base our estimates and judgments on historical experience
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and on various other factors that we believe 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. We believe the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
our Consolidated Financial Statements.
PRODUCT RETURN RESERVES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record as reductions of revenue provisions for estimated product returns. The
estimated amount is based on historical experience of similar products sold to
our customers and then returned. If our product mix or customer base changes
significantly, this could result in a change to our future estimated product
return reserve. Management believes the reserve for product returns is adequate
to cover anticipated credits issued for such returns; however, if future returns
differ from our historical experience and estimates, then this could result in
an increase in the reserve. An increase of one percent in the reserve percentage
would result in an increase in our estimated product return reserve of
approximately $1,500 as of March 31, 2005.
We record accounts receivable, net of an allowance for doubtful accounts.
Throughout the year, we estimate our ability to collect outstanding receivables
and establish an allowance for doubtful accounts. In doing so, we evaluate the
age of our receivables, past collection history, current financial conditions
for key customers, and economic conditions. Based on this evaluation, we
establish a reserve for specific accounts receivable that we believe are
uncollectible. A deterioration in the financial condition of any key customer or
a significant slowing in the economy could have a material negative impact on
our ability to collect a portion or all of the accounts receivable. We believe
that analysis of historical trends and current knowledge of potential collection
problems provides us significant information to establish a reasonable estimate
for an allowance for doubtful accounts. However, since we cannot predict with
certainty future changes in the financial stability of our customers, our actual
future losses from uncollectible accounts may differ from our estimates, which
could have an adverse effect on our financial condition and results of
operations.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings and accruals are
established when we are able to estimate the probable outcome of these matters
in accordance with Statements of Financial Accounting Standards No. 5
"Accounting for Contingencies." Such estimates of outcome are derived from
consultation with in-house and outside legal counsel, as well as an assessment
of litigation and settlement strategies. In many cases, outcomes of such matters
are determined by third parties, including governmental entities and judicial
bodies. Any provisions made in our financial statements, as well as related
disclosures, represent management's best estimates of the current status of such
matters and its potential outcome based on a review of the facts and in
consultation with in-house and outside legal counsel. Our estimates may change
from period to period based on changes in facts and circumstances, process of
negotiations in settling matters and changes determined by management. As
further described under the caption "Business--Legal proceedings," we are in
litigation with SmartMedia of Delaware, Inc. Currently, we do not have a
liability recorded on our balance sheet related to this matter as we believe an
unfavorable outcome is not probable. However, should circumstances change due to
new developments related to this matter changes in our estimates may need to be
made and recorded amounts and costs could be material.
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INVENTORY VALUATION
We record our inventories at the lower of historical cost or market value. In
assessing the ultimate realization of recorded amounts, we are required to make
judgments as to future demand requirements and compare these with the current or
committed inventory levels. Projected demand levels, economic conditions,
business restructurings, technological innovation and product life cycles are
variables we assess when determining our reserve for excess and obsolete
inventories. We have experienced significant changes in required reserves in
recent periods due to these variables. At the end of 2003, our inventory
reserves were estimated at $109,331 or 33.9% of gross inventory. As of March 31,
2005, such reserves have been reduced to $57,974 or 25.2% of gross inventory.
The reduction of reserves was the result of the write off and scrapping of
inventory, the sale of inventory and an improvement in our management of
inventory turns.
In addition, should future demand requirements change after a reserve has been
established, there is the possibility that we could have future sales of product
that has been previously reserved. While we continue to believe that our
recorded reserves and policy for determining the reserve requirement are
appropriate, it is possible that significant changes in required inventory
reserves may continue to occur in the future if there is a deterioration in
market conditions or acceleration in technological change and we may experience
future sales of product for which reserves had previously been established.
WARRANTY RESERVES
We provide standard warranty coverage for most of our products for a period of
one year from the date of shipment. We record a liability for estimated warranty
claims based on historical claims, product failure rates and other factors. This
liability primarily includes the anticipated cost of materials, labor and
shipping necessary to repair and service the equipment. Our warranty obligation
is affected by the products actually under warranty, product failure rates,
material usage rates, and the efficiency by which the product failure is
corrected. Should our warranty policy change or should actual failure rates,
material usage and labor efficiencies differ from our estimates, revisions to
the estimated warranty liability would be required. A five percent increase in
our products under warranty would cause an approximate $833 increase to our
warranty provision at March 31, 2005.
USEFUL LIVES OF LONG-LIVED ASSETS
We estimate the useful lives of our long-lived assets, including property, plant
and equipment, identifiable finite life intangible assets and software
development costs for internal use in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting
period. The estimated lives are based on historical experience with similar
assets as well as taking into consideration anticipated technological or other
changes. If technological changes were to occur more rapidly or slowly than
anticipated, or in a different form, useful lives may need to be changed
accordingly, resulting in either an increase or decrease in depreciation and
amortization expense. We review these assets annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important and that could trigger an impairment review
include significant changes in the manner of our use of the acquired asset,
technological advances, changes in historical or projected operating performance
and cash flows and significant negative economic trends.
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GOODWILL IMPAIRMENTS
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques in the
high-technology mobile computing industry. Goodwill is measured as the excess of
the cost of acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired less liabilities assumed. We perform our
goodwill impairment test on an annual basis or more frequently if an event
occurs or circumstances change that indicate a potential impairment may exist to
its carrying value. In response to changes in industry and market conditions, we
could be required to strategically realign our resources and consider
restructuring, disposing of, or otherwise exiting businesses, which could result
in an impairment of goodwill.
DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FOREIGN CURRENCY
We utilize derivative financial instruments to hedge foreign exchange rate risk
exposures related to foreign currency denominated payments from our
international subsidiaries. We also utilize a derivative financial instrument to
hedge fluctuations in the fair value of our investment in Cisco common shares.
Our foreign exchange derivatives qualify for hedge accounting in accordance with
the provisions of SFAS No. 133. We do not participate in speculative derivatives
trading. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective, or if we did not
believe the forecasted transactions would occur, the changes in fair value of
the derivatives used as hedges would be reflected in earnings and could be
material.
INCOME TAXES
Assessment of the appropriate amount and classification of income taxes are
dependent on several factors, including estimates of the timing and probability
of the realization of deferred income taxes and the timing of tax payments.
Deferred income taxes are provided for the effect of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes. We measure deferred
tax assets and liabilities using enacted tax rates, that if changed, would
result in either an increase or decrease in the reported income taxes in the
period of change. A valuation allowance is recorded when it is more likely than
not that a deferred tax asset will not be realized. In assessing the likelihood
of realization, management considers estimates of future taxable income, the
character of income needed to realize future tax benefits, and other available
evidence.
Our assessment of future taxable income is based on historical results,
exclusive of non-recurring or unusual charges and management's assessment of
future taxable income and other known transactions which would result in taxable
income.
Three forecasts of future sources of taxable income were prepared based on
various assumptions concerning the growth of our business operations that are
subject to income tax in the United States. The reversal of all significant
timing differences was considered in calculating the forecasted taxable income
under each scenario. The estimated income tax payable was then calculated based
on the tax rates in effect as of March 31, 2005. Tax credits (including a
forecast of expected tax credits that will arise in each year of the forecast)
were then applied to reduce the tax, subject to existing limitations under the
applicable tax laws. Based on these forecasts, substantially all of the deferred
tax assets would be utilized well before the underlying tax attributes'
expiration periods.
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We have had a number of isolated items in the past that have had a negative
impact on our taxable income, however, we do not expect these items to recur in
the future. We are projecting taxable income in the future.
Actual income taxes could vary from estimated amounts due to future impacts of
various items, including changes in tax laws, positions taken by governmental
authorities relative to the deductibility of certain expenses we incur, changes
in our financial condition and results of operations, as well as final review of
our tax returns by various taxing authorities that are under audit in the normal
course of business.
Our critical accounting policies have been reviewed with the Audit Committee of
the Board of Directors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment, ("Statement 123(R)")
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
In April 2005, the SEC extended the adoption date for Statement 123(R) until
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt Statement 123(R), based
upon the extended adoption date, on January 1, 2006 using the modified
prospective method.
As permitted by Statement 123, we currently account for share-based payments to
employees using APB Opinion 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method will have a significant impact
on our results of operations. The impact of adoption of Statement 123(R) cannot
be predicted at this time because it will depend on levels of share-based
payments granted in the future and assumptions used in such periods to calculate
the fair value of such grants. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share shown in Stock-Based Compensation in the footnotes to the
accompanying condensed consolidated financial statements. Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized for such tax deductions
were $1,947 and $0 for the three-months ended March 31, 2005 and 2004,
respectively.
Based on the release of Statement 123(R), we plan on amending our Employee Stock
Purchase Program ("ESPP") to reduce the discount of the price of the shares
purchased by employees in the ESPP from its current discount of 15% to a
discount of 5%, and we will also eliminate the look-back period currently
utilized to determine the price of the shares purchased. These
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changes will allow the ESPP to continue to be non compensatory, which will
result in no compensation expense to be recorded by us in our statement of
operations when we implement Statement 123(R).
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices. We have a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates on expected cash flows that may arise in the normal course of our
business. Currently, we do not use any financial instruments to manage our
interest rate risk. The counterparties in derivative transactions that we have
entered into are major financial institutions with ratings of A or better, as
determined by one of the major credit rating services.
We enter into forward foreign exchange contracts principally to hedge the
currency fluctuations in transactions denominated in foreign currencies, thereby
limiting our risk that would otherwise result from changes in exchange rates.
During 2004, the principal transactions hedged were short-term intercompany
sales. The periods of the forward foreign exchange contracts correspond to the
periods of the hedged transactions. Gains and losses on forward foreign exchange
contracts and foreign currency loans and the offsetting losses and gains on
hedged transactions are reflected as a component of operating results in our
consolidated statements of operations.
A large percentage of our sales are transacted in local currencies. As a result,
our international operating results are subject to foreign exchange rate
fluctuations. A 5% strengthening of the U.S. dollar against every applicable
foreign currency would have had a $5,289 negative impact on our revenue for the
three months ended March 31, 2005, while a 5% weakening of the U.S. dollar
against every applicable foreign currency would have had a $5,846 positive
impact on our revenue for the three months ended March 31, 2005. We did not use
foreign exchange contracts to hedge expected revenue for the three months ended
March 31, 2005. However, we acquire a portion of our raw materials using local
currencies. The strengthening or weakening of the U.S. dollar against local
currency would act as a partial offset to the impact on revenue.
We manufacture a significant portion of our products at our Mexico facility and
we generally invoice our international subsidiaries in their local currency for
finished and semi-finished goods. As a result, our U.S. dollar cash flow is
subject to foreign exchange rate fluctuations. As of March 31, 2005, a 5%
strengthening of the U.S. dollar against every applicable currency would have
had a $2,912 negative impact on the value of the realized cash remittances from
our subsidiaries during the three months ended March 31, 2005, while a 5%
weakening of the U.S. dollar against every applicable currency would have had a
$3,219 positive impact on the value of the realized cash remittances from our
subsidiaries. We routinely use foreign exchange contracts to hedge cash flows
that are either firm commitments or those which may be forecasted to occur.
While components and supplies are generally available from a variety of sources,
we currently depend on a single source or a limited number of suppliers for
several components of our equipment, certain subassemblies and certain of our
products. A loss of one of these suppliers may have an adverse effect on our
ability to deliver our products or to deliver them on time or
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to manufacture them at anticipated cost levels. However, due to the general
availability of components and supplies, we do not believe that the loss of any
supplier or subassembly manufacturer would have a long-term material adverse
effect on our business, although set-up costs and delays could occur in the
short term if we changed any single source supplier.
We currently hold an investment in Cisco common stock, which is accounted for in
accordance with SFAS No. 115. At March 31, 2005, 3,411.2 shares are classified
as trading securities and 748.8 shares are classified as available for sale
securities. They are carried at fair market value based on their quoted market
price. As such, we have exposure to market risk related to the fluctuation of
Cisco's stock price. However, the change in fair value of the Cisco stock price
is mitigated by the change in fair value of the embedded equity collar contained
in the SAILS arrangement. As of March 31, 2005, a 10% increase in the risk free
interest rate used to value the option would have a negative earnings impact of
$1,800, while a 10% increase in the assumed volatility used to value the option
would have a positive earnings impact of $270.
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BUSINESS
OUR BUSINESS
We are a global leader in designing, developing, manufacturing and servicing
products and systems used in end-to-end enterprise mobility solutions. Our
products and solutions capture, move and manage information in real time to
assist our customers in making more efficient business decisions. Our products
include advanced data capture products, mobile computing platforms, wireless
infrastructure, radio frequency identification ("RFID") infrastructure and tags
and mobility software and services, and are sold as both integrated solutions
and individual devices.
Our products and services are sold worldwide to a diverse set of customers in
markets such as retail, transportation and logistics, manufacturing, wholesale
and distribution, government and healthcare. For the year ended December 31,
2004, we generated $1,732.1 million in revenue and $81.8 million in net
earnings. For the three months ended March 31, 2005, we generated $457.5 million
in revenue and $22.2 million in net earnings.
We operate in two reportable business segments: (1) the design, development,
manufacture and marketing of advanced data capture, mobile computing, wireless
infrastructure, RFID and mobility software products and systems ("Product
Segment"); and (2) the servicing of, customer support for and professional
services related to these products and systems ("Services Segment").
OVERVIEW OF MARKET OPPORTUNITY
Enterprise mobility solutions can help businesses increase workforce
productivity, improve customer service and enhance operational efficiencies.
These solutions assist enterprises and their employees in delivering information
in real time as people, information and assets are on the move. Examples of
applications in which enterprise mobility products and solutions provide
valuable benefits include the following:
-- tracking and routing of assets as they move through the supply chain;
-- movement of goods in a retail store from product receipt to final sale;
-- verification that the correct medication is delivered to a particular
patient;
-- delivery of customer information to a mobile worker prior to a sales call;
-- collection and communication of data by law enforcement officials from
accident sites and crime scenes; and
-- gathering and dissemination of information to a retail sales associate
regarding a customer's preferences.
The enterprise mobility market is comprised of a number of large and growing
segments that together constitute these solutions:
-- Advanced Data Capture/Scanning. The worldwide market for bar code scanning
devices is projected to grow from $1.3 billion in 2003 to $1.8 billion in
2007, a compound annual growth rate of 8%.
-- Mobile Computers. The worldwide market for rugged on-board, tablet,
handheld, PDA and wearable mobile computers is projected to grow from $2.5
billion in 2003 to $3.6 billion in
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2007, a compound annual growth rate of 9%. "Rugged" mobile devices are
typically used in industrial and field settings and offer higher resistance
to vibration, shock and temperature variation than their typical
commercial-grade counterparts.
-- Wireless Infrastructure. The worldwide market for wireless LAN
infrastructure is projected to grow from $2.8 billion in 2003 to $4.1
billion in 2007, a compound annual growth rate of 10%.
-- RFID. The worldwide market for RFID is projected to grow from $1.2 billion
in 2003 to $4.4 billion in 2007, a compound annual growth rate of 35%.
-- Mobile Infrastructure Software. The worldwide market for mobile
infrastructure software (mobile middleware, mobile device management and
mobile security) is projected to grow from $0.9 billion in 2003 to $3.5
billion in 2007, a compound annual growth rate of 41%.
OUR STRENGTHS
We believe that we possess many of the attributes that will be necessary for
long-term success in our industry, including the following:
-- Unique end-to-end enterprise mobility solutions. We are well positioned in
the enterprise mobility market due to our core technology competencies, our
ability to integrate technology solutions at the platform and systems levels
and our technology and channel resellers and distributors that can package
specific applications to capture, move and manage information.
-- Leading market positions. We are the number one or number two global market
leader in many of our key product segments. Our market positions include the
following:
- market leader in handheld bar code scanners and handheld laser bar code
scanners with 28% and 45% market shares in 2003;
- market leader in smaller rugged mobile computers (handhelds and personal
digital assistants) with a 28% market share in 2003. Number two provider of
rugged mobile computers with a 16% market share in 2003;
- market leader in wireless LAN switch/controllers with an 18% market share in
the first half of 2004; and
- number two provider in enterprise wireless LAN infrastructure with a 14%
market share in the first half of 2004.
-- Technology and intellectual property leadership. Our research and
development effort is supported by engineers, scientists, Ph.D.s and other
technical personnel that comprise approximately 18% of our workforce. Our
intellectual property includes over 825 U.S. patents and over 565
international patents. Our intellectual property and technological
capabilities allow us to create high value products to deliver unique
solutions for our customers.
-- A global presence. We have offices in more than 60 countries. For the three
months ended March 31, 2005, we generated approximately 25.4% of our revenue
from customers in the Europe, Middle East and Africa ("EMEA") region and
6.3% from the Asia Pacific region.
-- Long-term customer relationships and knowledge of vertical markets. We have
a customer-and market-centric orientation and enjoy long-standing and strong
relationships with customers in each of our target vertical markets. In
particular, we have a long and solid history in providing innovative
solutions to the retail market. We also have significant
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experience in the manufacturing, transportation and logistics, wholesale and
distribution, government and healthcare markets.
-- A channel-centric and alliance-centric sales model. Our sales model
emphasizes sales through our indirect channel of value-added resellers and
distributors. We believe our sales model offers us broader penetration
across various markets and enables our internal sales force to focus on
building more effective customer relationships and on satisfying our
customers' specific business needs. We believe our PartnerSelect(TM) program
enhances our end-to-end enterprise mobility architecture with applications,
systems integration and implementations.
-- Customer service and support. Our Global Services Division ("GSD") offers
our customers an array of enterprise mobility services ranging from project
management to equipment repair and support. Through GSD, we combine our
extensive technical expertise and vertical market knowledge to support
solutions that increase the value of a customer's information technology
investment.
-- An experienced management team. We have assembled a strong and experienced
management team with significant experience in their respective areas of
expertise. In addition to management trained within Symbol, we have
recruited a number of our executives from companies such as Cisco Systems,
Inc., IBM Corporation, and Agere Systems, Inc.
OUR STRATEGY
Our strategy is to deliver to our customers our enterprise mobility products,
solutions and services, which are designed to increase cost-effectiveness,
enhance efficiency and promote faster execution of critical business processes.
We intend to pursue this goal by applying the following strategies:
-- Expand our position in enterprise mobility products and solutions. We
believe our ability to deliver innovative, end-to-end enterprise mobility
systems gives us a competitive advantage. Accordingly, we plan to continue
to invest in product development, make strategic acquisitions, such as our
acquisition of Matrics, and enter into alliances to expand our capabilities
in enterprise mobility solutions.
-- Target key vertical markets and penetrate new markets. We intend to expand
our presence as a leader in the retail market beyond traditional activities
such as point-of-sale, inventory and warehouse management, price
verification and retail floor operations to include self-shopping and
real-time inventory visibility. Moreover, we believe we have significant
opportunities to increase our penetration in other vertical markets in which
we participate, such as transportation, parcel and postal delivery,
warehousing, distribution and manufacturing.
-- Continue to improve and streamline operations. Over the past two years, we
have restructured and reorganized our major business functions to improve
and streamline our business processes. As part of our restructuring, we have
combined our product marketing, research and development and product
engineering teams into a single Global Products Group, moving from a product
focus to a customer- and market-centric focus and have embarked on a program
to enhance our core product lines. In addition, we have taken significant
steps to improve our manufacturing efficiencies by moving the majority of
our manufacturing to lower cost, company-owned and contract production
facilities outside the United States. In addition to increasing volumes,
these steps have helped lower our product
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cost of revenue as a percentage of product revenue to 49.5% for fiscal year
2004 as compared to 51.9% for fiscal year 2003 and 62.9% for fiscal year
2002. We plan to continue to work to improve and streamline our business
processes.
-- Build upon our strong foundation of intellectual property. We intend to
continue to invest in research and development to enable us to continue to
offer high quality, differentiated and cost-effective products to our
customers. In addition, through development and licensing agreements with
third parties, we intend to capitalize on the "best of breed" technologies
currently in the market and focus our resources on those areas that provide
the most value to our customers.
-- Rationalize product lines and pursue platform-based products. We believe
that pursuing high value-added, platform-based products will allow us to
increase our sales and margins. For example, on March 31, 2003, we offered
approximately 17,000 active product configurations, which we reduced to
approximately 4,700 as of March 31, 2005.
-- Expand our sales and channel capabilities. We believe there are
opportunities in each of the geographic regions we serve, and we intend to
expand our sales and channel capabilities in all of our markets. In the
Americas, we will pursue improved growth with our new sales management team
and better sales coverage both geographically and by vertical market through
our channel resellers and distributors program, Symbol PartnerSelect(TM). In
the EMEA region, we have reorganized our sales operations, centralized our
support functions and expanded our sales coverage. In the Asia Pacific
region, we have new management developing reseller and distributor
relationships, identifying products with special appeal to that geography
and focusing sales resources on the most promising markets.
PRODUCT SEGMENT
Our products and solutions are designed to capture, move and manage information
in real time to and from the point of business activity:
-- Capture. Our advanced data capture products fall into three categories: (1)
handheld and hands-free laser bar code scanners, imagers and kiosks; (2)
enterprise mobile computing systems, including "rugged" handheld, wearable
and vehicle-mounted mobile computers and durable personal digital
assistants; and (3) RFID infrastructure and tags.
-- Move. We offer mobility infrastructure solutions that provide wireless local
area networks ("wireless LAN") connectivity. Our mobility devices also offer
support for wireless LAN, wireless wide area networks ("wireless WAN"),
personal area wireless networks and complementary standards and
technologies, including Bluetooth(TM), WiFi, CDMA, GSM/GPRS.
-- Manage. Our Mobility Services Platform ("MSP") is a suite of software
products that includes our MSP Server and our MSP Studio, which are designed
to enhance the performance, efficiency and productivity of mobility
solutions.
The Global Products Group is comprised of the following five divisions
-- Mobile Computing Division;
-- Advanced Data Capture Division;
-- Wireless Infrastructure Division;
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-- RFID Division; and
-- Mobility Software Division.
For the three months ended March 31, 2005, Product Segment net revenue was
$384.2 million, which represented 84.0% of our total revenues. Our MSP was
announced in May 2004, but was not available for shipping until the fourth
quarter of 2004. For the three months ended March 31, 2005, revenues from sales
of our MSP products were immaterial.
ADVANCED DATA CAPTURE DIVISION
OVERVIEW
Enterprise mobility requires the ability to capture data in real time at the
point of business activity. Our advanced data capture solutions allow users to
gather product or asset specific information from retail points-of-sale and
along the supply chain in distribution centers, warehouses and manufacturing
plants. Our bar code scanners are designed for power, performance and durability
and are contained in an ergonomically designed housing in most data capture
environments. In addition, our advanced data capture devices have 1-D and 2-D
scanning capabilities, which read both existing standard Universal Product
Code/European Article Number bar codes as well as emerging RSS (reduced space
symbology), DataMatrix and Universal Container Code composite codes. For the
three months ended March 31, 2005, revenue from our advanced data capture
division accounted for 26.1% of our total Product Segment revenue.
PRODUCT AND TECHNOLOGY INFORMATION
-- Handheld Scanners. We offer customers a variety of handheld scanner designs,
configurations and product features. We recently introduced our new
long-range industrial scanner line, the LS 3408 family of advanced data
capture products that offer scanning from distances of up to 45 feet. These
scanners are targeted for inventory and asset management applications in the
manufacturing and warehousing segments.
-- Hands-Free and Fixed Mount Scanners. We offer a line of miniaturized slot
scanner products, which are designed to accommodate "on counter" and "in
counter" applications. We also offer laser diode-based projection scanners
that provide customers with more advanced scanning capability. This enables
a user to quickly capture bar code data regardless of how the bar code is
presented to the scanner. It also allows the scanner to read poorly printed
bar codes faster and more accurately.
-- Scan and Imaging Engines. We introduced our first line of scan engines in
1990 and continue to offer an array of laser scanning and imaging engines.
We also offer MiniScan module products that can be easily used as industrial
fixed-mount or embedded scanners. This feature offers flexibility in
applications such as information kiosks, ATMs, warehousing and manufacturing
assembly lines, conveyer belts, clinical diagnostic equipment, gas pumps,
robotic arms and authorization and identification for security purposes.
-- Self-Scanning and Self-Checkout. Our self-scanning and self-checkout
products are utilized in retail venues throughout the world in order to
increase customer traffic and worker productivity. Our automated customer
self-service device provides customers with the ability to check the price
of merchandise, retrieve product information and obtain real-time
information on in-store and frequent shopper promotions. Our acquisition of
@pos in 2002 included signature-capture terminals and payment transaction
terminals.
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-- Wearable Scanners. We were one of the first companies to introduce a
wearable scanning system that allows users wireless LAN connectivity,
hands-free bar code scanning and information collection. The primary markets
for our wearable scanners include transportation and logistics and wholesale
and distribution vertical markets.
MOBILE COMPUTING DIVISION
OVERVIEW
Our portfolio of mobile computing products includes durable, lightweight,
battery-powered handheld computers and vehicle-mounted computers. Our newest
designs are primarily based on industry-standard processors and
industry-standard Microsoft(R) and Palm(R) handheld operating systems.
Information is captured by a bar code reader, RFID reader, microphone or manual
entry via a keyboard or touch screen on a pen computer display/data entry
device. The information collected by the mobile computing device is then
transmitted across Bluetooth(TM) personal area wireless networks, wireless LAN
and/or wireless WAN, or via an offline batch file transfer. More than 95% of our
mobile computing devices are shipped with an integrated bar code reader and
approximately 90% offer optional integrated wireless LAN or wireless WAN
communication capability.
Our rugged mobile computers are primarily used in business or industrial
environments, and we design our devices to be modular and customizable to
customer requirements. Our mobile computing product line includes several
different rugged mobile computing models, many of which include multiple
configurations for each model. For the three months ended March 31, 2005,
revenue from our mobile computing division accounted for 64.3% of our total
product revenue.
PRODUCT AND TECHNOLOGY INFORMATION
-- Enterprise Digital Assistant ("EDA"). In early 2005, we introduced the
Symbol MC50, an enterprise-class handheld computer. The Symbol MC50 handheld
computer is a secure and manageable EDA that is designed for mobile managers
in the retail market and in other market segments that require in-building
mobile field force automation applications to maintain productivity,
efficiency and enterprise connectivity.
-- SPT Series. The SPT1800 is a Palm Powered(TM) handheld device that features
bar code data capture capability and wireless LAN or wireless WAN
connectivity. This family of products is designed for point-of-activity
information management and is used in office workflow automation, route
accounting, healthcare, education, retail, industrial and warehouse
settings.
-- PPT Series. Our PPT series is a family of Pocket PC-based mobile computers
that includes bar code scanning and real-time wireless communication
options. The PPT8800 slim handheld, based upon the Microsoft Windows CE 4.1
(also known as CE.NET) operating system, provides customers with laser bar
code scanning, ruggedization and wireless LAN connectivity. Its smaller
streamlined size enables it to extend into new enterprise applications such
as mobile shopping, mobile point-of-sale and mobile SAP access. The PPT8800
is also offered with the option for Bluetooth(TM) wireless connectivity.
-- MC3000 Series. In January 2005, we introduced the MC3000. The MC3000
handheld is a small, lightweight, highly ergonomic, rugged mobile computer
targeting the retail and transportation and logistics industries and
designed for in-store and backroom data capture
73
applications. The MC3000 provides a migration path to move from a legacy
DOS-based application environment to the Microsoft Windows CE.NET 4.2
computing platform for those customers seeking to upgrade aging systems to
support their competitive initiatives.
-- MC9000 Series. In November 2003, we introduced the MC9000 mobile computing
family. A recent addition to our mobile computing product portfolio delivers
application-specific mobility tools in three different models: the grip form
factor MC9000-G for scan-intensive applications; the handheld MC9000-K for
mobile applications outside the enterprise; and the handheld MC9000-S for
mobile field applications.
WIRELESS INFRASTRUCTURE DIVISION
OVERVIEW
We develop, design and provide wireless networking solutions that connect mobile
computing devices and bar code reading equipment to enterprise networks. Based
on industry-standard IEEE 802.11 and related technologies, our wireless
networking products provide real-time wireless data communication and voice
communication. The focus of the division is the design and development of
wireless network client and infrastructure solutions for the enterprise and
highly mobile transaction processing systems market. For the three months ended
March 31, 2005, revenue from our wireless infrastructure division accounted for
9.3% of total Product Segment revenue.
PRODUCT AND TECHNOLOGY INFORMATION
-- Enterprise Class Access Points ("APs"). We were one of the first companies
to introduce a wireless LAN product that operated in the 2.4 GHz
frequency-band. We support the IEEE 802.11 Wi-Fi standards for data
transmission, which provides users with high-speed wireless capabilities for
rapid data transfer from server to terminal, image transfer, Internet
communications, customer self-scanning services and streaming video. We also
offer the AP3021 (IEEE 802.11 Frequency Hopping) and AP 4131 (IEEE 802.11
Wi-Fi) enterprise class access points.
-- Wireless Switch Products. Our wireless switch products allow businesses to
manage their wireless networks from a centralized location. We pioneered the
wireless switch model that includes "thin" access ports, which gives
businesses the flexibility to grow their networks by adding access points as
needed.
- WS5100: The WS5100 Wireless Switch is our second generation wireless switch
system developed to integrate with existing enterprise infrastructure and
clients from several equipment vendors. Its design allows for existing an
emerging wireless paths to allow legacy access points to become integrated
to the wireless switch system. Symbol's WS5000 was our first generation
Wireless Switch solution.
- WS2000: The WS2000 Wireless Switch is an integrated, centralized wired and
wireless networking solution designed and priced for small to medium
enterprises and branch offices.
-- Wireless Voice over Internet Protocol ("VoIP"). We are incorporating voice
technology into our mobile computing devices and wireless infrastructure.
This technology includes walkie-talkie mode over Wi-Fi and the ability to
make voice calls over enterprise IP data networks (VoIP telephony).
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-- Client Products. Our first Wi-Fi certified IEEE 802.11 CompactFlash wireless
LAN adapter card delivers Wi-Fi wireless connectivity to PDAs. It can be
used with handheld devices running Microsoft(R) Windows(TM) for Pocket PC,
and supports numerous configurations of notebook computers.
RFID DIVISION
OVERVIEW
We develop, design and provide RFID data capture solutions. RFID is a next
generation data capture technology utilizing small tags that emit radio signals.
RFID tags, attached to products or assets, enable remote reading of information
relevant to the asset, similar to the data contained in a bar code. Because RFID
does not require physical contact between the reading device and the tag, or
even a line of sight, it provides the ability to capture more data more
efficiently and is beneficial in areas such as supply chain management, asset
tracking and security.
We believe that the acquisition of Matrics is an important step in executing our
plan to be a leader in the RFID market and allows us to offer our customers
additional advanced data capture solutions. We believe that in order for RFID to
be deployed successfully, it needs to be deployed as a system that allows
customers to capture, move and manage critical information to and from the point
of business activity. By incorporating the Matrics Electronic Product Code
("EPC")-compliant RFID products into our portfolio of mobile computing, advanced
data capture and wireless technologies, we believe we can help customers in key
market segments expand from bar code based systems to enterprise-wide RFID
deployments.
The Matrics technology is designed to be compatible with key existing RFID
standards, as well as anticipated next generation RFID standards under
development. We believe that our RFID solutions will be compliant with any
technology ultimately adopted as an industry standard.
PRODUCT AND TECHNOLOGY INFORMATION
-- RFID Tags. We design, manufacture and provide a product suite of RFID tags
for a range of RFID applications. We believe our tags produce high
application performance through advanced design and stringent manufacturing.
For example, our patented dual-dipole design allows tags to be read at
different orientations, which is a critical factor required to achieve
reliable read rates.
-- RFID Reader Infrastructure. We provide a line of fixed readers and
infrastructure solutions. Our products include the AR400 and the XR400, the
first commercially deployed reader to support the Windows "CE" operating
system. The AR400 and the XR400 are both EPC-compliant multi-protocol fixed
readers for shipping and receiving dock-doors and conveyer belts, and
industrial-strength EPC-compliant readers for embedded applications, such as
printers and mobile computers. The XR400, in addition to supporting all EPC
"Generation 1" tags, both Class 0 and Class 1, will offer full support for
the EPC "Generation 2" protocol via future firmware upgrades. Our reader
infrastructure also offers networking and management capabilities to help
reduce the complexity of large-scale deployments.
-- Mobile RFID Reader. We also offer customers a mobile RFID reader. The rugged
MC9000G mobile computer is an EPC-compliant RFID reader that is suitable for
a broad range of
75
applications. These reader products give organizations real-time access to
mission-critical information from key points in their supply chain.
MOBILITY SOFTWARE DIVISION
OVERVIEW
Important to enterprise mobility are centralized mobility management solutions
that reduce the risk and complexity associated with mobile deployments. These
systems provide the basis for rapid development, deployment, management, support
and control of mobile devices. At the same time, mobility management also
enables operations and IT groups to contain support costs and maintain complete,
real-time visibility into the performance of the enterprise mobility systems.
Our mobile infrastructure software division is focusing its efforts on
developing next-generation platform technologies and solution strategies. Our
Mobility Services Platform is a scalable and integrated software suite, which
ties together our mobile clients, wireless switch/infrastructure and back-end
applications and databases. Our MSP was announced in May 2004 and was available
for shipping in the fourth quarter of 2004. Revenue from sales of our MSP
products was immaterial in the three months ended March 31, 2005. We believe our
MSP will provide additional future revenue without materially affecting our
business operations. We expect to incur additional capital investment costs
relating to MSP at levels consistent with our other existing products.
PRODUCT AND TECHNOLOGY INFORMATION
-- Mobility Services Platform: Our Mobility Services Platform is designed to be
delivered through our MSP Server, which is a rack-mounted appliance with a
web-based console that includes wireless network management and mobile
device management capabilities such as configuration, provisioning,
monitoring, charting, reporting and troubleshooting. Our MSP Server provides
customers with control and visibility of their entire enterprise mobility
system, including mobile devices, mobile applications and wireless network
infrastructure. We believe that our MSP Server permits our customers to
accelerate the introduction of their enterprise mobility solutions, promote
better performance and quality of service, and reduce the complexity and
total cost of ownership of their enterprise mobility systems.
Our MSP Server provides the following functionalities:
- remote, rapid and secure configuration of mobile devices over any IP network
and the provision of the correct software and applications to these devices;
- provisioning of mobile devices and wireless network elements;
- visibility into performance data across mobile devices, mobile applications
and wireless networks and monitoring of several hundred mobile devices and
wireless network element characteristics;
- ability to save data and events into a database that is then used to provide
real-time device monitoring; and
- rapid diagnosis and resolution of network, device and application problems.
-- Software and Programming Tools. Our MSP Studio is a suite of software
programming tools that helps application developers save development costs
and launch mobile solutions faster
76
than custom coding and point solutions. Using the MSP Studio, companies can
build mobile applications for a single device and replicate the applications
to other devices across an organization with minimal effort.
SERVICES SEGMENT
OVERVIEW
The Global Services Division ("GSD"), our global services organization, offers
our customers an array of services from system planning and design for emerging
technologies to comprehensive product maintenance and support. Our services are
marketed under the Symbol Enterprise Mobility Services brand and are sold and
delivered via our global direct sales and services organization and through our
Symbol PartnerSelect(TM) and SymbolCertified(TM) Professional Services
certification programs. For the three months ended March 31, 2005, Services
Segment net revenue was $73.2 million, which represented 16.0% of total
revenues.
SYMBOL ENTERPRISE MOBILITY SERVICES
Symbol Enterprise Mobility Services is comprised of the following three
integrated service elements:
-- Mobility Services. Our Mobility Services organization provides customers
access to vertical market knowledge and expertise in designing and deploying
mobility solutions on a global basis. Customers also gain access to emerging
mobility technologies as services are developed, tested and proven. Once
these emerging technology solutions are tested and standardized, they are
transitioned to our SymbolCertified(TM) Professional Services Providers for
implementation.
-- SymbolCertified(TM) Professional Services. Our SymbolCertified(TM)
Professional Services Providers offer installation and implementation
services for mainstream mobility systems, devices and applications. We
certify our providers through a rigorous process and oversee and impose on
them quality standards to ensure that our customers receive the level and
quality of implementation and installation support required.
-- Customer Services. Our Customer Services organization delivers global repair
capabilities to our customers. We provide service and support on-site as
well as through our service centers. Our service centers provide maintenance
and repair services and offer a single repair point for both Symbol and
selected third-party products. Our customer service operations for the
Americas include a facility operated jointly in El Paso, Texas and Juarez,
Mexico. In 2004, we opened an approximately 102,000 square-foot Shared
Services Centre in Brno, South Moravia in the Czech Republic to service our
customers in the EMEA region. We are in the process of establishing service
capability in the Asia Pacific region.
VERTICAL MARKETS
We target the following six vertical market segments:
-- retail;
-- transportation and logistics;
-- manufacturing;
-- wholesale and distribution;
77
-- government; and
-- healthcare.
RETAIL
Our products help retailers control inventory flow, combine in-store and back
office solutions to enhance productivity and track customer purchasing patterns
for pinpoint marketing. We also provide industry-specific solutions across
retail segments including customer-facing technology to increase customer
loyalty, retention and sales. Examples of our solutions in the retail sector
include the following:
-- wireless handheld scanners that enable cashiers at home improvement stores
with scanning large, bulky items;
-- mobile handheld computers that contain bar code scanners and imagers that
interface with wireless networks and software applications for order entry,
price management and other in-store tasks;
-- kiosks that enable customers to self-scan items to verify prices and
participate in gift registries; and
-- the Symbol Portable Shopping System(TM), which allows customers to scan
purchases as they shop with lightweight, ergonomic handheld devices, giving
them product data, a running total of their purchases, targeted promotional
offers and access to other customer services.
TRANSPORTATION AND LOGISTICS
Our transportation and logistics mobility solutions are designed to enable
transportation and logistics companies to manage inventory in motion, improve
pick-up and delivery planning, improve turnaround times, drive more stops per
trip to lower fleet and driver requirements, improve margins by lowering
operating costs and enhance regulatory compliance. Examples of our solutions in
the transportation and logistics sector include the following:
-- systems to provide detailed, real-time information about fleet and delivery
activities to provide greater control of transportation resources and to
improve visibility into shipments;
-- in-vehicle systems that capture and transmit real-time information on driver
performance, routes taken and hours worked;
-- handheld computers that capture pick-up and delivery information and
transmit data to a central computer so that inventory is optimally assigned
to the appropriate transportation asset;
-- mobile computers to permit workers to receive delivery schedules when the
driver is ready to depart;
-- handheld systems to allow drivers to print delivery confirmation slips for
customers at the point-of-delivery and instantly send data messages such as
service completions or receive new pick-up assignments; and
-- wireless ring scanners to read bar codes on packages passing on a conveyer
belt, affording hands-free sorting in the routing of parcels and packages.
78
MANUFACTURING
Our solutions are designed to enable manufacturers to capture and transmit data
electronically, improve efficiency and assist in "just-in-time" manufacturing
processes. Moreover, point-of-activity solutions from us and our resellers and
distributors are a critical component in Enterprise Resource Planning systems.
We believe our solutions lead to better informed decisions by capturing data in
real time and linking seamlessly to middleware and enterprise planning suites
from every major provider. Examples of our solutions in manufacturing include:
-- rugged, mobile data-capture devices for incoming inspections and collection
and monitoring of data on assembly lines to help track work in progress,
monitor quality, manage materials and inventory and provide quality
assurance;
-- wireless LAN systems to connect engineering resources to the shop floor,
shipping to receiving, plants to each other, suppliers and customers to the
plant, the entire operation to the front office, and enterprise-wide
manufacturing systems to the Internet; and
-- wireless mobile computers and wireless LAN infrastructure to capture
information on the warehouse floor and move the inventory data into
databases to facilitate better financial management, inventory control and
tracking of customer orders.
WHOLESALE AND DISTRIBUTION
Our solutions are designed to help distributors track inventory, reduce errors,
improve productivity and increase asset visibility. As a result, distributors
are enabled to reduce their order fulfillment cycle to increase speed to market
in a more cost-efficient manner. Examples of our solutions in the wholesale and
distribution sector include the following:
-- handheld mobile computers to scan products upon arrival at the warehouse and
direct workers through their daily tasks of moving inventory throughout the
facility;
-- wireless mobile computers and wireless LAN infrastructure to manage the
movement of people, products and information on the warehouse floor and
communicate critical data to systems to provide visibility to and simplify
execution of customer orders;
-- handheld computers certified by U.S. and European standardization agencies
for electronics as "intrinsically safe" for use in hazardous areas; and
-- hands-free mobile computers to permit warehouse operators to use both hands
to perform warehouse receiving and picking tasks while scanning bar code
data.
GOVERNMENT
Our solutions are designed to help government agencies operate more efficiently
and effectively, generate and capture revenue and better serve their
constituents. Examples of our solutions in the government sector include the
following:
-- mobile computers and portable printers for use in parking enforcement;
-- mobile computers for use by police officers on patrol to collect and
communicate vital data from accident sites, roadside vehicle inspection
sites and crime scenes;
-- wireless networks, handheld computers and bar code scanners that serve as
building blocks for public safety and security applications;
-- RFID-enabled mobile computers to track shipping containers as they move
across borders; and
79
-- scanners used in correctional facilities to manage the movement of prison
inmates from facility to facility, manage access to phones, track activities
and register release dates.
HEALTHCARE
Our products are used by healthcare solution providers to enable healthcare
professionals to work more productively, obtain real-time access to the latest
patient data in order to prevent medical error and improve the level of patient
care. Our products help meet the recent requirement by the United States Food
and Drug Administration that pharmaceutical companies apply bar codes to
thousands of single-dosage prescription and over-the-counter drugs dispensed in
hospitals and clinics. Examples of our products used as part of solutions in the
healthcare sector include the following:
-- wireless mobile computers to read encoded information on a patient's
wristband and on the drug packaging to verify that the patient is receiving
the correct medication;
-- handheld mobile computers with bar code-reading capability to help
prioritize patients, view lab reports and capture vital signs and other
documentation; and
-- wireless applications to permit doctors and nurses to remotely monitor a
patient's vital signs and program a patient's monitor and infusion pumps.
SALES AND MARKETING
We market our products domestically and internationally through a variety of
distribution channels, including a direct sales force, original equipment
manufacturers, solution providers ("SPs"), authorized resellers ("ARs") and
distributors. SPs and ARs integrate and sell our products to customers while
also selling to those customers other products or services not provided by us.
Our sales organization includes offices located throughout the United States and
in Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark,
Dubai, Finland, France, Germany, Hong Kong, Italy, India, Japan, Mexico, the
Netherlands, Norway, Poland, Portugal, Russia, Singapore, South Africa, South
Korea, Spain, Sweden, Switzerland and the United Kingdom.
We have contractual relationships and strategic alliances with unaffiliated
resellers and distributors. Through these relationships, we are able to broaden
our distribution network and participate in industries other than those serviced
by our direct sales force and distributors. For example, in 2004 we entered into
a strategic alliance with Nextel Communications, Inc. ("Nextel") to jointly
develop and co-market voice and data mobility solutions to help business
customers reduce operating costs, increase workforce productivity and drive
operational efficiencies. The Symbol-Nextel mobile solutions for vertical field
service and sales workers will be targeted across many industry segments,
including transportation and distribution, public safety, retail, manufacturing,
healthcare, utilities and telecommunications. In 2004, we also developed a
co-marketing relationship with AT&T Wireless, through which AT&T Wireless and
Symbol will jointly sell and market AT&T Wireless voice and data services for
some of our mobile computing products in order to provide customers with
real-time enterprise mobility.
In 2003, we increased our focus on our reseller channel strategy and initiated
our PartnerSelect(TM) program, which is designed to enhance the capabilities of
our resellers and distributors and our relationships with them. We believe that
this program has significantly contributed to the increase of orders through our
resellers and distributors from approximately 46% of our total product orders
for the year ended 2002 to approximately 75% of our total
80
product orders as of March 31, 2005. Our goal is to have up to 84% of our
products ordered through these resellers and distributors. We have been
recognized by VARBusiness magazine as one of North America's top information
technology vendors for the breadth and depth of our channel reseller and
distributor program offerings.
We believe our focus on reseller channel strategy and the PartnerSelect(TM)
Program will allow us to leverage our SG&A cost structure over time without
materially impacting our gross margins. With respect to SG&A, we believe we are
able to benefit from our channel leveraged cost structure for distribution. The
benefits to our cost structure of leveraging our channel for distribution are
related to two areas. First, our channel reduces the amount of overhead we
require to sell and distribute our products by acting as an aggregation point.
Second, the distribution channel allows us to reduce fluctuations in our selling
prices by pricing products into the channel at a consistent rate and allowing
the distribution channel to absorb any price changes in our sales to the end
user customer. This allows for more reliable gross margin performance which as a
result allows us to focus on cost reduction and efficiency in our supply chain
and distribution processes.
We also believe our channel sales force allows us to increase revenues by
extending our supply to meet demand in market segments to which our direct sales
force does not sell. Resellers and distributors each have their own sales
organizations which in many cases complement our sales organization in their
coverage of potential customers of our products. Additionally, resellers and
distributors often pursue sales that have lower total revenue potential, and
thus might not be covered by our direct sales force. Finally, in many cases
resellers have deep expertise with specific applications or a specific
customer's operations that allow them to be effective in selling our products.
As a result, we believe our distribution model helps us meet our goal of
maintaining our gross margin over time, as we obtain scale from shipping more
efficiently through better management of our supply chain.
The following table sets forth certain information as to international revenues
of Symbol:(1)
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------ ---------------
(IN MILLIONS) 2002 2003 2004 2005
- --------------------------------------------------------------------------------------------
Area:
EMEA(2)......................................... $382.8 $438.6 $487.2 $ 116.4
Asia Pacific.................................... 84.6 112.6 128.7 29.0
Other(3)........................................ 75.5 92.9 87.7 23.1
------------------------------------------
Total........................................... $542.9 $644.1 $703.6 $ 168.5
- --------------------------------------------------------------------------------------------
</Table>
(1) See Notes 12 and 18 to the consolidated financial statements.
(2) Europe, Middle East, and Africa
(3) Includes the non-U.S. countries in The Americas.
ACQUISITIONS
MATRICS, INC.
On July 26, 2004, we entered into an agreement and plan of merger to acquire
Matrics, a leader in developing EPC-compliant RFID systems, for a cash purchase
price of $230 million (which includes certain payments to employee-stockholders
of Matrics). We consummated the
81
acquisition of Matrics on September 9, 2004. On October 29, 2004, Matrics was
merged with and into Symbol.
TRIO SECURITY, INC.
On June 17, 2004, Symbol acquired all of the outstanding capital stock of Trio
Security, Inc. ("Trio Security") for cash pursuant to a stock purchase
agreement. Trio Security developed next-generation security solutions for
enterprise networks and mobile applications for handheld devices.
SEAL SISTEMAS E TECHNOLOGIA DA INFORMACAO LTDA.
During 2002, we entered into an agreement with the owners of Seal Sistemas e
Technologia da Informacao Ltda. ("Seal"), a Brazilian corporation that had
operated as a distributor and integrator of our products since 1987. The
agreement resulted in the termination of distribution rights for Seal and the
creation of a majority-owned subsidiary of Symbol that would serve as the
Brazilian distributor and customer service entity ("Symbol Brazil"). In
accordance with the terms of the agreement, the owners of Seal acquired a 49%
ownership interest in Symbol Brazil.
On January 10, 2004, the parties amended this transaction, whereby Symbol
Technologies Holdings do Brasil Ltda., a wholly-owned subsidiary of Symbol,
purchased an additional 34% ownership interest of Symbol Brazil owned by two
principals of Seal. Symbol and Symbol Technologies Holdings do Brasil Ltda. now
own 85% of the capital of Symbol Brazil. Under the terms of the relevant
agreements, Symbol Brazil had its entity form changed into a corporation and it
will eventually become a wholly-owned subsidiary of Symbol.
COVIGO, INC.
On July 28, 2003, a wholly-owned subsidiary of Symbol was merged with Covigo,
Inc. ("Covigo") in a cash-for-stock merger. Covigo mobile software enables
customers to simplify the creation and deployment of wireless applications,
while reducing administrative costs associated with network management and data
synchronization.
@POS.COM, INC.
In September 2002, a wholly-owned subsidiary of Symbol was merged with @pos.com,
Inc. ("@pos") in a cash-for-stock merger. @pos manufactures and markets a range
of interactive customer transaction terminals with advanced signature capture
technology and I/P-enabled features that allow traditional and advanced payment
capabilities at the retail point-of-sale and provide enhanced customer
interaction and order processing.
PRODUCT MANUFACTURING
Our products are principally manufactured at our Reynosa, Mexico facility. We
also have a facility in Bohemia, New York that we utilize as a new product
development center.
While components and supplies are generally available from a variety of sources,
we currently depend on a limited number of suppliers for several components,
certain subassemblies and products. In the past, unexpected demand for
communication products caused worldwide shortages of certain electronic parts
and allocation of such parts by suppliers that had an adverse impact on our
ability to deliver our products as well as on the cost of producing such
82
products. While we have entered into contracts with suppliers of parts that we
anticipate may be in short supply, there can be no assurance that additional
parts will not become the subject of such shortages or that such suppliers will
be able to deliver the parts in fulfillment of their contracts.
Due to the general availability of components and supplies, we do not believe
that the loss of any supplier or subassembly manufacturer would have a long-term
material adverse effect on our business although set-up costs and delays could
occur in the short term if we change any single source supplier.
Certain of our products are manufactured by third parties, most of which are
outside the United States. In particular, we have a long-term strategic
relationship with Olympus Optical, Inc. of Japan ("Olympus") pursuant to which
Olympus and Symbol jointly develop selected products that are manufactured by
Olympus exclusively for sale by us in the field of our business and prospective
businesses. We are currently selling several such products. We have the right to
manufacture such products if Olympus is unable or unwilling to do so, but the
loss of Olympus as a manufacturer could have, at least, a temporary material
adverse impact on our ability to deliver such products to our customers. The
percentage of our product sales that include products or contain components
manufactured by Olympus historically has ranged from approximately 10% to 20% in
any given quarterly period. We have estimated that the temporary adverse impact
if we lost Olympus as a manufacturer would be approximately 40% of the product
sales that include products or contain components manufactured by Olympus or a
temporary adverse impact of approximately 4% to 8% of total product sales.
We employ certain advanced manufacturing processes that require highly
sophisticated and costly equipment and are continuously being modified in an
effort to improve efficiency, reduce manufacturing costs and incorporate product
improvements.
We generally maintain sufficient inventory to meet customer demand for products
on short notice, as well as to meet anticipated sales levels. This includes
carrying reasonable amounts of inventory at our distributors in order to meet
customer delivery requirements in a manner consistent with industry standards.
If our product mix changes in unanticipated ways, or if sales for particular
products do not materialize as anticipated, we may have excess inventory or
inventory that becomes obsolete. In such cases, our operating results could be
negatively affected.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that our future growth depends, in large part, upon our ability to
continue to apply our technology and intellectual property to develop new
products, improve existing products and expand market applications for our
products. Our research and development projects include, among other things,
improvements to the reliability, quality and capability of our laser scanners to
read at increased working distances and at faster speeds and to decode higher
density codes (including, but not limited to, two-dimensional codes); continued
development of our solid state laser diode-based scanners; development of solid
state imager-based engines for bar code data capture and general purpose imaging
applications; development of RFID engines for data capture applications;
improvements to packaging and miniaturization technology for bar code data
capture products, mobile data collection devices and integrated bar code and
RFID data capture products; development of high-performance digital data radios,
high-speed, secure, manageable mobile data communications systems and
telecommunications protocols and products; the development of "smart" mobile
devices that
83
may be located by intelligent wireless LAN systems; and the addition of software
to provide a complete line of high-performance interface hardware.
We use both our own associates and from time to time unaffiliated consultants in
our product engineering and research and development programs. From time to time
we have participated in and/or partially funded research projects in conjunction
with a number of universities including the State University of New York at
Stony Brook, Polytechnic University of New York and Massachusetts Institute of
Technology. We also jointly develop technology with Olympus, as described above.
We have enhanced our ability to develop our product technology and product
offerings through various strategic alliances. In 2003, we entered into a
strategic alliance with International Business Machines Corporation ("IBM")
pursuant to which Symbol and IBM will work together to jointly develop and
market a new generation of advanced hand-held wireless and scanning solutions
customized for specific industries to help customers improve operational
efficiency. In 2004, we entered into an alliance with Zebra Technologies
Corporation ("Zebra") pursuant to which Symbol and Zebra will jointly develop a
complete ultra high frequency RFID solution to market which will meet emerging
RFID standards and be readily implemented by end users in their logistics
operations.
We expended (including overhead charges) approximately $31.5 million and $30.9
million for research and development during the three months ended March 31,
2005 and 2004, respectively. We expended (including overhead charges)
approximately $125.1 million, $108.8 million and $72.8 million for research and
development during the years ended December 31, 2004, 2003 and 2002,
respectively. These amounts are included as a component of engineering in the
consolidated statements of operations.
COMPETITION
The business in which we are engaged is highly competitive and acutely
influenced by advances in technology, industry standards, product improvements
and new product introduction and price competition. Many firms are engaged in
the manufacture and marketing of products in bar code reading equipment,
wireless networks and mobile computing devices and mobility software. Numerous
companies, including present manufacturers of scanners, lasers, optical
instruments, microprocessors, wireless networks, notebook computers, handheld
devices and telephonic and other communication devices have the technical
potential to compete with us. Many of these firms have far greater financial,
marketing and technical resources than we do. We compete principally on the
basis of performance and the quality of our products and services.
We believe that our principal competitors are Casio, Inc., Cisco Systems, Inc.,
Datalogic S.P.A., Fujitsu, Ltd., Hand Held Products, Inc., Hewlett-Packard
Company, Intermec Technologies Corporation, LXE Inc., Matsushita Electric
Industrial Co., Ltd., Metrologic Instruments, Inc., Motorola, Inc., NCR
Corporation, DENSO Corporation, Opticon, Inc., Proxim, Inc., PSC, Inc. and Psion
Teklogix, Inc.
DEPENDENCE ON A GROUP OF CUSTOMERS
We are not dependent on any single customer, the loss of which would have a
material adverse effect on our business. However, sales to Scansource, one of
our distribution partners, accounts for more than 10% of our annual sales. In
addition, none of our segments is
84
dependent on any single customer or a few customers, the loss of which would
have a material adverse effect on any of our segments.
SEASONALITY
We do not believe that sales in either of our segments is seasonal; however,
within our Product Segment, certain product divisions may experience sales
seasonality.
PAYMENT TERMS
We offer industry standard payment terms within geographic regions and generally
do not grant extended payment terms.
PATENT AND TRADEMARK MATTERS
We file domestic and foreign patent applications to support our technology
position and new product development. Our intellectual property includes more
than 875 U.S. patents and more than 565 international patents. We have also
filed additional patent applications in the U.S. Patent and Trademark Office as
well as in foreign patent offices. We will continue to file patent applications,
both United States and foreign, to cover our most recent research developments
in the scanning, information collection and network communications fields. One
of our basic patents covering handheld laser scanning technology expired on June
6, 2000, and a key companion patent expired June 3, 2003. Due to the recent
expiration of these patents, we may see increased competition in handheld
trigger combined bar code readers; however, we have not witnessed any evidence
of that to date. Notwithstanding the expiring patents, we believe that our
extensive patent portfolio will continue to provide us with some level of
competitive advantage. Additionally, an important scanner-integrated computer
patent will expire in July 2005, which could lead to increased competition in
the marketplace.
Although we believe that our patents provide a competitive advantage, we believe
we are not dependent upon a single patent, or a few patents, the loss of which
would have a material adverse effect on our business. Our success depends more
upon our proprietary know-how, innovative skills, technical competence and
marketing abilities. In addition, because of rapidly changing technology, our
present intention is not to rely primarily on patents or other intellectual
property rights to protect or establish our market position. However, Symbol has
in the past instituted litigation against competitors to enforce its
intellectual property rights and is currently involved in several such lawsuits.
Symbol has licensed some of its intellectual property rights through
royalty-bearing license agreements. We may continue to enter into these types of
arrangements and other types of arrangements should the circumstances lead us to
believe that such an arrangement would be beneficial.
We have received and have currently pending third party claims and in the future
may receive additional notices of such claims of infringement of other parties'
rights. In such event, we have and will continue to take reasonable steps to
evaluate the merits of such claims and take such action as we may deem
appropriate, which action may require that we enter into licensing discussions,
if available, and/or modify the affected products and technology, or result in
litigation against parties seeking to enforce a claim which we reasonably
believe is without merit. We have been involved in such litigation in the past,
are currently involved in such litigation and additional litigation may be filed
in the future. Such parties have and are likely to claim damages and/or seek to
enjoin commercial activities relating to our products or technology affected by
such parties' rights. In addition to subjecting us to potential liability for
85
damages, such litigation may require us to obtain a license in order to
manufacture or market the affected products and technology. To date, such
activities have not had a material adverse affect on our business and we have
either prevailed in all litigation, obtained a license on commercially
acceptable terms or otherwise been able to modify any affected products or
technology. However, there can be no assurance that we will continue to prevail
in any such actions or that any license required under any such patent would be
made available on commercially acceptable terms, if at all. A failure to obtain
such licenses could have a material adverse effect on our business, results of
operations or financial condition. There are a significant number of U.S. and
foreign patents and patent applications in our areas of interest, and we believe
that there has been and is likely to continue to be significant litigation in
the industry regarding patent and other intellectual property rights. For a
description of certain of our intellectual property litigation, see "--Legal
proceedings--Pending patent and trademark litigation."
We have also obtained certain domestic and international trademark registrations
for our products and maintain certain details about our processes, products and
strategies as trade secrets.
We regard our software as proprietary and attempt to protect it with copyrights,
trade secret law and international nondisclosure safeguards, as well as
restrictions on disclosure and transferability that are incorporated into our
software license agreements. We license our software products to customers
rather than transferring title. Despite these restrictions, it may be possible
for competitors or users to copy aspects of our products or to obtain
information that we regard as trade secrets. Our computer software generally has
not been patented and existing copyright laws afford only limited practical
protection. In addition, the laws of foreign countries generally do not protect
our proprietary rights in our products to the same extent as do the laws of the
United States.
GOVERNMENT REGULATIONS
The use of lasers and radio emissions are subject to regulation in the United
States and in other countries in which we do business. In the United States,
various Federal agencies including the Center for Devices and Radiological
Health of the Food and Drug Administration, the Federal Communications
Commission ("FCC"), the Occupational Safety and Health Administration and
various State agencies have promulgated regulations which concern the use of
lasers and/or radio/electromagnetic emissions standards. Member countries of the
European community have enacted standards concerning electrical and laser safety
and electromagnetic compatibility and emissions standards.
Regulatory changes in the United States and other countries may require
modifications to some of our products in order for us to continue to be able to
manufacture and market these products. For example, certain consumer advocacy
groups are lobbying against the adoption of RFID systems in the retail
environment because of privacy and other consumer protection concerns. While we
believe that these concerns are mostly unfounded, there can be no assurance that
such efforts will not result in regulatory and/or legal action that could have a
materially adverse effect on our ability to manufacture and market RFID
products.
Our RF mobile computing product line includes various models, all of which
intentionally transmit radio signals as part of their normal operation. Certain
versions of our handheld computers and our Spectrum One and Spectrum 24 networks
utilize spread spectrum radio technology. We have obtained certification from
the FCC and other countries' certification
86
agencies for our products that utilize this radio technology. Users of these
products in the United States do not require any license from the FCC to use or
operate these products. Some of our products transmit narrow band radio signals
as part of their normal operation.
We have obtained certification from the FCC and other countries' certification
agencies for our narrow band radio products. Users of these products in the
United States do not require any license from the FCC to use or operate these
products. We also market radio products that utilize cellular radio technology.
We have obtained certification from the FCC and other countries' certification
agencies for our products that utilize this radio technology. Users of these
products in the United States do not require any license from the FCC to use or
operate these products.
In all cases, such certification is valid for the life of the product unless the
circuitry of the product is altered in any material respect, in which case a new
certification may be required. Where a country certificate has a limited
duration, additional certification will be obtained during the life of the
product, when required.
In addition, some of our operations use substances regulated under various
federal, state, local and international laws governing the environment and
worker health and safety, including those governing the discharge of pollutants
into the ground, air and water, the management and disposal of hazardous
substances and wastes and the cleanup of contaminated sites. Certain of our
products are subject to various federal, state, local and international laws
governing chemical substances in electronic products.
In January 2003, the European Union ("EU") issued two directives relating to
chemical substances in electronic products. The Waste Electrical and Electronic
Equipment Directive requires producers of electrical goods to pay for specified
collection, recycling, treatment and disposal of past and future covered
products. EU governments were required to enact and implement legislation that
complies with this directive by August 13, 2004 (such legislation together with
the directive, the "WEEE Legislation"), and certain producers are to be
financially responsible under the WEEE Legislation beginning in August 2005. The
EU has issued another directive that requires electrical and electronic
equipment placed on the EU market after July 1, 2006 to be free of lead,
mercury, cadmium, hexavalent chromium (above a threshold limit) and brominated
flame retardants. EU governments were required to enact and implement
legislation that complies with this directive by August 13, 2004 (such
legislation together with this directive, the "RoHS Legislation"). Based upon
current information available to us, we believe we will be able to comply with
these regulations within the applicable time periods. However, if we do not
comply with these directives, we may suffer a loss of revenue, be unable to sell
in certain markets and/or countries, be subject to penalties and enforced fees
and/or suffer a competitive disadvantage. Similar legislation could be enacted
in other jurisdictions, including in the United States. Costs to comply with the
WEEE Legislation, RoHS Legislation and/or similar future legislation, if
applicable, could include costs associated with modifying our products,
recycling and other waste processing costs, legal and regulatory costs and
insurance costs. We may also be required to take reserves for costs associated
with compliance with these regulations.
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PROPERTIES
The following table states the location, primary use and approximate size of all
of our principal plants and facilities and the duration of our tenancy with
respect to each facility.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
LOCATION PRINCIPAL USE SIZE (SQUARE FEET) TENANCY/OWNERSHIP
- -----------------------------------------------------------------------------------------------
One Symbol Plaza World Headquarters 299,000 Owned
Holtsville, New York
5400 George McVay Drive Distribution Facility 334,000 Owned
McAllen, Texas
Avenida Industrial Rio Manufacturing 296,000 Owned
San Juan Mz-9-L-4,
Parque Del Norte
Reynosa, Tamaulipas
Mexico
116 Wilbur Place Operations Offices, 90,000 Owned
Bohemia, New York Labs
110 Wilbur Place Manufacturing, 30,000 Owned
Bohemia, New York Development Lab
6480 Via Del Oro, Network Systems 100,000 Leased: expires August
Valley Oak Technology Engineering, Marketing 31, 2009
Campus San Jose,
California
1220 Don Haskins Drive Customer Service Center 62,907 Leased: expires
El Paso, Texas and Warehouse December 31, 2007
Symbol Place, 100 EMEA Headquarters, 55,500 Leased: expires
Berkshire Place, Marketing and December 31, 2012
Winnersh Triangle Administration and
Winnersh, United United Kingdom
Kingdom Headquarters
Avenida Valle del Cedro New Facility 78,533 Leased: expires
#1310 Parque Industrial February 28, 2015
Intermex, Cd. Juarez
Chih, Mexico
Technology Park Customer Service and 102,153 Leased: expires June
Technicka 15, Brno 616 Shared Financial 30, 2014
00 Czech Republic Services
Palm Terrace 25541 Sales, Customer Service 42,090 Leased: expires
Commercentre Drive and Marketing December 31, 2008
Lake Forest, California (Option to vacate
December 31, 2006)
300 Allegheny Drive Sales 67,540 Leased: expires
Warrendale, (7,000 subleased) November 30, 2012
Pennsylvania
RMZ Ecospace Block 3B New Facility 82,000 Leased: expires
Outer Ring Road October 13, 2009
Bangalore, India
- -----------------------------------------------------------------------------------------------
</Table>
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In addition to these principal locations, we lease other offices throughout the
world, ranging in size from approximately 150 to 40,000 square feet.
EMPLOYEES
At June 8, 2005, we had approximately 5,600 full-time employees. Of these,
approximately 2,700 were employed in the United States. Symbol also employs
temporary production personnel. None of our U.S. employees is represented by a
labor union. Some of our employees outside of the United States are represented
by labor unions. We consider our relationship with our employees to be good.
LEGAL PROCEEDINGS
We are a party to lawsuits arising in the normal course of business. Litigation
arising in the normal course of business, as well as the lawsuits and
investigations described below, can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
and government investigations are difficult to predict. Unless otherwise
specified, Symbol is currently unable to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, for the lawsuits and investigations
described herein. An unfavorable resolution to any of the lawsuits or
investigations described below could have a material adverse effect on Symbol's
business, results of operations or financial condition.
GOVERNMENT INVESTIGATIONS
In May 2001, in response to an inquiry from the SEC, we retained a law firm to
conduct an internal investigation into certain allegations concerning our
accounting practices, focusing on specific transactions with two of our
customers but also including a limited review of other large transactions. The
law firm retained an accounting firm to assist it in the investigation. We
subsequently discovered that this investigation was hindered by certain of our
former employees. As a result of actions by these former employees, the SEC
expressed dissatisfaction with the investigation.
In March 2002, we retained a second law firm to conduct a wide-ranging internal
investigation into our accounting practices. The investigation was conducted
over a period of approximately eighteen months with the assistance of an outside
forensic accounting team. The SEC and the Eastern District commenced separate
but related investigations relating to our accounting practices.
The investigation found that, during the period covered by the restatement,
certain members of former management engaged in, directed and/or created an
environment that encouraged a variety of inappropriate activities that resulted
in accounting errors and irregularities affecting our previously issued
financial statements that we have now restated. The errors and irregularities
caused by these actions primarily concerned the timing and amount of product and
service revenue recognized. In particular, the investigation found that revenue
was accelerated from the appropriate quarters to earlier quarters through a
variety of improper means and, on a more limited basis, revenue was improperly
created and inflated on a net basis. Additionally, there were errors and
irregularities associated with the establishment and utilization of certain
reserves and restructurings, including certain end-of-quarter adjustments that
were apparently made in order to achieve previously forecasted financial
results. There were also errors and/or irregularities associated with the
administration of certain options
89
programs, as well as several categories of cost of revenue and operating
expenses, including efforts to artificially reduce reported inventory.
In addition, the internal investigation uncovered efforts by certain then
employees, including certain members of then management, to impede both the
initial and second internal investigations. The employees responsible for
directing such conduct resigned or were terminated.
The investigation found that, in addition to the specific items of misconduct
giving rise to the need for the restatement, there was a failure by our former
management to establish an appropriate control environment, and there were
significant failures in our internal controls and procedures resulting from
numerous causes, including inadequate hiring of qualified and experienced
personnel, insufficient training and supervision of personnel, a decentralized
accounting structure for operations in the United States and inadequate systems
and systems interfaces. The investigation also found instances in which some
members of former management and sales and finance-related employees devoted
insufficient attention and resources to ensuring accurate accounting and
financial reporting. As the guilty pleas of three former senior members of our
finance group illustrate, there were also instances in which such activity rose
to the level of criminal misconduct. All of the members of senior management who
were primarily responsible for the errors and irregularities underlying the
restatement either have been terminated from employment at Symbol as part of the
internal investigation or have left Symbol, including Tomo Razmilovic, one of
our former Presidents, Chief Executive Officers and directors, and Kenneth
Jaeggi, our former Senior Vice President and Chief Financial Officer. We
assembled a new management team and appointed new board members beginning in
mid-2002.
In November 2002, we announced the unaudited, preliminary expected magnitude of
the anticipated restatement of our financial statements, and updated that
information on several occasions over the subsequent eleven months. Accordingly,
the selected financial data for 1998, 1999, 2000 and 2001, financial statements
for the years ended December 31, 2000 and 2001, and unaudited selected quarterly
information for each of the four quarters of 2001 and the first three quarters
of 2002 were restated in our 2002 Annual Report on Form 10-K/A.
In connection with our accounting practices various class action lawsuits were
filed against us and certain of our former management and our former board of
directors in March 2002, March 2003 and May 2003. For more information see
"--Securities litigation matters."
On June 3, 2004, we announced that we resolved the investigation by the Eastern
District relating to our past accounting practices by entering into a
non-prosecution agreement with the Eastern District. As a result of this
non-prosecution agreement, no criminal complaint will be filed against us. In
addition, on June 3, 2004, we announced an agreement with the SEC to resolve
allegations against us relating to our past accounting practices that were under
investigation by the SEC. Pursuant to the agreements with the Eastern District
and the SEC, we have paid a total of $37 million in cash to a restitution fund
for members of the class consisting of purchasers of our common stock from
February 15, 2000 to October 17, 2002, and $3 million to the United States
Postal Inspection Service Consumer Fraud Fund. In addition to these payments,
the non-prosecution agreement included an acknowledgement by us that between
1999 and 2002, as a result of the actions of certain of our former employees, we
(a) violated federal criminal law in connection with accounting practices
involving improper sales transactions, unsupported and fictitious accounting
entries and the manipulation of our accounting reserves and expenses; and (b)
filed and caused to be filed materially false and
90
misleading financial statements and other documents with the SEC. As part of the
non-prosecution agreement, we agreed to continue our cooperation with the
Eastern District and the SEC, and to implement remedial measures, including, but
not limited to, retaining an independent, government-approved examiner to review
our internal controls, financial reporting practices and our compliance with the
settlement agreements and establishing and maintaining an annual training and
education program designed to diminish the possibility of future violations of
the federal securities laws. If we violate the injunction with the SEC, the
agreement with the Eastern District or commit or attempt to commit other
violations, such as accounting offenses that were not the subject of the
investigations, we will be subject to federal criminal charges. Pursuant to the
non-prosecution agreement we have waived certain defenses that may have
otherwise been available to us in the event of a federal criminal charge,
including the statute of limitations, and will be subject to prosecution for any
offense, including any offense related to our past accounting practices. In
addition, in the event of a violation of the agreement and a federal criminal
charge, statements that were made by or on behalf of us to the Eastern District,
SEC and the Postal Inspection Service, including the acknowledgments of
responsibility described above, will be deemed admissible in evidence and
certain evidentiary rules will not be available to us. Pursuant to the agreement
with the SEC, the SEC filed, and the court has approved, a Final Consent
Judgment in the Eastern District of New York providing for injunctive relief,
enjoining us from further violations of the antifraud, reporting, books and
records and internal control provisions of the federal securities laws, and a
civil penalty in the amount of $37 million, as described above. We paid both the
$37 million and the $3 million to the United States Postal Inspection Service
Consumer Fraud Fund prior to June 30, 2004.
On October 26, 2004, we issued a press release announcing our financial results
for the third quarter 2004. On November 8, 2004, we issued a second press
release revising certain of the previously reported numbers. The revised numbers
included a reduction of approximately $13.6 million in revenue for the nine
months ending September 30, 2004, as compared to the results previously reported
in the press release of October 26, 2004. The November 8, 2004 press release
stated that we had discovered certain discrepancies in the amount of inventory
at a distributor as well as inventory on hand that affected its
previously-announced results. On November 15, 2004, we filed our quarterly
report on Form 10-Q for the third quarter of 2004.
The non-prosecution agreement between us and the United States Attorney's Office
for the Eastern District of New York, described previously, provides that should
we violate the agreement or commit a crime in the future, we would be subject to
prosecution for any offense, including any offense related to our past
accounting practices. We have retained outside counsel to investigate the facts
and circumstances surrounding the erroneous numbers included in the October 26,
2004 press release. We have been cooperating with the informal requests made by
the Eastern District and by the SEC regarding this matter, including whether we
have complied with the injunction issued in connection with the June 2004
settlement with the SEC and non-prosecution agreement with the Eastern District.
There can be no assurance that these events will not give rise to an enforcement
action or other proceeding, or to the imposition of fines or other penalties, by
the SEC or the Eastern District.
SECURITIES LITIGATION MATTERS
On June 3, 2004, we announced our settlement of the Pinkowitz, Hoyle and Salerno
class action lawsuits, which are described below. Under the settlement, we
agreed to pay to the class members an aggregate of $1.75 million in cash and an
aggregate number of shares of
91
common stock having a market value of $96.25 million, subject to a minimum and
maximum number of shares based upon the volume-weighted moving average trading
price of our common stock for the five day period immediately prior to our
payment of the common stock to the class ("Determined Price"). If the Determined
Price is greater than $16.41 per share, then we will issue 5,865.3 shares of our
common stock to the class. If the Determined Price is between $16.41 per share
and $11.49 per share, then we will issue to the class the number of shares of
common stock equal to a market value of $96.25 million divided by the Determined
Price. If the Determined Price is less than $11.49 per share, we will issue
8,376.8 shares of our common stock to the class. For example, the total number
of shares issuable on June 8, 2005, pursuant to the settlement agreement would
have been approximately 8.4 million shares, of which 586,533 were delivered on
November 17, 2004. The settlement also provides that we have the right to pay up
to an additional $6.0 million in cash to reduce the number of shares of our
common stock that we are required to deliver in an amount equal to the amount of
additional cash divided by the Determined Price. If (i) there occurs any event
that would lead to the de-listing of our common stock or our board of directors
recommends the approval of a tender offer or the purchase of a majority of our
common stock or (ii) the Determined Price is less than $11.90 per share, then
the lead counsel for the plaintiffs can require us to place into escrow the
number of shares that would otherwise be payable to the class and would have the
right to sell all or any portion of the escrowed shares and invest such proceeds
until distribution to the class. If we do not deliver our common stock as
required by the settlement agreement within the ten days of such requirement,
the lead counsel for the plaintiffs may terminate the settlement agreement. The
court held a fairness hearing regarding the settlement on October 4, 2004 and
approved the fairness of the settlement by an order entered on October 20, 2004.
On November 17, 2004, we delivered 586,500 shares, or 10% of the settlement
amount (at $16.41 per share), as satisfaction of the plaintiffs' attorneys' fees
incurred as of October 2004, pursuant to the court's order. We currently expect
to deliver the balance of the shares required to be issued under the settlement
the first half of 2005. As of March 31, 2005, we have reflected $86.6 million as
accrued litigation costs in our current liabilities. For every $1.00 per share
above $16.41 per share on the date the shares are issued, an additional non-cash
litigation charge of approximately $5.3 million (pre-tax) and $3.2 million
(after-tax) will be required to be recorded in our income statement in 2005.
Included in our basic diluted shares outstanding at March 31, 2005 is 6.6425
million shares for shares that would have been issued under this settlement
agreement.
In addition to the payments described above, the $37 million civil penalty
imposed by the SEC, which we have already paid, will be distributed to the
class. Also, as part of the settlement, Dr. Jerome Swartz, our co-founder and
former chairman, has paid $4 million in cash in 2004 to the class to settle the
claims against him in the Pinkowitz and Hoyle class action lawsuits.
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a class action lawsuit was filed in the United States District
Court for the Eastern District of New York on behalf of purchasers of our common
stock between October 19, 2000 and February 13, 2002, inclusive, against us and
certain members of our former management and our former board of directors. The
complaint alleged that the 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 our
securities. This case is subject to the settlement agreement described above.
92
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against us and certain
members of our former management and our former board of directors. On May 7,
2003, a virtually identical class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints were brought on behalf of a class of former
shareholders of Telxon Corporation ("Telxon") who obtained our common stock in
exchange for their Telxon stock in connection with our acquisition of Telxon in
November 2000. The complaint alleges that the defendants violated the federal
securities laws by issuing a Registration Statement and Joint Proxy
Statement/Prospectus in connection with the Telxon acquisition that contained
materially false and misleading statements that had the effect of artificially
inflating the market price of our securities. These cases are subject to the
settlement agreement described above.
SMART MEDIA LITIGATION
Telxon v. Smart Media of Delaware, Inc.
On December 1, 1998, Telxon filed suit against Smart Media of Delaware, Inc.
("SMI") in the Court of Common Pleas for Summit County, Ohio in a case seeking a
declaratory judgment that Telxon did not contract to develop SMI's products or
invest approximately $3 million in SMI's business and that it did not
fraudulently induce SMI to refrain from engaging in business with others or
interfere with SMI's business relationships. On March 12, 1999, SMI filed its
answer and counterclaim denying Telxon's allegations and alleging counterclaims
against Telxon for negligent misrepresentation, estoppel, tortious interference
with business relationship and intentional misrepresentation and seeking
approximately $10 million in compensatory damages, punitive damages, fees and
costs. In addition, William Dupre, an individual employed by SMI at that time,
asserted similar counterclaims against Telxon. In November 2000, Symbol acquired
Telxon with these claims still pending.
On September 17, 2003, the jury awarded approximately $218 million in damages
against Telxon, of which approximately $6 million was awarded to Mr. Dupre. The
court denied Telxon's motion for judgment in its favor notwithstanding the
verdict, for a new trial and for a reduction in the amount of the jury verdicts.
On May 6, 2004, the court entered judgment against Telxon for approximately $218
million in damages, plus statutory interest from the date of the verdicts and
granted a motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by Mr. Dupre. Prior to these court rulings, SMI withdrew
its motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by SMI. We and Telxon have filed notices of appeal of
these rulings and the related verdicts. Symbol and Telxon have deposited
approximately $50 million into an interest-bearing court escrow account to stay
execution of the judgment against both Symbol and Telxon pending resolution of
the appeal. The parties completed the submission of briefs on this appeal in
March 2005. Oral arguments in response to the appellate briefs were heard on
June 3, 2005.
Our available cash, including cash available under our existing lines of credit,
may not be sufficient to pay jury verdicts of this size and we would need to
obtain additional financing in order to pay the judgment entered against Telxon
in this matter. In addition, we currently have not recorded any liability in our
consolidated financial statements with respect to the jury verdicts and the
judgment entered as we believe that, in accordance with the relevant
93
guidance set forth in Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," an unfavorable outcome of this litigation is not
probable or estimatable at this time. However, there can be no assurance that we
will not be found to be ultimately liable for the full amount of the judgment,
plus statutory interest from the date of the verdicts. In the event we are found
liable, and the judgment is not paid, we would be in violation of the terms of
our new credit facility. See "Description of new credit facility."
PENDING PATENT AND TRADEMARK LITIGATION
Metrologic Instruments, Inc. v. Symbol Technologies, Inc.
On June 19, 2003, Metrologic Instruments, Inc. ("Metrologic") filed a complaint
against us in the United States District Court, District of New Jersey, alleging
patent infringement and breach of contract, and seeking monetary damages of $2.3
million (as of March 31, 2004) and termination of the cross-licensing agreement
between the parties. We answered the complaint and asserted counterclaims for
declaratory judgments of invalidity and noninfringement of Metrologic's patents
and for non-breach of the cross-licensing agreement. We moved for partial
summary judgment to dismiss Metrologic's breach of contract claim. On October
18, 2004, the Court granted Symbol's motion for summary judgment on Metrologic's
breach of contract claim, and also granted Symbol leave to assert certain
defenses. On October 25, 2004, Symbol asserted defenses of inequitable conduct
with respect to Metrologic's patents. We intend to defend the case vigorously on
the merits.
Metrologic Instruments, Inc. v. Symbol Technologies, Inc.
On May 25, 2005, we were served with a complaint by Metrologic seeking a
declaratory judgment that Symbol had materially breached the license agreement
between us, and for damages for the alleged breach. The complaint asserts that
Symbol did not have the right to cease royalty payments on certain devices
Metrologic claims are covered by its patents. Symbol disputes that it breached
the license agreement and that Metrologic's patents cover Symbol's devices, and
intends to defend the case vigorously.
Symbol Technologies, Inc. et al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership
On July 21, 1999, we and six other members of the Automatic Identification and
Data Capture industry ("Auto ID Companies") jointly initiated a lawsuit against
the Lemelson Medical, Educational, & Research Foundation, Limited Partnership
("Lemelson Partnership"). The suit was commenced in the United States District
Court, District of Nevada in Reno, Nevada, but was subsequently transferred to
the federal court in Las Vegas, Nevada. In the litigation, the Auto ID Companies
sought, among other remedies, a declaration that certain patents, which had been
asserted by the Lemelson Partnership against end users of bar code equipment,
were invalid, unenforceable and not infringed.
The Lemelson Partnership had 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. We had
received many requests from our customers asking that we undertake the defense
of these claims using our knowledge of the technology at issue, and the other
Auto ID Companies have received similar requests. Certain of our customers had
requested indemnification against the Lemelson Partnership's claims from us, and
certain customers of the other Auto ID Companies had requested similar
94
indemnification from them, individually and/or collectively with other equipment
suppliers. We believe that generally we had no obligation to indemnify our
customers against these claims and that the patents being asserted by the
Lemelson Partnership against our customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
On January 23, 2004, the court concluded that Lemelson's patent claims are
unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the court are not infringed by us because
use of the accused products does not satisfy one or more of the limitations of
each and every asserted claim; and that the claims are invalid for lack of
enablement even if construed in the manner urged by Lemelson. The court entered
its judgment in favor of Symbol and the other Auto ID Companies on January 23,
2004. The Lemelson Partnership filed several post-trial motions all of which
were denied by the court. The Lemelson Partnership filed a notice of appeal on
June 23, 2004. The court heard oral arguments on the appellate briefs on June 6,
2005.
Intermec IP Corp. v. Matrics, Inc.
On June 7, 2004, Intermec IP Corp., a subsidiary of Intermec Technologies
Corporation ("Intermec"), filed suit against Matrics in the Federal District
Court in Delaware asserting infringement of four patents owned by Intermec IP
Corp. relating to RFID readers and RFID tags. The complaint against Matrics
seeks payment of a "reasonable royalty" as well as an injunction against Matrics
from infringing such patents. On September 9, 2004, Symbol consummated the
acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004, and
accordingly, Symbol is defending the case vigorously on the merits.
On January 21, 2005, Matrics filed an Amended Answer and Counterclaim to which
Intermec replied on February 4, 2005. On January 25, 2005, Matrics filed a
motion to dismiss Intermec IP Corp.'s damages claims insofar as they seek
damages for the period after October 29, 2004, the date on which Matrics was
merged into Symbol and ceased to exist. In the alternative, Matrics moved to
substitute Symbol for Matrics as successor-in-interest to Matrics. Intermec IP
Corp. initially opposed the motion, but subsequently withdrew its opposition to
substituting Symbol for Matrics. Symbol filed an amended answer and
counterclaims on April 6, 2005. On April 20, 2005, Intermec IP Corp. filed an
Amended and Supplemental Complaint which formally substituted Symbol for Matrics
as the defendant.
The Court entered a Scheduling Order on February 8, 2005. The Order provides for
a Markman claim construction hearing to be held September 7, 2005. The case is
scheduled for a ten day jury trial beginning on May 1, 2006. Discovery is just
under way.
Symbol Technologies, Inc. v. Intermec Technologies Corporation
On March 10, 2005, Symbol filed a patent infringement suit against Intermec in
the United States District Court for the District of Delaware, asserting
infringement of four Symbol patents relating to wireless technology. On March
23, 2005, Intermec asserted counterclaims against Symbol for alleged
infringement of six Intermec patents. The Intermec patents relate to wireless
scanners, signature capture technology and bar code readers with multi-tasking
operating systems. Symbol responded to Intermec's infringement claims on April
11, 2005 and asserted counterclaims seeking declarations that the Intermec
patents were invalid and not infringed. On May 17, 2005, Symbol moved for
judgment on the pleadings, seeking the relief sought by Symbol in the complaint
and dismissal of Intermec's counterclaims. The motion has not been fully
briefed. Symbol intends to defend the case vigorously on the merits.
95
Nanopower Technologies, Inc. v. Symbol Technologies, Inc. and Matrics Technology
Systems, Inc.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a California
corporation, filed a civil suit against Matrics and Symbol in state court in
California. The suit alleges that Matrics breached a consulting agreement,
confidentiality agreement and intellectual property licensing agreement
pertaining to certain ultra low voltage RFID tag start-up technology to which
Nanopower claims ownership and that the defendants violated California state law
relating to the protection of trade secrets. The suit also named Symbol as a
defendant because of Symbol's announced intention to purchase Matrics. Nanopower
alleges that Symbol (i) has improperly received disclosure of Nanopower's
confidential information, (ii) has, or will, misappropriate Nanopower's trade
secrets as a consequence of the acquisition of Matrics and (iii) will benefit
from the alleged breaches of the intellectual property licensing and consulting
agreements. On September 9, 2004, Symbol consummated the acquisition of Matrics.
Matrics was merged into Symbol on October 29, 2004, and accordingly, Symbol is
defending the case vigorously on the merits.
Matrics' agreements with Nanopower provide for mandatory arbitration of these
disputes in Washington, DC and contain an exclusive venue clause requiring any
effort to obtain injunctive relief to be filed in Maryland. The state court
complaint was removed to federal court and Matrics has filed a motion to
transfer the suit to Maryland in anticipation of a subsequent stay pending
arbitration. On October 1, 2004, before the Court heard Matrics' motion,
Nanopower agreed to and the parties filed a stipulation to stay the case pending
mediation, and if necessary, arbitration. A mediation was held on December 21,
2004, in an effort to resolve this matter. However, no resolution was reached.
Symbol has been informed by Nanopower's attorneys that they intend to pursue an
arbitration. One of Nanopower's claims is for breach of a consulting agreement,
based on Matrics' failure to pay an invoice in the amount of approximately
$38,000. On February 15, 2005, the Company sent to Nanopower a check in the
amount of the invoice, plus accrued interest. It is not yet known if Nanopower
will seek to arbitrate its other claims.
OTHER LITIGATION
Barcode Systems, Inc. v. Symbol Technologies Canada, Inc. and Symbol
Technologies, Inc.
On March 19, 2003, Barcode Systems, Inc. ("BSI") filed an amended statement of
claim in the Court of Queen's Bench in Winnipeg, Canada, naming Symbol
Technologies Canada, Inc. and Symbol as defendants. BSI alleges that we
deliberately, maliciously and willfully breached our agreement with BSI under
which BSI purported to have the right to sell our products in western Canada and
to supply Symbol's support operations for western Canada. BSI has claimed
damages in an unspecified amount, punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated any
agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian $1.3
million, representing the unpaid balance of products sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the Canadian
Competition Tribunal ("Tribunal"). BSI sought an Order from the Tribunal that
would require us to accept BSI as a customer on the "usual trade terms" as they
existed prior to the termination of their agreement in April 2003. The Tribunal
granted leave for BSI to proceed with its claim against us on January 15, 2004.
We filed an appeal of the Tribunal's decision before the Federal Court
96
of Appeals on January 26, 2004, and a brief in support of the appeal on April
22, 2004. On October 7, 2004, the Federal Court of Appeals dismissed Symbol's
appeal, allowing BSI to make its application before the Tribunal against Symbol.
On November 17, 2003, BSI filed an additional lawsuit in British Columbia,
Canada against us and a number of our distributors alleging that we refused to
sell products to BSI, conspired with the other defendants to do the same and
used confidential information to interfere with BSI's business. We intend to
defend against these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata filed a
lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico") in
October 2003 to reclaim property on which our Reynosa facility is located. The
lawsuit was filed before the First Civil Judge of First Instance, 5th Judicial
District, in Reynosa, Tamaulipas, Mexico. The First Civil Judge ordered the
recording of a lis pendens with respect to this litigation before the Public
Register of Property in Cd. Victoria, Tamaulipas.
The plaintiff alleges that she is the legal owner of a tract of land of 100
hectares, located within the area comprising the Rancho La Alameda, Municipality
of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas, irrigation
district. The plaintiff is asking the court to order Symbol Mexico to physically
and legally deliver to the plaintiff the portion of land occupied by Symbol
Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial Reynosa from
Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument. An Owner's
Policy of Title Insurance was issued by Stewart Title Guaranty Company in
connection with the above-mentioned transaction in the amount of $13.4 million.
A Notice of Claim and Request for Defense of Litigation was duly delivered on
behalf of Symbol to Stewart Title Guaranty Company on November 4, 2003.
In late November 2004, the First Level Civil Judge entered a final judgment in
this matter for Symbol. In his decision, the judge held that, while the
plaintiff had established she had title to a tract of land, she failed to
establish that her parcel is the property on which Symbol's Reynosa
manufacturing facility is located. The judge further held that, based on the
plaintiff's complaint, it was not possible to identify the location of the
property to which plaintiff claims title.
The plaintiff failed to appeal the judgment to the Court of Second Instance and
a final non-appealable order has been entered in for Symbol.
Bruck Technologies Handels GmbH European Commission Complaint
In February 2004, we became aware of a notice from the European Competition
Commission ("EC") of a complaint lodged with it by Bruck Technologies Handels
GmbH ("Bruck") that certain provisions of the Symbol PartnerSelect(TM) program
violate Article 81 of the EC Treaty. Bruck has asked the EC to impose
unspecified sanctions. We have provided all information requested by the EC and
will respond to any additional inquiries . No action has been taken and the
matter is pending. We intend to defend against these claims vigorously.
97
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information regarding our executive officers
and directors as of the date of this prospectus. Each of our directors serves
for a term of one year.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
NAME AGE POSITION
- -----------------------------------------------------------------------------------------------
William R. Nuti............... 41 President, Chief Executive Officer and Director
Todd A. Abbott................ 45 Senior Vice President--Worldwide Operations
John G. Bruno................. 40 Senior Vice President--Corporate Development
Mark T. Greenquist............ 46 Senior Vice President--Finance and Chief Financial
Officer
Todd Hewlin................... 38 Senior Vice President--Global Products Group
Salvatore Iannuzzi............ 51 Senior Vice President, Chief Administrative and Control
Officer and Director
Peter M. Lieb................. 49 Senior Vice President, General Counsel and Secretary
Arthur O'Donnell.............. 58 Senior Vice President--Global Services Division and Chief
Quality Officer
James M. Langrock............. 40 Vice President, Controller and Chief Accounting Officer
Robert J. Chrenc.............. 60 Director, Chairman of the Board of Directors
Edward Kozel.................. 49 Director
George Samenuk................ 49 Director
Melvin A. Yellin.............. 62 Director
- -----------------------------------------------------------------------------------------------
</Table>
Mr. Nuti was appointed President, Chief Executive Officer and director in
December 2003. Prior to Mr. Nuti's appointment as Chief Executive Officer, he
served as President and Chief Operating Officer from July 2002 through December
2003. Mr. Nuti joined Symbol from Cisco Systems, Inc., where he was Senior Vice
President of U.S. Theatre and Worldwide Service Provider Operations, responsible
for Cisco's field operations, systems engineering, professional services and
marketing for the global service provider arena. In his 10-year career at Cisco,
Mr. Nuti served as President of EMEA operations, Senior Vice President for
Worldwide Service Provider operations, Vice President for Cisco Asia Pacific
Region and in various sales management positions.
Mr. Abbott has served as our Senior Vice President--Worldwide Operations since
April 2004. Prior to Mr. Abbott's appointment as Senior Vice
President--Worldwide Operations, he served Symbol as our Senior Vice
President--Worldwide Sales from November 2002 and to April 2004. Mr. Abbott
joined Symbol from Cisco Systems, Inc., where he was most recently Group Vice
President of Cisco EMEA Service Provider Sales, a position he held for three
years. Prior to that, Mr. Abbott served as Cisco's Vice President of Asian
operations for 18 months and for 18 months prior to that he served as Cisco's
Operations Director for Southeast Asia.
Mr. Bruno serves as our Senior Vice President--Corporate Development. Mr. Bruno
joined Symbol as its Senior Vice President--Business Development and Chief
Information Officer in November 2002 from Cisco Systems, Inc. At Cisco Systems,
Inc. he served as Vice President of Technology Marketing and Vice President of
Information Technology from June 2000 to November 2002. Prior to that, Mr. Bruno
served as Executive Director of Information
98
Technology for Bristol-Myers Squibb, Inc. from September 1998 to June 2000 and
as Director of Information Technology at United Parcel Service from August 1990
to September 1998.
Mr. Greenquist joined Symbol as its Senior Vice President--Finance and Chief
Financial Officer in February 2003 from Agere Systems, Inc., where he was
Executive Vice President and Chief Financial Officer from January 2001 to
January 2003, responsible for executive management and the oversight of its
financial operations. Before joining Agere Systems, Mr. Greenquist was based in
Zurich, Switzerland, with General Motors Europe as Vice President of Finance and
Chief Financial Officer. In 1986, he joined the New York General Motors finance
organization and held a number of positions in GM's New York Treasurer's Office,
including corporate finance, capital markets, foreign exchange and commodity
hedging and investor relations.
Mr. Hewlin joined Symbol as its Senior Vice President--Global Products Group in
June 2003 from The Chasm Group, LLC where he served as a Managing Director since
May 2001. Prior to joining The Chasm Group, LLC he was a Managing Director at
Internet Capital Group from July 1999 to May 2001 and before that he was a
partner at McKinsey & Co., where he served as co-head of its Global Electronic
Commerce Practice.
Mr. Iannuzzi was elected a director by the board of directors in December 2003
and was appointed Senior Vice President, Chief Administrative and Control
Officer in April 2005. Mr. Iannuzzi was an independent consultant from August
2004 until April 2005. He was employed as the Chief Administrative Officer and
Managing Director of CIBC World Markets, Inc. from April 2000 to July 2004. From
1982 to 2000, he held several senior positions at Bankers Trust Company/Deutsche
Bank, including senior control officer and head of corporate compliance.
Mr. Lieb joined Symbol as its Senior Vice President, General Counsel and
Secretary in October 2003 from International Paper Company, where he served in
various senior legal positions including Deputy General Counsel and Chief
Counsel for litigation from September 1997 to October 2003. Prior to his tenure
at International Paper Company, Mr. Lieb was Assistant General Counsel for GTE
Service Corporation, a litigation partner at Jones, Day, Reavis & Pogue and
served as an Assistant United States Attorney for the Southern District of New
York. Early in his legal career, Mr. Lieb served as a law clerk to U.S. Supreme
Court Chief Justice Warren Burger.
Mr. O'Donnell serves as our Senior Vice President--Global Services Division and
Chief Quality Officer. Mr. O'Donnell joined Symbol in July 2003 from Solectron
Global Services, where he had served for the previous three years as President
and Chief Operating Officer of the Solectron Americas Global Services
organization. Prior to that, Mr. O'Donnell was Vice President of Services at
GTECH Holdings Corporation from 1998 to 2000 and held positions in operations
and functional and managerial roles in services, manufacturing and engineering
at Digital Equipment Corporation and Compaq Computer Corp. over a 25-year
period.
Mr. Langrock joined Symbol as its Vice President, Internal Audit and has led
Symbol's internal audit department since December 2003. Before joining Symbol,
he served as Chief Financial Officer at Empress International, Ltd., an importer
and wholesale distributor, from May 2002 through November 2003. From August 1991
through April 2002, Mr. Langrock held a variety of audit positions at Arthur
Andersen LLP, including Senior Manager in the Audit and Business Advisory
Practice. Prior to Arthur Andersen, Mr. Langrock served in various roles,
including Assistant Divisional Controller, Manager in the Financial Services
Division of Citibank, N.A., in New York, New York from September 1987 to July
1991.
99
Mr. Chrenc was elected a director by the board of directors in December 2003 and
appointed non-executive chairman of the board of directors in April 2005. Mr.
Chrenc was Executive Vice President and Chief Administrative Officer at
ACNielsen, a leading provider of marketing information based on measurement and
analysis of marketplace dynamics and consumer attitudes and behavior, from
February 2001 until his retirement in December 2001. From June 1996 to February
2001, he served as ACNielsen's Executive Vice President and Chief Financial
Officer.
Mr. Kozel was elected a director by the board of directors in April 2004. Mr.
Kozel is currently an independent consultant. He was a managing director of
Integrated Finance Ltd., an advisory firm, from January 2004 until February
2005. He was the managing member of Open Range Ventures, a venture capital firm,
from December 1999 until January 2004. From 1989 to 1997, he worked at Cisco
Systems, Inc. where he held a variety of senior executive roles, including
Senior Vice President--Business Development, Chief Technology Officer, and was a
member of the board of directors from 1996 to 2002. Mr. Kozel also serves on the
boards of directors of Reuters Group PLC (where he is a member of the
remuneration committee), Yahoo!, Inc. (where he serves as Chairman of the audit
committee) and Red Hat, Inc. At no time during their respective periods of
employment with Cisco did either Mr. Kozel or Mr. Nuti report to the other.
Mr. Samenuk was elected a director by the board of directors in March 2004. Mr.
Samenuk has served as Chief Executive Officer and a director of Network
Associates, Inc. since January 2001. In April 2001, Mr. Samenuk was named
Chairman of the board of directors of Network Associates. From January 2000 to
January 2001, Mr. Samenuk served as President and Chief Executive Officer of
TradeOut, Inc., a private online exchange company. From April 1999 to January
2000, Mr. Samenuk served as General Manager, Americas at IBM Corporation. From
August 1996 to April 1999, Mr. Samenuk was General Manager, ASEAN/South Asia at
IBM Corporation. From January 2001 to September 2002, Mr. Samenuk served as a
director of McAfee.com Corporation, including serving as the chairman of its
board from March 2001 until September 2002, when Network Associates purchased
the minority interest in McAfee.com Corporation.
Mr. Yellin was elected a director by the board of directors in December 2003.
Mr. Yellin has been the President of Stone Point Corporation since August 2003.
Stone Point Corporation concentrates primarily on risk management and corporate
solutions for its corporate clients. From 1999 to July 2003, Mr. Yellin was of
counsel to Skadden Arps Slate Meagher & Flom LLP. Prior to that, Mr. Yellin
served as Executive Vice President and General Counsel of Bankers Trust Company.
In 2002, Mr. Yellin served as Chairman and President of the New York
Metropolitan Chapter of the National Association of Corporate Directors and has
been a frequent lecturer for The Conference Board on governance issues.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors currently has an audit committee, a compensation
committee and a nominating and corporate governance committee.
AUDIT COMMITTEE
The audit committee is currently comprised of Messrs. Chrenc, Kozel, Samenuk and
Yellin. The audit committee is responsible for (1) appointing, compensating,
retaining and overseeing the work of the independent auditor, (2) pre-approving
the engagement of the independent
100
auditor, (3) reviewing the independence and quality control procedures of the
independent auditor and the experience and qualifications of the independent
auditor's senior personnel that are providing audit services to Symbol, (4)
meeting with management, the independent auditor and the internal auditor in
connection with each annual audit to discuss the scope of the audit, the
procedures to be followed and the staffing of the audit, (5) determining whether
to recommend to the board of directors that the audited financial statements be
included in Symbol's Annual Report on Form 10-K for the fiscal year subject to
the audit, (6) reviewing and discussing the quarterly financial statements with
management and the independent auditor, (7) reviewing the appointment and
replacement of the internal auditor, (8) meeting periodically with Symbol's
internal auditor to discuss the responsibilities, budget and staffing of
Symbol's internal audit function and any issues that the internal auditor
believes warrant audit committee attention and (9) such other matters that are
specifically delegated to the audit committee in the audit committee charter.
The board of directors has determined that all of the members of the audit
committee are independent within the meaning of SEC regulations, the listing
standards of the New York Stock Exchange and Symbol's Corporate Governance
Guidelines. The board of directors has determined that Mr. Chrenc is qualified
as an independent audit committee financial expert within the meaning of SEC
regulations and that he has accounting and related financial management
expertise within the meaning of the listing standards of the New York Stock
Exchange.
COMPENSATION COMMITTEE
The compensation committee is currently comprised of Messrs. Yellin, Chrenc and
Kozel. The compensation committee is responsible for (1) reviewing Symbol's
compensation philosophy, (2) determining the Chief Executive Officer's
compensation, (3) reviewing and approving compensation for all officers,
directors and other employees of Symbol or its subsidiaries with a base salary
greater than or equal to $250,000 and reviewing and approving all officers'
employment agreements and severance arrangements, (4) reviewing the performance
of principal senior executives, (5) reviewing a report from Symbol's management
regarding the status of Symbol's non-employee director compensation in relation
to other U.S. companies of comparable size and Symbol's competitors, (6)
managing and reviewing all annual bonus, long-term incentive compensation, stock
option, employee pension and welfare benefit plans, (7) establishing and
reviewing policies concerning perquisite and similar benefits and (8) such other
matters that are specifically delegated to the compensation committee in the
compensation committee charter.
The board of directors has determined that all of the members of the
compensation committee are independent within the meaning of the listing
standards of the New York Stock Exchange and Symbol's Corporate Governance
Guidelines.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
The nominating and corporate governance committee is currently comprised of
Messrs. Chrenc and Yellin. The nominating and corporate governance committee is
responsible for developing and implementing policies and practices relating to
corporate governance, including reviewing and monitoring the implementation of
Symbol's Corporate Governance Guidelines. In addition, the nominating and
corporate governance committee develops and reviews background information on
candidates for the board of directors and makes recommendations to the board of
directors regarding such candidates. The nominating and corporate governance
101
committee also supervises the board of directors' annual review of director
independence and the board of directors' performance self-evaluation.
The board of directors has determined that all of the members of the nominating
and corporate governance committee are independent within the meaning of the
listing standards of the New York Stock Exchange and Symbol's Corporate
Governance Guidelines.
BOARD OF DIRECTORS COMPENSATION
BASE COMPENSATION
Members of the board of directors who are not employees of Symbol are paid an
annual retainer of $30,000. They also receive a fee of $2,000 for each board of
directors meeting they attend. All members of the audit committee, compensation
committee and nominating and governance committee other than the chairman
receive additional annual retainers in the amount of $25,000, $15,000 and
$10,000, respectively. In addition, the chairmen of the audit committee,
compensation committee and nominating and governance committee receive
additional annual retainers in the total amount of $40,000, $25,000 and $15,000,
respectively. Committee members do not receive any additional fees for attending
committee meetings.
Directors who are employees do not receive additional compensation for serving
as directors or for attending board of directors or committee meetings. Symbol
reimburses directors for their expenses in connection with attending meetings of
the board of directors or committees of the board of directors.
EQUITY COMPENSATION AWARDS
Directors are eligible to receive equity compensation awards, including option
grants and shares of restricted stock, under our 2004 Equity Incentive Award
Plan, which became effective in April 2004. See "--Equity compensation plans."
In May 2004, we amended our 2004 Equity Incentive Award Plan to provide for
formula-based equity compensation awards to our non-employee directors.
Following the adoption of this amendment by our board of directors, upon initial
election or appointment to our board of directors each new non-employee director
will be granted an option to purchase 25,000 shares of our stock and will be
awarded 7,500 shares of restricted stock. In addition, each year continuing
non-employee directors will be granted an additional option to purchase 15,000
shares of our stock and will be awarded an additional 7,500 shares of restricted
stock. Options granted to non-employee directors will have an exercise price
equal to the fair market value of our stock on the date of grant and will have a
maximum term of ten years. Options and restricted stock awards generally will be
made to non-employee directors as of the date of each annual meeting of our
stockholders following May 2004 and, subject to the director's service as a
director, will vest as of January 1 of the calendar year immediately following
the date of grant. In May 2005, the compensation committee further amended the
2004 Equity Incentive Award Plan to provide that the non-executive chairman of
the board shall receive an additional annual award of shares of restricted stock
in an amount to be determined by the compensation committee in its sole
discretion, in addition to the regular annual non-employee director grant of
7,500 shares of restricted stock, subject to the director's continuing service
as non-executive chairman of the board. In May 2005, all of our then current
non-employee directors received these formula-based options and restricted stock
awards including Mr. Chrenc, who received an additional award of 10,000 shares
of restricted stock in recognition of his service as non-executive chairman of
the board. Additionally, in May 2004, Mr. Iannuzzi was awarded 10,000 shares of
restricted stock, and Messrs. Yellin and Chrenc
102
were each awarded 5,000 shares of restricted stock, under our 2004 Equity
Incentive Award Plan. The restrictions with respect to such shares of restricted
stock lapsed on January 1, 2005. These restricted stock awards were granted in
recognition of significant contributions made by Messrs. Iannuzzi, Yellin and
Chrenc during the period beginning in late 2003 and ending in May 2004 (and, in
the case of Mr. Iannuzzi, to reflect his serving as non-executive chairman of
the board). Prior to the adoption of the 2004 Equity Incentive Award Plan, our
directors who were not also our employees were eligible to receive stock option
grants pursuant to two non-employee director option plans. No additional options
may be granted under either of these two non-employee director option plans.
The compensation of directors may be modified from time to time by the board of
directors if it determines such modification is necessary or appropriate in
light of Symbol's needs, best market practices or applicable legal and
regulatory changes.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee of our board of directors is composed entirely of
independent directors. Mr. Yellin became a member of this committee in December
2003, Mr. Kozel joined the compensation committee in March 2004 and Mr. Chrenc
joined the compensation committee in April 2005. During the last ten years, none
of them has been an officer or employee of Symbol.
None of Symbol's executive officers currently serves, or in the past, has
served, on the board of directors or compensation committee (or committee
performing equivalent functions) of any other company that has or had one or
more executive officers serving on Symbol's board of directors or compensation
committee.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth information concerning total
compensation earned or paid to (i) each individual who served as our Chief
Executive Officer during 2004 and (ii) the four other most highly compensated
executive officers of Symbol who served in such capacities as of December 31,
2004, in each case for services rendered to Symbol during each of the past three
fiscal years.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------
------------------------------------------ RESTRICTED SECURITIES ALL OTHER
SALARY OTHER ANNUAL STOCK AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($)(A) COMPENSATION ($)(A) OPTIONS (#) ($)(B)
- ---------------------------------------------------------------------------------------------------------------------------------
William R. Nuti................. 2005 1,000,002 - - - - -
President and Chief 2004 1,000,002 1,131,252 75,003(c) 2,712,450 200,000 6,150
Executive Officer 2003 600,018 450,013 - 250,000 6,000
2002 242,315 - 2,992,000(d) 800,000 -
Todd A. Abbott.................. 2005 450,000 - - - - -
Senior Vice President-- 2004 394,624 421,754 28,475(e) 1,669,200 80,000 3,942
Worldwide Sales 2003 362,237 271,678 321,728(f) - 50,000 -
2002 48,462 48,462 - 300,000 -
Mark T. Greenquist.............. 2005 465,005 - - - - -
Senior Vice President-- 2004 465,005 225,237 21,328(g) 1,001,520 75,000 6,000
Chief Financial Officer 2003 363,849 136,443 7,415(h) - 400,000 6,000
</Table>
103
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------
------------------------------------------ RESTRICTED SECURITIES ALL OTHER
SALARY OTHER ANNUAL STOCK AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($)(A) COMPENSATION ($)(A) OPTIONS (#) ($)(B)
- ---------------------------------------------------------------------------------------------------------------------------------
John G. Bruno................... 2005 385,008 - - - - -
Senior Vice President-- 2004 382,128 180,317 94,618(i) 1,460,550 85,000 4,100
Corporate Development* 2003 350,022 296,492(j) 123,688(k) - 75,000 4,486
2002 40,387 - - - 200,000 -
Todd G. Hewlin.................. 2005 385,029 - - - - -
Senior Vice President-- 2004 385,029 212,969 31,010(j) 1,460,550 80,000 6,150
Global Products Group 2003 363,849 156,484(m) 371,125(n) - 400,000 6,000
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
* As of June 1, 2005, Mr Bruno was appointed Senior Vice President and General
Manager or Symbol's RFID Division.
(a) As of May 13, 2004, Messrs. Nuti, Abbott, Greenquist, Bruno and Hewlin
received awards of 195,000, 120,000, 72,000, 105,000, and 105,000 shares of
restricted stock, respectively. Except as specifically set forth in footnote (e)
below, the figures set forth in the table represent the dollar value of these
restricted stock awards based on the closing market price of Symbol's common
stock on the date of such grant. Such shares of restricted stock are subject to
forfeiture if the executive ceases to be an employee of Symbol prior to the date
the restricted stock award vests and are subject to transfer restrictions prior
to vesting. The restricted stock awards are eligible to become vested only upon
Symbol's attainment of specified "return on net asset" targets over a period of
four consecutive fiscal quarters (provided that even if the specified return on
net asset targets are attained, a portion of the restricted stock awards may not
become vested until the first, second, third or fourth anniversary of the award
date, respectively). As of December 31, 2004, no portion of the restricted stock
awards had become vested. Restricted stockholders are eligible to receive any
dividends payable with respect to their shares of restricted stock, but any
stock dividends will be deemed to be shares of restricted stock subject to the
vesting provisions described above.
(b) Represents matching contributions made to Symbol's 401(k) plan.
(c) Other annual compensation with respect to Mr. Nuti in 2004 includes (i)
$43,610 for legal fees paid on his behalf in connection with the negotiation of
his employment agreement and related matters; (ii) $4,637 for the personal use
of an aircraft in which Symbol has purchased a fractional ownership interest
(valued in accordance with Internal Revenue Code Section 61 and Treasury
Regulation Section 1.61-21); (iii) $13,125 for an automobile allowance; and (iv)
$13,631 for travel and related expenses of Mr. Nuti's spouse in connection with
Symbol's annual sales incentive and executive leadership meeting.
(d) In connection with his hiring in July 2002, Mr. Nuti received a grant of
400,000 fully-vested shares of common stock which had a closing market value on
the date of grant equal to $2,992,000. Dividends were paid with respect to such
shares to the extent dividends were otherwise paid with respect to shares of
common stock. As of the date of grant, these shares of common stock were deemed
to be "restricted securities" as the term is defined in Rule 144 promulgated
pursuant to the Securities Act of 1933, as amended, and accordingly, Mr. Nuti's
ability to resell these shares was restricted by applicable federal securities
laws. In connection with his employment agreement with Symbol, Mr. Nuti agreed
not to resell or otherwise transfer these shares prior to August 1, 2004. On
December 30, 2004, in accordance with a Rule 10b5-1 trading plan adopted by Mr.
Nuti on August 31, 2004, Mr. Nuti sold all of these restricted shares at a
selling price of $16.45 per share. As of December 30, 2004, the aggregate value
of these shares was $6,580,000.
(e) Other annual compensation with respect to Mr. Abbott in 2004 includes (i)
$16,522 for an automobile allowance; and (ii) $11,953 for travel and related
expenses of Mr. Abbott's spouse in connection with Symbol's annual sales
incentive and executive leadership meeting.
(f) Represents relocation expenses paid by Symbol in connection with Mr.
Abbott's relocation to the Long Island, New York region.
(g) Other annual compensation with respect to Mr. Greenquist in 2004 includes
(i) $14,278 for an automobile allowance; and (ii) $7,050 for travel and related
expenses of Mr. Greenquist's spouse in connection with Symbol's annual sales
incentive and executive leadership meeting.
(h) Represents relocation expenses paid by Symbol in connection with Mr.
Greenquist's relocation to the Long Island, New York region.
(i) Other annual compensation with respect to Mr. Bruno in 2004 includes (i)
$60,579 in relocation expenses paid by Symbol; (ii) $16,673 for an automobile
allowance; and (ii) $17,366 for travel and related expenses of Mr. Bruno's
spouse in connection with Symbol's annual sales incentive and executive
leadership meeting.
(j) Includes $105,234 received as a signing bonus.
(k) Includes $123,688 in relocation expenses paid by Symbol.
(l) Other annual compensation with respect to Mr. Hewlin in 2004 includes (i)
$13,555 for an automobile allowance; and (ii) $17,455 for travel and related
expenses of Mr. Hewlin's spouse in connection with Symbol's annual sales
incentive and executive leadership meeting.
(m) Includes $78,058 received as a signing bonus.
(n) Represents relocation expenses paid by Symbol in connection with Mr.
Hewlin's relocation to the Long Island, New York region.
104
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows all grants of stock options made to the individuals
named above in the Summary Compensation Table during the fiscal year ended
December 31, 2004. No stock appreciation rights were granted to such individuals
in 2004.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($)(A)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(B) FISCAL YEAR ($/SHARE) DATE 5% 10%
- ----------------------------------------------------------------------------------------------------
William R. Nuti...... 200,000 2.31 16.89 02/8/14 2,124,406 5,383,662
Todd A. Abbott....... 80,000 0.92 16.89 02/8/14 849,762 2,153,465
Mark T. Greenquist... 50,000 0.58 16.89 02/8/14 531,102 1,345,916
25,000 0.29 18.40 01/6/14 289,292 733,122
John G. Bruno........ 75,000 0.87 16.89 02/8/14 796,652 2,018,873
10,000 0.12 18.40 01/6/14 115,717 293,249
Todd G. Hewlin....... 80,000 0.92 16.89 02/8/14 849,762 2,153,465
- ----------------------------------------------------------------------------------------------------
</Table>
(a) Potential realizable value is net of exercise price, but before deduction of
taxes associated with exercise. A 0% gain in stock price will result in zero
dollars for the optionee. The dollar amounts indicated in these columns are the
result of calculations assuming growth rates required by the SEC. These growth
rates are not intended to forecast future appreciation, if any, in the price of
our common stock.
(b) Subject to the optionee's continued employment with us, each option will
become vested and exerciseable with respect to (i) 10% shares covered thereby on
the first anniversary of the date of grant and (ii) an additional 15% of the
shares covered thereby on each six month anniversary thereafter (until the
option becomes fully vested and exercisable with respect to all shares covered
thereby on the fourth anniversary of the date of grant).
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table shows information about unexercised options to purchase the
common stock as of December 31, 2004 and the value realized upon the exercise of
options in 2004 by the individuals named in the Summary Compensation Table. No
stock appreciation rights were exercised by such individuals in 2004 or held by
such individuals as of December 31, 2004.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS HELD AT IN-THE-MONEY OPTIONS HELD
ACQUIRED ON DECEMBER 31, 2004 AT DECEMBER 31, 2004($)(A)
EXERCISE IN VALUE --------------------------- ---------------------------
2004 REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------
William R. Nuti...... - - 382,500 867,500 2,749,000 4,513,000
Todd A. Abbott....... - - 132,500 297,500 962,600 1,538,200
Mark T. Greenquist... - - 100,000 375,000 705,000 2,135,500
John G. Bruno........ - - 102,500 257,500 793,000 1,281,750
Todd G. Hewlin....... - - 100,000 380,000 328,000 1,016,800
- ---------------------------------------------------------------------------------------------------------
</Table>
(a) Options were "in-the-money" as of December 31, 2004 if the market value of
the common stock on that date exceeded the exercise price of the options. The
amounts set forth represent the difference between the closing price of the
common stock on the New York Stock Exchange on December 31, 2004 ($17.30) and
the exercise price payable for those shares.
105
EMPLOYMENT AGREEMENT
In March 2004, we entered into a new employment agreement with Mr. Nuti, the
initial term of which expires in July 2009 (subject to year-to-year extensions
if neither party gives notice of its intention not to extend the term). Pursuant
to the new agreement, Mr. Nuti will receive an annual base salary of $1,000,000.
Mr. Nuti's salary will be reviewed annually but may not be decreased. Mr. Nuti
also participates in Symbol's Executive Bonus Plan. The target amount of his
annual bonus is 100% of his base salary, and the maximum annual bonus that he
may receive is 200% of his base salary. If Mr. Nuti's employment is terminated
during the term of his employment agreement for any reason (other than due to
his death or disability, his termination by Symbol for Cause (as defined in the
employment agreement) or his voluntary resignation without Good Reason (as
defined in the employment agreement)), Mr. Nuti will receive severance payments
equal to 1.5 times the sum of (a) his then-current annual base salary and (b)
the greater of the bonus paid him in the fiscal year ending immediately prior to
the date of termination or 50% of his target bonus for such year. If Symbol does
not extend the term of Mr. Nuti's employment agreement, then Mr. Nuti will
receive severance payments equal to the sum of (x) his then-current annual base
salary and (y) the greater of the bonus paid him in the fiscal year ending
immediately prior to the date of termination or 50% of his target bonus for such
year. If there is a Change in Control of Symbol (as defined in the employment
agreement) and Mr. Nuti's employment is terminated without Cause or for Good
Reason during the period beginning six months prior to the Change in Control and
ending 18 months after the Change in Control, then Mr. Nuti will receive
payments equal to three times the sum of (i) his then-current annual base salary
and (ii) the target bonus payable to him for the fiscal year ending immediately
prior to the date of termination. If any payments made to Mr. Nuti in connection
with a Change in Control are subject to an excise tax payable under Section 4999
of the Internal Revenue Code of 1986, as amended, then Symbol will pay Mr. Nuti
an additional "gross-up" payment sufficient to place Mr. Nuti in the same
after-tax position as he would have been in had the excise tax not applied. The
employment agreement also contains restrictive covenants preventing Mr. Nuti
from competing with or soliciting Symbol's employees, customers or suppliers for
defined periods following the termination of his employment with Symbol,
requires him to maintain in perpetuity the confidential information of Symbol,
and prohibits him from intentionally disparaging Symbol and its products, among
other things. The non-solicitation covenant expires 24 months following Mr.
Nuti's termination of employment. The non-compete covenant expires 18 months
following Mr. Nuti's termination of employment (other than a termination due to
Symbol's non-extension of the employment agreement, in which case the
non-compete covenant expires 12 months following such termination). If Mr. Nuti
violates any of these covenants, he will forfeit any severance payments not paid
to him prior to such violation. The employment agreement that we entered into
with Mr. Nuti in March 2004 supersedes an employment agreement that we
previously entered into with Mr. Nuti in July 2002, except that the provisions
related to the grant of restricted stock to Mr. Nuti in connection with his
original employment by Symbol are incorporated into, and are not superseded by,
the March 2004 agreement.
AGREEMENTS WITH FORMER EXECUTIVES
Richard Bravman. In a letter dated February 19, 2004 and countersigned by Mr.
Bravman on March 1, 2004, we entered into an agreement with Mr. Bravman that
provided for his continued employment by Symbol as a senior advisor to Mr. Nuti
and the board of directors until July 15, 2004. This letter agreement augmented
a prior employment agreement between
106
us and Mr. Bravman pursuant to which Mr. Bravman had received an annual base
salary of $750,000. Mr. Bravman was paid a base salary at an annual rate of
$750,000 for his employment with Symbol through July 15, 2004 and was eligible
to participate in all applicable employee benefits plans of Symbol through such
date (except that Mr. Bravman was not eligible to receive any bonus for his
services in 2004). Additionally, so long as Mr. Bravman entered into a waiver
and release agreement with us, Mr. Bravman was entitled to receive all severance
payments as set forth in his original employment agreement with Symbol (subject
to adjustment for repayment of Mr. Bravman's loans from Symbol). In July 2004,
Mr. Bravman executed a release agreement and received a severance payment in the
amount of $1,312,511, the full after-tax amount of which was applied to the
repayment of Mr. Bravman's loans from Symbol. As of the date of this prospectus,
Mr. Bravman is entitled to receive one additional severance payment from Symbol
in the amount of $1.5 million on July 15, 2005. Mr. Bravman is also entitled to
continue to receive certain fringe benefits from Symbol (including life, health,
disability insurance and the use of an automobile) until July 15, 2005.
Jerome Swartz. On July 7, 2003, we entered into a separation, release and
employment agreement with Dr. Swartz. Pursuant to this separation agreement, Dr.
Swartz was employed as chief scientist emeritus until July 1, 2004, at a base
salary of $1.00 for the term of his employment by Symbol. Dr. Swartz was not
eligible to participate in Symbol's Executive Bonus Plan. This separation
agreement superseded an employment agreement in effect between us and Dr. Swartz
through July 7, 2003, pursuant to which Dr. Swartz received an annual base
salary of $1 million.
On June 1, 2004, we entered into an agreement with Dr. Swartz for the mutual
release of all claims, except claims arising from a breach of the securities
fraud class action settlement agreement and for indemnification under our
charter, by-laws and Delaware law. Pursuant to the settlement agreement, Dr.
Swartz agreed to pay $14.1 million comprised of the following: (i) $4 million in
cash to the class in settlement of the claims made against Dr. Swartz in the
securities fraud class action lawsuits, (ii) $7.2 million in cash to Symbol and
(iii) $2.9 million in cash and in the form of surrendered Symbol stock options
to Symbol. In addition, Dr. Swartz has agreed not to make any claim against our
insurance policies relating to any alleged financial fraud or accounting
matters, and we will not incur any indemnification costs relating to any civil,
administrative or criminal proceedings or investigations by any government
agency unless such government agency is acting in the capacity of a shareholder.
Any indemnity by Symbol to Dr. Swartz for attorneys' fees and expenses incurred
through June 1, 2004 relating to any alleged financial fraud or accounting
matters is limited to $500,000 and all post-June 1, 2004 indemnity rights of Dr.
Swartz relating to any alleged financial fraud or accounting matters is limited
to $2.5 million.
Leonard Goldner. On December 15, 2000, we entered into an employment agreement
with Mr. Goldner that was scheduled to terminate on December 31, 2005. Mr.
Goldner initially received an annual base salary of $415,800 which increased to
$457,380 through 2001. His annual base salary was increased to $465,775 prior to
his resignation as of June 30, 2003.
On July 8, 2003, we entered into an interim resignation agreement with Mr.
Goldner for his resignation effective June 30, 2003 that provides that, until a
definitive agreement is negotiated between the parties with respect to the terms
and conditions of his resignation, Mr. Goldner may serve as a legal consultant
to Symbol, at a rate of $475 per hour, primarily in connection with our current
and ongoing intellectual property litigation matters. Symbol may terminate this
consulting arrangement at any time in its sole and absolute discretion. In this
107
interim resignation agreement, neither Symbol nor Mr. Goldner waived any rights,
remedies or claims against the other. On June 9, 2004, we entered into a tolling
agreement with Mr. Goldner providing that for the nine-month period beginning
February 1, 2004 and ending November 1, 2004, neither party shall commence any
action or assert any cross-claim or counterclaim against the other. On October
13, 2004, the parties entered into an agreement to extend the tolling period
under the tolling agreement until November 1, 2005. On April 25, 2005, we
entered into a settlement agreement with Mr. Goldner for the mutual release of
all claims, including any claims by Mr. Goldner for indemnification,
advancement, severance, retirement payments or any other payment, including any
claim for payment under Symbol's Executive Retirement Program. Pursuant to the
settlement agreement, Symbol agreed to pay $243,635 for Mr. Goldner's attorneys'
fees. Symbol will not incur any indemnification costs relating to any civil,
administrative or criminal proceedings or investigations by any government
agency unless such government agency is acting in the capacity of a shareholder.
The settlement agreement does not preclude Symbol from seeking to obtain all or
a portion of the funds forfeited by Mr. Goldner to the Department of Justice in
connection its investigation and prosecution.
Tomo Razmilovic. On July 1, 2000, we entered into an employment agreement with
Mr. Razmilovic, one of our former Presidents, Chief Executive Officers and
directors, that was scheduled to terminate on June 30, 2005. Under that
agreement, Mr. Razmilovic received a base salary at an annual rate of $1 million
until his resignation from Symbol, effective as of February 14, 2002.
In February 2002, we entered into new agreements with Mr. Razmilovic that
superseded and replaced the earlier agreement. The new agreements provided for:
-- the payment to Mr. Razmilovic of $5 million in March 2002;
-- the payment to Mr. Razmilovic of $2 million in May 2003; and
-- the termination and cancellation of 1,818,750 outstanding stock options
previously granted to Mr. Razmilovic.
The agreements provided for Mr. Razmilovic to remain as a full-time employee
through May 6, 2002 at an annual salary of $1 million and then to be employed on
a part-time and consulting basis for a period of five years beginning May 7,
2002. Pursuant to these agreements, Mr. Razmilovic was entitled to receive
$200,000 per annum during this five year period and was to continue to
participate in fringe benefit programs in effect as of February 14, 2002.
On May 6, 2003, we entered into a tolling agreement with Mr. Razmilovic that
suspended the obligations of both parties under the 2002 agreements for a period
of 12 months beginning April 1, 2003 and ending March 31, 2004. Pursuant to the
tolling agreement, the payment to Mr. Razmilovic of $2 million in May 2003 was
not made by Symbol. On March 18, 2004, the parties entered into an agreement to
extend the tolling period under the tolling agreement until December 31, 2004.
In October 2004, Symbol determined that Mr. Razmilovic's failure to disclose to
Symbol, at the time of the negotiation of the 2002 agreements, the material
facts concerning his involvement in fraudulent conduct during his tenure at
Symbol constituted fraud in the inducement and renders the 2002 agreements
voidable. As such, Symbol maintains that it has no further liability to Mr.
Razmilovic with respect to the 2002 agreements.
108
EQUITY COMPENSATION PLANS
We currently maintain the 2004 Equity Incentive Award Plan (the "2004 Plan"),
the 2001 Non-Executive Stock Option Plan (the "2001 Plan"), the 1997 Employee
Stock Option Plan (the "1997 Plan"), the 1991 Employee Stock Plan, the 1990
Non-Executive Stock Option Plan and two additional option plans for the benefit
of our non-employee directors. As of June 30, 2004, the total number of options
outstanding under all of Symbol's option plans (including all director option
plans) was 27,789,935. The weighted average exercise price of such options was
$14.15 per share and the weighted average term to expiration was 6.9 years.
In April 2004, Symbol adopted the 2004 Plan in connection with which all
existing Symbol stock option plans were amended to provide that no further
options will be granted under Symbol's other option plans. In May 2004, the
compensation committee granted "performance vesting" restricted stock awards to
certain senior executives of Symbol pursuant to the 2004 Plan. The vesting of
such restricted stock awards may be accelerated if Symbol attains specified
"return on net asset" targets. Such restricted stock awards are intended to
align the interests of such senior executives with the interests of Symbol's
stockholders and to support the retention of such senior executives. Also in May
2004, we amended the 2004 Plan to provide for formula-based equity compensation
awards to our non-employee directors and we awarded shares of restricted stock
to certain non-employee directors in recognition of their significant
contributions to Symbol. See"--Board of directors compensation--Equity
compensation awards."
Options outstanding under the 2004 Plan, 2001 Plan and the 1997 Plan generally
have a maximum term of 10 years and an exercise price equal to 100% of the fair
market value of our common stock on the date of grant. All options outstanding
under the 2001 Plan and the options granted to non-executive officers and
outstanding under the 1997 Plan generally become vested with respect to 20% of
the shares covered thereby on the first anniversary of the date of grant and
with respect to 10% of the shares covered thereby every six months thereafter.
Options granted to executive officers and outstanding under the 1997 Plan
generally become vested with respect to 10% of the shares covered thereby on the
first anniversary of the date of grant and with respect to 15% of the shares
covered thereby every six months thereafter.
STOCK OWNERSHIP GUIDELINES
In 2002, we adopted the 2002 Executive Stock Ownership and Retention Program,
which replaced a similar program that had been in existence since 1995. Under
the program, without the compensation committee's prior permission, if an
executive has not attained the minimum requirements described below, his ability
to exercise options or sell shares is limited. Executive officers must agree to
participate in the program to be eligible to receive options or stock awards
after May 6, 2002. All of our current executive officers have agreed to
participate in the program. In connection with its ongoing review of Symbol's
compensation policies, the compensation committee is currently evaluating the
program and intends to present recommendations regarding the adoption of a new
program to the full board of directors upon completion of its review.
The program limits the exercise of vested options unless the executive either
(i) retains all shares acquired upon exercise (net of shares used to pay for the
exercise price and taxes resulting from such exercise) or (ii) meets and will
continue to meet the equity interest requirement described below after the
exercise and sale of shares acquired upon exercise. The equity interest
requirement provides that the combined value of the common stock and vested
109
options held by the executive, each valued at the then-current market price of
our common stock, must be equal to or greater than a designated multiple of the
executive's annual base salary plus target bonus.
If the equity interest requirement is satisfied, the program allows for the
exercise of vested options if (i) at least 50% of the net after tax proceeds
from the exercise of such options (other than options awarded in connection with
an executive's initial hire or initial promotion to an executive officer
position, or options already held by a person prior to such promotion) is
retained in the form of shares of our common stock or (ii) the executive owns
shares of our common stock having a market value equal to a specified multiple
of his or her base salary.
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------
SHARE
EQUITY INTEREST OWNERSHIP
POSITION REQUIREMENT REQUIREMENT
- --------------------------------------------------------------------------------------------------
Chairman of the Board of
Directors...................... 7 times base salary plus target bonus 5 times base salary
Chief Executive Officer/
Chief Operating Officer........ 5 times base salary plus target bonus 3 times base salary
Executive/Senior Vice President... 2 times base salary plus target bonus 2 times base salary
Vice President.................... 2 times base salary plus target bonus 1 times base salary
- --------------------------------------------------------------------------------------------------
</Table>
EMPLOYEE STOCK PURCHASE PLAN
We maintain the Symbol Technologies, Inc. Employee Stock Purchase Plan (the
"ESPP") for the benefit of our eligible employees. We originally adopted the
ESPP in 1997. The total number of shares of common stock reserved and available
for distribution under the ESPP is 250,000. As of June 30, 2003, due to our
delinquency in filing our Annual Report on Form 10-K for the year ended December
31, 2002 and our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 with the SEC, as required by the Exchange Act, we were deemed not to have
an effective registration statement covering the purchases of shares by
participating employees pursuant to the ESPP. As a result, we were not able to
issue shares to participants with respect to the January 1, 2003 through June
30, 2003 payment period, nor were we permitted to conduct an open enrollment for
new participants in the ESPP. As of December 31, 2003, we still were deemed not
to have an effective registration statement covering the purchase of shares by
participating employees pursuant to the ESPP, and as a result, effective January
1, 2004, we suspended the withholding of participant payroll deductions. On
February 25, 2004, we filed the delinquent Quarterly Reports on Form 10-Q with
the SEC, thereby curing the deficiency and causing the plan to once again
satisfy the requirements of Section 423 of the Internal Revenue Code.
Thereafter, the participants' accumulated amounts for the extended payment
period were used to purchase shares of stock at 85% of the closing price on
January 1, 2003, which represented the lesser of the closing prices at the
beginning and end of the extended payment period. As of July 1, 2004, eligible
employees were again allowed to participate in the ESPP with respect to the
payment period beginning July 1, 2004 and payroll deductions were resumed.
Subject to the limits of the ESPP, eligible employees may purchase shares of our
common stock as of the last day of each payment period. The ESPP provides for
two payment periods each calendar year. The first payment period begins on
January 1 and ends on June 30, and the second payment period begins on July 1
and ends on December 31. With respect to each payment period, the purchase price
of shares of common stock under the ESPP will be the
110
lesser of: (1) 85% of the fair market value of the shares on the first business
day of the payment period; or (2) 85% of the fair market value of the shares on
the last business day of the payment period. Employees pay for shares of stock
purchased under the ESPP via payroll deductions in an amount designated by the
employee, but not less than 2% or more than 10% of the employee's base salary.
The amounts so deducted are paid to us and the number of shares of common stock
purchased by each participating employee are credited to an account established
for the employee.
The maximum number of shares that may be purchased by an employee in any payment
period is 2,500. Also, no employee may receive an option under the ESPP that
permits the employee's right to purchase stock under the ESPP to accrue at a
rate that exceeds $25,000 of stock (determined as of the first day of a payment
period) in any calendar year.
An employee's continuing participation in the ESPP will terminate upon, and no
additional purchases of common stock under the ESPP will be made on behalf of
such employee following, the employee's termination of employment. All amounts
previously deducted via payroll deduction and held in the employee's account at
the time of termination of employment (less amounts previously used to purchase
shares of common stock on behalf of the employee) will be refunded to the
employee without interest.
The ESPP is generally administered by our board of directors or a committee
designated by our board to administer the ESPP. Our board of directors may
amend, suspend or terminate the ESPP at any time. However, the ESPP may not be
amended to increase the maximum number of shares of common stock subject to the
ESPP or to change the designation or class of employees eligible to participate
under the ESPP without approval of our stockholders.
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
which is revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Based on the release of Statement 123(R), Symbol is currently considering
amending the ESPP to conform with the requirements necessary to render the ESPP
non-compensatory. These amendments may result in reducing the discount of the
price of the shares purchased by employees in the ESPP from its current discount
of 15% to a discount of 5% and eliminating the look-back period currently
utilized to determine the price of the shares purchased. These changes will
allow the ESPP to continue to be non-compensatory to Symbol.
401(K) PLAN
Our U.S. employees are eligible to participate in a 401(k) defined contribution
plan after 90 days of service. With some limitations, a participant may make
pre-tax contributions to the plan. Except for participants over the age of 50,
the maximum contribution a participant was allowed to make in 2004 was $13,000
and in 2005 is $14,000. Participants over the age of 50 were entitled to
contribute a maximum of $16,000 in 2004 and will be entitled to contribute up to
$18,000 in 2005. The plan matches 50% of up to 6% of eligible compensation
contributed by each participant during each pay period. The employee's
contribution is vested immediately. Our contribution is 100% vested after one
year of service. Amounts accumulated under the plan are normally paid to a
participant on retirement or termination of employment. Payments depend on the
following: the amounts contributed by the participant; the manner in which
contributions have been invested; the amount of any prior withdrawal; and other
factors as detailed in the plan.
111
EXECUTIVE RETIREMENT PLAN
Our Executive Retirement Plan is a non-qualified deferred compensation plan for
a select group of senior management employees. Effective as of January 1, 2005,
this plan was amended to provide that certain of our current employees
(including our named executive officers) ceased to be eligible to participate
and receive benefits under this plan. This amendment does not, however, effect
the rights of former employees or others who have accrued and vested benefits
under this plan. In May 2005, we adopted a non-qualified account balance
deferred compensation plan in which our named executive officers are eligible to
participate (and which is described in further detail, below). The following
table illustrates the estimated annual retirement benefits payable under the
Executive Retirement Plan to a participant at specified average compensation
levels and years of service.
PENSION PLAN TABLE
<Table>
<Caption>
- -------------------------------------------------------------------------------------------
YEARS OF SERVICE
3-YEAR AVERAGE ANNUAL ----------------------------------
COMPENSATION 5 10 15
- -------------------------------------------------------------------------------------------
$ 400,000 $100,000 $ 200,000 $ 200,000
800,000 200,000 400,000 400,000
1,200,000 300,000 600,000 600,000
1,600,000 400,000 800,000 800,000
2,000,000 500,000 1,000,000 1,000,000
2,400,000 600,000 1,200,000 1,200,000
- -------------------------------------------------------------------------------------------
</Table>
As described above, none of our named executive officers participates in our
Executive Retirement Plan. Benefits under the Executive Retirement Plan are not
offset for Social Security benefits. Benefits payable under the Executive
Retirement Plan will be reduced by the value of any retirement income of the
participant attributable to contributions by us to any qualified pension plan
adopted by us (excluding our 401(k) plan).
Under the Executive Retirement Plan, the maximum benefit a participant may be
paid is the cumulative participant's average compensation (base salary plus
accrued bonus) for the three highest fiscal years in the five-year period
immediately prior to the date the participant is no longer a plan participant
multiplied by five ("Benefit Ceiling Amount"). After five successive years of
participation in the Executive Retirement Plan, a participant is entitled to 50%
of the Benefit Ceiling Amount. After each additional full year of participation
in the Executive Retirement Plan up to five additional years of participation, a
participant is entitled to an additional 10% of the Benefit Ceiling Amount.
Benefits are normally payable in equal monthly installments over a 10-year
period after retirement, beginning after the participant attains age 65 or age
60 with at least 15 years of credited service. Participants with more than 10
years of credited service will receive 12 equal monthly installments for each
full year of creditable service above 10 years, with a maximum of five
additional years of service. Upon death or disability, payment is accelerated
and made in a lump sum but the amount is reduced to the then present value of
the benefit payments which would have been made under the normal mode of
payment.
DEFERRED COMPENSATION PLAN
In May 2005, we adopted a non-qualified deferred compensation plan, in which
certain highly compensated employees are eligible to participate. Selected
employees, including but not limited to those former participants in the
Executive Retirement Plan, will be eligible to receive
112
annual credits to their deferred compensation plan accounts. The amount of the
credits will be based on the Company's performance for the preceding fiscal year
and may range from a minimum of 6 percent to a maximum of 12 percent of the
participant's aggregate cash compensation for the immediately preceding fiscal
year. Such credits will be deemed to be invested 50 percent in cash and 50
percent in common stock and will vest in accordance with the vesting schedule
applicable to the deferred compensation plan.
EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2004)
- --------------------------------------------------------------------------------
<Table>
<Caption>
(C)
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
(A) (B) FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
-------------------------- -------------------- -----------------------
PLAN CATEGORY 12/31/04 12/31/04 12/31/04
- -----------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security
holders(a)......... 11,525,235 $12.21 17,914,878(c)
Equity compensation
Plans not approved
by security
holders(b)......... 15,605,722 $15.44 0
Total(*)........... 27,789,935(d) $14.15 17,914,878
- -----------------------------------------------------------------------------------------------------
</Table>
* These amounts include stock options that Symbol assumed under the 1990
Employee and 1990 Non-Employee Stock Option plans of Telxon Corporation,
pursuant to which such stock options are exercisable for 658,978 shares of
common stock effective December 31, 2004. These options have a weighted average
exercise price of $17.46 per share December 31, 2004. No awards have been made
under these plans since their assumption by Symbol.
(a) Approved Plans: 1991 Employee Stock Plan, 1994 Directors' Stock Option Plan,
1997 Employee Stock Option Plan, 1997 Employee Stock Purchase Plan, 2000
Directors' Stock Option Plan, the 2002 Directors' Stock Option Plan and the 2004
Equity Incentive Award Plan.
(b) Non-Approved Plans: 1990 Non-Executive Stock Option Plan and 2001
Non-Executive Stock Option Plan.
(c) Of these shares, 1,804,575 shares remain available for purchase under the
1997 Employee Stock Purchase Plan.
(d) The weighted average term for these options is 6.9 years.
Under the 1990 Non-Executive Stock Option Plan, the compensation committee of
the board of directors was permitted to grant options to key employees of Symbol
and its subsidiaries other than executive officers, with similar terms and
vesting periods as those contained in the 2001 Plan. The 1990 Non-Executive
Stock Option Plan terminated on April 30, 2003.
113
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
The following chart shows a comparison of the yearly performance change in an
investment of $100 in the common stock compared to an investment of $100 in the
Standard & Poor's Composite 500 Stock Index and the Standard & Poor's Technology
Sector Index for a five year period beginning January 1, 1999 and ending
December 31, 2004. The chart assumes that all dividends will be reinvested.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG SYMBOL, THE S&P 500 INDEX
AND THE S&P INFORMATION TECHNOLOGY INDEX
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
12/99 12/00 12/01 12/02 12/03 12/04
- --------------------------------------------------------------------------------------------
Symbol...................................... 100.00 84.99 56.30 29.20 60.10 61.65
S&P 500..................................... 100.00 90.89 80.09 62.39 80.29 89.02
S&P Information Technology.................. 100.00 59.10 43.81 27.42 40.37 41.40
- --------------------------------------------------------------------------------------------
</Table>
* $100 invested on December 31, 1999 in stock or index, including reinvestment
of all dividends. Fiscal year ending December 31.
114
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the common stock as
of June 8, 2005 by (i) those persons known by us to own beneficially more than
5% of the outstanding common stock; (ii) each current executive officer named in
the Summary compensation table; (iii) each director; and (iv) all current
directors and executive officers, as a group.
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------
NAME OF INDIVIDUAL OR AMOUNT AND NATURE OF % OF COMMON
IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) STOCK(2)
- --------------------------------------------------------------------------------------------------
FMR Corp. .......................................... 32,220,852(3) 13.390%
82 Devonshire Street
Boston, Massachusetts 02109
William R. Nuti..................................... 875,000(4) *
Todd A. Abbott...................................... 313,000(5) *
Todd G. Hewlin...................................... 273,000(6) *
John G. Bruno....................................... 258,000(7) *
Mark T. Greenquist.................................. 248,250(8) *
Salvatore Iannuzzi.................................. 160,000(9) *
Robert Chrenc....................................... 77,500(10) *
Edward Kozel........................................ 73,000(11) *
George Samenuk...................................... 62,500(12) *
Melvin Yellin....................................... 62,500(13) *
All current executive officers and directors as a
group (consisting of 13 individuals)............. 2,728,889(14) 1.12%
- --------------------------------------------------------------------------------------------------
</Table>
* Less than 1%.
(1) The amounts shown are the number of shares of the common stock owned
beneficially (as determined in accordance with Rule 13d-3(d)(1) of the
Securities Exchange Act of 1934, as amended ("Exchange Act")) as of February 15,
2005 (except for FMR Corp., where the amounts are as of December 31, 2004, as
reported in FMR Corp.'s on Schedule 13G filed on February 14, 2005). The persons
identified in this table have sole voting and investment power over the shares
of the common stock stated above, except as stated otherwise in these footnotes.
This chart was prepared from information the directors and executive officers
have given to us and from publicly available documents filed or furnished to the
SEC.
(2) The percentages shown represent the percentages beneficially owned of the
outstanding common stock as of June 8, 2005, except for FMR Corp., where the
amounts are as of December 31, 2004.
(3) All information regarding FMR Corp. and its affiliates is based on
information disclosed in a Schedule 13G/A filed by FMR Corp., Edward C. Johnson
3rd and Abigail P. Johnson on February 14, 2005 ("FMR Schedule 13G/A"), which is
the most recent filing by FMR Corp. on Schedule 13G. According to the FMR
Schedule 13G/A, Fidelity Management & Research Company, a wholly-owned
subsidiary of FMR Corp., is the beneficial owner of 26,226,766 shares and the
sole power to vote or direct the vote of these 26,226,766 shares resides with
Edward C. Johnson 3d, FMR Corp. and the Boards of Trustees of the various
Fidelity funds. Fidelity Management Trust Company, a wholly-owned subsidiary of
FMR Corp., is the beneficial owner of 5,184,025 shares and the sole dispositive
power and the sole power to vote or direct the vote of these 5,184,025 shares
resides with Edward C. Johnson 3d and FMR Corp. Through Strategic Advisers,
Inc., a wholly-owned subsidiary of FMR Corp., FMR owns 1,861 shares of Symbol.
Fidelity International Limited ("FIL") is the beneficial owner of 808,200 shares
of Symbol. FMR Corp. and FIL are of the view that they are not acting as a
"group" for purposes of Section 13(d) under the Exchange Act and that they are
not otherwise required to attribute to each other the "beneficial ownership" of
securities "beneficially owned" by the other entity within the meaning of Rule
13d-3 promulgated under the Exchange Act. Therefore, they are of the view that
the shares held by the other entity need not be aggregated for purposes of
Section 13(d).
(4) This number includes 680,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 195,000 restricted shares owned by
Mr. Nuti.
(5) This number includes 193,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 120,000 restricted shares owned by
Mr. Abbott.
(6) This number includes 168,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 105,000 restricted shares owned by
Mr. Hewlin.
115
(7) This number includes 148,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 105,000 restricted shares owned by
Mr. Bruno.
(8) This number includes 171,250 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 72,000 restricted shares owned by
Mr. Greenquist.
(9) This number includes 50,000 shares that may be acquired upon the exercise of
options within 60 days of June 8, 2005 and 100,000 restricted shares owned by
Mr. Iannuzzi.
(10) This number includes 50,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 17,500 restricted shares owned by
Mr. Chrenc.
(11) This number includes 50,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 7,500 restricted shares owned by
Mr. Kozel.
(12) This number includes 50,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 7,500 restricted shares owned by
Mr. Samenuk.
(13) This number includes 50,000 shares that may be acquired upon the exercise
of options within 60 days of June 8, 2005 and 7,500 restricted shares owned by
Mr. Yellin.
(14) This number includes 1,790,000 shares that may be acquired upon the
exercise of options within 60 days of June 8, 2005 and 881,000 restricted
shares.
116
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 2000, we entered into a new employment agreement with Raymond Martino, a
then-current member of our board of directors and a former President, that
terminated on February 15, 2005. He was employed as a part-time consultant,
assisting the non-executive chairman of the board of directors and the CEO and
President. In 2004, Mr. Martino received $100,000 pursuant to his agreement.
Raymond Martino's son, Raymond Martino, Jr., is employed by us as Vice
President--Technology Strategy. Mr. Martino, Jr.'s base compensation for fiscal
year 2004 was $231,338. His compensation is not subject to approval by the board
of directors. On February 9, 2004, Mr. Martino, Jr. was awarded options under
our 2001 Plan to purchase 10,000 shares of our common stock at an exercise price
of $16.89 per share, which was the closing price of our common stock on the New
York Stock Exchange on the date the option was granted. Twenty percent of these
options vest on February 9, 2005 and 10% vest on August 9, 2005 and each of the
seven next consecutive six-month anniversary dates of that date.
In January 2003, we loaned $500,000, interest free, to John Bruno, our current
Senior Vice President--Corporate Development, who, at such time, was not an
"executive officer" as such term is used in the Sarbanes-Oxley Act of 2002 or an
"officer" as such term is defined in Rule 16a-1(f) of the Exchange Act and for
purposes of Section 16(a) of the Exchange Act. As of March 1, 2004, this loan
was repaid in full by Mr. Bruno. On March 10, 2004, the board of directors
appointed Mr. Bruno an executive officer of Symbol.
We loaned $1 million to Mr. Bravman in February 2002 and $500,000 in October
1999. These loans to Mr. Bravman were made prior to the adoption of the
Sarbanes-Oxley Act and thus were "grandfathered" and not subject to the
prohibition against loans to an "executive officer" as such term is used in the
Sarbanes-Oxley Act. Mr. Bravman repaid these loans in full in July 2004, as
required by the letter agreement Mr. Bravman entered into with us in connection
with his termination of employment. See "Management--Executive compensation--
Agreements with former executives--Richard Bravman."
As disclosed previously, we have entered into an employment agreement with Mr.
Nuti, who also serves as a Director. See "Executive Compensation--Employment
Agreements--William R. Nuti."
In addition, effective as of April 7, 2005, Salvatore Iannuzzi resigned as
Symbol's non-executive Chairman of the Board of Directors. On April 11, 2005,
Mr. Iannuzzi joined Symbol as its Senior Vice President, Chief Administrative
and Control Officer. For 2005, Mr. Iannuzzi will receive a base salary of
$450,000 and a signing bonus of $500,000, payable in equal quarterly
installments. Mr. Iannuzzi will also be eligible to participate in the Senior
Executive Bonus Plan. Additionally, the Compensation Committee, at its next
regularly scheduled meeting, will award Mr. Iannuzzi options to purchase 500,000
shares of our Common Stock at an exercise price equal to the fair market value
of our Common Stock on the NYSE on the date the options are granted (as
determined by the 2004 Equity Plan) and 100,000 shares of restricted stock.
Messrs. Nuti and Iannuzzi will not receive compensation for their Board service
except for reimbursement of reasonable expenses incurred in connection with
their attendance at Board meetings.
117
DESCRIPTION OF OUR CREDIT FACILITY
On December 29, 2004, we entered into our credit facility (i) to repay in full
our outstanding senior indebtedness, comprised of the short-term credit facility
and our prior revolving credit facility; (ii) for working capital and general
corporate purposes; and (iii) to pay certain fees and expenses incurred in
connection with such transactions. Pursuant to our new credit facility, the
lenders severally agreed to provide us the following: (a) a senior secured term
loan facility in an aggregate principal amount of $100,000,000 and (b) a senior
secured revolving credit facility in an aggregate principal amount of up to
$150,000,000 with a $20,000,000 sublimit available for letters of credit. Our
credit facility is secured on a first priority basis by (i) a pledge of all of
the capital stock or other equity interests of our domestic subsidiaries, (ii) a
pledge of 65% of the capital stock or other equity interests of selected
overseas subsidiaries located in the United Kingdom, the Netherlands and Japan,
(iii) 100% of the capital stock of the manufacturing entity in Reynosa, Mexico
and all of its other assets and (iv) all our other domestic assets (other than
real estate) and domestic subsidiaries.
The term loan facility is payable at approximately $11,111,111 per quarter
commencing on December 15, 2005 through the term loan maturity date of December
30, 2007. The revolving credit facility matures on December 30, 2009. The
interest rate on our credit facility is the greater of (i) the prime rate and
(ii) the federal funds rate plus 0.5%, plus, in both cases, the applicable
margin for U.S.-based loans. For Eurodollar-based loans, the rate is the
adjusted LIBO rate (defined as the LIBO rate multiplied by the statutory reserve
rate) plus the applicable margin. The applicable margin is based upon our
leverage ratio (defined as the ratio of our total indebtedness to our
consolidated EBITDA for the period of the most recent four fiscal quarters) plus
0.25% to 1% for U.S.-based loans and 1.25% to 2% for Eurodollar-based loans. The
interest rates on our outstanding borrowings at March 31, 2005 for the
$100,000,000 term loan facility was 4.50% for $50,000,000 and 4.41% for
$50,000,000. The interest rate on the $50,000,000 revolving credit facility as
of March 31, 2005 was 4.47%.
Our credit facility contains customary negative covenants and restrictions on
our ability to engage in specified activities, including, but not limited to:
-- limitations on indebtedness, except, among others, permitted subordinated
debt, unsecured debt not to exceed $30,000,000 at any time, indebtedness to
finance capital expenditures not to exceed $20,000,000 at any time;
-- restrictions on liens, mergers and acquisitions, transactions with
affiliates and guarantees;
-- limitations on investments, except, among others, permitted investments,
investments by the company and its subsidiaries in equity interests in
their subsidiaries not to exceed $25,000,000 at any time, intercompany
loans not to exceed $25,000,000 at any time, permitted acquisitions not to
exceed $50,000,000 at any time, and other investments not to exceed
$15,000,000 in the aggregate;
-- limitations on sales of assets, among others, to persons other than
affiliates not to exceed $25,000,000 at any time, and sales or transfers of
lease contracts under the Bank of Tokyo securitization not to exceed
$15,000,000 in any fiscal year;
-- limitations on sale and leaseback transactions not to exceed $20,000,000 at
any time; and
-- restrictions on payments of dividends in an amount not to exceed $8,000,000
in any year, and repurchases of common stock under employee stock purchase
plans.
118
Our credit facility contains customary affirmative covenants that require us to
perform certain activities, including, but not limited to:
-- furnish the administrative agent and each lender with certain periodic
financial reports;
-- furnish the administrative agent and each lender notice of certain events,
including, but not limited to, the occurrence of any default or any other
occurrence that could reasonably be expected to result in an material
adverse effect;
-- furnish the administrative agent with notice regarding any changes to the
collateral; and
-- pay taxes and other material obligations, maintain insurance and keep
proper books and records.
Under provisions of our credit facility, at our option, we may seek to obtain
investment grade ratings from Moody's Investor's Service, Inc. and Standard &
Poor's Ratings Group, Inc. If these ratings are obtained, all collateral
securing the credit facility will be released.
Our credit facility contains financial covenants that (a) restrict our total
leverage ratio (debt to adjusted EBITDA) to a ratio no greater than 2.5 times
total debt at any time, (b) the maximum senior leverage ratio to 2.0 to 1.0
(after January 1, 2006, maximum senior leverage is 1.75x at any time total
leverage exceeds 2.0x), (c) minimum fixed charge coverage ratio of 1.5x and (d)
minimum unrestricted domestic cash requirement of $25,000,000 at all times prior
to September 30, 2005 and $50,000,000 at all times thereafter. As of March 31,
2005, we were in compliance with the covenants under our credit facility.
119
DESCRIPTION OF DEBT SECURITIES
The debt securities will be direct obligations of ours, which may be secured or
unsecured, and which may be senior, senior subordinated or subordinated
indebtedness. The debt securities will be issued under one or more indentures or
indenture supplements between us and a trustee. Any indenture will be subject
to, and governed by, the Trust Indenture Act of 1939, as amended. The statements
made in this prospectus relating to any indentures and the debt securities to be
issued under the indentures or supplemental indentures are summaries of certain
anticipated provisions of the indentures or supplemental indentures and are not
complete. We will file a copy of the indentures or supplemental indentures with
the SEC at or before the time of the offering of the applicable series of debt
securities . You should refer to those indentures or supplemental indentures for
the complete terms of the debt securities.
GENERAL
We may issue debt securities that rank "senior," "senior subordinated" or
"subordinated." The debt securities that we refer to as "senior securities" will
be direct obligations of ours and will rank equally and ratably in right of
payment with other indebtedness of ours that is not subordinated. We may issue
debt securities that will be subordinated in right of payment to the prior
payment in full of senior indebtedness, as defined in the applicable prospectus
supplement, and may rank equally and ratably with the senior subordinated notes
and any other senior subordinated indebtedness. We refer to these as "senior
subordinated securities." We may also issue debt securities that may be
subordinated in right of payment to the senior subordinated securities. These
would be "subordinated securities."
We may issue the debt securities without limit as to aggregate principal amount,
in one or more series, in each case as we establish in one or more supplemental
indentures. We need not issue all debt securities of one series at the same
time. Unless we otherwise provide, we may reopen a series, without the consent
of the holders of such series, for issuances of additional securities of that
series.
We anticipate that any indenture will provide that we may, but need not,
designate more than one trustee under an indenture, each with respect to one or
more series of debt securities. Any trustee under any indenture may resign or be
removed with respect to one or more series of debt securities, and we may
appoint a successor trustee to act with respect to that series.
The applicable prospectus supplement will describe the specific terms relating
to the series of debt securities we will offer, including, where applicable, the
following:
-- the title and series designation and whether they are senior securities,
senior subordinated securities or subordinated securities;
-- the aggregate principal amount of the securities;
-- the percentage of the principal amount at which we will issue the debt
securities and, if other than the principal amount of the debt securities,
the portion of the principal amount of the debt securities payable upon
maturity of the debt securities;
-- if convertible, the initial conversion price, the conversion period and any
other terms governing such conversion;
-- the stated maturity date;
-- any fixed or variable interest rate or rates per annum;
120
-- the place where principal, premium, if any, and interest will be payable and
where the debt securities can be surrendered for transfer, exchange or
conversion;
-- the date from which interest may accrue and any interest payment dates;
-- any sinking fund requirements;
-- any provisions for redemption, including the redemption price and any
remarketing arrangements;
-- whether the securities are denominated or payable in United States dollars
or a foreign currency or units of two or more foreign currencies;
-- the events of default and covenants of such securities, to the extent
different from or in addition to those described in this prospectus;
-- whether we will issue the debt securities in certificated or book-entry
form;
-- whether the debt securities will be in registered or bearer form and, if in
registered form, the denominations if other than in even multiples of $1,000
and, if in bearer form, the denominations and terms and conditions relating
thereto;
-- whether we will issue any of the debt securities in permanent global form
and, if so, the terms and conditions, if any, upon which interests in the
global security may be exchanged, in whole or in part, for the individual
debt securities represented by the global security;
-- the applicability, if any, of the defeasance and covenant defeasance
provisions described in this prospectus or any prospectus supplement;
-- whether we will pay additional amounts on the securities in respect of any
tax, assessment or governmental charge and, if so, whether we will have the
option to redeem the debt securities instead of making this payment;
-- the subordination provisions, if any, relating to the debt securities;
-- if the debt securities are to be issued upon the exercise of debt warrants,
the time, manner and place for them to be authenticated and delivered; and
-- the provisions relating to any security provided for the debt securities.
We may issue debt securities at less than the principal amount payable upon
maturity. We refer to these securities as "original issue discount securities."
If material or applicable, we will describe in the applicable prospectus
supplement special U.S. federal income tax, accounting and other considerations
applicable to original issue discount securities.
Except as may be set forth in any prospectus supplement relating to the debt
securities, an indenture will not contain any other provisions that would limit
our ability to incur indebtedness or that would afford holders of the debt
securities protection in the event of a highly leveraged or similar transaction
involving us or in the event of a change of control. You should review carefully
the applicable prospectus supplement for information with respect to events of
default and covenants applicable to the securities being offered.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable prospectus supplement, we will
issue the debt securities of any series that are registered securities in
denominations that are even multiples of $1,000, other than global securities,
which may be of any denomination.
121
Unless otherwise specified in the applicable prospectus supplement, we will pay
the interest, principal and any premium at the corporate trust office of the
trustee. At our option, however, we may make payment of interest by check mailed
to the address of the person entitled to the payment as it appears in the
applicable register or by wire transfer of funds to that person at an account
maintained within the United States.
If we do not punctually pay or duly provide for interest on any interest payment
date, the defaulted interest will be paid either:
-- to the person in whose name the debt security is registered at the close of
business on a special record date the applicable trustee will fix; or
-- in any other lawful manner, all as the applicable indenture describes.
You may exchange or transfer debt securities at the office of the applicable
trustee. The trustee acts as our agent for registering debt securities in the
names of holders and transferring debt securities. We may change this
appointment to another entity or perform it ourselves. The entity performing the
role of maintaining the list of registered holders is called the "registrar." It
will also perform transfers.
You will not be required to pay a service charge to transfer or exchange debt
securities, but you may be required to pay for any tax or other governmental
charge associated with the exchange or transfer. The security registrar will
make the transfer or exchange only if it is satisfied with your proof of
ownership.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Under any indenture, we are generally permitted to consolidate or merge with
another company. We are also permitted to sell substantially all of our assets
to another company, or to buy substantially all of the assets of another
company. However, except as otherwise set forth in the prospectus supplement
relating to the debt securities, we may not take any of these actions unless all
the following conditions are met:
-- Immediately after the merger, sale of assets or other transaction we are not
in default on the debt securities. A default for this purpose would include
any event that would be an event of default if the requirements for giving
us default notice or our default having to exist for a specific period of
time were disregarded.
-- If we merge out of existence or sell our assets, the other company must be a
corporation, partnership or other entity organized under the laws of a State
of the United States or the District of Columbia or under federal law. The
other company must agree to be legally responsible for the debt securities.
-- If, as a result of transaction, our property or that of our restricted
subsidiaries becomes subject to a lien prohibited by the indenture, we or
the successor entity must secure the debt securities as required by the
indenture.
-- We must deliver an officers' certificate and opinion of counsel to the
trustee as specified under the indenture.
122
CERTAIN COVENANTS
Provision of financial information. Except as otherwise set forth in the
prospectus supplement relating to the debt securities, whether or not required
by the rules and regulations of the SEC, so long as any debt securities are
outstanding, we will furnish to the holders of debt securities:
-- all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if we were
required to file these reports, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report by our certified independent
accountants; and
-- all financial information that would be required to be included in a Form
8-K filed with the SEC if we were required to file this report.
In addition, except as otherwise set forth in the prospectus supplement relating
to the debt securities, whether or not required by the rules and regulations of
the SEC, we will file a copy of all such information and reports with the SEC
for public availability, unless the SEC will not accept such a filing, and make
this information available to investors who request it in writing.
Additional covenants. Any additional or different covenants, or modifications to
the foregoing covenants, with respect to any series of debt securities will be
set forth in the applicable prospectus supplement.
EVENTS OF DEFAULT AND RELATED MATTERS
Events of default. Except as otherwise set forth in the prospectus supplement
relating to the debt securities, the term "event of default" means any of the
following:
-- We do not pay interest on a debt security within 30 days of its due date;
-- We do not pay the principal or any premium on a debt security on its due
date;
-- We do not deposit any sinking fund payment on its due date;
-- We remain in breach of any other term of the applicable indenture for 60
days after we receive a notice of default stating we are in breach. The
holders of 10% in principal amount of debt securities of the affected series
may send the notice;
-- Default in the payment of any of our other indebtedness over a specified
amount that results in the acceleration of the maturity of the indebtedness
or constitutes a default in the payment of the indebtedness at final
maturity, but only if the indebtedness is not discharged or the acceleration
is not rescinded or annulled;
-- The rendering of a final judgment or judgments against us over a specified
amount that remains unstayed, undischarged or unbonded for a period of 60
days thereafter;
-- We or one of our "significant subsidiaries" files for bankruptcy or certain
other events in bankruptcy, insolvency or reorganization occur;
-- Any other event of default described in the applicable prospectus supplement
occurs.
Except as otherwise set forth in the prospectus supplement relating to the debt
securities, the term "significant subsidiary" means each of our significant
subsidiaries (as defined in Regulation S-X promulgated under the Securities
Act).
123
Remedies if an event of default occurs. If an event of default has occurred and
has not been cured, the trustee or the holders of at least 25% in principal
amount of the debt securities of the affected series may declare the entire
principal amount of all the debt securities of that series to be due and
immediately payable. We call this a "declaration of acceleration of maturity."
If an event of default occurs because of certain events in bankruptcy,
insolvency or reorganization, the principal amount of all the debt securities of
that series will be automatically accelerated, without any action by the trustee
or any holder. At any time after the trustee or the holders have accelerated any
series of debt securities, but before a judgment or decree for payment of the
money due has been obtained, the holders of at least a majority in principal
amount of the debt securities of the affected series may, under certain
circumstances, rescind and annul such acceleration.
The trustee will be required to give notice to the holders of debt securities
within 90 days of a default under the applicable indenture unless the default
has been cured or waived. The trustee may withhold notice to the holders of any
series of debt securities of any default with respect to that series, except a
default in the payment of the principal, premium, or interest on any debt
security of that series or in the payment of any sinking fund installment in
respect of any debt security of that series, if specified responsible officers
of the trustee consider the withholding to be in the interest of the holders.
Except in cases of default, where the trustee has some special duties, the
trustee is not required to take any action under the applicable indenture at the
request of any holders unless the holders offer the trustee reasonable
protection from expenses and liability. We refer to this as an "indemnity." If
reasonable indemnity is provided, the holders of a majority in principal amount
of the outstanding securities of the relevant series may direct the time, method
and place of conducting any lawsuit or other formal legal action seeking any
remedy available to the trustee. These majority holders may also direct the
trustee in performing any other action under the applicable indenture, subject
to certain limitations.
Before you bypass the trustee and bring your own lawsuit or other formal legal
action or take other steps to enforce your rights or protect your interests
relating to the debt securities, the following must occur:
-- You must give the trustee written notice that an event of default has
occurred and remains uncured;
-- The holders of at least a majority in principal amount of all outstanding
securities of the relevant series must make a written request that the
trustee take action because of the default, and must offer reasonable
indemnity to the trustee against the cost and other liabilities of taking
that action; and
-- The trustee must have not taken action for 60 days after receipt of the
above notice and offer of indemnity.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on your security after its due date.
Every year we will furnish to the trustee a written statement by certain of our
officers certifying that to their knowledge we are in compliance with the
applicable indenture and the debt securities, or else specifying any default.
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MODIFICATION OF AN INDENTURE
There are three types of changes we can make to the indentures and the debt
securities:
Changes requiring your approval. First, there are changes we cannot make to
your debt securities without your specific approval. Except as otherwise set
forth in the prospectus supplement relating to the debt securities, the
following is a list of those types of changes:
-- change the stated maturity of the principal or interest on a debt security;
-- reduce any amounts due on a debt security;
-- reduce the amount of principal payable upon acceleration of the maturity of
a debt security following a default;
-- change the place or currency of payment on a debt security;
-- impair your right to sue for payment;
-- reduce the percentage of holders of debt securities whose consent is needed
to modify or amend an indenture or to waive compliance with certain
provisions of an indenture or to waive certain defaults;
-- reduce the percentage of holders of debt securities required for quorum or
voting;
-- waive a default or event of default in the payment of principal of or
premium, if any, or interest on the debt securities; or
-- modify any of the foregoing provisions, or any of the provisions relating to
the waiver of particular past defaults or particular covenants, except to
increase the required percentage to effect such action or to provide that
certain other provisions may not be modified or waived without the consent
of the holder of the debt security.
Changes requiring a majority vote. The second type of change to an indenture
and the debt securities is the kind that requires a vote in favor by holders of
debt securities owning a majority of the principal amount of the particular
series affected. Most changes fall into this category, except for clarifying
changes and certain other changes that would not adversely affect holders of the
debt securities. We require the same vote to obtain a waiver of a past default.
However, we cannot obtain a waiver of a payment default or any other aspect of
an indenture or the debt securities listed in the first category described above
under "--Changes requiring your approval" unless we obtain your individual
consent to the waiver.
Changes not requiring approval. The third type of change does not require any
vote by holders of debt securities. This type is limited to clarifications and
certain other changes that would not adversely affect holders of the debt
securities.
Further details concerning voting. When taking a vote, we will use the
following rules to decide how much principal amount to attribute to a debt
security:
-- For original issue discount securities, we will use the principal amount
that would be due and payable on the voting date if the maturity of the debt
securities were accelerated to that date because of a default.
-- For debt securities whose principal amount is not known, we will use a
special rule for that security described in the applicable prospectus
supplement. An example is if the principal amount is based on an index.
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-- For debt securities denominated in one or more foreign currencies or
currency units, we will use the U.S. dollar equivalent.
Debt securities are not considered outstanding, and therefore not eligible to
vote, if we have deposited or set aside in trust for you money for their payment
or redemption or if we or one of our affiliates own them. Debt securities are
also not eligible to vote if they have been fully defeased as described
immediately below under "--Discharge, defeasance and covenant defeasance--Full
defeasance."
A meeting may be called at any time by the trustee, and also, upon request, by
us or the holders of at least 25% in principal amount of the outstanding debt
securities of such series, in any such case, upon notice given as provided in
the indenture.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Discharge. We may discharge some obligations to holders of any series of debt
securities by irrevocably depositing with the trustee, in trust, funds in the
applicable currency in an amount sufficient to pay the debt securities,
including any premium and interest.
Full defeasance. We can, under particular circumstances, effect a full
defeasance of your series of debt securities. By this we mean we can legally
release ourselves from any payment or other obligations on the debt securities
if we put in place the following arrangements to repay you, except as otherwise
set forth in the prospectus supplement relating to the debt securities:
-- We must deposit in trust for your benefit and the benefit of all other
direct holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the debt
securities on their various due dates.
-- The current federal tax law must be changed or an IRS ruling must be issued
permitting the above deposit without causing you to be taxed on the debt
securities any differently than if we did not make the deposit and just
repaid the debt securities ourselves. Under current federal tax law, the
deposit and our legal release from the debt securities would be treated as
though we took back your debt securities and gave you your share of the cash
and notes or bonds deposited in trust. In that event, you could recognize
gain or loss on the debt securities you give back to us.
-- We must deliver to the trustee a legal opinion confirming the tax law change
described above.
If we did accomplish full defeasance, you would have to rely solely on the trust
deposit for repayment on the debt securities. You could not look to us for
repayment in the unlikely event of any shortfall. Conversely, the trust deposit
would most likely be protected from claims of our lenders and other creditors if
we ever became bankrupt or insolvent. You would also be released from any
subordination provisions.
Covenant defeasance. Under current federal tax law, we can make the same type of
deposit described above and be released from some of the restrictive covenants
in the debt securities. This is called "covenant defeasance." In that event, you
would lose the protection of those restrictive covenants but would gain the
protection of having money and securities set aside in trust to repay the
securities and you would be released from any subordination provisions. In
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order to achieve covenant defeasance, except as otherwise set forth in the
prospectus supplement relating to the debt securities, we must do the following:
-- We must deposit in trust for your benefit and the benefit of all other
direct holders of the debt securities a combination of money and U.S.
government or U.S. government agency notes or bonds that will generate
enough cash to make interest, principal and any other payments on the debt
securities on their various due dates.
-- We must deliver to the trustee a legal opinion confirming that under current
federal income tax law we may make the above deposit without causing you to
be taxed on the debt securities any differently than if we did not make the
deposit and just repaid the debt securities ourselves.
If we accomplish covenant defeasance, the following provisions of an indenture
and the debt securities would no longer apply:
-- Any covenants applicable to the series of debt securities and described in
the applicable prospectus supplement.
-- Any subordination provisions.
-- Certain events of default relating to breach of covenants and acceleration
of the maturity of other debt set forth in any prospectus supplement.
If we accomplish covenant defeasance, you can still look to us for repayment of
the debt securities if a shortfall in the trust deposit occurred. If one of the
remaining events of default occurs, for example, our bankruptcy, and the debt
securities become immediately due and payable, there may be a shortfall.
Depending on the event causing the default, you may not be able to obtain
payment of the shortfall.
OPTION TO DEFER INTEREST PAYMENTS OR TO PAY-IN-KIND
If provided in the applicable prospectus supplement, we will have the right, at
any time and from time to time during the term of any series of debt securities,
to defer the payment of interest for such number of consecutive interest payment
periods as may be specified in the applicable prospectus supplement, subject to
the terms, conditions and covenants, if any, specified in such prospectus
supplement, provided that an extension period may not extend beyond the stated
maturity of the final installment of principal of the series of debt securities.
If provided in the applicable prospectus supplement, we will have the right, at
any time and from time to time during the term of any series of debt securities,
to make payments of interest by delivering additional debt securities of the
same series. Certain material U.S. federal income tax consequences and special
considerations applicable to the debt securities will be described in the
applicable prospectus supplement.
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SUBORDINATION
We will set forth in the applicable prospectus supplement the terms and
conditions, if any, upon which any series of senior subordinated securities or
subordinated securities is subordinated to debt securities of another series or
to other indebtedness of ours. The terms will include a description of:
-- the indebtedness ranking senior to the debt securities being offered;
-- the restrictions, if any, on payments to the holders of the debt securities
being offered while a default with respect to the senior indebtedness is
continuing;
-- the restrictions, if any, on payments to the holders of the debt securities
being offered following an event of default; and
-- provisions requiring holders of the debt securities being offered to remit
some payments to holders of senior indebtedness.
GLOBAL SECURITIES
If so set forth in the applicable prospectus supplement, we may issue the debt
securities of a series in whole or in part in the form of one or more global
securities that will be deposited with a depositary identified in the prospectus
supplement. We may issue global securities in either registered or bearer form
and in either temporary or permanent form. The specific terms of the depositary
arrangement with respect to any series of debt securities will be described in
the prospectus supplement.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
We have the authority to issue the following total number of shares of capital
stock:
-- 600,000,000 shares of common stock, $.01 par value, of which 272,836,305
shares were issued (242,878,248 shares were outstanding) as of June 8,
2005; and
-- 10,000,000 shares of preferred stock, $1.00 par value.
The following description is qualified in its entirety by reference to all of
the provisions of our certificate of incorporation, as amended, and amended and
restated by-laws, which are exhibits to the registration statement of which this
prospectus forms a part.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, holders of our common stock are entitled to receive dividends as
may be declared by our board of directors out of funds legally available to pay
dividends, and, in the event of liquidation, dissolution or winding up of our
affairs, whether voluntary or involuntary, to share in any distribution of our
assets after payment of liabilities and the liquidation preference of any of our
outstanding preferred stock. Each holder of common stock is entitled to one vote
for each share held of record on the applicable record date for all matters
submitted to a vote of stockholders. Holders of common stock have no cumulative
voting rights. Thus, the holders of a majority of our outstanding common stock
will be able to elect all members of our board of directors and to take other
actions requiring a vote of our common stock.
The prospectus supplement will describe the specific terms of the common stock
offered by the prospectus supplement.
PREFERRED STOCK
Our board of directors is authorized to issue up to 10 million shares of
preferred stock, in one or more series, having such number of shares,
designation, relative voting rights, dividend rights, dividend rates, conversion
rights, rights and terms of redemption (including any sinking fund provisions),
the redemption price or prices, liquidation or other rights, preferences and
limitations as may be fixed by our board of directors without any further
stockholder approval.
The prospectus supplement will describe the specific terms of the preferred
stock offered by such prospectus supplement.
RIGHTS AGREEMENT
On August 13, 2001, we entered into a rights agreement pursuant to which each
share of our common stock has one right attached to it. Each right entitles the
holder to purchase one one-thousandth of a share of our Series A Junior
Participating Preferred Stock, par value $1.00 per share, at a purchase price to
be determined by our board of directors. The following summary description of
the rights agreement does not purport to be complete and is qualified in its
entirety by reference to the rights agreement between us and The Bank of New
York, as rights
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agent. A copy of the rights agreement is filed as an exhibit to the registration
statement of which this prospectus is a part and is incorporated herein by
reference.
Rights will only be exercisable under limited circumstances specified in the
rights agreement when there has been a distribution of the rights and such
rights have not expired or are no longer redeemable by us.
If any person or group, other than one involving us, acquires beneficial
ownership of 15% or more of the outstanding shares of our common stock, or
commences or announces an intention to make a tender offer or exchange offer the
consummation of which would result in such person or group owning 15% or more of
our common stock, the "flip-in" provision of the rights agreement will be
triggered and the rights will entitle a holder, other than such person, any
member of such group or related person (as to whom such rights will be void) to
acquire a number of additional shares of common stock having a market value of
twice the purchase price of each right. If we are involved in a merger or other
business combination transaction, each right will entitle its holder to
purchase, at the right's then-current purchase price, a number of shares of the
acquiring or surviving company's common stock having a value at that time of
twice the right's exercise price.
The rights will expire upon the tenth anniversary of the date of the rights
agreement unless such date is extended or the rights are earlier redeemed or
exchanged by us. At no time will the rights have any voting rights. The
provisions of the rights agreement may be amended by our board of directors
under certain circumstances.
The rights have certain anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire us under certain
circumstances. Accordingly, the existence of the rights may deter certain
acquirors from making takeover proposals or tender offers. However, the rights
are not intended to prevent a takeover, but rather are designed to enhance the
ability of the board of directors to negotiate with a potential acquiror on
behalf of all of the stockholders. For additional anti-takeover provisions
relating to Symbol, see "--Anti-takeover effects of provisions of Delaware law
and our charter documents."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER DOCUMENTS
CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of our certificate of incorporation and by-laws may be deemed
to have an anti-takeover effect or may delay, defer or prevent a tender offer or
takeover attempt that a stockholder might consider in the stockholder's best
interests, including those attempts that might result in a premium being paid
over the market price for the shares held by a stockholder.
Under our certificate of incorporation and by-laws, any vacancy on our board of
directors, including a vacancy resulting from an enlargement of our board of
directors or any vacancy resulting from death, resignation, retirement,
disqualification, removal from office or other cause, may be filled only by vote
of a majority of our directors then in office. Additionally, a decrease in the
number of directors constituting the board of directors will not shorten the
term of any incumbent director. These limitations on the ability of our
stockholders to remove directors and fill vacancies could make it more difficult
for a third party to acquire, or discourage a third party from seeking to
acquire, control of Symbol.
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Our by-laws provide that any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted and shall be
delivered to us by delivery to our registered office in the State of Delaware,
our principal place of business, or an officer or agent of ours having custody
of the book in which proceedings of meetings of stockholders are recorded.
Our certificate of incorporation and by-laws also provide that, except as
otherwise prescribed by statute, a special meeting of stockholders for any
purpose may be called only by the chairman of the board of directors, or if no
chairman of the board of directors is then serving by the president, by the
board of directors or by the secretary at the request in writing of a majority
of the board of directors. In addition, our by-laws establish an advance notice
procedure for stockholder proposals to be brought before an annual meeting of
stockholders, including proposed nominations of candidates for election to our
board of directors. Stockholders at an annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before
the meeting by or at the direction of our board of directors or by a stockholder
of record on the record date for the meeting, who is entitled to vote at the
meeting and who has delivered timely written notice in proper form to our
secretary of the stockholder's intention to bring such business before the
meeting. These provisions could have the effect of delaying until the next
stockholder meeting stockholder actions that are favored by the holders of a
majority of our outstanding voting securities.
Our certificate of incorporation provides for 10 million authorized shares of
preferred stock. Our board of directors may establish one or more series of
preferred stock and fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption, the redemption price or
prices, liquidation or other rights, preferences and limitations as may be fixed
by our board of directors without any further stockholder approval. Such rights,
preferences, privileges and limitations as may be established could have the
effect of impeding or discouraging the acquisition or control of Symbol.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Delaware General Corporation Law ("DGCL") authorizes corporations to limit
or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breaches of directors' fiduciary duties.
Our certificate of incorporation includes a provision that eliminates the
personal liability of directors for actions taken as a director, except for
liability:
-- for breach of duty of loyalty;
-- for acts or omissions not in good faith or involving intentional misconduct
or knowing violation of law;
-- under Section 174 of the DGCL (unlawful dividends); or
-- for transactions from which the director derived improper personal benefit.
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Our certificate of incorporation and by-laws provide that we must indemnify our
directors and officers to the fullest extent authorized by the DGCL. We are also
expressly authorized to carry directors' and officers' insurance providing
indemnification for our directors, officers, employees or agents for some
liabilities. We believe that these indemnification provisions and insurance are
useful to attract and retain qualified directors and executive officers.
The limitation of liability and indemnification provisions in our certificate of
incorporation and by-laws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. These provisions may also
have the effect of reducing the likelihood of derivative litigation against
directors and officers, even thought such an action, if successful, might
otherwise benefit us and our stockholders. In addition, your investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers.
DELAWARE TAKEOVER STATUTE
We are subject to the provisions of Section 203 of the DGCL regulating corporate
takeovers. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a business
combination with an interested stockholder for a period of three years following
the date the person became an interested stockholder unless:
-- Prior to the date of the transaction, the board of directors of the
corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder;
-- Upon completion of the transaction that resulted in the stockholder becoming
an interested stockholder, the stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding (1)
shares owned by persons who are directors and also officers and (2) shares
owned by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
-- On or subsequent to the date of the transaction, the business combination is
approved by the board and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is any person who, together with
affiliates and associates, is the owner of 15% or more of a corporation's
outstanding voting stock or is an affiliate or associate of the corporation and
did own 15% or more of a corporation's outstanding voting stock within the three
years prior to the determination of interested stockholder status. We expect the
existence of this provision to have an anti-takeover effect with respect to
transactions our board of directors does not approve in advance. We also
anticipate that Section 203 may also discourage attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
The provisions of Delaware law, our certificate of incorporation and our by-laws
could have the effect of discouraging others from attempting hostile takeovers
and, as a consequence, they
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may also inhibit temporary fluctuations in the market price of our common stock
that often result from actual or rumored hostile takeover attempts. These
provisions may also have the effect of preventing changes in our management. It
is possible that these provisions could make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their best interests.
TRANSFER AGENT AND REGISTRAR
We have appointed The Bank of New York as the transfer agent and registrar for
our common stock.
LISTING
Our common stock is listed on the New York Stock Exchange under the symbol
"SBL."
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PLAN OF DISTRIBUTION
We may sell the securities to one or more underwriters for public offering and
sale by them and may also sell the securities to investors directly or through
agents. We will name any underwriter or agent involved in the offer and sale of
securities in the applicable prospectus supplement. We have reserved the right
to sell or exchange securities directly to investors on our own behalf in those
jurisdictions where we are authorized to do so.
We may distribute the securities from time to time in one or more transactions:
-- at a fixed price or prices, which may be changed;
-- at market prices prevailing at the time of sale;
-- at prices related to such prevailing market prices; or
-- at negotiated prices.
We may also, from time to time, authorize dealers, acting as our agents, to
offer and sell securities upon the terms and conditions set forth in the
applicable prospectus supplement. In connection with the sale of securities, we,
or the purchasers of securities for whom the underwriters may act as agents, may
compensate underwriters in the form of underwriting discounts or commissions. If
underwriters or dealers are used in the sale, the securities will be acquired by
the underwriters or dealers for their own account and may be resold from time to
time in one or more transactions, at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of the sale, or at prices
related to such prevailing market prices, or at negotiated prices. The
securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more of
such firms. Unless otherwise set forth in the prospectus supplement, the
obligations of underwriters or dealers to purchase the securities offered will
be subject to certain conditions precedent and the underwriters or dealers will
be obligated to purchase all the offered securities if any are purchased. Any
public offering price and any discounts or concessions allowed or reallowed or
paid by underwriters or dealers to other dealers may be changed from time to
time.
We will describe in the applicable prospectus supplement any compensation we pay
to underwriters or agents in connection with the offering of securities, and any
discounts, concessions or commissions allowed by underwriters to participating
dealers. Dealers and agents participating in the distribution of securities may
be deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the securities may be deemed to be
underwriting discounts and commissions. We may enter into agreements to
indemnify underwriters, dealers and agents against certain civil liabilities,
including liabilities under the Securities Act, and to reimburse these persons
for certain expenses.
To the extent that we make sales to or through one or more underwriters or
agents in at-the-market offerings, we will do so pursuant to the terms of a
distribution agreement between us and the underwriters or agents. If we engage
in at-the-market sales pursuant to a distribution agreement, we will issue and
sell shares of our common stock to or through one or more underwriters or
agents, which may act on an agency basis or on a principal basis. During the
term of any such agreement, we may sell shares on a daily basis in exchange
transactions or otherwise as we agree with the underwriters or agents. The
distribution agreement will provide that any shares of our common stock sold
will be sold at prices related to the then-
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prevailing market prices for our common stock. Therefore, exact figures
regarding proceeds that will be raised or commissions to be paid cannot be
determined at this time and will be described in a prospectus supplement.
Pursuant to the terms of the distribution agreement, we also may agree to sell,
and the relevant underwriters or agents may agree to solicit offers to purchase,
blocks of our common stock or other securities. The terms of each such
distribution agreement will be set forth in more detail in a prospectus
supplement to this prospectus. In the event that any underwriter or agent acts
as principal, or broker-dealer acts as underwriter, it may engage in certain
transactions that stabilize, maintain or otherwise affect the price of our
securities. We will describe any such activities in the prospectus supplement
relating to the transaction.
We may enter into derivative or other hedging transactions with financial
institutions. These financial institutions may in turn engage in sales of our
common stock to hedge their position, deliver this prospectus in connection with
some or all of those sales and use the shares covered by this prospectus to
close out any short position created in connection with those sales. We may
pledge or grant a security interest in some or all of our common stock covered
by this prospectus to support a derivative or hedging position or other
obligation and, if we default in the performance of our obligations, the
pledgees or secured parties may offer and sell our common stock from time to
time pursuant to this prospectus.
To facilitate the offering of securities, certain persons participating in the
offering may engage in transactions that stabilize, maintain, or otherwise
affect the price of the securities. This may include over-allotments or short
sales of the securities, which involve the sale by persons participating in the
offering of more securities than we sold to them. In these circumstances, these
persons would cover such over-allotments or short positions by making purchases
in the open market or by exercising their over-allotment option, if any. In
addition, these persons may stabilize or maintain the price of the securities by
bidding for or purchasing securities in the open market or by imposing penalty
bids, whereby selling concessions allowed to dealers participating in the
offering may be reclaimed if securities sold by them are repurchased in
connection with stabilization transactions. The effect of these transactions may
be to stabilize or maintain the market price of the securities at a level above
that which might otherwise prevail in the open market. These transactions may be
discontinued at any time.
Certain of the underwriters, dealers or agents and their associates may engage
in transactions with and perform services for us in the ordinary course of our
business for which they receive compensation.
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LEGAL MATTERS
Latham & Watkins LLP, New York, New York will issue an opinion about certain
legal matters with respect to the securities for us. Any underwriters will be
advised about the other issues relating to any offering by their own legal
counsel.
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On March 25, 2004, the audit committee of the board of directors of Symbol
approved the appointment of Ernst & Young LLP ("Ernst & Young") as Symbol's
independent auditors and the dismissal of Deloitte & Touche LLP ("Deloitte &
Touche"), which had previously served in this capacity. On April 27, 2004, the
appointment of Ernst & Young was approved and ratified by stockholder vote.
During the years ended December 31, 2003 and 2002 and the subsequent interim
period through March 25, 2004, Symbol did not consult with Ernst & Young
regarding the application of accounting principles to a specified transaction,
either completed or proposed, the type of audit opinion that might be rendered
on Symbol's consolidated financial statements, or any matter that was the
subject of disagreement or a reportable event as set forth in Items 304(a)(2)(i)
and (ii) of Regulation S-K.
The audit reports of Deloitte & Touche on Symbol's consolidated financial
statements for the years ended December 31, 2003 and 2002 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. Deloitte & Touche's audit
report on Symbol's consolidated financial statements for such years includes an
explanatory paragraph relating to the change in method of accounting in 2002 for
goodwill and other intangibles to conform to Statement of Financial Accounting
Standards (Statement) No. 142, "Goodwill and Other Intangible Assets."
During the fiscal years ended December 31, 2003 and 2002 and the subsequent
interim period through March 25, 2004, there were no disagreements between
Symbol and Deloitte & Touche on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Deloitte & Touche, would
have caused Deloitte & Touche to make reference to the subject matter of the
disagreement in connection with their reports, except that, subsequent to the
issuance of Symbol's 2002 consolidated financial statements, Deloitte & Touche
advised Symbol that it believed that the accounting treatment afforded to an
available for sale security for which an other than temporary impairment charge
was recorded in the second quarter of 2002 should be revised. Deloitte & Touche
advised Symbol that it believed that an other than temporary impairment of such
investment should have been recognized in 2001. Symbol disagreed with Deloitte &
Touche's conclusions with respect to this matter. This accounting matter was
resolved, Symbol revised the accounting treatment for this investment and
reissued its 2002 financial statements in an amended filing of it's 2002 Annual
Report on Form 10-K/A (Amendment No. 1) on February 25, 2004.
During the two fiscal years ended December 31, 2003 and 2002 and the subsequent
interim period through March 25, 2004, Deloitte & Touche reported to Symbol's
audit committee that
136
Deloitte & Touche considered matters involving Symbol's internal controls and
their operation to be material weaknesses as follows:
(1) In connection with its audit of the consolidated financial statements of
Symbol for the fiscal year ended December 31, 2002, Deloitte & Touche
reported to the audit committee the following material weaknesses:
-- decentralized accounting structure for operations in the United States;
-- inadequate policies and processes for identifying complex non-standard
transactions, including restructurings and acquisitions;
-- inadequate hiring of qualified and experienced personnel;
-- inadequate training and supervision of personnel;
-- inadequate systems and systems interfaces;
-- errors related to the processing of stock option exercises;
-- errors related to the timing and amount of revenue recognized;
-- errors in the timing and recording of certain reserves, including excess
and obsolete inventory;
-- inadequate support and approval for numerous manual journal entries; and
-- informal and inconsistent policies and procedures related to account
reconciliations.
(2) In connection with its audit of the consolidated financial statements of
Symbol for the fiscal year ended December 31, 2003, Deloitte & Touche
reported that a material weakness exists related to the manner in which
Symbol processes transactions to record revenue. Additionally, Deloitte &
Touche reported that deficiencies exist relating to the adequacy and
timeliness of account reconciliations, formalized worldwide policies and
procedures and the amount of manual journal entries required to record
transactions.
Symbol has authorized Deloitte & Touche to respond fully to inquiries of Ernst &
Young concerning the reportable events discussed above.
Deloitte & Touche, the member firms of Deloitte Touche Tohmatsu and their
respective affiliates may continue to be engaged by Symbol or its subsidiaries
in non-audit capacities now or in the future.
EXPERTS
The consolidated financial statements and related schedule of Symbol
Technologies, Inc. and subsidiaries at December 31, 2004 and for the year then
ended, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent registered public accounting firm, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given on the authority of such firm as experts in
accounting and auditing.
The financial statements of Symbol and subsidiaries as of December 31, 2003 and
for the years ended December 31, 2003 and 2002 included in this prospectus and
the related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their
137
report appearing herein and elsewhere in the registration statement and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Matrics, Inc. as of December 31, 2003 and 2002 and
for each of the two years in the period ended December 31, 2003 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
given on the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC regarding this
prospectus. This prospectus, which is part of the registration statement, does
not contain all of the information included in the registration statement, and
you should refer to the prospectus supplement, the registration statement and
its exhibits to read that information. We are subject to the informational
reporting requirements of the Exchange Act of 1934 and, under that Act, we file
reports, proxy statements and other information with the SEC. You may read and
copy the registration statement, the related exhibits and the reports, proxy
statements and other information we file with the SEC at the SEC's public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. You can also request copies of those documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC also maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file with
SEC. The site's Internet address is www.sec.gov.
You may also request a copy of these filings, at no cost, by writing or
telephoning us at:
Corporate Secretary
Symbol Technologies, Inc.
One Symbol Plaza
Holtsville, NY 11742-1360
(631) 738-2400
www.symbol.com
138
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS
Reports of independent registered public accounting firms... F-2
Consolidated balance sheets as of December 31, 2004 and
2003...................................................... F-4
Consolidated statements of operations for the years ended
December 31, 2004, 2003 and 2002.......................... F-5
Consolidated statements of stockholders' equity for the
years ended December 31, 2002, 2003 and 2004.............. F-6
Consolidated statements of cash flows for the years ended
December 31, 2004, 2003 and 2002.......................... F-8
Notes to consolidated financial statements.................. F-10
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.........................
Condensed consolidated balance sheets at March 31, 2005
(unaudited) and December 31, 2004......................... F-61
Condensed consolidated statements of income for the three
months ended March 31, 2005 and 2004 (unaudited).......... F-62
Condensed consolidated statements of cash flows for the
three months ended March 31, 2005 and 2004 (unaudited).... F-63
Notes to condensed consolidated financial statements
(unaudited)............................................... F-64
MATRICS, INC. FINANCIAL STATEMENTS
Report of independent auditors.............................. F-90
Balance sheets at December 31, 2003 and 2002................ F-91
Statements of operations for the years ended December 31,
2003 and 2002............................................. F-92
Statement of changes in stockholders' deficit for the years
ended December 31, 2003 and 2002.......................... F-93
Statements of cash flows for the years ended December 31,
2003 and 2002............................................. F-94
Notes to financial statements............................... F-95
MATRICS, INC. CONDENSED FINANCIAL STATEMENTS
Condensed balance sheets at June 30, 2004 (unaudited) and
December 31, 2003......................................... F-108
Condensed statements of operations for the six months ended
June 30, 2004 and 2003 (unaudited)........................ F-109
Condensed statements of cash flows for the six months ended
June 30, 2004 and 2003 (unaudited)........................ F-110
Notes to condensed financial statements (unaudited)......... F-111
</Table>
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Symbol Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Symbol
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2004 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Symbol
Technologies, Inc. and subsidiaries at December 31, 2004, and the consolidated
results of their operations and their cash flows for the year ended December 31,
2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 1, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 1, 2005
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Symbol Technologies, Inc.
Holtsville, New York
We have audited the accompanying consolidated balance sheet of Symbol
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2003, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Symbol Technologies, Inc. and
subsidiaries as of December 31, 2003, and the results of their operations and
their cash flows for the years ended December 31, 2003 and 2002, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
New York, New York
March 12, 2004
F-3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
- -----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 217,641 $ 150,017
Accounts receivable, less allowance for doubtful accounts of
$9,385 and $13,946, respectively......................... 113,658 152,377
Inventories, net............................................ 207,338 212,862
Deferred income taxes....................................... 179,844 182,571
Other current assets........................................ 24,286 36,204
---------------------------
Total current assets..................................... 742,767 734,031
Property, plant and equipment, net.......................... 241,508 210,888
Deferred income taxes....................................... 236,725 228,470
Investments in marketable securities........................ 81,230 102,136
Goodwill.................................................... 497,283 302,467
Intangible assets, net...................................... 45,404 33,729
Restricted cash............................................. 51,370 -
Other assets................................................ 34,082 34,797
---------------------------
Total assets............................................. $ 1,930,369 $ 1,646,518
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses....................... $ 414,915 $ 490,666
Short term credit facility.................................. 100,000 -
Current portion of long-term debt........................... 18,072 234
Deferred revenue............................................ 43,692 34,615
Income taxes payable........................................ 20,132 5,468
Accrued restructuring expenses.............................. 9,971 5,240
---------------------------
Total current liabilities................................ 606,782 536,223
Long-term debt, less current maturities..................... 176,087 99,012
Deferred revenue............................................ 25,122 19,729
Other liabilities........................................... 49,859 70,956
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 272,069 shares and 256,897 shares, respectively... 2,721 2,569
Additional paid-in capital.................................. 1,484,093 1,342,229
Accumulated other comprehensive earnings, net............... 13,699 4,498
Deferred compensation....................................... (15,642) --
Accumulated deficit......................................... (112,565) (189,669)
---------------------------
1,372,306 1,159,627
LESS:
Treasury stock at cost, 29,796 shares and 26,130 shares,
respectively............................................. (299,787) (239,029)
---------------------------
Total stockholders' equity............................... 1,072,519 920,598
---------------------------
Total liabilities and stockholders' equity............ $ 1,930,369 $ 1,646,518
- -----------------------------------------------------------------------------------------
</Table>
See notes to consolidated financial statements.
F-4
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002
- -------------------------------------------------------------------------------------------------
REVENUE:
Product.................................................... $1,433,671 $1,223,853 $1,103,070
Services................................................... 298,452 306,425 298,547
------------------------------------
1,732,123 1,530,278 1,401,617
COST OF REVENUE:
Product cost of revenue.................................... 709,967 635,103 693,980
Services cost of revenue................................... 213,118 219,926 219,985
------------------------------------
923,085 855,029 913,965
------------------------------------
Gross Profit............................................... 809,038 675,249 487,652
------------------------------------
OPERATING EXPENSES:
Engineering................................................ 167,543 156,328 142,602
Selling, general and administrative........................ 502,331 421,132 343,971
Stock based compensation expense/(recovery)(1)............. 2,234 17,087 (68,084)
(Recovery)/ provision for legal settlements................ (21,400) 72,000 98,300
Restructuring and impairment charges....................... 5,170 1,181 2,590
Write-off of acquired in-process research and
development.............................................. 12,800 - -
------------------------------------
668,678 667,728 519,379
------------------------------------
Earnings/(Loss) from Operations............................ 140,360 7,521 (31,727)
------------------------------------
OTHER (EXPENSE)/INCOME:
Interest income............................................ 3,507 2,969 2,322
Interest expense........................................... (20,032) (10,590) (16,801)
Impairment of investments.................................. -- (3,550) (32,200)
Other (expense)/ income, net............................... (66) 7,551 16,676
------------------------------------
(16,591) (3,620) (30,003)
------------------------------------
Earnings/(Loss) Before Income Taxes........................ 123,769 3,901 (61,730)
Provision for/(benefit from) income taxes.................. 41,922 606 (16,815)
------------------------------------
Net earnings/(loss)........................................ $ 81,847 $ 3,295 $ (44,915)
------------------------------------
EARNINGS/(LOSS) PER SHARE:
Basic...................................................... $ 0.34 $ 0.01 $ (0.20)
------------------------------------
Diluted.................................................... $ 0.33 $ 0.01 $ (0.20)
------------------------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic...................................................... 242,469 230,710 229,593
------------------------------------
Diluted.................................................... 246,166 236,449 229,593
- -------------------------------------------------------------------------------------------------
</Table>
(1) If we had allocated stock based compensation expense/(recovery) to each of
the respective line items the allocation would have been as follows:
<Table>
Product cost of revenue.................................. $ 710 $ 640 $ 192
Services cost of revenue................................. 335 1,002 207
Engineering.............................................. 140 2,740 (2,888)
Selling, general and administrative...................... 1,049 12,705 (65,595)
------------------------------------
$ 2,234 $ 17,087 $ (68,084)
- -------------------------------------------------------------------------------------------------
</Table>
See notes to consolidated financial statements
F-5
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
$0.01 PAR VALUE ACCUMULATED
---------------- ADDITIONAL OTHER
(AMOUNTS IN THOUSANDS, SHARES PAID-IN DEFERRED ACCUMULATED TREASURY COMPREHENSIVE COMPREHENSIVE
EXCEPT PER SHARE DATA) ISSUED AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCK EARNINGS (LOSS) EARNINGS (LOSS)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1,
2002........... 253,313 $2,533 $1,373,432 $ - $ (138,827) $(222,104) $ (15,919)
Comprehensive loss:
Net loss......... - - - - (44,915) - $ (44,915) -
Translation
adjustments, net of
tax............ - - - - - - 6,663 6,663
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... - - - - - - (3,840) (3,840)
-------------
Total comprehensive
loss......... - - - - - - $ (42,092) -
=============
Exercise of stock
options........ 3,099 31 17,579 - - - -
Exercise of
warrants....... 177 2 912 - - - -
Stock based
compensation
expense/ (recovery)
under variable plan
accounting..... - - (68,084) - - - -
Treasury share
activity....... - - - - - (26,092) -
Re-issuance of
treasury shares... - - (754) - - 11,720 -
Dividends paid... - - - - (4,598) - -
----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2002........... 256,589 2,566 1,323,085 - (188,340) (236,476) (13,096)
Comprehensive
earnings:
Net earnings..... - - - - 3,295 - $ 3,295 -
Translation
adjustments, net of
tax............ - - - - - - 17,009 17,009
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... - - - - - - 585 585
-------------
Total comprehensive
earnings..... - - - - - - $ 20,889 -
=============
Stock option
abeyance....... - - 10,539 - - - -
Exercise of stock
options........ 308 3 2,119 - - - -
ESPP differential... - - 6,137 - - - -
Stock based
compensation
expense........ - - 349 - - - -
Treasury share
activity....... - - - - - (2,553) -
Dividends paid... - - - - (4,624) - -
----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2003........... 256,897 $2,569 $1,342,229 $ - $ (189,669) $(239,029) $ 4,498
- ----------------------------------------------------------------------------------------------------------------------------------
<Caption>
- ---------------------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) TOTAL
- ---------------------- --------
BALANCE, JANUARY 1,
2002........... $999,115
Comprehensive loss:
Net loss......... (44,915)
Translation
adjustments, net of
tax............ 6,663
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... (3,840)
Total comprehensive
loss......... -
Exercise of stock
options........ 17,610
Exercise of
warrants....... 914
Stock based
compensation
expense/ (recovery)
under variable plan
accounting..... (68,084)
Treasury share
activity....... (26,092)
Re-issuance of
treasury shares... 10,966
Dividends paid... (4,598)
--------
BALANCE, DECEMBER 31,
2002........... 887,739
Comprehensive
earnings:
Net earnings..... 3,295
Translation
adjustments, net of
tax............ 17,009
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... 585
Total comprehensive
earnings..... -
Stock option
abeyance....... 10,539
Exercise of stock
options........ 2,122
ESPP differential... 6,137
Stock based
compensation
expense........ 349
Treasury share
activity....... (2,553)
Dividends paid... (4,624)
--------
BALANCE, DECEMBER 31,
2003........... $920,598
- ----------------------
</Table>
F-6
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
<Table>
<Caption>
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
$0.01 PAR VALUE ACCUMULATED
---------------- ADDITIONAL COMPREHENSIVE OTHER
(AMOUNTS IN THOUSANDS, SHARES PAID-IN DEFERRED ACCUMULATED TREASURY EARNINGS COMPREHENSIVE
EXCEPT PER SHARE DATA) ISSUED AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCK (LOSS) EARNINGS (LOSS)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2003........... 256,897 $2,569 $1,342,229 $ - $ (189,669) $(239,029) $ 4,498
Comprehensive
earnings:
Net earnings..... - - - - 81,847 - $ 81,847 -
Translation
adjustments, net of
tax............ - - - - - - 11,446 11,446
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... - - - - - - (2,245) (2,245)
-------------
Total comprehensive
earnings..... - - - - - - $ 91,048 -
=============
Stock option
abeyance....... - - 2,430 - - - -
Exercise of stock
options........ 13,273 133 114,210 - - -
Class action lawsuit
settlement in
shares......... 587 6 9,619 - - - -
ESPP differential... - - (2,258) - - - -
Treasury share
activity....... - - - - - (68,006) -
Re-issuance of
treasury shares... - - - - - 7,248 -
Deferred stock
compensation... 1,312 13 17,863 (15,642) - - -
Dividends paid... - - - - (4,743) - -
--------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31,
2004........... 272,069 $2,721 $1,484,093 $ (15,642) $ (112,565) $(299,787) $ 13,699
- --------------------------------------------------------------------------------------------------------------------------------
<Caption>
- ---------------------- ----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) TOTAL
- ---------------------- ----------
BALANCE, DECEMBER 31,
2003........... $ 920,598
Comprehensive
earnings:
Net earnings..... 81,847
Translation
adjustments, net of
tax............ 11,446
Unrealized gain/(loss)
on available for
sale securities and
foreign currency
cash flow hedges,
net of tax..... (2,245)
Total comprehensive
earnings..... -
Stock option
abeyance....... 2,430
Exercise of stock
options........ 114,343
Class action lawsuit
settlement in
shares......... 9,625
ESPP differential... (2,258)
Treasury share
activity....... (68,006)
Re-issuance of
treasury shares... 7,248
Deferred stock
compensation... 2,234
Dividends paid... (4,743)
----------
BALANCE, DECEMBER 31,
2004........... $1,072,519
- ----------------------
</Table>
See notes to consolidated financial statements
F-7
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
- -------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
(AMOUNTS IN THOUSANDS) 2004 2003 2002
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss)...................................... $ 81,847 $ 3,295 $ (44,915)
ADJUSTMENTS TO RECONCILE NET EARNINGS/(LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant
and equipment......................................... 54,248 52,949 56,460
Other amortization....................................... 23,549 15,838 12,877
Provision for losses on accounts receivable.............. 3,514 7,564 15,975
Provision for inventory writedown........................ 16,189 20,132 26,339
(Recovery) provision for legal settlements............... (21,400) 72,000 98,300
Write-off of acquired in-process research and
development........................................... 12,800 - -
Non cash restructuring, asset impairment and
other charges......................................... 15,964 4,433 46,774
Non cash stock based compensation expense/(recovery)..... 4,468 17,087 (65,092)
Loss on sale of property, plant and equipment............ 3,803 2,751 3,031
Unrealized holding loss/(gain) on marketable
securities............................................ 20,758 (46,549) 17,090
(Decrease)/increase in fair value of derivative.......... (19,622) 39,311 (37,787)
Deferred income taxes provision (benefit)................ 15,627 (6,232) (22,964)
Tax benefit on exercise of stock options and warrants.... 25,665 439 139
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF
EFFECTS OF ACQUISITIONS AND DIVESTITURES:
Accounts receivable...................................... 32,546 3,588 (25,572)
Inventories.............................................. (5,867) 33,522 51,320
Other assets............................................. (573) (1,239) 5,835
Net proceeds (payments) from lease securitizations....... 6,695 9,395 (3,930)
Accounts payable and accrued expenses.................... (59,268) (7,447) 54,471
Accrued restructuring expenses........................... (7,323) (1,708) (6,692)
Other liabilities and deferred revenue................... 20,899 14,636 (4,189)
--------------------------------
Net cash provided by operating activities............. 224,519 233,765 177,470
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of companies purchased, net of cash acquired........ (239,329) (14,993) (10,796)
Restricted cash.......................................... (51,012) - -
Proceeds from sale of property, plant and equipment...... 3,550 1,381 4,243
Purchases of property, plant and equipment............... (91,574) (60,573) (34,703)
Investments in intangible and other assets............... (3,479) (5,083) (2,376)
--------------------------------
Net cash used in investing activities.................. (381,844) (79,268) (43,632)
--------------------------------
</Table>
F-8
<Table>
<Caption>
- -------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
(AMOUNTS IN THOUSANDS) 2004 2003 2002
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable and long-term
debt.................................................. 453,505 - -
Repayment of notes payable and long-term debt............ (253,714) (86,782) (51,837)
Repurchase of convertible notes and debentures........... - - (84,432)
Proceeds from exercise of stock options, warrants and
employee stock purchase plan.......................... 47,212 4,178 15,074
Acquisition of treasury shares........................... (26,590) (5,110) (8,772)
Dividends paid........................................... (4,743) (4,624) (4,598)
--------------------------------
Net cash provided by/(used in) financing activities... 215,670 (92,338) (134,565)
--------------------------------
Effects of exchange rate changes on cash and cash
equivalents............................................ 9,279 11,737 6,483
--------------------------------
Net increase in cash and cash equivalents................ 67,624 73,896 5,756
Cash and cash equivalents, beginning of year............. 150,017 76,121 70,365
--------------------------------
Cash and cash equivalents, end of year................... $ 217,641 $150,017 $ 76,121
--------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest................................................. $ 26,867 $ 11,132 $ 15,598
Income taxes............................................. $ 15,006 $ 4,698 $ (11,513)
- -------------------------------------------------------------------------------------------
</Table>
See notes to consolidated financial statements
F-9
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 2004 AND 2003 AND FOR THE
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
Symbol Technologies, Inc., The Enterprise Mobility Company(TM), and subsidiaries
deliver products and solutions that capture, move and manage information in real
time to and from the point of business activity. Symbol enterprise mobility
solutions integrate advanced data capture products, mobile computing platforms,
wireless infrastructure, mobility software and services programs under the
Symbol Enterprise Mobility Services brand. The Consolidated Financial Statements
include the accounts of Symbol Technologies, Inc. and its majority-owned and
controlled subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation. References herein to "Symbol," "Company,"
"we," "us," or "our" refer to Symbol Technologies, Inc. and its subsidiaries
unless the context specifically states or implies otherwise.
b. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and consist primarily of money market funds
and time deposits at December 31, 2004 and 2003. Such investments are stated at
cost, which approximates market value and were $98,005 and $63,021 at December
31, 2004 and 2003, respectively. These investments are not subject to
significant market risk.
Restricted cash at December 31, 2004 of $51,370 represents two deposits, plus
interest. One amount of $50,358 at December 31, 2004 collateralizes a bond
serving as security for the trial court judgment against Telxon and Symbol for
Telxon vs. SmartMedia of Delaware, Inc. pending appeal. The cash is held in a
trust and is restricted as to withdrawal or use, and is currently invested in a
short-term certificate of deposit (See note 14d). The second amount at December
31, 2004 of $1,012 is an interest-bearing letter of credit pledged as a supplier
bond. Interest income earned from these investments are recognized by the
Company.
c. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Our allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risks, as well as the aging of the accounts receivable.
d. INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market. The Company evaluates its inventories to determine excess or
slow moving products based on quantities on hand, current orders and expected
future demand. For those items in which the Company believes it has an excess
supply or for items that are obsolete, the Company estimates the net amount that
the Company expects to realize from the sale of such products.
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e. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization is provided on a straight-line basis over the following estimated
useful lives:
<Table>
Buildings and improvements.................................. 15 to 40 years
Machinery and equipment..................................... 3 to 7 years
Furniture, fixtures and office equipment.................... 3 to 10 years
Computer hardware and software.............................. 3 to 7 years
Leasehold improvements (limited to terms of the leases)..... 2 to 10 years
Transportation.............................................. 5 years
</Table>
f. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, goodwill and indefinite life intangible
assets acquired in a business combination will no longer be amortized but rather
be subject to an assessment for impairment at least annually using a prescribed
fair-value-based test. We, therefore, stopped amortizing goodwill and adopted
the provisions of this Statement effective January 1, 2002. We performed an
impairment analysis in 2004, 2003 and 2002 as required by SFAS No. 142, and
concluded that the carrying amount of goodwill was not impaired (see Note 6).
Patents and trademarks, including costs incurred in connection with the
protection of patents, are amortized using the straight-line method over six
years. The Company does not have any indefinite-life intangible assets.
Finite-life intangible assets are evaluated whenever events or changes in
circumstances indicate that the carrying value of the asset may be impaired. An
asset is impaired if its estimated undiscounted cash flow to be produced by such
asset is less than the asset carrying value. An impairment loss is recognized
for an intangible asset to the extent that the asset's carrying value exceeds
its fair value.
g. RESEARCH AND DEVELOPMENT INCLUDING SOFTWARE DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and are
included as a component of engineering costs. Such costs, including charges for
overhead, were $125,100, $108,800 and $72,845 for the years ended December 31,
2004, 2003 and 2002, respectively. Software development costs are expensed as
incurred until a working model has been established. After a working model is
established, any additional costs would be capitalized in accordance with SFAS
No. 86, "Accounting for the Cost of Computer Software to Be Sold, Leased or
Otherwise Marketed." To date, no software development costs have been
capitalized, as such costs have not been significant and we believe our current
process for developing this software is essentially completed concurrently with
the establishment of a working model.
h. INVESTMENTS
MARKETABLE SECURITIES
All marketable equity securities are classified as either "available-for-sale"
or "trading" under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Unrealized gains and losses, net of tax, related to
available-for-sale securities are included in accumulated
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other comprehensive earnings or loss within stockholders' equity. Unrealized
gains and losses on trading securities, realized gains and losses on trading and
available for sale securities and unrealized other than temporary losses on
available for sale securities are reflected in other income in the Consolidated
Statements of Operations. We evaluate the carrying value of our investments in
marketable equity securities considered available-for-sale as required under the
provisions of SFAS No. 115.
NON-MARKETABLE SECURITIES
We account for non-marketable investments using the equity method of accounting
if the investment gives the Company the ability to exercise significant
influence, but not control, over an investee. Significant influence generally
exists if the Company has an ownership interest representing between 20% and 50%
of the voting stock of the investee. Under the equity method of accounting,
investments are stated at initial cost and are adjusted for subsequent
additional investments and the Company's proportionate share of income or losses
and distributions. The Company records its share of the investees' earnings or
losses in other income (expense) in the Consolidated Statements of Operations.
Where the Company is unable to exercise significant influence over the investee,
investments are accounted for under the cost method. Under the cost method,
investments are carried at cost and adjusted only for the other-than-temporary
declines in fair value or additional investments.
i. LONG-LIVED ASSETS
We review our long-lived assets, other than goodwill, including property, plant
and equipment and finite-lived intangible assets, for impairment whenever events
or circumstances indicate that their carrying amounts may not be recoverable. We
determined recoverability of the assets by comparing the carrying amount of the
asset to net future undiscounted cash flows that the asset was expected to
generate. If such cash flows do not equal or exceed the carrying value, we will
recognize an impairment equal to the amount by which the carrying amount
exceeded the discounted value of expected cash flows (fair value) of the asset.
j. SECURITIZATION TRANSACTIONS
We periodically securitize certain of our lease receivables which have
unguaranteed residual values. Our retained interest in these securitized lease
receivables is classified as a component of other assets in the Consolidated
Balance Sheets. These retained interests are initially recorded at their
allocated carrying amounts based on the relative fair value of assets sold and
retained. Retained interests, other than unguaranteed residuals, are reviewed
and adjusted to fair value on a monthly basis as trading securities. Since
quoted market prices are generally not available, we estimate fair value of
these retained interests by determining the present value of future expected
cash flows using modeling techniques that incorporate our best estimates of key
assumptions, which include credit losses, prepayment speed and discount rates
commensurate with the risks involved.
k. REVENUE RECOGNITION
We sell our products and systems to end users for their own consumption as well
as to value-added resellers, distributors and original equipment manufacturers
(OEMs or channel partners). Channel partners may provide a service or add
componentry in order to resell our product to end users. Revenue from the direct
sale of our products and systems to end users and OEMs is recognized when
products are shipped or services are rendered, the title and risk of loss has
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passed to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The recognition of revenues related to
sales of our products or systems to our value-added resellers is dependent upon
the reseller's ability to pay for the product without reselling it to the end
user. Sales to resellers that are financially sound are recognized when products
are shipped to the resellers, the title and risk of loss has passed to the
reseller, the sales price is fixed or determinable and collectibility is
reasonably assured. Sales to resellers that lack economic substance or cannot
pay for our products without reselling them to their customers are recognized
when the revenue is billed and collected. Revenue on sales to distributors is
recognized when our products and systems are sold by the distributor to its
customer. Rebates are recorded as a reduction of product revenues when earned by
our customers. Outbound shipping charges to our customers are included in our
product sales. Rebates for the years ended December 31, 2004, and 2003 were
approximately $33,100, and $23,000, respectively. Included in accounts payable
and accrued expenses as of December 31, 2004 and 2003 was $18,169 and $13,161
related to rebates.
The Services business is comprised of three integrated elements: mobility
services, professional services and customer services.
The mobility and professional services offerings include design, consulting and
implementation of Symbol products and solutions. These services are generally
billed on a fixed fee basis and revenue is recognized when the services are
completed due to the short term nature of such services.
Customer services offerings, includes time and material services, spare part
sales and maintenance service contracts. Time and material services are
typically ordered by customers for equipment which is not under a maintenance
service contract and which is in need of repair. These arrangements provide
payment to Symbol based on direct labor hours at fixed rates plus the cost of
materials. Revenue is recognized once the product has been repaired and shipped
to the customer, when there is persuasive evidence of an arrangement, the price
is fixed or determinable and collectibility is reasonably assured. Revenue from
sales that lack evidence of an arrangement are recognized when services are
rendered and are billed and collected.
Spare part sales encompasses the sale of spare parts/accessories to third
parties. Revenue is recognized when parts and accessory orders are fulfilled and
shipped to the customer, when there is persuasive evidence of an arrangement,
the price is fixed or determinable and collectibility is reasonably assured.
Revenue from sales that lack evidence of an arrangement are recognized when
services are rendered and are billed and collected.
Maintenance service contract revenues are recognized when there is persuasive
evidence of an arrangement, the services are rendered, the price is fixed or
determinable and collectibility is reasonably assured, generally over the
contract term. Revenue from these contracts that lack evidence of an arrangement
are recognized when billed and collected and services are rendered.
When a sale involves multiple elements, such as sales of products that include
services, the entire revenue from the arrangement is allocated to each
respective element based on its relative fair value and is recognized when the
revenue recognition criteria for each element are met. Fair value for each
element is established based on the sales price charged by us when the same
element is sold separately. In addition, installation services are not
considered by the Company to be a separate unit of accounting and accordingly,
the Company defers revenue associated with its product offerings until the
installation is completed and customer acceptance is obtained.
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We record a provision for estimated future product returns based on our
historical experience of similar product returns from our customers.
l. GUARANTEES AND PRODUCT WARRANTIES
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"), requires that upon issuance of a guarantee, the guarantor must disclosure
and recognize a liability for the fair value of the obligation it assumes under
that guarantee. The disclosure requirements of FIN 45 are applicable to the
Company's product warranty liability.
We provide standard warranty coverage for most of our products for a period of
one year from the date of shipment. We record a liability for estimated warranty
claims based on historical claims, product failure rates and other factors.
Management reviews these estimates on a regular basis and adjusts the warranty
reserves as actual experience differs from historical estimates or other
information becomes available. This warranty liability primarily includes the
anticipated cost of materials, labor and shipping necessary to repair and
service the equipment.
The following table illustrates the changes in our warranty reserves for the
years ended December 31, 2004, 2003 and 2002, respectively:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------
Balance, beginning of year.................................. $ 20,828 $ 15,034 $ 12,556
Charges to expense--cost of revenue......................... 27,225 34,559 39,249
Revisions in estimates...................................... - 2,800 -
Utilization/payment......................................... (27,097) (31,565) (36,771)
------------------------------
Balance, end of year........................................ $ 20,956 $ 20,828 $ 15,034
- --------------------------------------------------------------------------------------------
</Table>
m. INCOME TAXES
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in our consolidated
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
accounting and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. We
evaluate the likelihood of recovering our deferred tax assets and the adequacy
of the related valuation allowance by estimating sources of taxable income and
the impact of tax planning strategies. Realization of our deferred tax assets is
dependent on our ability to generate sufficient future taxable income.
Research, experimental and other tax credits are accounted for by the
flow-through method. The cumulative amount of undistributed earnings of foreign
subsidiaries at December 31, 2004 approximates $95,000. We do not provide
deferred taxes on undistributed earnings of foreign subsidiaries since these
earnings are considered indefinitely reinvested. If it was intended that these
earnings were not reinvested, the Company does not expect that, over time,
recording deferred taxes would result in significant incremental taxes since the
majority of foreign earnings were subject to income tax at rates approximating
the U.S. federal corporate income tax rate.
F-14
On October 22, 2004 the President signed the American Jobs Creation Act of 2004
("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the AJCA. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S.
Based on analysis to date, we expect to repatriate up to $95,000 in accordance
with this temporary incentive. The resulting tax impact of repatriation cannot
be reasonably estimated at this time. We expect to finalize our assessment of
this new provision by September 30, 2005.
n. EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per share are based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
amounts are based on the weighted average number of common and potentially
dilutive common shares (options, warrants and restricted shares) outstanding
during the period computed in accordance with the treasury stock method.
o. STOCK-BASED COMPENSATION
As permitted by the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," we apply the intrinsic value method as described in Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
our employee stock based compensation plans. Generally, no compensation cost has
been recognized for the fixed portion of our plans. However, as described in
Note 15, during 2004 and 2003, compensation expense has been recognized related
to options of certain current and former associates and stock purchases under
our Employee Stock Purchase Plan ("ESPP"). Also during 2002, compensation
expense has been recognized for certain options granted through July 30, 2002.
F-15
The following table illustrates the effect on net earnings/(loss) per share if
we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------
Net earnings/(loss)--as reported........................... $ 81,847 $ 3,295 $ (44,915)
Stock based employee compensation expense/(recovery)
included in reported net earnings/ (loss), net of
related tax effects..................................... 1,605 6,702 (41,872)
Less total stock based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects.............................. (21,407) (20,510) (21,034)
-------------------------------
Pro forma net earnings/(loss).............................. $ 62,045 $(10,513) $(107,821)
-------------------------------
Earnings/(loss) per share:
Basic--as reported......................................... $ 0.34 $ 0.01 $ (0.20)
Diluted--as reported....................................... 0.33 0.01 (0.20)
-------------------------------
Basic--pro forma........................................... 0.26 (0.05) (0.47)
Diluted--pro forma......................................... $ 0.25 $ (0.05) $ (0.47)
- --------------------------------------------------------------------------------------------
</Table>
The weighted average fair value of options granted during 2004, 2003, and 2002
was $7.91, $7.02, and $4.53 respectively. In determining the fair value of
options and stock purchase warrants granted for purposes of calculating the pro
forma results disclosed above, we used the Black-Scholes option pricing model
and assumed the following: a risk free interest rate of 2.8 percent for 2004 and
2003, 4.0 percent for 2002 an expected option life of 4.5, 4.7 and 4.7 years for
2004, 2003 and 2002 respectively, an expected volatility of 61 percent for 2004
and 2003 and 59 percent for 2002 and a dividend yield of 0.14 percent per year.
As required by SFAS No. 123, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation.
p. DERIVATIVE INSTRUMENTS, FOREIGN CURRENCY AND HEDGING ACTIVITIES
Assets and liabilities of foreign subsidiaries where the local currency is the
functional currency are translated at year-end exchange rates. Changes arising
from translation are recorded in the accumulated other comprehensive
earnings/(loss) component of stockholders' equity. Results of operations are
translated using the average exchange rates prevailing throughout the year.
Gains and losses from foreign currency transactions are included in the
Consolidated Statements of Operations for the periods presented and are not
material.
We follow the provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. SFAS No. 133 requires the recognition of
all derivative instruments as either assets or liabilities in the consolidated
balance sheet measured at fair value. Changes in fair value are recognized
immediately in earnings unless the derivative qualifies as a cash flow hedge.
For derivatives qualifying as cash flow hedges, the effective portion of changes
in fair value of the derivative instrument is recorded as a component of other
comprehensive earnings/(loss) and is reclassified to earnings in the same period
during which the hedged transaction affects earnings. Any ineffective portion
(representing the remaining gain or loss
F-16
on the derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged transaction) is recognized in earnings
as it occurs. For fair value hedges, changes in fair value of the derivative, as
well as the offsetting changes in fair value of the hedged item, are recognized
in earnings each period.
We formally designate and document each derivative financial instrument as a
hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. We also assess whether the derivative financial instrument is
effective in offsetting changes in the fair value or cash flows of the hedged
item. We did not recognize any gain or loss related to hedge ineffectiveness in
2004, 2003 or 2002.
We do not use derivative financial instruments for trading purposes. All of our
hedges qualify for either cash flow or fair value hedge accounting, other than a
portion of our embedded equity collar contained in the private Mandatorily
Exchangeable Contract for Shared Appreciation Income Linked Securities ("SAILS")
arrangement (See Note 5) as the related Cisco shares have been designated as
trading securities. However, the aforementioned portion of the embedded equity
collar and the related Cisco shares result in an economic hedge as it
effectively manages a large portion of the fluctuation in the Cisco shares
designated as trading securities. Accordingly, any change in fair value of this
embedded equity collar between reporting dates is recognized through operations
in other income. In addition, the change in market value of Cisco shares,
designated as trading securities, between reporting dates is recognized through
operations in other income. As of April 1, 2003, we designated a portion of the
embedded equity collar as a fair value hedge of our Cisco shares designated as
available-for-sale securities.
We also utilize derivative financial instruments to hedge the risk exposures
associated with foreign currency fluctuations for payments denominated in
foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Gains
and losses on these derivative financial instruments and the offsetting losses
and gains on hedged transactions are reflected in the Consolidated Statements of
Operations as a component of cost of revenue. Such (losses) and gains were
$(1,736), $315, and $(1,666) for the years ended December 31, 2004, 2003 and
2002, respectively. We do not use these derivative financial instruments for
trading purposes.
As of December 31, 2004 and 2003, respectively, we had $70,632 and $40,673 in
notional amounts of forward exchange contracts outstanding. The forward exchange
contracts generally have maturities that do not exceed 12 months and require us
to exchange foreign currencies for U.S. dollars at maturity at rates agreed to
at inception of the contracts. These contracts are primarily denominated in
British pounds, Euros, Australian dollars, Canadian dollars and Japanese yen and
have been marked to market each year with the resulting gains and losses
included in the Consolidated Statement of Operations. The fair value of these
forward exchange contracts was $(3,629) and $107 as of December 31, 2004 and
2003 respectively, which was recorded in current liabilities and current assets,
respectively.
q. SEGMENT INFORMATION
We follow the provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating
F-17
segments. SFAS No. 131 requires disclosures about products and services,
geographic areas and major customers. (See Note 18)
r. USE OF ESTIMATES
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could materially differ from those estimates.
Our most significant use of estimates relates to the determination of provisions
for uncollectible accounts receivable, excess and obsolete inventory,
recoverability of goodwill, warranty costs, product return costs, tax valuation
allowances and litigation contingencies.
s. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, including cash and cash
equivalents, accounts payable and accrued expenses, approximate cost because of
their short maturities. The fair value of investments in marketable securities
is determined using quoted market prices.
t. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents, investments in marketable
securities and accounts receivable.
Credit is extended to customers based on an evaluation of their financial
condition and collateral is not required. We perform ongoing credit assessments
of our customers and maintain an allowance for doubtful accounts.
Revenues from one of our distribution partners, in our product division,
represents approximately 16%, 13% and 10% of our consolidated revenue for the
years ended December 31, 2004, 2003 and 2002, respectively. Accounts receivable
from one of our customers represented approximately 11% of our consolidated
accounts receivable at December 31, 2004.
u. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will
be permitted in periods in which financial statements have not yet been issued.
We expect to adopt Statement 123(R) on July 1, 2005.
Statement 123(R) permits public companies to adopt its requirements using one of
two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of Statement 123(R)
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for all share-based payments granted after the effective date and (b)
based on the requirements of Statement 123(R) for all awards granted to
employees prior to the effective date of Statement 123(R) that remain
unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
Statement 123(R) for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
We plan to adopt Statement 123(R) using the modified-prospective method.
As permitted by Statement 123(R), we currently account for share-based payments
to employees using Opinion 25's intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method will have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123(R) as described in the disclosure of pro forma net income and
earnings per share shown in letter o. above. Statement 123(R) also requires the
benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption.
While we cannot estimate what those amounts will be in the future (because they
depend on, among other things, when employees exercise stock options), the
amount of operating cash flows recognized in prior periods for such tax
deductions were $25,665, $439, and $139 in 2004, 2003 and 2002, respectively.
Based on the release of Statement 123(R), we plan on amending our Employee Stock
Purchase Program ("ESPP") to reduce the discount of the price of the shares
purchased by employees in the ESPP from its current discount of 15% to a
discount of 5% and we will also eliminate the look-back period currently
utilized to determine the price of the shares purchased. These changes will
allow the ESPP to continue to be non compensatory, which will result in no
compensation expense to be recorded by us in our statement of operations when we
implement Statement 123(R).
2. ACQUISITIONS
a. BRAZIL ACQUISITION
During the second quarter of 2002, we entered into an agreement with the owners
of Seal Sistemas e Technologia Da Informacao Ltda. ("Seal"), a Brazilian
corporation that had operated as a distributor and integrator of our products
since 1987. The agreement resulted in the termination of distribution rights for
Seal and the creation of a majority-owned subsidiary of the Company that would
serve as the Brazilian distributor and customer service entity ("Symbol
Brazil"). In accordance with the terms of the agreement, the owners of Seal
acquired a 49 percent ownership interest in Symbol Brazil.
Terms of the agreement included payments to the minority shareholders that range
from a minimum of $9,550 to a maximum of $14,800 contingent upon the attainment
of certain
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annual net revenue levels of Symbol Brazil. In the event that none of the
specified revenue levels are attained, the minimum earnout payment is payable no
later than March 31, 2009. With each earnout payment, we will obtain a portion
of Symbol Brazil's shares owned by the minority shareholders such that we will
ultimately own 100 percent of Symbol Brazil no later than March 31, 2009. We
loaned an entity affiliated with the minority shareholders $5,000 at the time of
the agreement, which was due on the date the first earnout payment is triggered.
The present value of net future minimum earnout payments of $4,550 amounted to
$1,992 and was recorded as part of the purchase price resulting in a total
purchase price of $6,992. Any additional earnout payments will be accounted for
as additional purchase price and recorded as goodwill.
Management allocated the purchase price and considered a number of factors and,
as a result of such procedures, the total purchase price has been classified as
goodwill. We have not shown the pro-forma effects of this acquisition as the
results of operations of the acquired company prior to our acquisition was
immaterial in relation to our Consolidated Financial Statements.
On January 10, 2004, the parties amended this transaction, whereby Symbol
Technologies Holdings do Brasil Ltda., a wholly owned subsidiary of the Company,
purchased an additional 34% ownership interest of Symbol Brazil owned by two
principals of Seal. The Company paid $4,050 and also forgave the pre-existing
$5,000 loan and related accrued interest of $92 that had been made to an entity
affiliated with the principals of Seal. Accordingly, the Company and Symbol
Technologies Holdings do Brasil Ltda. now own 85% of the capital of Symbol
Brazil. As a result of the transaction, the Company satisfied the obligation
related to the minimum earnout requirement of approximately $2,337 at January
10, 2004 and recorded the excess purchase price of approximately $1,805 as
goodwill. Under the terms of the relevant agreements, Symbol Brazil was
reorganized into a corporation and it will eventually become a wholly owned
subsidiary of the Company.
The minority interest in earnings of operations of Symbol Brazil was immaterial
for the years ended December 31, 2004 and 2003 and the period post acquisition
through December 31, 2002, respectively.
b. COVIGO ACQUISITION
In July 2003, we purchased all of the outstanding common and preferred shares of
Covigo, Inc. ("Covigo"), a creator of software used in developing and deploying
mobile computing applications, for approximately $12,500. The acquisition is
expected to enhance and expand the range of such applications that Symbol
offers. The acquisition was accounted for as a purchase and accordingly,
Covigo's operating results since the acquisition date have been included in
Symbol's Consolidated Financial Statements. Covigo became part of the Company's
Product segment. The assets acquired and liabilities assumed have been recorded
at their estimated fair values.
F-20
The following table summarizes the allocation of the purchase price to the
assets acquired and liabilities assumed at the date of acquisition
<Table>
<Caption>
- ---------------------------------------------------------------------
Current assets.............................................. $ 137
Property, plant and equipment............................... 60
Deferred income taxes....................................... 7,665
Purchased software (five-year life)......................... 3,200
Customer relationship (five-year life)...................... 200
Goodwill.................................................... 4,709
Other assets................................................ 18
Liabilities................................................. (3,480)
-------
$12,509
- ---------------------------------------------------------------------
</Table>
We have not shown the pro forma effects of this acquisition as the results of
operations of the acquired company prior to our acquisition was immaterial in
relation to our consolidated financial statements.
c. IMAGEWARE TECHNOLOGIES, INC.
In January 2003, we completed the purchase of certain software and related
assets from Imageware Technologies, Inc. for an initial purchase price of $750.
On March 16, 2004, we terminated the agreement with Imageware and paid $375 in
termination fees associated with ending the Imageware agreement and accordingly,
have written off this investment.
d. Cuesol, Inc.
In January 2003, we purchased 216 shares of voting common stock in Cuesol, Inc.
("Cuesol") for $1,000. Cuesol creates wireless, customer-interactive solutions
that empower retailers to communicate with customers on an individual basis.
Since our investment is less than 20 percent and we lack the ability to exercise
significant influence over Cuesol, we account for this investment using the cost
method.
e. TRIO SECURITY, INC.
In June 2004, we purchased all of the issued and outstanding capital stock of
Trio Security, Inc. ("Trio"), a privately held designer and developer of next
generation security solutions for enterprise networks to enable mobile
applications for handheld devices, for $600, excluding $60 of transaction costs.
Pursuant to the acquisition agreement, $500 of the purchase price was paid in
June 2004 and $100 was paid in July 2004. The acquisition is expected to enable,
enhance and expand the range of applications for which Symbol products can be
used. The acquisition was accounted for as a purchase and accordingly, Trio's
operating results since the acquisition date have been included in Symbol's
financial statements. Trio became part of the Company's Product segment. The
assets acquired and liabilities assumed have been recorded at their estimated
fair values. All of the purchase price has been allocated to goodwill.
We have not shown the pro forma effects of this acquisition as the results of
operations of the acquired company prior to our acquisition was immaterial in
relation to our consolidated financial statements.
F-21
f. MATRICS, INC.
On September 9, 2004, we consummated the acquisition of privately held Matrics,
Inc. ("Matrics"). Based in Rockville, Maryland, Matrics is a leader in
developing Electronic Product Code ("EPC")-compliant Radio Frequency
Identification ("RFID") systems. RFID is a next generation data capture
technology that utilizes small tags that emit radio signals. Attaching a tag to
products or assets allows for remote reading of information relevant to the
asset. While similar to a bar code, RFID does not require physical contact
between the reader and the tag, or even a line of sight, it provides the ability
to capture more data more efficiently and is beneficial in areas such as supply
chain management, asset tracking and security. We believe the acquisition of
Matrics is an important step in executing our plan to be a leader in RFID, and
will expand our product offerings.
Matrics has focused its strategic RFID solutions efforts on Electronic Product
Code standards, which are the emerging global RFID standards. Matrics has
developed EPC-compliant RFID systems for retail, defense, transportation and
other vertical markets. The Matrics product portfolio features RFID systems
including multi-protocol, EPC-compliant fixed readers; readers designed for
embedded applications, such as RFID printers and mobile computers; high-
performance antennas for RFID tag reading; and EPC labels that can be attached
to items such as containers, pallets, cartons and more. The RFID tag family
includes both read-only and read/write functionality to address a wide range of
asset visibility applications. Matrics is also developing a proprietary
manufacturing process that is expected to provide for higher volume and more
cost effective manufacturing of tags.
The aggregate purchase price of $237,858 consisted of $230,000 in cash payments
to the sellers and $7,858 in transaction costs, primarily professional fees. The
purchase price was funded from borrowings under the $250,000 short-term credit
facility (see note 12b).
The results of Matrics have been included in Symbol's consolidated financial
statements since September 9, 2004, the acquisition date. Shown below is the
purchase price allocation, which summarizes the fair value of the assets
acquired and liabilities assumed at the date of acquisition.
<Table>
<Caption>
- -------------------------------------------------------------------------------
Current assets.............................................. $ 12,778
Deferred income taxes....................................... 16,605
Other assets................................................ 763
Identifiable intangible assets:
Proprietary technology and know how (4 year useful life).... $5,700
Patents (4 year useful life)................................ 3,500
Customer relationships (5 year useful life)................. 4,700
Covenants not to compete (1.5 year useful life)............. 600
------
Total identifiable intangible assets........................ 14,500
In-process research and development......................... 12,800
Goodwill.................................................... 194,358
Deferred tax liability...................................... (5,583)
Other liabilities assumed................................... (8,363)
--------
Net assets acquired......................................... $237,858
- -------------------------------------------------------------------------------
</Table>
F-22
In accordance with FASB Interpretation No. 4 "Applicability of FASB Statement
No. 2 to Business Combination Accounted for by the Purchase Method", the $12,800
allocated to acquired in-process research and development was written off
immediately following the acquisition. The write-off of the in-process research
and development was related to our product segment. Current assets above
includes acquired cash of $3,431.
The amount allocated to in-process research and development represented a
portion of the total value of the acquired assets. We believe the Matrics
acquisition is an important step in executing our plan to be a leader in RFID
and will expand our offerings in the advanced data capture industry.
Our assumptions for IPR&D were based on our estimate of the present value of the
cash flows arising from each of the material research and development projects
that Matrics was investing in at the time of closing. Each project was evaluated
based on the income approach. With the exception of the proprietary
manufacturing process, this was achieved by discounting cash flows to be derived
from the sales of the products to their present value. For the proprietary
manufacturing process, the income approach was used by estimating the gross
margin benefit from the technology and discounting the cash flows from that
gross margin benefit. The values allocated to the IPR&D and the technology
assets acquired were based upon several factors including the generation of the
technology acquired, the estimated lives and future revenue and costs associated
with the technology.
The products included in IPR&D ranged from the early stages of development to
the latter stages of development at the time of acquisition. A discount rate
ranging from 23% to 30% was used for the projects to account for various risks,
including the technical risk, the risk that customers will not desire to
purchase the product, the risk around significant price erosion, the risk of
commercializing the technology, the risk that even once successfully
commercialized the technology may not yield the gross margin benefit and for the
broader market risk associated with the adoption of RFID. While RFID technology
is in a relatively early stage of development, we currently believe that the
costs we will incur during the product life cycle for both existing technology
and future, replacement RFID technology will be consistent with the expenditures
we have incurred in developing and maintaining our current enterprise mobility
solutions.
The following unaudited pro forma consolidated financial information for the
years ended December 31, 2004 and, 2003, give effect to the acquisition as if it
had been consummated as of the earliest period presented, after giving effect to
the following adjustments (i) amortization of acquired intangible assets (ii)
Symbol's financing costs, consisting of interest expense on the $250,000 short
term credit facility that would have been incurred had the acquisition occurred
as of January 1, 2003 and the amortization of the debt issuance costs over the
term (one-year) of the short term credit facility and (iii) the related income
tax effects.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------
2004 2003
- ----------------------------------------------------------------------------------------
Revenue..................................................... $1,739,308 $1,533,949
Net earnings/(loss)......................................... $66,091 $(21,858)
Diluted earnings/(loss) per share........................... $.27 $(.09)
- ----------------------------------------------------------------------------------------
</Table>
The unaudited pro forma consolidated financial information is presented for
comparative purposes only and is not intended to be indicative of the actual
results that would have been
F-23
achieved had the transaction been consummated as of the dates indicated above,
nor does it purport to indicate results that may be attained in the future.
3. INVENTORIES
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Raw materials......................................... $ 57,946 $ 66,500
Work in progress...................................... 26,845 24,422
Finished goods........................................ 122,547 121,940
-------------------------------------
$ 207,338 $ 212,862
- ---------------------------------------------------------------------------------------------
</Table>
The amounts shown above are net of inventory reserves of $55,247 and $109,331 as
of December 31, 2004 and 2003, respectively, and include inventory accounted for
as consigned of $61,005 and $34,564 as of December 31, 2004 and 2003,
respectively.
4. PROPERTY, PLANT AND EQUIPMENT.NET
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Land.................................................. $ 7,343 $ 10,057
Buildings and improvements............................ 70,362 72,380
Machinery and equipment............................... 130,603 121,530
Furniture, fixtures and office equipment.............. 44,264 41,821
Computer hardware and software........................ 247,121 198,658
Leasehold improvements................................ 23,090 18,169
Transportation........................................ 4,250 -
-------------------------------------
527,033 462,615
Less: Accumulated depreciation and amortization....... (285,525) (251,727)
-------------------------------------
$ 241,508 $ 210,888
- ---------------------------------------------------------------------------------------------
</Table>
5. INVESTMENT IN MARKETABLE SECURITIES
As a result of the November 2000 acquisition of Telxon Corporation, we obtained
4,166.1 shares of Cisco Systems, Inc. common stock (the "Cisco shares"). We also
obtained two derivative financial instruments related to the Cisco shares
(referred to collectively herein as the "Collar"). The Collar essentially hedged
our risk of loss on the Cisco shares by utilizing purchased put options.
Conversely, the Collar arrangement also limited the potential gain by employing
written call options.
In January 2001, we sold 6.1 of the Cisco shares and simultaneously terminated
the existing Collar and entered into a private Mandatorily Exchangeable
Securities Contract for Shared Appreciation Income Linked Securities ("SAILS")
arrangement (see Note 12(e) with a highly rated financial institution for the
remaining 4,160 shares. These shares had a market value of $80,288 and $100,797
at December 31, 2004 and 2003, respectively. Such shares are held as collateral
to secure the debt instrument associated with the SAILS and are included in
F-24
Investment in Marketable Securities in the Consolidated Balance Sheets. The
SAILS contain an embedded equity collar, which effectively manages a large
portion of our exposure to fluctuations in the fair value of our holdings in the
Cisco shares. At maturity, the SAILS will be exchangeable for shares of Cisco
common stock or, at our option, cash in lieu of shares. We account for the
embedded equity collar as a derivative financial instrument in accordance with
the requirements of SFAS No. 133 and the change in fair value of this derivative
between reporting dates is recognized as other income/(expense). As there is a
legal right of offset, the derivative has been combined with the debt instrument
and is included in long-term debt in the Consolidated Balance Sheets.
Approximately 3,411.2 of the Cisco shares are economically hedged in conjunction
with the SAILS arrangement and are classified as trading securities. However,
because these securities collateralize the long-term debt underlying the SAILS
arrangement, they have been classified as non-current assets. The changes in
market value of these trading securities and related derivative instrument of
approximately $2,600, $(1,140), and $16,275 for the years ended December 31,
2004, 2003, and 2002, respectively, have been included in other (expense)/income
in the Consolidated Statements of Operations. The remaining 748.8 Cisco shares
are classified as available-for-sale securities in accordance with SFAS No. 115
and on April 1, 2003 a portion of the embedded equity collar described above was
designated as a fair value hedge of these securities. To the extent the collar
is effective, the change in fair value of the Cisco shares classified as
available for sale securities are recorded as a component of other income or
expense rather than as other comprehensive income. The change in fair value of
the embedded equity collar is also recorded as a component of other income or
expense.
Under SFAS No. 115, available-for-sale securities are required to be carried at
their fair value, with unrealized gains and losses, net of income taxes,
recorded as a component of accumulated other comprehensive earnings/(loss).
Information regarding marketable securities classified as available-for-sale is
presented in the table below:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Cost basis............................................ $ 10,090 $ 10,090
Gross unrealized holding (loss) gain on
available-for-sale securities....................... (29) 119
Gross unrealized holding gain on hedged available-for-
sale securities..................................... 5,333 9,069
-------------------------------------
Aggregate fair market value........................... $ 15,394 $ 19,278
- ---------------------------------------------------------------------------------------------
</Table>
Based on the provisions of SFAS No. 115 and the evidence reviewed, we determined
that there were no declines in market value for these investments which were
other than temporary in 2004, 2003 and 2002.
F-25
Information regarding marketable securities classified as trading securities is
presented in the table below:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Cost basis............................................ $ 142,844 $ 142,844
Gross unrealized holding losses on trading
securities.......................................... (77,008) (59,986)
-------------------------------------
Aggregate fair market value........................... $ 65,836 $ 82,858
- ---------------------------------------------------------------------------------------------
</Table>
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended December 31,
2004 and 2003 are as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
PRODUCTS SERVICES TOTAL
- --------------------------------------------------------------------------------------------
Balance as of January 1, 2003............................... $244,014 $57,009 $301,023
Covigo acquisition.......................................... 4,709 - 4,709
Translation adjustments..................................... 3,274 818 4,092
@POS goodwill adjustments(1)................................ (4,511) (1,128) (5,639)
Sweden earnout payment...................................... 709 - 709
Telxon goodwill adjustments................................. (1,942) (485) (2,427)
------------------------------
Balance as of December 31, 2003............................. $246,253 $56,214 $302,467
Acquisition of Matrics...................................... 194,358 - 194,358
Brazil Acquisition.......................................... 1,552 253 1,805
Trio acquisition............................................ 660 - 660
Translation adjustments..................................... 2,038 417 2,455
Telxon goodwill adjustments(2).............................. (4,462) - (4,462)
------------------------------
Balance as of December 31, 2004............................. $440,399 $56,884 $497,283
- --------------------------------------------------------------------------------------------
</Table>
(1) Adjustment related to recording certain deferred tax assets in connection
with the acquisition.
(2) To adjust Telxon goodwill for previously recorded valuation allowance booked
on acquisition.
Other than goodwill, finite life intangible assets, all of which are subject to
amortization, consist of the following:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
---------------------- ----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ---------------------------------------------------------------------------------------------
Patents, trademarks and tradenames.......... $39,160 $ (18,433) $35,080 $ (24,670)
Purchased technology........................ 33,500 (13,988) 27,800 (9,652)
Other....................................... 9,100 (3,935) 7,250 (2,079)
-----------------------------------------------
$81,760 $ (36,356) $70,130 $ (36,401)
- ---------------------------------------------------------------------------------------------
</Table>
These assets have estimated useful lives ranging from 1.5 to 8 years.
Amortization expense for these assets was $10,918, $10,220 and $6,849 for the
years ended December 31, 2004, 2003 and 2002, respectively. Estimated future
amortization expense for the above finite life intangible
F-26
assets, assuming no additions or writeoffs, for each of the years ending
December 31, is as follows:
<Table>
- ---------------------------------------------------------------------
2005........................................................ $12,767
2006........................................................ 10,153
2007........................................................ 9,652
2008........................................................ 8,440
2009........................................................ 3,031
Thereafter.................................................. 1,361
-------
$45,404
- ---------------------------------------------------------------------
</Table>
7. AIRCLIC TRANSACTIONS
In November 2000, we invested $35,000 in and licensed certain intellectual
property to AirClic Inc. ("AirClic"), a business which allows wireless devices
to scan bar codes and transmit data to the Internet. In return, we received
convertible preferred stock of AirClic. We do not currently have the right to
convert the preferred stock into common stock of AirClic and our ability to do
so in the future is subject to certain contractual restrictions. As we do not
have the ability to exercise significant influence over AirClic, we account for
this investment using the cost method. We periodically test the carrying value
of this investment for impairment. In consideration of the outlook of AirClic's
business, the general decline in the economy and the decline in information
technology spending in 2002, we determined that the decline in the value of our
investment in AirClic was other than temporary in June 2002. We wrote down the
carrying amount of the investment to its estimated fair value of $2,800 by
recording an impairment of the investment of $32,200 which is shown as a
component of other income/(expense) in the Consolidated Statements of Operations
in 2002. In January 2003, we invested an additional $750 in AirClic in exchange
for convertible preferred stock. This additional investment was also accounted
for under the cost method and increased our investment in AirClic to $3,550. In
March 2003, AirClic received additional financing from other investors but the
negative outlook for AirClic's business and the lack of a rebound in the
information technology sector and the economy in general prompted us to record
an additional impairment charge of $3,025 related to this investment during the
three months ended March 31, 2003. We subsequently wrote off our remaining
investment in AirClic of $525 by September 2003.
During the year ended December 31, 2001, we had accumulated certain component
inventories in anticipation of orders from AirClic. As a result, during 2001,
AirClic paid $7,000 with respect to this component inventory. This payment was
accounted for as an advance payment for future inventory purchases. At December
31, 2002, an accrued liability of $6,147 remained outstanding under this
obligation. In July 2003, we reached an agreement with AirClic as it related to
this obligation. The remaining obligation of $4,992 as of July 2003 was settled
by making a cash payment of $2,497 to AirClic. Accordingly, we recognized other
income of $2,495 in the third quarter of 2003.
F-27
8. OFFICER LOANS
In February 2002, we loaned $1,000 to our former Chief Executive Officer,
Director and Vice Chairman of the Board of Directors. This loan bore interest at
an annual rate of LIBOR plus 100 basis points, which approximated 2.4 percent at
July 15, 2004, the date that the loan was paid off in full, including accrued
interest.
In addition, we also loaned our former Chief Executive Officer, Director and
Vice Chairman of the Board of Directors $500 in October 1999. This loan bore
interest at an annual rate of 7 percent and on July 15, 2004, the loan was paid
off in full, including accrued interest.
In January 2003, we loaned $500 to our Senior Vice President, Corporate
Development. At the time of the loan, he was not considered to be an "officer"
as such term is defined in Rule 16a-1(f) of the Exchange Act and for purposes of
Section 16(a) of the Exchange Act. This loan was non-interest bearing and was
repaid in full as of March 1, 2004. He became an officer of the Company as
defined in Rule 16a-1(f) of the Exchange Act and for purposes of Section 16(a)
of the Exchange Act on March 10, 2004.
The purpose of these loans were for relocation expenses and the purchase of new
residences in connection with their employment by Symbol. These loans were
unsecured and were classified as other assets in the Consolidated Balance Sheet
as of December 31, 2003.
9. LEASE SECURITIZATIONS
During 2000, we entered into a $50,000 lease receivable securitization
agreement. This agreement matured on December 31, 2003, and was subsequently
extended until December 31, 2005. During the years ended December 31, 2004 and
2003, we securitized approximately $0 and $7,275, respectively, of our lease
receivables in accordance with the terms of the agreement. Losses on lease
securitizations during 2004, 2003 and 2002 were approximately $0, $273 and $610,
respectively. For a discussion of retained interest, see Note 1(j).
Key economic assumptions used in measuring the fair value of retained interests
at the date of securitization resulting from securitizations completed during
2004 and 2003 (weighted based on principal amounts securitized) were as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------
AS OF DECEMBER 31,
------------------
2004 2003
- --------------------------------------------------------------------------------
Prepayment rate............................................. N/A(1) N/A(1)
Weighted-average remaining life (in years).................. N/A(2) 2.75
Expected credit losses...................................... N/A(2) $ 73
Discount rate............................................... N/A(2) 9 percent
- --------------------------------------------------------------------------------
</Table>
F-28
The following table presents the fair values of retained interest as of December
31, 2004 and 2003, along with key economic assumptions used to derive the values
as of year-end. The table also presents the sensitivity of the current fair
value to immediate 10 percent and 20 percent adverse changes in the listed
economic assumptions:
<Table>
<Caption>
- ----------------------------------------------------------------------------------
AS OF
DECEMBER 31,
--------------------
2004 2003
- ----------------------------------------------------------------------------------
Fair value of retained interest............................. $3,849 $8,720
Weighted-average remaining life (in years).................. 1.24 1.72
Prepayment speed assumption................................. N/A(1) N/A(1)
Impact on fair value of 10 percent adverse change........ - -
Impact on fair value of 20 percent adverse change........ - -
Expected credit losses (annual rate)........................ 1.0% 1.0%
Impact on fair value of 10 percent adverse change........ $3,839 $8,695
Impact on fair value of 20 percent adverse change........ $3,829 $8,671
Discount rate............................................... 9.0% 9.0%
Impact on fair value of 10 percent adverse change........ $3,824 $8,652
Impact on fair value of 20 percent adverse change........ $3,800 $8,585
- ----------------------------------------------------------------------------------
</Table>
(1) Our lease portfolios historically have not been subject to prepayment risk.
(2) No lease securitizations were completed during 2004.
These sensitivities are hypothetical and should be used with caution. As the
amounts indicate, changes in fair value based on a 10 percent and 20 percent
variation in assumptions generally cannot easily be extrapolated because the
relationship of the change in the assumptions to the change in fair value may
not be linear. Also, in the above table, the effect that a change in a
particular assumption may have on the fair value is calculated without changing
any other assumption. In reality, changes in one factor may result in changes in
another, which might magnify or counteract the sensitivities. Static pool credit
losses are calculated by summing actual and projected future credit losses and
dividing them by the original balance of each securitization pool. At December
31, 2004 and 2003, static pool net credit losses for leases securitized were not
material.
The table below summarizes certain cash flows received from/(paid to)
securitization trusts:
<Table>
<Caption>
- -----------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------
2004 2003
- -----------------------------------------------------------------------------------
Proceeds from new securitizations........................... $ - $ 4,400
Collections used by the trust to purchase new balances in
revolving securitizations................................ 6,695 11,440
Servicing fees received..................................... 200 356
Purchases of delinquent assets.............................. (581) (44)
- -----------------------------------------------------------------------------------
</Table>
F-29
The table below presents information about delinquencies and components of
reported and securitized financial assets at December 31, 2004 and 2003:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------
2004 2003
--------------------------------- ---------------------------------
TOTAL PRINCIPAL DELINQUENT TOTAL PRINCIPAL DELINQUENT
AMOUNT PRINCIPAL OVER AMOUNT PRINCIPAL OVER
OF LEASES 90 DAYS OF LEASES 90 DAYS
- ---------------------------------------------------------------------------------------------------
Leases held in portfolio.... $ 3,031 $ 2,469 $ 2,750 $ 2,368
Leases held for
securitization........... 3,839 8 969 -
Leases securitized.......... 10,305 38 27,728 78
---------------------------------------------------------------------
Total leases managed........ $ 17,175 $ 2,515 $ 31,447 $ 2,446
- ---------------------------------------------------------------------------------------------------
</Table>
Leases securitized of $10,305 and $27,728 at December 31, 2004 and 2003,
respectively, is comprised of our retained interest in future cash flows of
those leases measured at fair value of $3,849 and $8,720, respectively, and the
financial institution's interest in those leases of $6,456 and $19,008
respectively, and is shown as a component of other assets on the Consolidated
Balance Sheets.
We monitor our potential credit risk associated with lease securitizations and
provide for an allowance for doubtful accounts which is maintained at a level
that we believe is sufficient to cover potential losses on leases securitized.
Credit losses historically have not been material.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Accounts payable...................................... $ 91,413 $ 104,305
Accrued compensation, fringe benefits and related
payroll taxes...................................... 88,667 71,765
Accrued litigation.................................... 86,625 179,000
Accrued professional fees............................. 19,408 11,805
Accrued warranty...................................... 20,956 20,828
Accrued rebates....................................... 18,169 13,161
Other accrued expenses................................ 89,677 89,802
-------------------------------------
$ 414,915 $ 490,666
- ---------------------------------------------------------------------------------------------
</Table>
11. RESTRUCTURING AND IMPAIRMENT CHARGES
a. TELXON ACQUISITION
We recorded certain restructuring, impairment and merger integration related
charges related to our Telxon acquisition during 2001 and 2002. Approximately
$61 relating to lease obligations was included in accrued restructuring expenses
as of December 31, 2003. During the year ended December 31, 2004, $53 was paid
and as of December 31, 2004, $8 remained in accrued restructuring expenses.
F-30
b. MANUFACTURING TRANSITION
In 2001, we began to transition volume manufacturing away from our Bohemia, New
York facility to lower cost locations, primarily our Reynosa, Mexico facility
and Far East contract manufacturing partners. As a result of these activities,
we incurred restructuring charges during 2002 and 2001. During the first quarter
of 2004, the Company entered into a sub-lease arrangement at its Bohemia, New
York facility and recorded the anticipated sub-lease income of approximately
$2,861 as a reduction of the lease obligation cost, which had been previously
recorded in 2001. This amount has been recorded as a reduction to product cost
of revenue during the first quarter of 2004. Included in accrued restructuring
expenses as of December 31, 2004 is $623 of net lease obligations relating to
these manufacturing restructuring charges.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
LEASE
WORKFORCE OBLIGATION
REDUCTIONS COSTS TOTAL
- ----------------------------------------------------------------------------------------------
Balance at December 31, 2001.............................. $ - $ 10,282 $ 10,282
Additional provision (reduction).......................... 4,843 (3,477) 1,366
Utilization/payments...................................... (4,843) (1,211) (6,054)
----------------------------------
Balance at December 31, 2002.............................. - $ 5,594 5,594
Utilization/payments...................................... - (1,238) (1,238)
----------------------------------
Balance at December 31, 2003.............................. - 4,356 4,356
Anticipated sub-lease income adjustment................... - (2,861) (2,861)
Utilization/payments...................................... - (872) (872)
----------------------------------
Balance at December 31, 2004.............................. $ - $ 623 $ 623
- ----------------------------------------------------------------------------------------------
</Table>
c. GLOBAL SERVICES TRANSITION
In 2003, our global services organization initiated restructuring activities
which included transferring a large percentage of our repair operations to
Mexico and the Czech Republic, reorganizing our professional services group to
utilize third party service providers for lower margin activities, and
reorganizing our European management structure from a country based structure to
a regional structure. The total costs incurred in connection with this
restructuring, which related almost entirely to workforce reductions, is
approximately $2,856, of which $2,633 and $223 was recorded as a component of
cost of revenue and operating expenses, respectively, in 2003.
In 2003, we initiated additional restructuring activities in connection with our
decision to relocate additional product lines from New York to Mexico. The costs
associated with this restructuring relate to workforce reductions and
transportation costs. The total amount incurred in connection with this
restructuring activity is approximately $961, all of which was recorded as a
component of cost of revenue in 2003. These restructuring activities were
completed by June 30, 2003.
In connection with the global services transition, the Company recorded
additional provisions of $8,795 during 2004 which relate to lease obligation
costs net of sub-lease income and further work force reductions. These amounts
have been recorded as a component of service
F-31
cost of revenue in the year ended 2004. These restructuring activities are
expected to be completed in 2005.
d. GENERAL AND ADMINISTRATIVE RESTRUCTURING
During the second quarter of 2004, the shared services organization initiated
restructuring activities that included the consolidating and transitioning of
back office transactional activities to the Czech Republic. The costs associated
with this restructuring relate to workforce reductions. The total amount
incurred in connection with this restructuring activity was $5,025 in 2004, all
of which was recorded as a component of operating expenses. These restructuring
activities are expected to be completed in the first quarter of 2005. Further
shared service restructuring activities are being considered and future benefits
are not yet defined, therefore, we cannot reasonably estimate the remaining cost
expected to be incurred.
e. In 2003, we initiated additional restructuring activities to exit buildings
that were acquired with the acquisition of @POS and Covigo, Inc. The costs
associated with this restructuring relate primarily to lease obligation costs,
adjusted for anticipated sub-lease income. The total amount incurred in
connection with this restructuring activity was $958, all of which was recorded
as a component of operating expenses. These restructuring activities were
completed by September 30, 2003. During the fourth quarter of 2004, we recorded
an adjustment of $145 for @POS sub-lease assumptions that did not occur. This
was recorded as a component of operating expense.
Details of the global services transition and general and administrative
restructuring charges and remaining balances as of December 31, 2004 are as
follows:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
LEASE ASSET
WORKFORCE OBLIGATION IMPAIRMENTS
REDUCTIONS COSTS AND OTHER TOTAL
- -----------------------------------------------------------------------------------------------
Balance of December 31, 2002.................. $ - $ - $ - $ -
Provision--cost of revenue.................... 3,429 2 208 3,639
Provision--operating expenses................. 137 721 323 1,181
Utilization/payments.......................... (3,487) (151) (359) (3,997)
-----------------------------------------------
Balance at December 31, 2003.................. $ 79 $ 572 $ 172 $ 823
Provision--cost of revenue.................... 5,160 3,585 50 8,795
Provision--operating expenses................. 5,025 145 - 5,170
Foreign Exchange.............................. - - 1,060 1,060
Utilization/payments.......................... (4,867) (1,497) (144) (6,508)
-----------------------------------------------
Balance at December 31, 2004.................. $ 5,397 $ 2,805 $ 1,138 $ 9,340
- -----------------------------------------------------------------------------------------------
</Table>
F-32
A summary of the combined restructuring, impairment and related charges
(reductions) incurred in each period are as follows:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------
Product cost of revenue (Manufacturing)..................... $(2,861) $ - $(3,477)
Product cost of revenue (Manufacturing)..................... - - 3,020
Product cost of revenue..................................... - 3,639 -
Service cost of revenue..................................... 8,795 - -
--------------------------
Total cost of revenue....................................... 5,934 3,639 (457)
--------------------------
Workforce reductions........................................ 5,025 137 1,823
Other....................................................... 145 1,044 767
------- ------ -------
Restructuring and impairment charges........................ $ 5,170 $1,181 $ 2,590
- ----------------------------------------------------------------------------------------
</Table>
12. LONG-TERM DEBT
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
DECEMBER 31, 2004 DECEMBER 31, 2003
- ---------------------------------------------------------------------------------------------
Senior Secured Term Loan Facility(a).................. $100,000 $ -
Senior Secured Revolving Credit Facility(a)........... 100,000 -
Short-term financing: short-term credit facility(b)... - -
Prior Revolving Credit Facility(c).................... - -
Secured Installment Loan(d)........................... 10,369 -
SAILS exchangeable debt(e)............................ 83,727 98,927
Other(f).............................................. 63 319
-------------------------------------
Total debt............................................ 294,159 99,246
Less: Current maturities.............................. 118,072 234
-------------------------------------
$176,087 $ 99,012
- ---------------------------------------------------------------------------------------------
</Table>
(a) On December 29, 2004, we entered into our new credit facility to be used (i)
to repay in full our outstanding senior indebtedness, comprised of the
short-term credit facility and our prior revolving credit facility; (ii) for
working capital and general corporate purposes; and (iii) to pay certain fees
and expenses incurred in connection with such transactions. Pursuant to our new
credit facility, the lenders severally agreed to provide us the following: (a) a
senior secured term loan facility in an aggregate principal amount of $100,000
and (b) a senior secured revolving credit facility in an aggregate principal
amount of up to $150,000 with a $20,000 sub limit available for letters of
credit. Our new credit facility is secured on a first priority basis by (i) a
pledge of all of the capital stock or other equity interests of our domestic
subsidiaries, (ii) a pledge of 65% of the capital stock or other equity
interests of selected overseas subsidiaries located in the United Kingdom, the
Netherlands and Japan, (iii) 100% of the capital stock of the manufacturing
entity in Reynosa, Mexico and all of its other assets and (iv) all our other
assets (other than real estate) of our domestic subsidiaries.
On December 29, 2004, we borrowed $100,000 on the term loan facility and
$100,000 on the revolving credit facility. The term loan facility is payable at
approximately $11,111 per quarter, which commences on December 15, 2005 through
the term loan maturity date of December 30, 2007. The revolving credit facility
matures on December 30, 2009. The revolving credit facility is classified as
short term on the Consolidated Balance Sheet as our intention is to pay it off
currently. We incurred approximately $3,600 of deferred financing costs related
to the new credit facility. The interest rate on the new credit facility is the
greater of (i) the prime rate and (ii) the federal funds rate plus 0.5%, plus,
in both cases, the applicable margin for U.S.-based loans. For Eurodollar-based
loans, the rate is the adjusted LIBO rate (defined as the LIBO rate multiplied
by the statutory reserve rate) plus the applicable margin. The applicable margin
is based upon our leverage ratio (defined as the ratio of our total indebtedness
to our consolidated EBITDA for the period of the most recent four fiscal
quarters) plus 0.25% to 1% for U.S.-based loans and 1.25% to 2% for
Eurodollar-based loans. The interest rate on our new credit facility, which
includes our term loan facility and revolving credit facility, was 6.0% at
December 31, 2004. The new credit facility contains a number of security and
financial covenants, we are in compliance with all covenants as of December 31,
2004.
F-33
(b) On September 9, 2004, in connection with the acquisition of Matrics, we
entered into a short-term credit facility in the amount of $250,000. The
short-term credit facility, which was a senior unsecured borrowing, initially
had an annual interest rate of three-month LIBOR plus 400 basis points and
matured on September 9, 2005. The annual interest rate increased by 100 basis
points on November 1, 2004 and would have increased by an additional 50 basis
points at the end of each one-month period thereafter until September 9, 2005,
but would not have exceeded 11.5% (or 13.5% if there have been an event of
default). If the short-term credit facility was not repaid in full prior to
September 9, 2005, it may have been converted to exchange notes pursuant to an
indenture that would have matured on September 9, 2011. This facility contained
a number of security and financial covenants. On December 29, 2004, this
facility was replaced by the new credit facility referred to in (a) above. We
wrote off approximately $6,300 of deferred financing costs when this facility
was paid off on December 29, 2004.
(c) Through September 15, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and international banks. These borrowings bore
interest at either LIBOR plus 75 and 100 basis points at September 15, 2003
(which approximated 1.86 percent at such date), or the base rate of the
syndication agent bank, contingent upon various stipulations by the lender,
which approximated 4.0 percent at September 15, 2003. As a result of the length
of time necessary to restate our financial statements beginning on September 16,
2003, we would have been in violation of one of the covenants of our credit
agreement that requires the timely filing of financial statements with the SEC.
On September 15, 2003, we reached an agreement with the bank group and obtained
a waiver to provide us additional time to become current with our periodic
filings with the SEC. Under the revised credit agreement, the credit facility
was reduced from $350,000 to $100,000 and we voluntarily agreed to limit our
usage of the credit facility to $50,000 until such time as we became current
with our periodic filings. In addition, we pledged our U.S. trade receivables
and agreed to retain $75,000 of unencumbered, worldwide cash until that time.
In November 2003, this credit facility was replaced with a $30,000 secured
credit line which expired in May 2006. These borrowings which were secured by
U.S. trade receivables bore interest at either LIBOR plus 200 basis points which
approximated 3.1% at December 31, 2003 or, the base rate of the syndication
agent bank, which approximated 4.0% at December 31, 2003. As of December 31,
2003, there were no borrowings outstanding under the secured credit line. On
February 27, 2004, this credit facility was increased to $45,000 with the same
interest provisions. On March 16, 2004, this credit facility was increased to
$60,000 with the same interest provisions. On December 29, 2004, this facility
was replaced by the new credit facility referred to in (a) above.
(d) On March 31, 2004, we entered into a purchase money secured installment loan
with a bank for $13,825. The loan is payable in four semiannual installments of
$3,655, including interest, commencing October 1, 2004. The proceeds received
under the loan were used to finance the purchases of certain software. The fixed
interest rate on this installment loan is 5.33%. This installment loan is
collateralized by the purchased software.
(e) In order to provide additional liquidity to be used for general corporate
purposes, including the repayment of debt outstanding under our revolving credit
facility and to effectively lock in the gain recognized upon the sale of our
Cisco shares, while avoiding a tax liability in January 2001, we entered into a
private Mandatorily Exchangeable Securities Contract for Shared Appreciation
Income Linked Securities ("SAILS") with a highly rated financial institution.
The securities that underlie the SAILS contract represent our investment in
Cisco common stock, which was acquired in connection with the Telxon acquisition
(see Note 5). This debt has a seven-year maturity and bears interest at a cash
coupon rate of 3.625 percent of the original notional amount of debt of
$174,200. At maturity, the SAILS are exchangeable for shares of Cisco common
stock or, at our option, cash in lieu of shares. Net proceeds from the issuance
of the SAILS and termination of an existing freestanding collar arrangement were
approximately $262,246. The SAILS contain an embedded equity collar, which
effectively manages a large portion of our exposure to fluctuations in the fair
value of our holdings in Cisco common stock. We account for the embedded equity
collar as a derivative financial instrument in accordance with the requirements
of SFAS 133. The change in fair value of this derivative between reporting dates
is recognized as other income. The derivative has been combined with the debt
instrument in long-term debt as there is a legal right of offset in accordance
with FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts." Since inception, the gross SAILS liability remains unchanged at
$174,200. The derivative asset was valued at $90,473 and $75,273 on December 31,
2004 and 2003, respectively. The net SAILS liability, when offset by the
derivative asset, represents $83,727 and $98,927 of the total long-term debt
balance outstanding at December 31, 2004 and 2003, respectively. We have the
option to terminate the SAILS arrangement prior to its scheduled maturity. If we
terminate the SAILS arrangement prior to its scheduled maturity by delivering
our Cisco common stock our cash payment would not exceed the present value of
our future coupon payments at the time of termination. At the present time, we
do not anticipate terminating the SAILS arrangement prior to its scheduled
maturity date.
(f) We have available $25,000 in uncommitted U.S. dollar and foreign currency
lines of credit with several global banks with a range of borrowing rates and
varying terms that continue until such time as either party wishes to terminate
the agreements. As of December 31, 2004, there were no outstanding borrowings
under these agreements. The remaining balances in other long-term debt of $63
and $319 at December 31, 2004 and 2003, respectively, represent capital lease
obligations and various other loans maturing through 2007.
Based on the borrowing rates currently available to us for bank loans with
similar terms, the fair values of borrowings under the Credit Agreement, senior
notes and promissory notes, approximate their carrying values.
F-34
Our capital lease obligations are included in long-term debt in the Consolidated
Balance Sheets. The combined aggregate amount of long-term debt and capital
lease maturities for each of the years ending December 31 are as follows:
<Table>
- ----------------------------------------------------------------------
2005........................................................ $118,072
2006........................................................ 47,906
2007........................................................ 44,449
2008........................................................ 83,732
--------
Total.................................................... $294,159
- ----------------------------------------------------------------------
</Table>
13. INCOME TAXES
The provision for (benefit from) income taxes consists of:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
- ----------------------------------------------------------------------------------------------
CURRENT:
Federal.................................................. $11,630 $ 52 $ -
State and local.......................................... 7,721 - -
Foreign.................................................. 6,944 6,786 6,149
--------------------------------
26,295 6,838 6,149
--------------------------------
DEFERRED:
Federal.................................................. 20,829 (12,114) (23,402)
State and local.......................................... (137) 3,306 (2,836)
Foreign.................................................. (5,065) 2,576 3,274
--------------------------------
15,627 (6,232) (22,964)
--------------------------------
Total provision for (benefit from) income taxes............. $41,922 $ 606 $(16,815)
- ----------------------------------------------------------------------------------------------
</Table>
The components of income before income taxes are as follows for the three years
ended December 31:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
- -----------------------------------------------------------------------------------------------
United States............................................... $115,165 $(24,796) $(72,662)
International............................................... 8,604 28,697 10,932
---------------------------------
$123,769 $ 3,901 $(61,730)
- -----------------------------------------------------------------------------------------------
</Table>
F-35
A reconciliation between the statutory U.S. Federal income tax rate and our
effective tax rate is as follows:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2004 2003 2002
----------------- ---------------- -----------------
% OF % OF % OF
AMOUNT PRETAX AMOUNT PRETAX AMOUNT PRETAX
- ----------------------------------------------------------------------------------------------
Statutory U.S. Federal rate
provision (benefit)............. $ 43,319 35.0% $ 1,365 35.0% $(21,605) (35.0)%
State taxes, net of federal tax
effect.......................... 4,930 4.0 2,149 55.1 (1,843) (3.0)
Tax credits........................ (10,181) (8.2) (5,892) (151.1) (4,491) (7.2)
Writeoff of In Process R&D......... 4,480 3.6 - - - -
Non-deductible fines............... 12,250 9.9 1,750 44.9 - -
Extraterritorial income
exemption....................... (4,254) (3.4) (1,037) (26.6) - -
Income of foreign subsidiaries
taxed at differing tax rates.... (22) (0.1) (757) (19.4) 1,064 1.7
Change in valuation allowance...... (8,346) (6.7) 2,180 55.9 6,166 10.0
Non-deductible compensation........ 92 0.1 370 9.5 2,895 4.7
Other non-deductible items......... 634 0.5 564 14.5 580 0.9
Other, net......................... (980) (0.8) (86) (2.3) 419 0.7
---------------------------------------------------------
$ 41,922 33.9% $ 606 15.5% $(16,815) (27.2)%
- ----------------------------------------------------------------------------------------------
</Table>
Our effective tax rate will change from year to year based on recurring factors
including the geographical mix of income before taxes, state and local taxes,
the ratio of permanent items to pretax book income and the implementation of
various global tax strategies, as well as nonrecurring events.
Net tax (costs)/benefits of $28,400 in 2004, $(12,419) in 2003 and $16,650 in
2002 were recorded directly through equity which included net tax benefits
related to currency translations, unrealized losses on available for sale
securities and certain employee benefit plans. In addition, net tax benefits of
$15,299 were recorded as part of a reduction of goodwill in connection with the
Matrics and Telxon acquisitions.
F-36
The components of our deferred tax assets and liabilities at December 31, 2004
and 2003, are as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
AT DECEMBER 31,
-------------------
2004 2003
- ---------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Receivables................................................. $ 64,114 $ 46,220
Inventory................................................... 17,893 49,226
Accrued compensation and associate benefits................. 19,341 36,793
Other accrued liabilities................................... 81,253 80,296
Accrued restructuring and severance costs................... 1,046 400
Deferred revenue-current.................................... - 16,102
Deferred revenue-long term.................................. 9,616 -
Purchased technology and other intangibles.................. 130,204 20,777
Property, plant and equipment............................... 4,307 1,764
Cumulative translation adjustments.......................... 2,357 157
Net operating loss carryforwards............................ 115,639 164,048
Capital loss carryforwards.................................. 12,965 12,493
Tax credit carryforwards.................................... 88,012 96,169
Charitable contribution carryforwards....................... 1,046 2,114
Other, net.................................................. 1,281 5,510
-------------------
Total deferred tax assets................................... 549,074 532,069
Valuation allowance......................................... (37,288) (43,936)
-------------------
Net deferred tax assets..................................... 511,786 488,133
-------------------
DEFERRED TAX LIABILITIES:
Investments................................................. (69,027) (57,095)
Net investment in sales-type leases......................... (4,314) (5,991)
Deferred revenue-long-term.................................. (9,113) (5,244)
Deferred patent and product development costs............... - (8,762)
Property, plant and equipment............................... (12,763) -
-------------------
Total deferred tax liabilities.............................. (95,217) (77,092)
-------------------
Net deferred income tax assets.............................. $416,569 $411,041
- ---------------------------------------------------------------------------------
</Table>
Amounts recognized as deferred tax assets in the Consolidated Balance Sheets
consists of:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
AT DECEMBER 31,
-------------------
2004 2003
- ---------------------------------------------------------------------------------
Current..................................................... $179,844 $182,571
Non-current................................................. 236,725 228,470
-------------------
Total....................................................... $416,569 $411,041
- ---------------------------------------------------------------------------------
</Table>
F-37
We have available federal, state and foreign net operating loss carryforwards of
approximately $283,259, $583,501 and $7,290, respectively, at December 31, 2004.
Such loss carryforwards expire in accordance with provisions of applicable tax
law and have remaining lives ranging from 1 to 20 years and $6,544 of these loss
carryforwards have no expiration date. Certain loss carryforwards are more
likely than not to expire unused.
We also have a capital loss carryforward of approximately $36,010 for federal
and state jurisdictions at December 31, 2004. Such loss carryforward expires in
4 years in accordance with provisions of applicable tax laws.
We also have available federal, state and foreign credit carryforwards of
approximately $78,692, $8,880 and $440, respectively, at December 31, 2004. Such
credits have expiration dates ranging from 1 to 20 years, and $21,346 of these
credits has no expiration date. Certain credit carryforwards are more likely
than not to expire unused.
The valuation allowance decreased by $6,648 during 2004 and increased by $12,500
during 2003. The 2004 decrease relates to foreign tax credits which the Company
expects to utilize based on the current forecasts and an increase in the foreign
tax credit carryforward period from 5 to 10 years pursuant to AJCA. This
decrease is slightly offset by an increase in the valuation allowance for state
and local loss carryforwards that are more likely than not to expire. The
increase in 2003 relates to limitations on federal net operating loss
carryforwards and tax credits of acquisitions, as well as, foreign tax credits
and state and foreign loss carryforwards that are more likely than not to expire
before they can be utilized. Subsequent recognition of a substantial portion
($30,908) of the deferred tax asset relating to such net operating loss and tax
credit carryforwards against which a valuation allowance has been recorded would
result in a reduction of goodwill recorded in connection with the Telxon, @POS
and/or Covigo acquisitions.
F-38
14. COMMITMENTS AND CONTINGENCIES
a. LEASE AGREEMENTS
The combined aggregate amount of required future minimum rental payments under
non-cancelable capital and operating leases for each of the years ending
December 31 are as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
OPERATING
CAPITAL LEASES
LEASES ---------
- ---------------------------------------------------------------------------------
2005........................................................ $ 49 $ 22,709
2006........................................................ - 19,031
2007........................................................ - 16,582
2008........................................................ - 13,779
2009........................................................ - 10,634
Thereafter.................................................. - 27,727
-------------------
Total minimum payments...................................... 49 $ 110,462
---------
Less amounts representing interest.......................... 1
-------
Present value of future lease payments...................... 48
Less current portion........................................ 48
-------
Long-term capital lease obligation.......................... $ -
- ---------------------------------------------------------------------------------
</Table>
Rent expense under operating leases was $21,238, $19,979 and $17,103 for the
years ended December 31, 2004, 2003 and 2002, respectively.
b. EMPLOYMENT CONTRACTS
We have, or had, executed employment contracts with certain senior executives
that vary in length, for which we have a minimum commitment aggregating
approximately $4,736 and $5,519 at December 31, 2004 and 2003, respectively. In
February 2002, our former President and Chief Executive Officer announced his
retirement. In connection therewith, we recorded a pre-tax compensation and
related benefits charge of $8,597 in 2002 which is included in selling, general
and administrative expenses in the Consolidated Statements of Operations.
c. LETTERS OF CREDIT AND PURCHASE COMMITMENTS
At December 31, 2004, we had outstanding letters of credit of $3,118 and $16,882
of unused letters of credit. As of December 31, 2004 and 2003, we have included
in our accrued liabilities $4,094 and $1,110 respectively, for purchase
commitments for which a loss was recognized.
d. LEGAL MATTERS
We are a party to lawsuits in the normal course of business. Litigation in the
normal course of business, as well as the lawsuits and investigations described
below, can be expensive, lengthy and disruptive to normal business operations.
Moreover, the results of complex legal proceedings and government investigations
are difficult to predict. Unless otherwise specified, Symbol is currently unable
to estimate, with reasonable certainty, the possible loss, or range of
F-39
loss, if any, for the lawsuits and investigations described herein. An
unfavorable resolution to any of the lawsuits or investigations described below
could have a material adverse effect on Symbol's business, results of operations
or financial condition.
GOVERNMENT INVESTIGATIONS
In May 2001, in response to an inquiry from the SEC, we retained a law firm to
conduct an internal investigation into certain allegations concerning our
accounting practices, focusing on specific transactions with two of our
customers but also including a limited review of other large transactions. The
law firm retained an accounting firm to assist it in the investigation. We
subsequently discovered that this investigation was hindered by certain of our
former employees. As a result of actions by these former employees, the SEC
expressed dissatisfaction with the investigation.
In March 2002, we retained a second law firm to conduct a wide-ranging internal
investigation into our accounting practices. The investigation was conducted
over a period of approximately eighteen months with the assistance of an outside
forensic accounting team. The SEC and the United States Attorney's Office for
the Eastern District of New York ("Eastern District") commenced separate but
related investigations relating to our accounting practices.
The investigation found that, during the period covered by the restatement,
certain members of former management engaged in, directed and/or created an
environment that encouraged a variety of inappropriate activities that resulted
in accounting errors and irregularities affecting our previously issued
financial statements that we have now restated. The errors and irregularities
caused by these actions primarily concerned the timing and amount of product and
service revenue recognized. In particular, the investigation found that revenue
was accelerated from the appropriate quarters to earlier quarters through a
variety of improper means and, on a more limited basis, revenue was improperly
created and inflated on a net basis. Additionally, there were errors and
irregularities associated with the establishment and utilization of certain
reserves and restructurings, including certain end-of-quarter adjustments that
were apparently made in order to achieve previously forecasted financial
results. There were also errors and/or irregularities associated with the
administration of certain options programs, as well as several categories of
cost of revenue and operating expenses, including efforts to artificially reduce
reported inventory.
In addition, the internal investigation uncovered efforts by certain then
employees, including certain members of then management, to impede both the
initial and second internal investigations. The employees responsible for
directing such conduct resigned or were terminated.
The investigation found that, in addition to the specific items of misconduct
giving rise to the need for the restatement, there was a failure by our former
management to establish an appropriate control environment, and there were
significant failures in our internal controls and procedures resulting from
numerous causes, including inadequate hiring of qualified and experienced
personnel, insufficient training and supervision of personnel, a decentralized
accounting structure for operations in the United States and inadequate systems
and systems interfaces. The investigation also found instances in which some
members of former management and sales and finance-related employees devoted
insufficient attention and resources to ensuring accurate accounting and
financial reporting. As the guilty pleas of three former senior members of our
finance group illustrate, there were also instances in which such activity rose
to the level of criminal misconduct. All of the members of senior management
F-40
who were primarily responsible for the errors and irregularities underlying the
restatement either have been terminated from employment at Symbol as part of the
internal investigation or have left Symbol, including Tomo Razmilovic, one of
our former Presidents, Chief Executive Officers and directors, and Kenneth
Jaeggi, our former Senior Vice President and Chief Financial Officer. We
assembled a new management team and appointed new board members beginning in
mid-2002.
In November 2002, we announced the unaudited, preliminary expected magnitude of
the anticipated restatement of our financial statements, and updated that
information on several occasions over the subsequent eleven months. Accordingly,
the selected financial data for 1998, 1999, 2000 and 2001, financial statements
for the years ended December 31, 2000 and 2001, and unaudited selected quarterly
information for each of the four quarters of 2001 and the first three quarters
of 2002 were restated in our 2002 Annual Report on Form 10-K/A.
In connection with our accounting practices various class action lawsuits were
filed against us and certain of our former management and our former board of
directors in March 2002, March 2003 and May 2003. For more information see
"-- Securities litigation matters."
On June 3, 2004, we announced that we resolved the investigation by the Eastern
District relating to our past accounting practices by entering into a
non-prosecution agreement with the Eastern District. As a result of this
non-prosecution agreement, no criminal complaint will be filed against us. In
addition, on June 3, 2004, we announced an agreement with the SEC to resolve
allegations against us relating to our past accounting practices that were under
investigation by the SEC. Pursuant to the agreements with the Eastern District
and the SEC, we have paid a total of $37,000 in cash to a restitution fund for
members of the class consisting of purchasers of our common stock from February
15, 2000 to October 17, 2002, and $3,000 to the United States Postal Inspection
Service Consumer Fraud Fund. In addition to these payments, the non-prosecution
agreement included an acknowledgement by us that between 1999 and 2002, as a
result of the actions of certain of our former employees, we (a) violated
federal criminal law in connection with accounting practices involving improper
sales transactions, unsupported and fictitious accounting entries and the
manipulation of our accounting reserves and expenses; and (b) filed and caused
to be filed materially false and misleading financial statements and other
documents with the SEC. As part of the non-prosecution agreement, we agreed to
continue our cooperation with the Eastern District and the SEC, and to implement
remedial measures, including, but not limited to, retaining an independent,
government-approved examiner to review our internal controls, financial
reporting practices and our compliance with the settlement agreements and
establishing and maintaining an annual training and education program designed
to diminish the possibility of future violations of the federal securities laws.
If we violate the injunction, the agreement with the Eastern District or the SEC
or commit or attempt to commit other violations, such as accounting offenses
that were not the subject of the investigations, we will be subject to federal
criminal charges. Pursuant to the non-prosecution agreement we have waived
certain defenses that may have otherwise been available to us in the event of a
federal criminal charge, including the statute of limitations, and will be
subject to prosecution for any offense, including any offense related to our
past accounting practices. In addition, in the event of a violation of the
agreement and a federal criminal charge, statements that were made by or on
behalf of us to the Eastern District, SEC and the Postal Inspection Service,
including the acknowledgments of responsibility described above, will be deemed
admissible in evidence and certain evidentiary rules will not be available to
us. Pursuant to the agreement with the SEC, the SEC filed, and the court has
approved, a Final Consent Judgment in the Eastern District of
F-41
New York providing for injunctive relief, enjoining us from further violations
of the antifraud, reporting, books and records and internal control provisions
of the federal securities laws, and a civil penalty in the amount of $37,000, as
described above. We paid both the $37,000 and the $3,000 to the United States
Postal Inspection Service Consumer Fraud Fund prior to June 30, 2004.
On October 26, 2004, the Company issued a press release announcing its financial
results for the third quarter 2004. On November 8, 2004, the Company issued a
second press release, revising some of the previously reported numbers. The
revised numbers included a reduction of approximately $13.3 million in revenue
for the nine months ending September 30, 2004, as compared to the results
previously reported in the press release of October 26, 2004. The November 8,
2004 press release stated that the Company had discovered certain discrepancies
in the amount of inventory at a distributor as well as inventory on hand that
affected its previously-announced results. On November 15, 2004, the Company
filed its Form 10-Q for the third quarter of 2004.
The non-prosecution agreement between the Company and the United States
Attorney's Office for the Eastern District of New York, described previously,
provides that should the Company violate the agreement or commit a crime in the
future, the Company would be subject to prosecution for any offense, including
any offense related to the Company's past accounting practices. The Company has
retained outside counsel to investigate the facts and circumstances surrounding
the erroneous numbers included in the October 26, 2004 press release. The
Company has been cooperating with the informal requests made by the Eastern
District and by the SEC regarding this matter, including whether Symbol has
complied with the injunction entered into in connection with its June 2004
settlement with the SEC and the non-prosecution agreement with the Eastern
District. There can no assurance that these events will not give rise to an
enforcement action or other proceeding brought by the SEC or the Eastern
District.
SECURITIES LITIGATION MATTERS
On June 3, 2004, we announced our settlement of the Pinkowitz, Hoyle and Salerno
class action lawsuits, which are described below. Under the settlement, we
agreed to pay to the class members an aggregate of $1,750 in cash and an
aggregate number of shares of common stock having a market value of $96,250,
subject to a minimum and maximum number of shares based upon the volume-weighted
moving average trading price of our common stock for the five day period
immediately prior to our payment of the common stock to the class ("Determined
Price"). If the Determined Price is greater than $16.41 per share, then we will
issue 5,865.3 shares of our common stock to the class. If the Determined Price
is between $16.41 per share and $11.49 per share, then we will issue to the
class the number of shares of common stock equal to a market value of $96,250
divided by the Determined Price. If the Determined Price is less than $11.49 per
share, we will issue 8,376.8 shares of our common stock to the class. The
settlement also provides that we have the right to pay up to an additional $6.0
million in cash to reduce the number of shares of our common stock that we are
required to deliver in an amount equal to the amount of additional cash divided
by the Determined Price. If (i) there occurs any event that would lead to the
de-listing of our common stock or our board of directors recommends the approval
of a tender offer for the purchase of a majority of our common stock or (ii) the
Determined Price is less than $11.90 per share, then the lead counsel for the
plaintiffs can require us to place into escrow the number of shares that would
otherwise be payable to the class and would have the right to sell all or any
portion of the escrowed shares and invest such proceeds until distribution to
the class. If we do
F-42
not deliver our common stock as required by the settlement agreement within the
ten days of such requirement, the lead counsel for the plaintiffs may terminate
the settlement agreement. The court held a fairness hearing regarding the
settlement on October 4, 2004 and approved the fairness of the settlement by an
order entered on October 20, 2004. On November 17, 2004, we delivered 586.5
shares, or 10% of the settlement amount (at $16.41 per share), as satisfaction
of the plaintiffs' attorneys' fees incurred as of October 2004, pursuant to the
court's order. We expect to deliver the balance of the shares required to be
issued under the settlement of 5,278.8 shares in the first half of 2005. As of
December 31, 2004, the Company has reflected $86,625 as accrued litigation costs
in its current liabilities. For every $1.00 per share above $16.41 per share on
the date the shares are issued, an additional non-cash litigation charge of
approximately $5.3 (pre-tax) and $3.2 (after-tax) will be required to be
recorded in our statements of operations in 2005.
In addition to the payments described above, the $37,000 civil penalty imposed
by the SEC, which we have already paid, will be distributed to the class. Also,
as part of the settlement, Dr. Jerome Swartz, our co-founder and former
chairman, has paid $4,000 in cash to the class to settle the claims against him
in the Pinkowitz and Hoyle class action lawsuits.
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a class action lawsuit was filed in the United States District
Court for the Eastern District of New York on behalf of purchasers of our common
stock between October 19, 2000 and February 13, 2002, inclusive, against us and
certain members of our former management and our former board of directors. The
complaint alleged that the 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 our
securities. This case is subject to the settlement agreement described above.
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against us and certain
members of our former management and our former board of directors. On May 7,
2003, a virtually identical class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints were brought on behalf of a class of former
shareholders of Telxon Corporation ("Telxon") who obtained our common stock in
exchange for their Telxon stock in connection with our acquisition of Telxon in
November 2000. The complaint alleges that the defendants violated the federal
securities laws by issuing a Registration Statement and Joint Proxy
Statement/Prospectus in connection with the Telxon acquisition that contained
materially false and misleading statements that had the effect of artificially
inflating the market price of our securities. These cases are subject to the
settlement agreement described above.
SMART MEDIA LITIGATION
Telxon v. Smart Media of Delaware, Inc.
On December 1, 1998, Telxon filed suit against Smart Media of Delaware, Inc.
("SMI") in the Court of Common Pleas for Summit County, Ohio in a case seeking a
declaratory judgment that Telxon did not contract to develop SMI's products or
invest approximately $3,000 in SMI's
F-43
business and that it did not fraudulently induce SMI to refrain from engaging in
business with others or interfere with SMI's business relationships. On March
12, 1999, SMI filed its answer and counterclaim denying Telxon's allegations and
alleging counterclaims against Telxon for negligent misrepresentation, estoppel,
tortious interference with business relationship and intentional
misrepresentation and seeking approximately $10,000 in compensatory damages,
punitive damages, fees and costs. In addition, William Dupre, an individual
employed by SMI at that time, asserted similar counterclaims against Telxon. In
November 2000, Symbol acquired Telxon with these claims still pending.
On September 17, 2003, the jury awarded approximately $218,000 in damages
against Telxon, of which approximately $6,000 was awarded to Mr. Dupre. The
court denied Telxon's motions for judgment in its favor notwithstanding the
verdict, for a new trial and for a reduction in the amount of the jury verdicts.
On May 6, 2004, the court entered judgment against Telxon for approximately
$218,000 in damages, plus statutory interest from the date of the verdicts and
granted a motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by Mr. Dupre. Prior to these court rulings, SMI withdrew
its motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by SMI. We and Telxon have filed notices of appeal of
these rulings and the related verdicts. Symbol and Telxon have deposited
approximately $50,000 into an interest-bearing court escrow account to stay
execution of the judgment against both Symbol and Telxon pending resolution of
the appeal. The parties completed the submission of briefs on this appeal in
March 2005.
Our available cash, including cash available under our existing lines of credit,
may not be sufficient to pay jury verdicts of this size and we would need to
obtain additional financing in order to pay the judgment entered against Telxon
in this matter. In addition, we currently have not recorded any liability in our
consolidated financial statements with respect to the jury verdicts and the
judgment entered as we believe that, in accordance with the relevant guidance
set forth in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," an unfavorable outcome of this litigation is not probable at
this time. However, there can be no assurance that we will not be found to be
ultimately liable for the full amount of the judgment, plus statutory interest
from the date of the verdicts. In the event we are found liable, and the
judgment is not paid, we would be in violation of the terms of our new credit
facility.
PENDING PATENT AND TRADEMARK LITIGATION
Metrologic Instruments, Inc. v. Symbol Technologies, Inc.
On June 19, 2003, Metrologic Instruments, Inc. ("Metrologic") filed a complaint
against us in the United States District Court, District of New Jersey, alleging
patent infringement and breach of contract, and seeking monetary damages of
approximately $2,300 (as of March 31, 2004) and termination of the
cross-licensing agreement between the parties. We answered the complaint and
asserted counterclaims for declaratory judgments of invalidity and
noninfringement of Metrologic's patents and for non-breach of the
cross-licensing agreement. We moved for partial summary judgment to dismiss
Metrologic's breach of contract claim. On October 18, 2004 the Court granted
Symbol's motion for summary judgment on Metrologic's breach of contract claim,
and also granted Symbol leave to assert certain defenses. On October 25, 2004,
Symbol asserted defenses of inequitable conduct with respect to Metrologic's
patents. We intend to defend the case vigorously on the merits.
F-44
Symbol Technologies, Inc. et al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership
On July 21, 1999, we and six other members of the Automatic Identification and
Data Capture industry ("Auto ID Companies") jointly initiated a lawsuit against
the Lemelson Medical, Educational, & Research Foundation, Limited Partnership
("Lemelson Partnership"). The suit was commenced in the United States District
Court, District of Nevada in Reno, Nevada, but was subsequently transferred to
the federal 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 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. We have
received many requests from our customers asking that we undertake the defense
of these claims using our knowledge of the technology at issue, and the other
Auto ID Companies have received similar requests. Certain of our customers have
requested indemnification against the Lemelson Partnership's claims from us, and
certain customers of the other Auto ID Companies have requested similar
indemnification from them, individually and/or collectively with other equipment
suppliers. We believe that generally we have no obligation to indemnify our
customers against these claims and that the patents being asserted by the
Lemelson Partnership against our customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
On January 23, 2004, the court concluded that Lemelson's patent claims are
unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the court are not infringed by us because
use of the accused products does not satisfy one or more of the limitations of
each and every asserted claim; and that the claims are invalid for lack of
enablement even if construed in the manner urged by Lemelson. The court entered
its judgment in favor of Symbol and the other Auto ID Companies on January 23,
2004. The Lemelson Partnership filed several post-trial motions all of which
were denied by the court. The Lemelson Partnership filed a notice of appeal on
June 23, 2004. Briefs on appeal have been filed by the parties.
Intermec IP Corp. v. Matrics, Inc.
On June 7, 2004, Intermec IP Corp., a subsidiary of Intermec Technologies
Corporation ("Intermec"), filed suit against Matrics in the Federal District
Court in Delaware asserting infringement of four patents owned by Intermec IP
Corp. relating to RFID readers and RFID tags. The complaint against Matrics
seeks payment of a "reasonable royalty" as well as an injunction against Matrics
from infringing such patents. On September 9, 2004, Symbol consummated the
acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004, and
accordingly, Symbol is defending the case vigorously on the merits.
On January 21, 2005, Matrics filed an Amended Answer and Counterclaim to which
Intermec replied on February 4, 2005. On January 25, 2005, Matrics filed a
motion to dismiss Intermec IP Corp.'s damages claims insofar as they seek
damages for the period after October 29, 2004, the date on which Matrics was
merged into Symbol and ceased to exist. In the alternative, Matrics moved to
substitute Symbol for Matrics as successor-in-interest to Matrics. Intermec IP
Corp. initially opposed the motion, but subsequently withdrew its opposition to
substituting Symbol for Matrics. Symbol filed an amended answer and
counterclaims on April 6, 2005.
F-45
The Court entered a Scheduling Order on February 8, 2005. The Order provides for
a Markman claim construction hearing to be held September 7, 2005. The case is
scheduled for a ten day jury trial beginning on May 1, 2006. Discovery is just
under way.
Symbol Technologies, Inc. v. Intermec Technologies Corporation
On March 10, 2005, Symbol filed a patent infringement suit against Intermec in
the United States District Court for the District of Delaware, asserting
infringement of four Symbol patents relating to wireless technology. On March
23, 2005, Intermec asserted counterclaims against Symbol for alleged
infringement of six Intermec patents. The Intermec patents relate to wireless
scanners, signature capture technology and bar code readers with multi-tasking
operating systems. Symbol responded to Intermec's infringement claims on April
11, 2005 and asserted counterclaims seeking declarations that the Intermec
patents were invalid and not infringed. Symbol intends to defend the case
vigorously on the merits.
Nanopower Technologies, Inc. v. Symbol Technologies, Inc. and Matrics Technology
Systems, Inc.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a California
corporation, filed a civil suit against Matrics and Symbol in state court in
California. The suit alleges that Matrics breached a consulting agreement,
confidentiality agreement and intellectual property licensing agreement
pertaining to certain ultra low voltage RFID tag start-up technology to which
Nanopower claims ownership and that the defendants violated California state law
relating to the protection of trade secrets. The suit also named Symbol as a
defendant because of Symbol's announced intention to purchase Matrics. Nanopower
alleges that Symbol (i) has improperly received disclosure of Nanopower's
confidential information, (ii) has misappropriated, or will, misappropriate
Nanopower's trade secrets as a consequence of the acquisition of Matrics and
(iii) will benefit from the alleged breaches of the intellectual property
licensing and consulting agreements. On September 9, 2004, Symbol consummated
the acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004,
and accordingly, Symbol is defending the case vigorously on the merits.
Matrics' agreements with Nanopower provide for mandatory arbitration of these
disputes in Washington, DC and contain an exclusive venue clause requiring any
effort to obtain injunctive relief to be filed in Maryland. The state court
complaint was removed to federal court and Matrics has filed a motion to
transfer the suit to Maryland in anticipation of a subsequent stay pending
arbitration. On October 1, 2004, before the Court heard Matrics' motion,
Nanopower agreed to and the parties filed a stipulation to stay the case pending
mediation, and if necessary, arbitration. A mediation was held on December 21,
2004, in an effort to resolve this matter. However, no resolution was reached.
Symbol has been informed by Nanopower's attorneys that they intend to pursue an
arbitration. One of Nanopower's claims is for breach of a consulting agreement,
based on Matrics' failure to pay an invoice in the amount of approximately
$38,000. On February 15, 2005, the Company sent to Nanopower a check in the
amount of the invoice, plus accrued interest. It is not yet known if Nanopower
will seek to arbitrate its other claims.
OTHER LITIGATION
Barcode Systems, Inc. v. Symbol Technologies Canada, Inc. and Symbol
Technologies, Inc.
On March 19, 2003, Barcode Systems, Inc. ("BSI") filed an amended statement of
claim in the Court of Queen's Bench in Winnipeg, Canada, naming Symbol
Technologies Canada, Inc. and
F-46
Symbol as defendants. BSI alleges that we deliberately, maliciously and
willfully breached our agreement with BSI under which BSI purported to have the
right to sell our products in western Canada and to supply Symbol's support
operations for western Canada. BSI has claimed damages in an unspecified amount,
punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated any
agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,300, representing the unpaid balance of products sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the Canadian
Competition Tribunal ("Tribunal"). BSI sought an Order from the Tribunal that
would require us to accept BSI as a customer on the "usual trade terms" as they
existed prior to the termination of their agreement in April 2003. The Tribunal
granted leave for BSI to proceed with its claim against us on January 15, 2004.
We filed an appeal of the Tribunal's decision before the Federal Court of
Appeals on January 26, 2004, and a brief in support of the appeal on April 22,
2004. On October 7, 2004, the Federal Court of Appeals dismissed Symbol's
appeal, allowing BSI to make its application before the Tribunal against Symbol.
On November 17, 2003, BSI filed an additional lawsuit in British Columbia,
Canada against us and a number of our distributors alleging that we refused to
sell products to BSI, conspired with the other defendants to do the same and
used confidential information to interfere with BSI's business. We intend to
defend against these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata filed a
lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico") in
October 2003 to reclaim property on which our Reynosa facility is located. The
lawsuit was filed before the First Civil Judge of First Instance, 5th Judicial
District, in Reynosa, Tamaulipas, Mexico. The First Civil Judge ordered the
recording of a lis pendens with respect to this litigation before the Public
Register of Property in Cd. Victoria, Tamaulipas.
The plaintiff alleges that she is the legal owner of a tract of land of 100
hectares, located within the area comprising the Rancho La Alameda, Municipality
of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas, irrigation
district. The plaintiff is asking the court to order Symbol Mexico to physically
and legally deliver to the plaintiff the portion of land occupied by Symbol
Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial Reynosa from
Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument. An Owner's
Policy of Title Insurance was issued by Stewart Title Guaranty Company in
connection with the above-mentioned transaction in the amount of $13,400. A
Notice of Claim and Request for Defense of Litigation was duly delivered on
behalf of Symbol to Stewart Title Guaranty Company on November 4, 2003.
In late November 2004, the First Level Civil Judge entered a final judgment in
this matter for Symbol. In his decision, the judge held that, while the
plaintiff had established she had title to a tract of land, she failed to
establish that her parcel is the property on which Symbol's Reynosa
manufacturing facility is located. The judge further held that, based on the
plaintiff's complaint, it was not possible to identify the location of the
property to which plaintiff claims title.
F-47
The plaintiff has appealed the judgment to the Court of Second Instance.
Bruck Technologies Handels GmbH European Commission Complaint
In February 2004, we became aware of a notice from the European Competition
Commission ("EC") of a complaint lodged with it by Bruck Technologies Handels
GmbH ("Bruck") that certain provisions of the Symbol PartnerSelect(TM) program
violate Article 81 of the EC Treaty. Bruck has asked the EC to impose
unspecified sanctions. We have provided all information requested by the EC and
will respond to any additional inquiries. No action has been taken and the
matter is pending. We intend to defend against these claims vigorously.
SECURITIES LITIGATION MATTERS IN WHICH SYMBOL HAS BEEN REALIGNED AS PLAINTIFF
Bildstein v. Symbol Technologies, Inc., et al.
On April 29, 2003, a shareholder derivative lawsuit was filed in the United
States District Court for the Eastern District of New York against certain
members of our former management and board of directors and against Symbol as a
nominal defendant. The plaintiff alleges that the defendants violated Section
14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated
thereunder and common and state law by authorizing the distribution of proxy
statements in 2000, 2001 and 2002. Plaintiff sought the cancellation of all
affirmative votes at the annual meetings for 2000, 2001 and 2002, the
cancellation of all awards under the option plans approved pursuant to those
proxy statements, an injunction preventing the implementation of those option
plans and all awards thereunder and an accounting by the defendants for all
injuries and damages suffered by Symbol, plus all costs and expenses, including
but not limited to attorneys' fees, incurred in connection with the action.
In September 2004, the court approved a settlement that Symbol reached with the
plaintiff. As part of the settlement, Symbol and the plaintiffs agreed to a
stipulation pursuant to which Symbol was realigned as plaintiff, and the action
dismissed without prejudice so as to permit Symbol to pursue the claims asserted
in this case and in the Gold litigation described below. As part of the
stipulation, Symbol agreed to pay and has since paid $120 to Bildstein's counsel
for services rendered in the case. The case was finally dismissed on October 7,
2004.
Gold v. Symbol Technologies, Inc., et al.
On December 18, 2003, a derivative action lawsuit was filed in the Court of
Chancery of the State of Delaware against Symbol and certain of our former
senior management. The complaint alleges that the defendants violated the
federal securities laws by issuing materially false and misleading statements
from January 1, 1998 through December 31, 2002 that had the effect of
artificially inflating the market price of Symbol's securities and that the
defendants (1) failed to properly oversee or implement policies, procedures and
rules to ensure compliance with federal and state laws requiring the
dissemination of accurate financial statements, which ultimately caused Symbol
to be sued for, and exposed to liability for, violations of the anti-fraud
provisions of the federal securities laws, (2) engaged in insider trading in
Symbol's common stock, (3) wasted corporate assets and (4) improperly awarded a
severance of approximately $13 million to Tomo Razmilovic, one of our former
Presidents and Chief Executive Officers. Plaintiff sought to recover
incentive-based compensation paid to certain of our former senior management in
reliance on materially inflated financial statements and to impose a trust to
recover cash and other valuable assets received by the former senior management
defendants and former Symbol board members.
F-48
On July 27, 2004, the court approved a settlement that Symbol reached with the
plaintiff. The settlement calls for the lawsuit to continue as direct litigation
by Symbol on its own behalf against the defendants. As part of the settlement,
the plaintiff consents to entry of Symbol's proposed order under which Symbol
will now be the plaintiff in the case. Symbol plans to continue to pursue this
lawsuit vigorously and, as part of the settlement, has agreed to pay $185 to
cover the reasonable legal fees of the plaintiff's lawyers.
On October 28, 2004, Symbol filed its amended complaint in the action, naming
Mr. Razmilovic as the defendant. By Order dated November 9, 2004, the Court
stayed the action against Mr. Razmilovic pending the resolution of the
Government's criminal case against Mr. Razmilovic's co-defendants. In addition,
on November 9, 2004, Symbol filed a complaint in the United States District
Court, Eastern District of New York against certain other former officers and
employees in connection with their past employment at Symbol and the facts and
circumstances that led to the Company's restatement. On November 19, 2004, the
Court issued a stay, pending the resolution of the government's criminal action
against the defendants.
15. STOCKHOLDERS' EQUITY
On July 26, 2004, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,405 and was paid on October 8,
2004 to shareholders of record on September 17, 2004.
On February 10, 2004, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,338 and was paid on April 9,
2004 to shareholders of record on March 19, 2004.
On March 10, 2003, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,312 and was paid on April 28,
2003 to shareholders of record on April 14, 2003.
On August 11, 2003, the Board of Directors approved a $0.01 semi-annual cash
dividend which amounted to $2,312 and was paid on September 26, 2003 to
shareholders of record on September 5, 2003.
On February 19, 2002, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to 2,292 and was paid on April 5, 2002
to shareholders of record on March 11, 2002.
On August 12, 2002, the Board of Directors approved a $0.01 semi-annual cash
dividend which amounted to 2,306 and was paid on October 7, 2002 to shareholders
of record on September 13, 2002.
F-49
a. STOCK OPTION PLAN
There are a total of 49,955,372 shares of common stock reserved for issuance
under our stock option plans at December 31, 2004. Stock options granted to date
generally vest over a one-to-five year period, expire after 10 years and have
exercise prices equal to the market value of our common stock at the date of
grant. A summary of changes in the stock option plans is as follows:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------
SHARES UNDER OPTION
--------------------------------------------------
WEIGHTED
OPTION PRICE SHARES AVERAGE
PER SHARE (IN THOUSANDS) EXERCISE PRICE
- ------------------------------------------------------------------------------------------------
Shares under option at January 1, 2002...... $ 1.58 to $41.22 36,307 $ 14.33
Granted..................................... $ 7.40 to $ 9.62 8,676 $ 8.69
Exercised................................... $ 1.58 to $11.02 (3,150) $ 6.06
Cancelled................................... $ 2.44 to $37.11 (3,655) $ 23.82
--------------
Shares under option at December 31, 2002.... $ 1.58 to $41.22 38,178 $ 12.82
Granted..................................... $10.25 to $16.79 7,068 $ 13.51
Exercised................................... $ 1.65 to $ 8.67 (308) $ 5.43
Cancelled................................... $ 1.80 to $41.22 (4,784) $ 16.68
--------------
Shares under option at December 31, 2003.... $ 1.58 to $41.22 40,154 $ 12.54
Granted..................................... $12.57 to $18.40 7,301 $ 15.50
Exercised................................... $ 1.58 to $17.19 (13,130) $ 6.57
Cancelled................................... $ 2.46 to $41.22 (8,214) $ 17.43
--------------
Shares under option at December 31, 2004.... $ 3.46 to $41.22 26,111 $ 14.84
-------------------------------
Shares exercisable at December 31, 2004..... $ 3.46 to $41.22 11,185 $ 14.84
-------------------------------
Shares exercisable at December 31, 2003..... $ 1.58 to $41.22 24,332 $ 11.19
-------------------------------
Shares exercisable at December 31, 2002..... $ 1.58 to $41.22 21,249 $ 10.23
- ------------------------------------------------------------------------------------------------
</Table>
F-50
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2004
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING LIFE AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES (IN THOUSANDS) (YEARS) EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------
$ 3.45-$ 5.17 524 0.9 $ 4.66 524 $ 4.66
$ 5.18-$ 7.77 1,911 2.3 $ 6.78 1,446 $ 6.72
$ 7.78-$11.67 6,397 6.7 $ 9.16 3,288 $ 9.23
$11.68-$17.52 13,269 8.0 $ 15.03 3,708 $ 15.62
$17.53-$26.29 903 6.0 $ 21.52 510 $ 23.33
$26.30-$39.45 3,062 5.6 $ 30.26 1,675 $ 31.19
$39.46-$41.22 45 5.1 $ 41.22 34 $ 41.22
-------------- --------------
26,111 11,185
- ----------------------------------------------------------------------------------------------------
</Table>
At December 31, 2004, an aggregate of 16,227 shares remain available for grant
under the stock option plans. The tax benefits arising from stock option
exercises during the years ended December 31, 2004, 2003 and 2002 in the amount
of $25,665, $439 and $139 respectively, were recorded in stockholders' equity as
additional paid-in capital.
As an accommodation to certain stock option plan participants (including certain
officers and directors), an informal practice began in or around the early
1990's, whereby certain officers and directors were afforded a look-back period
(no more than 30 days) for purposes of determining the market price to be used
in connection with the specific exercise. In addition, these individuals were
given an extended period of time in which to pay for their option exercises.
These practices were contrary to the terms of the relevant option plans. As this
practice allowed certain participants to choose exercise dates outside of the
approved plan terms and also allowed these participants to extend the period of
time in which to pay for their option exercise, the price of the option at grant
date was not fixed and determinable. Accordingly, in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," our
financial statements reflect as compensation expense the change in market price
of the common stock underlying these options granted to plan participants that
could have participated in this practice from the date of grant until the
options either expired or were exercised. Effective July 30, 2002, this practice
of options exercise ended resulting in ceasing the accounting for such options
under variable plan accounting.
As of March 31, 2003, due to the inability of Symbol to make timely filings with
the Commission, our stock option plans were held in abeyance, meaning that our
employees could not exercise their options until we became current with out
filings. As an accommodation to both current and former Symbol associates whose
options were impacted by this suspension, the Compensation Committee of the
Board approved an abeyance program that allowed associates whose options were
affected during the suspension period the right to exercise such options up to
90 days after the end of the suspension period. This resulted in a new
measurement date for those options, which led to a non-cash accounting
compensation charge of $10,539 for the intrinsic value of those vested options
when the employee either terminated
F-51
employment during the suspension period or within the 90 day period after the
end of the suspension period. On February 25, 2004 this suspension period ended.
B. OUTSIDE DIRECTORS' OPTIONS AND STOCK PURCHASE WARRANTS
All options and stock purchase warrants issued to outside directors vest over a
one-to-four year period, expire after 10 years and have exercise prices equal to
the market value of our common stock at the date of grant. A summary of changes
in the outside directors' options and stock purchase warrants is as follows:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------
NUMBER WEIGHTED
OPTION PRICE OF SHARES AVERAGE
PER SHARE (IN THOUSANDS) EXERCISE PRICE
- ------------------------------------------------------------------------------------------------
Shares under option at January 1, 2002...... $ 3.33 to $35.83 1,098 $ 21.52
Granted................................... $ 8.17 100 $ 8.17
Exercised................................. $ 3.33 to $ 7.37 (177) $ 5.16
Cancelled................................. $ 9.83 to $35.83 (163) $ 29.31
-----------
Shares under option at December 31, 2002.... $ 3.33 to $35.83 858 $ 21.87
Granted................................... $16.79 150 $ 16.79
Exercised................................. $ - - $ -
Cancelled................................. $ - - $ -
-----------
Shares under option at December 31, 2003.... $ 3.33 to $35.83 1,008 $ 21.11
Granted................................... $13.83 100 $ 13.83
Exercised................................. $ 4.43 to $ 9.83 (244) $ 6.89
Cancelled................................. $ 3.33 to $35.83 (614) $ 27.83
-----------
Shares under option at December 31, 2004.... $13.83 to $16.79 250 $ 15.61
-------------------------------
Shares exercisable at December 31, 2004..... $16.79 38 $ 16.79
-------------------------------
Shares exercisable at December 31, 2003..... $ 3.33 to $35.83 680 $ 21.36
-------------------------------
Shares exercisable at December 31, 2002..... $ 3.33 to $35.83 534 $ 19.50
- ------------------------------------------------------------------------------------------------
</Table>
The following table indicates the number of common shares issuable upon exercise
and the exercise price per share of all outstanding outside directors' options
and stock purchase warrants as of December 31, 2004:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
NUMBER OF SHARES SHARES EXERCISABLE AT
ISSUABLE UPON EXERCISE EXERCISE PRICE DECEMBER 31, 2004
EXERCISABLE TO (IN THOUSANDS) PER SHARE (IN THOUSANDS)
- ---------------------------------------------------------------------------------
2013 150 $16.79 38
2014 100 $13.83 -
---------------------- ---------------------
250 38
- ---------------------------------------------------------------------------------
</Table>
F-52
c. EMPLOYEE STOCK PURCHASE PLAN
Under our employee stock purchase plan, participants may purchase shares of
stock for an amount equal to 85 percent of the lesser of the closing price of a
share of stock on the first trading day of the period or the last trading day of
the period.
The stock sold to plan participants shall be authorized but unissued common
stock, treasury shares or shares purchased in the open market. The aggregate
number of shares which may be issued pursuant to the plan is 4,898.4. As of
December 31, 2004, 3,093.8 shares were issued to participants and subsequent to
December 31, 2004, 167.8 shares were issued to participants, all of which were
purchased in the open market.
During 2003, as a result of our delinquent filings with the SEC, we incurred a
non-cash compensation expense of $6,137 associated with our ESPP as the ESPP
lost its tax exempt status.
d. STOCKHOLDER RIGHTS PLAN
In August 2001, our Board of Directors adopted a stockholder rights plan. In
connection with the adoption of the rights plan, the Board designated and
reserved 500 shares of Series A Junior Participating preferred stock and has
declared a dividend of one preferred stock purchase right (the "rights") for
each share of our common stock outstanding on September 14, 2001. The rights
will continue to be represented by, and trade with, our common stock
certificates unless the rights become exercisable. The rights become exercisable
(with certain exceptions) only in the event that any person or group acquires
beneficial ownership of, or announces a tender or exchange offer for, 15 percent
or more of the outstanding shares of our common stock. The rights will expire on
August 13, 2011, unless earlier redeemed, exchanged or terminated in accordance
with the rights plan.
e. TREASURY STOCK
The Company's treasury stock is comprised of shares purchased in open market
transactions pursuant to programs authorized by the Board of Directors, shares
tendered by executive officers to us (with certain restrictions) to pay option
prices and taxes in connection with stock option exercises in accordance with
the provisions in our stock option plans, exercises of warrants by board members
under the 1998 plan, shares purchased in the open market to be re-issued in
connection with our ESPP, and other transactions described below.
F-53
Below is a summary of the changes in our treasury stock for the years ended
December 31:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
SHARES $ AMOUNT SHARES $ AMOUNT SHARES $ AMOUNT
- ------------------------------------------------------------------------------------------------
Balance January 1................. 26,130 $(239,029) 25,962 $(236,476) 24,849 $(222,104)
Acquisition of Treasury Shares
Purchased in open market.......... - - - - 450 (3,631)
Shares tendered relating to
executive stock option
exercises(a).................... 4,060 (64,230) - - 1,159 (17,320)
ESPP shares purchased............. 150 (2,092) 528 (5,110) 625 (5,141)
Shares tendered relating to legal
settlement(b)................... 138 (1,684) - - - -
------------------------------------------------------------
Total acquired.................... 4,348 (68,006) 528 (5,110) 2,234 (26,092)
Re-issuance of Treasury Shares
Director's warrant exercises...... (101) 1,016 - - (50) 463
ESPP shares allocated............. (581) 6,232 (360) 2,557 (671) 7,601
Restricted shares issued to
executive(c).................... - - - - (400) 3,656
------------------------------------------------------------
Total re-issued................... (682) 7,248 (360) 2,557 (1,121) 11,720
------------------------------------------------------------
Balance December 31,.............. 29,796 $(299,787) 26,130 $(239,029) 25,962 $(236,476)
- ------------------------------------------------------------------------------------------------
</Table>
(a) Such executives acquired approximately 4,170 and 736 additional shares of
common stock in the years ended December 31, 2004 and 2002, respectively. In
2004, executives tendered additional shares amounting to $24,498 for which the
Company paid the tax liability on the option exercise on their behalf.
(b) On August 10, 2004, Dr. Jerome Swartz, a former executive officer tendered
these shares as a partial payment of a legal settlement.
(c) In 2002, we re-issued these shares of treasury stock to our new President
and Chief Executive Officer. These shares had a market value of $2,992 at the
date of issuance. This officer was restricted from selling or transferring these
shares for a period of two years from the date of issuance. On December 30,
2004, all of these shares were sold by the officer at a market value of $6,580.
f. RESTRICTED STOCK
In May 2004, the Company granted 920 shares of restricted stock awards to
certain executives and non-employee directors of the Company. On the date of
grant, the market value of these restricted stock awards aggregated $13,005. The
non-employee director restricted stock awards totaled 20 shares and cliff-vest
at January 1, 2005. The remaining 900 executive restricted stock awards
cliff-vest in five years provided the Company's return on net assets for four
consecutive quarters does not exceed 16.4%. If the Company's return on net
assets for any four consecutive quarters exceeds 16.4% as defined in the grant
document, portions of the executive restricted stock awards vesting will be
accelerated. In November 2004, one associate left the Company and forfeited her
48 restricted shares from the May 2004 grant. As a result of this forfeiture, in
the fourth quarter of 2004 the Company reversed the original transaction that
recorded the granting of the 48 shares and reduced the amount of compensation
expense to be recognized in future periods. Compensation expense related to
these awards currently is estimated to be $715 per quarter and could accelerate
if targets are met.
F-54
In September and October 2004, the Company granted 440 shares of restricted
stock awards to certain employees associated with the Matrics, Inc. acquisition;
one a service based grant (220 shares) and another a performance accelerated
grant (220 shares). On the dates of the grants the market value of these awards
aggregated $5,553. The service based grants vest 30 percent in eighteen months,
with the remaining 70 percent vesting three years from the date of the grant.
The performance accelerated grants cliff vest in five years from the date of the
grant. In January 2005, one associate left the Company and forfeited his 20
restricted shares from the October 2004 grant. As a result of this forfeiture,
in the first quarter of 2005 the Company will reverse the original transaction
that recorded the granting of the 20 shares and will reduce the amount of
compensation expense to be recognized in future periods. Compensation expense
related to these awards currently is estimated to be $418 per quarter and could
accelerate if targets are met.
16. ASSOCIATE BENEFIT PLANS
a. PROFIT SHARING RETIREMENT PLAN
We maintain a profit sharing retirement plan for all associates meeting certain
service requirements. Generally, we contribute monthly 50 percent of up to 6
percent of associates' contributions, up to the maximum amount allowed by law.
Plan expense for the years ended December 31, 2004, 2003 and 2002 was $9,374,
$8,564, and $8,155 respectively.
b. HEALTH BENEFITS
We pay a portion of costs incurred in connection with providing associate and
dependant health benefits through programs administered by various insurance
companies. Such costs amounted to $20,944, $20,824 and $19,381 for the years
ended December 31, 2004, 2003 and 2002, respectively.
F-55
c. EXECUTIVE RETIREMENT PLAN
We maintain an Executive Retirement Plan (the "Plan") in which certain highly
compensated associates are eligible to participate. Participants are selected by
a committee of the Board of Directors. Benefits vest after five years of service
and are based on a percentage of average compensation (base salary plus bonus)
for the three highest fiscal years in the five-year period immediately preceding
termination of the participant's full-time employment. As of December 31, 2004,
seven executive officers were participants in the Plan. Our obligations under
the Plan are not funded. The Company uses a November 1 measurement date for the
Plan.
<Table>
<Caption>
- ---------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------
2004 2003
- ---------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year..................... $ 20,785 $ 20,266
Service cost................................................ 1,482 1,486
Interest cost............................................... 1,288 1,353
Actuarial gain.............................................. (3,566) (2,180)
Benefits paid............................................... (381) (140)
-------------------
Benefit obligation at end of year........................... $ 19,608 $ 20,785
-------------------
FUNDED STATUS:
Funded status at end of year................................ $(19,608) $(20,785)
Unrecognized actuarial loss................................. (1,993) 1,572
Unrecognized prior service cost............................. 1,397 1,662
-------------------
Net amount recognized....................................... $(20,204) $(17,551)
- ---------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
- ---------------------------------------------------------------------------------
AS OF DECEMBER 31,
-------------------
2004 2003
- ---------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS:
Accrued benefit liability................................... $(20,204) $(17,551)
- ---------------------------------------------------------------------------------
</Table>
The accumulated benefit obligation for the Plan was $17,442 and $17,472 at
December 31, 2004 and 2003, respectively.
<Table>
<Caption>
- --------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost................................................ $1,482 $1,486 $ 881
Interest cost............................................... 1,288 1,353 1,205
Amortization of unrecognized prior service cost............. 264 264 92
Recognized net actuarial loss............................... - 213 229
------------------------
Net periodic benefit cost................................... $3,034 $3,316 $2,407
- --------------------------------------------------------------------------------------
</Table>
F-56
ASSUMPTIONS
The weighted-average assumptions used to determine benefit obligations at
December 31, were as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------
2004 2003
- ---------------------------------------------------------------------------
Discount rate............................................... 6.00% 6.25%
Rate of compensation increases.............................. 3.00% 4.00%
- ---------------------------------------------------------------------------
</Table>
The weighted-average assumptions used to determine net periodic benefit cost for
the year end December 31, were as follows:
<Table>
<Caption>
- -----------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------
2004 2003
- -----------------------------------------------------------------------------
Discount rate............................................... 6.25% 6.75%
Rate of compensation increases.............................. 4.00% 4.50%
Corridor.................................................... 10.00% 10.00%
- -----------------------------------------------------------------------------
</Table>
PAYMENTS TO PLAN PARTICIPANTS
We expect to pay expected benefit payments of $461 in 2005.
17. EARNINGS/(LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------------------
Numerator:
Earnings/(loss) applicable to common shares for basic and
diluted calculation................................... $ 81,847 $ 3,295 $(44,915)
------------------------------
Denominator:
Weighted-average common shares........................... 242,469 230,710 229,593
Effect of dilutive securities:
Stock options and warrants............................ 3,697 5,739 -
------------------------------
Denominator for diluted calculation......................... 246,166 236,449 229,593
- --------------------------------------------------------------------------------------------
</Table>
For the years ended December 31, 2004, 2003 and 2002, the effect of
approximately 4,253.8, 19,710.1 and 40,037.8 respectively, of potentially
dilutive common shares for outstanding stock options, warrants and convertible
subordinated notes and debentures were excluded from the calculation of diluted
earnings/(loss) per share because the effects were anti-dilutive.
F-57
18. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS
Our business consists of delivering products and solutions that capture, move
and manage information in real time to and from the point of business activity.
In addition, we provide customer support for our products and professional
services related to these products and solutions. These services are coordinated
under one global services organization. As a result, our activities are
conducted in two reportable segments, Products and Services.
The Products segment sells products and solutions in the forms of advanced data
capture equipment, mobile computing devices, RFID, wireless communication
equipment and other peripheral products and also receives royalties. The
Services segment provides solutions that connect our data capture equipment and
mobile computing devices to wireless networks. This segment also provides
worldwide comprehensive repair, maintenance, integration and support in the form
of service contracts or repairs on an as-needed basis. We use many factors to
measure performance and allocate resources to these two reportable segments. The
primary measurements are sales and gross profit. The accounting policies of the
two reportable segments are essentially the same as those used to prepare our
consolidated financial statements. We rely on our internal management system to
provide us with necessary sales and cost data by reportable segment, and we make
financial decisions and allocate resources based on the information we receive
from this management system. In the measurement of segment performance, we do
not allocate research and development, sales and marketing, or general and
administrative expenses. We do not use that information to make key operating
decisions and do not believe that allocating these expenses is significant in
evaluating performance.
Beginning January 1, 2004, we revised our internal reporting of certain
manufacturing costs, including but not limited to costs of re-working product,
warranty costs, obsolescence costs and costs to scrap, and we no longer include
these in our standard costing structure. As reflected in the table below, there
is an increase in our standard gross profit and our manufacturing variances and
other related costs for the year ended December 31, 2004 as compared to the
comparable period in 2003. There is no change in the overall gross profit of our
segments. The positive impact that this change had on our year ended December
31, 2004 product division standard gross profit by geographic region is as
follows; the Americas $45,032, EMEA $19,898 and Asia Pacific $5,464.
Our 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.
We operate 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). Sales are
allocated to each region based upon the location of the use of the products and
services. Non-U.S. sales for each of the years ended December 31, 2004, 2003 and
2002 were $703,570, $644,085 and $542,886 respectively.
Identifiable assets are those tangible and intangible assets used in operations
in each geographic region. Corporate assets are principally goodwill, intangible
assets and temporary investments.
F-58
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table.
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------
FOR YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
- -----------------------------------------------------------------------------------------------------
REVENUES:
The Americas(a)............. $ 921,975 $194,254 $1,116,229 $ 777,105 $201,994 $ 979,099
EMEA........................ 394,747 92,474 487,221 345,983 92,632 438,615
Asia Pacific................ 116,949 11,724 128,673 100,765 11,799 112,564
-----------------------------------------------------------------------
Total net sales............. $1,433,671 $298,452 $1,732,123 $1,223,853 $306,425 $1,530,278
STANDARD GROSS PROFIT:
The Americas................ $ 506,772 $ 57,469 $ 564,241 $ 405,558 $ 50,604 $ 456,162
EMEA........................ 232,977 29,162 262,139 179,500 31,994 211,494
Asia Pacific................ 68,579 4,637 73,216 52,059 4,605 56,664
-----------------------------------------------------------------------
Total gross profit at
standard................... $ 808,328 $ 91,268 $ 899,596 $ 637,117 $ 87,203 724,320
Manufacturing variances and
other related costs........ 84,624 5,934 90,558 48,367 704 49,071
-----------------------------------------------------------------------
Total gross profit.......... $ 723,704 $ 85,334 $ 809,038 $ 588,750 $ 86,499 $ 675,249
- -----------------------------------------------------------------------------------------------------
<Caption>
- ---------------------------- ----------------------------------
FOR YEAR ENDED DECEMBER 31,
----------------------------------
2002
----------------------------------
PRODUCTS SERVICES TOTAL
- ---------------------------- ----------------------------------
REVENUES:
The Americas(a)............. $ 728,294 $205,876 $ 934,170
EMEA........................ 300,130 82,716 382,846
Asia Pacific................ 74,646 9,955 84,601
----------------------------------
Total net sales............. $1,103,070 $298,547 $1,401,617
STANDARD GROSS PROFIT:
The Americas................ $ 348,783 $ 74,177 $ 422,960
EMEA........................ 147,671 19,381 167,052
Asia Pacific................ 37,957 4,395 42,352
----------------------------------
Total gross profit at
standard................... $ 534,411 $ 97,953 632,364
Manufacturing variances and
other related costs........ 125,321 19,391 144,712
----------------------------------
Total gross profit.......... $ 409,090 $ 78,562 $ 487,652
- ----------------------------
</Table>
(a) Included in The Americas are revenues of approximately $87,676, $92,906, and
$75,439 from non-U.S. countries, mainly Canada, Brazil and Mexico, for the years
ended December 31, 2004, 2003 and 2002, respectively.
Below is a summary of product revenues by product division for the years ended
December 31, 2004, 2003 and 2002:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2003 2002
- ---------------------------------------------------------------------------------------------
PRODUCT DIVISION:
Mobile Computing................................. $ 885,469 $ 755,559 $ 695,353
Advanced Data Capture............................ 407,697 352,410 317,091
Wireless Infrastructure.......................... 150,663 128,357 103,285
RFID............................................. 5,610 - -
Other, net....................................... (15,768) (12,473) (12,659)
------------------------------------------
Total............................................ $ 1,433,671 $ 1,223,853 $ 1,103,070
- ---------------------------------------------------------------------------------------------
</Table>
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
F-59
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2004 2003
- -----------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
The Americas................................................ $ 915,565 $ 867,133
EMEA........................................................ 322,490 316,406
Asia Pacific................................................ 52,385 64,228
Corporate (principally goodwill, intangible assets and
investments).............................................. 639,929 398,751
---------------------------
Total....................................................... $ 1,930,369 $ 1,646,518
- -----------------------------------------------------------------------------------------
</Table>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth unaudited quarterly financial information for the
years ended December 31, 2004 and 2003.
<Table>
<Caption>
- -------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- -------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004:
Revenue.................................. $419,651 $432,785 $ 429,152 $ 450,535
Cost of revenue.......................... 224,723 236,102 228,439 233,821
Gross profit............................. 194,928 196,683 200,713 216,714
Recovery from legal settlements.......... - (9,000) (12,400) -
Other operating expenses................. 165,473 162,017 184,454(1) 178,134
Earnings from operations................. 29,455 43,666 28,659 38,580
Net earnings............................. 6,828 28,771 17,791 28,457
NET EARNINGS PER COMMON SHARE:
Basic.................................... $ 0.03 $ 0.12 $ 0.07 $ 0.12
Diluted.................................. $ 0.03 $ 0.12 $ 0.07 $ 0.11
YEAR ENDED DECEMBER 31, 2003:
Revenue.................................. $386,347 $373,819 $ 377,110 $ 393,002
Cost of revenue.......................... 214,475 221,430 210,208 208,916
Gross profit............................. 171,872 152,389 166,902 184,086
Stock based compensation expense......... 776 1,456 7,640 7,215
Loss provision for legal settlements..... 72,000 - - -
Other operating expenses................. 136,173 146,685 141,264 154,519
(Loss)/earnings from operations.......... (37,077) 4,248 17,998 22,352
Net (loss)/earnings...................... (31,013) 6,615 11,519 16,174
NET (LOSS)/EARNINGS PER COMMON SHARE(2):
Basic.................................... $ (0.13) $ 0.03 $ 0.05 $ 0.07
Diluted.................................. $ (0.13) $ 0.03 $ 0.05 $ 0.07
- -------------------------------------------------------------------------------------------
</Table>
(1) We wrote off $12,800 of in-process research and development related to the
acquisition of Matrics in the third quarter of 2004.
(2) Quarterly earnings per share calculations do not agree to the year end
earnings per share calculation due to rounding.
F-60
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2005 2004
- ----------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 218,218 $ 217,641
Accounts receivable, less allowance for doubtful accounts of
$7,725 and $9,385, respectively........................... 111,143 113,658
Inventories, net............................................ 172,360 207,338
Deferred income taxes....................................... 180,394 179,844
Other current assets........................................ 27,040 24,286
--------------------------
Total current assets...................................... 709,155 742,767
Property, plant and equipment, net.......................... 249,522 241,508
Deferred income taxes....................................... 214,373 236,725
Investment in marketable securities......................... 75,212 81,230
Goodwill.................................................... 496,025 497,283
Intangible assets, net...................................... 43,889 45,404
Restricted cash............................................. 51,636 51,370
Other assets................................................ 31,456 34,082
--------------------------
Total assets.............................................. $ 1,871,268 $ 1,930,369
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 399,849 $ 414,915
Short term credit facility.................................. 50,000 100,000
Current portion of long-term debt........................... 29,183 18,072
Deferred revenue............................................ 52,057 43,692
Income taxes payable........................................ 8,965 20,132
Accrued restructuring expenses.............................. 7,325 9,971
--------------------------
Total current liabilities................................. 547,379 606,782
Long-term debt, less current maturities..................... 162,709 176,087
Deferred revenue............................................ 28,046 25,122
Other liabilities........................................... 33,342 49,859
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 272,657 shares and 272,069 shares, respectively.... 2,727 2,721
Additional paid-in capital.................................. 1,491,037 1,484,093
Accumulated other comprehensive earnings, net............... 10,976 13,699
Deferred compensation....................................... (14,365) (15,642)
Accumulated deficit......................................... (92,824) (112,565)
--------------------------
LESS:....................................................... 1,397,551 1,372,306
Treasury stock, at cost 29,634 shares and 29,796 shares,
respectively.............................................. (297,759) (299,787)
--------------------------
Total stockholders' equity................................ 1,099,792 1,072,519
--------------------------
Total liabilities and stockholders' equity............. $ 1,871,268 $ 1,930,369
- ----------------------------------------------------------------------------------------
</Table>
See notes to condensed consolidated financial statements.
F-61
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
- ---------------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2005 2004
- ---------------------------------------------------------------------------------
REVENUE:
Product..................................................... $384,242 $348,239
Services.................................................... 73,245 71,412
-------------------
457,487 419,651
COST OF REVENUE:
Product cost of revenue..................................... 197,866 170,739
Services cost of revenue.................................... 54,060 53,984
-------------------
251,926 224,723
-------------------
Gross profit................................................ 205,561 194,928
-------------------
OPERATING EXPENSES:
Engineering................................................. 42,351 41,559
Selling, general and administrative (including $1,003 and $0
of restricted stock compensation expense, respectively)... 138,887 121,680
Stock based compensation expense(1)......................... - 2,234
-------------------
181,238 165,473
Earnings from operations.................................... 24,323 29,455
Other (expense) income, net................................. (6,568) 1,006
-------------------
Earnings before income taxes................................ 17,755 30,461
(Benefit from) provision for income taxes................... (4,413) 23,633
-------------------
Net earnings................................................ $ 22,168 $ 6,828
-------------------
EARNINGS PER SHARE:
Basic and diluted........................................... $ 0.09 $ 0.03
-------------------
CASH DIVIDENDS DECLARED PER COMMON SHARE.................... $ 0.01 $ 0.01
-------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic....................................................... 247,404 231,685
Diluted..................................................... 251,286 239,401
- ---------------------------------------------------------------------------------
</Table>
(1) If we had allocated stock-based compensation expense shown above to each of
the respective line items, the allocation would have been as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------------
2005 2004
- ---------------------------------------------------------------------------------
Product cost of revenue..................................... $ -- $ 710
Services cost of revenue.................................... -- 335
Engineering................................................. -- 140
Selling, general and administrative......................... -- 1,049
-------------------
$ -- $ 2,234
- ---------------------------------------------------------------------------------
</Table>
See notes to condensed consolidated financial statements.
F-62
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
- -----------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2005 2004
- -----------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings................................................ $ 22,168 $ 6,828
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property, plant and
equipment................................................ 12,496 14,428
Other amortization.......................................... 4,756 3,598
(Benefit from) provision for losses on accounts
receivable............................................... (69) 542
Provision for inventory write-down.......................... 1,740 1,183
Deferred income tax (benefit)/provision..................... (4,413) 23,633
Non-cash stock-based compensation expense................... 1,003 2,234
Non-cash restructuring, asset impairment and other
charges.................................................. 535 -
Loss on disposal of property, plant and equipment and other
assets................................................... 404 109
Unrealized holding loss on marketable securities............ 5,741 -
Decrease in fair value of derivative........................ (3,371) -
Tax benefit on exercise of stock options.................... 1,947 -
Changes in operating assets and liabilities:
Accounts receivable...................................... 792 27,645
Inventories.............................................. 33,238 199
Other assets............................................. 5,284 7,933
Accounts payable and accrued expenses.................... (2,979) (47,876)
Accrued restructuring expenses........................... (2,918) (1,744)
Other liabilities and deferred revenue................... (3,702) 2,077
---------------------
Net cash provided by operating activities............. 72,652 40,789
---------------------
Cash flows from investing activities:
Investment in other companies, net of cash acquired......... - (4,050)
Purchases of property, plant and equipment.................. (21,077) (11,171)
Investments in intangible and other assets.................. (1,727) -
---------------------
Net cash used in investing activities................. (22,804) (15,221)
---------------------
Cash flows from financing activities:
Repayment of notes payable and long-term debt and other
financing activities..................................... (50,267) (80)
Proceeds from long-term debt................................ - 13,825
Proceeds from exercise of stock options and warrants........ 5,313 10,293
Purchase of treasury shares................................. - (19,956)
---------------------
Net cash (used in) provided by financing activities... (44,954) 4,082
Effects of exchange rate changes on cash and cash
equivalents.............................................. (4,317) (634)
---------------------
Net increase in cash and cash equivalents................... 577 29,016
Cash and cash equivalents, beginning of period.............. 217,641 150,017
---------------------
Cash and cash equivalents, end of period.............. $218,218 $179,033
---------------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest.................................................... $ 2,749 $ 3,551
Income taxes................................................ $ (639) $ 3,578
- -----------------------------------------------------------------------------------
</Table>
See notes to condensed consolidated financial statements.
F-63
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2005 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
OVERVIEW
Symbol Technologies, Inc., The Enterprise Mobility Company(TM), and subsidiaries
deliver products and solutions that capture, move and manage information in real
time to and from the point of business activity. Symbol enterprise mobility
solutions integrate advanced data capture products, radio frequency
identification ("RFID") technology, mobile computing platforms, wireless
infrastructure, mobility software and services programs under the Symbol
Enterprise Mobility Services brand.
The Condensed Consolidated Financial Statements include the accounts of Symbol
Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "Symbol" or "we" or "our" or "us" or the "Company" refer to
Symbol Technologies, Inc. and subsidiaries unless the context specifically
requires otherwise. The Condensed Consolidated Financial Statements have been
prepared by us, without audit, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include all
necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of March 31, 2005, and the results of our
operations and cash flows for the three months ended March 31, 2005 and 2004, in
accordance with the instructions to Form 10-Q of the Commission and in
accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information. The results of operations
for the three months ended March 31, 2005 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 our Annual
Report on Form 10-K for the year ended December 31, 2004.
RECLASSIFICATIONS
Certain reclassifications were made to previously disclosed amounts to conform
to current presentations.
STOCK-BASED COMPENSATION
We account for our employee stock option plans under the intrinsic value method
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under APB Opinion No. 25, generally no compensation expense is recorded when the
terms of the award are fixed and the exercise price of the employee stock option
equals or exceeds the fair value of the underlying stock on the date of the
grant. Except in connection with certain restricted stock
F-64
awards (see note 5a), no stock based compensation expense has been recognized
for the fixed portion of our plans; however, during the first quarter 2004,
certain stock-based compensation expenses have been recognized through our
operating results related to options of certain current and former associates.
We have adopted the disclosure-only requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock grants
made as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
The following table illustrates the effect on net earnings and earnings per
share if we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
<Table>
<Caption>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
- --------------------------------------------------------------------------------
Net earnings--as reported................................... $22,168 $ 6,828
Stock-based compensation expense included in reported net
earnings, net of related tax effects..................... 617 1,374
Less total stock-based compensation expense determined under
the fair value based method for all awards, net of
related tax effects...................................... (4,944) (4,900)
------------------
Pro forma net earnings...................................... $17,841 $ 3,302
------------------
Basic and diluted net earnings per share:
As reported.............................................. $ 0.09 $ 0.03
Pro forma................................................ $ 0.07 $ 0.01
- --------------------------------------------------------------------------------
</Table>
The weighted average fair value of options granted during the three months ended
March 31, 2005 and 2004 was $9.07 and $8.70 per option, respectively. In
determining the fair value of such options granted during these periods for
purposes of calculating the pro forma results disclosed above for the three
months ended March 31, we used the Black-Scholes option pricing model and
assumed the following: a risk free interest rate of 2.8 percent for 2005 and
2004; an expected option life of 4.5 years for 2005 and 4.7 years for 2004; an
expected volatility of 61 percent for 2005 and 2004; and a dividend yield of
0.14 percent for 2005 and 0.16 percent for 2004.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"),
which is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash
Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
F-65
In April 2005, the SEC extended the adoption date for Statement 123(R) until
January 1, 2006. Early adoption will be permitted in periods in which financial
statements have not yet been issued. We expect to adopt Statement 123(R), based
upon the extended adoption date, on January 1, 2006 using the modified
prospective method.
As permitted by Statement 123, we currently account for share-based payments to
employees using APB Opinion 25's intrinsic value method and, as such, generally
recognize no compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)'s fair value method will have a significant impact
on our results of operations. The impact of adoption of Statement 123(R) cannot
be predicted at this time because it will depend on levels of share-based
payments granted in the future and assumptions used in such periods to calculate
the fair value of such grants. However, had we adopted Statement 123(R) in prior
periods, the impact of that standard would have approximated the impact of
Statement 123 as described in the disclosure of pro forma net income and
earnings per share shown in Stock-Based Compensation in the footnotes to the
accompanying condensed consolidated financial statements. Statement 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock
options), the amount of operating cash flows recognized for such tax deductions
were $1,947 and $0 for the three-months ended March 31, 2005 and 2004,
respectively.
Based on the release of Statement 123(R), we plan on amending our Employee Stock
Purchase Program ("ESPP") to reduce the discount of the price of the shares
purchased by employees in the ESPP from its current discount of 15% to a
discount of 5% and we will also eliminate the look-back period currently
utilized to determine the price of the shares purchased. These changes will
allow the ESPP to continue to be non compensatory, which will result in no
compensation expense to be recorded by us in our statement of income when we
implement Statement 123(R) with respect to such plan.
RESTRICTED CASH
Restricted cash at March 31, 2005 of $51,636 represents two deposits, plus
interest. One amount of $50,622 at March 31, 2005 collateralizes a bond serving
as security for the trial court judgment against Telxon and Symbol for the Smart
Media litigation pending appeal. The cash is held in a trust and is restricted
as to withdrawal or use, and is currently invested in a short-term certificate
of deposit (See note 9c). The second amount at March 31, 2005 of $1,014 is an
interest-bearing letter of credit pledged as a supplier bond. Interest income
earned from these investments are recognized by the Company.
F-66
2.INVENTORIES
<Table>
<Caption>
- --------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2005 2004
- --------------------------------------------------------------------------------------
Raw materials............................................... $ 34,028 $ 57,946
Work-in-process............................................. 31,769 26,845
Finished goods.............................................. 106,563 122,547
------------------------
$ 172,360 $ 207,338
- --------------------------------------------------------------------------------------
</Table>
The amounts shown above are net of inventory reserves of $57,974 and $55,247 as
of March 31, 2005 and December 31, 2004, respectively, and include inventory
accounted for as consigned of $49,183 and $61,005 as of March 31, 2005 and
December 31, 2004, respectively.
3.GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months ended March
31, 2005 are as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
PRODUCT SERVICES TOTAL
- --------------------------------------------------------------------------------------------
Balance as of December 31, 2004............................. $440,399 $56,884 $497,283
Translation adjustments..................................... (633) (121) (754)
Other(1).................................................... (504) - (504)
------------------------------
Balance as of March 31, 2005................................ $439,262 $56,763 $496,025
- --------------------------------------------------------------------------------------------
</Table>
(1) To adjust Matrics goodwill.
Other than goodwill, finite life intangible assets, all of which are subject to
amortization, consist of the following:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------
MARCH 31, 2005 DECEMBER 31, 2004
---------------------- ----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ---------------------------------------------------------------------------------------------
Patents, trademarks and tradenames.......... $40,887 $ (19,989) $39,160 $ (18,433)
Purchased technology........................ 33,500 (15,339) 33,500 (13,988)
Other....................................... 9,100 (4,270) 9,100 (3,935)
-----------------------------------------------
$83,487 $ (39,598) $81,760 $ (36,356)
- ---------------------------------------------------------------------------------------------
</Table>
The amortization expense for the three months ended March 31, 2005 and 2004
amounted to $3,242 and $2,970, respectively.
F-67
Estimated amortization expense for the above intangible assets, assuming no
additions or write-offs, for the nine months ended December 31, 2005 and for
each of the subsequent years ending December 31 is as follows:
<Table>
- ---------------------------------------------------------------------
2005 (nine months).......................................... $ 9,725
2006........................................................ 10,441
2007........................................................ 9,940
2008........................................................ 8,727
2009........................................................ 3,318
Thereafter.................................................. 1,738
-------
$43,889
- ---------------------------------------------------------------------
</Table>
4.EARNINGS PER SHARE AND DIVIDENDS
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 common and potentially dilutive common shares
(options and warrants) outstanding during the period, computed in accordance
with the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
- --------------------------------------------------------------------------------
Numerator:
Earnings applicable to common shares for basic and diluted
calculation............................................... $22,168 $ 6,828
------------------
Denominator:
Weighted-average common shares(a)........................... 247,404 231,685
Effect of dilutive securities:
Stock options and warrants................................ 3,882 7,716
------------------
Denominator for diluted calculation......................... 251,286 239,401
- --------------------------------------------------------------------------------
</Table>
(a) Included in weighted-average common shares for the three months ended March
31, 2005 are 6,642.5 shares representing shares that would have been issuable at
March 31, 2005 under our settlement agreement of our class action litigation
(See Note 9).
Stock options and warrants outstanding for the three months ended March 31, 2005
and 2004 aggregating 16,706 and 13,026, respectively, of potentially dilutive
shares have not been included in the diluted per share calculations since their
effect would be antidilutive.
On February 28, 2005, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,427 and was paid on April 8,
2005 to shareholders of record as of March 17, 2005.
F-68
5.SHAREHOLDERS' EQUITY
a. RESTRICTED STOCK
In May 2004, the Company granted 920 shares of restricted stock awards to
certain executives and non-employee directors of the Company. On the date of
grant, the market value of these restricted stock awards aggregated $13,005. The
non-employee director restricted stock awards totaled 20 shares and cliff-vested
at January 1, 2005. The remaining 900 executive restricted stock awards
cliff-vest in five years provided the Company's return on net assets for four
consecutive quarters does not exceed 16.49%. If the Company's return on net
assets for any four consecutive quarters exceeds 16.49% as defined in the grant
document, portions of the executive restricted stock awards vesting will be
accelerated. In November 2004, one associate left the Company and forfeited 48
restricted shares from the May 2004 grant. As a result of this forfeiture, in
the fourth quarter of 2004 the Company reversed the original transaction that
recorded the granting of the 48 shares and reduced the amount of compensation
expense to be recognized in future periods. Compensation expense related to
these awards currently is estimated to be $602 per quarter and could accelerate
if targets are met.
In September and October 2004, the Company granted 440 shares of restricted
stock awards to certain employees associated with the Matrics, Inc. ("Matrics")
acquisition; one a service based grant (220 shares) and another a performance
accelerated grant (220 shares). On the dates of the grants, the market value of
these awards aggregated $5,553. The service based grants vest 30 percent in
eighteen months, with the remaining 70 percent vesting three years from the date
of the grant, respectively. The performance accelerated grants cliff-vest in
five years from the date of the grant. In January 2005, one associate left the
Company and forfeited 20 restricted shares from the October 2004 grant. As a
result of this forfeiture, in the first quarter of 2005 the Company reversed the
original transaction that recorded the granting of the 20 shares and reduced the
amount of compensation expense to be recognized in future periods. In April
2005, another associate left the Company and forfeited 30 restricted shares from
the September 2004 grant. As a result of this forfeiture, in the second quarter
of 2005 the Company will reverse the original transaction that recorded the
granting of the 30 shares and will reduce the amount of compensation expense to
be recognized in future periods. Compensation expense related to these awards
currently is estimated to be $388 per quarter and could accelerate if targets
are met.
F-69
b. COMPREHENSIVE EARNINGS
The components of comprehensive earnings are as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
- ---------------------------------------------------------------------------------
Net earnings................................................ $22,168 $ 6,828
Other comprehensive income:
Change in unrealized gains and losses on available-for-sale
securities, net of tax.................................... (184) 538
Change in unrealized fair value of derivative instruments,
net of tax................................................ 1,521 (112)
Translation adjustments, net of tax......................... (4,058) (1,076)
-------------------
Total comprehensive earnings................................ $19,447 $ 6,178
- ---------------------------------------------------------------------------------
</Table>
6.RESTRUCTURING AND IMPAIRMENT CHARGES
a. TELXON ACQUISITION
We recorded certain restructuring, impairment and merger integration related
charges related to our Telxon acquisition during 2001 and 2002. Approximately $8
relating to lease obligations was included in accrued restructuring expenses as
of December 31, 2004. All remaining charges were utilized as of March 31, 2005
and there is no remaining accrual.
b. MANUFACTURING TRANSITION
In 2001, we began to transition volume manufacturing away from our Bohemia, New
York facility to lower cost locations, primarily our Reynosa, Mexico facility
and Far East contract manufacturing partners. As a result of these activities,
we incurred restructuring charges during 2002 and 2001. During the first quarter
of 2004, the Company entered into a sub-lease arrangement at its Bohemia, New
York facility and recorded the anticipated sub-lease income of approximately
$2,861 as a reduction of the lease obligation cost, which had been previously
recorded in 2001. This amount was recorded as a reduction to product cost of
revenue during the first quarter of 2004. Included in accrued restructuring
expenses as of March 31, 2005 is $686 of net lease obligations relating to these
manufacturing restructuring charges.
<Table>
<Caption>
- ------------------------------------------------------------------------------
LEASE OBLIGATION
COSTS
- ------------------------------------------------------------------------------
Balance at December 31, 2004................................ $ 623
Utilization/payments........................................ (296)
Anticipated sub-lease income adjustment..................... 359
----------------
Balance at March 31, 2005................................... $ 686
- ------------------------------------------------------------------------------
</Table>
F-70
c. GLOBAL SERVICES TRANSITION
In 2003, our global services organization initiated restructuring activities
which included transferring a large percentage of our repair operations to
Mexico and the Czech Republic, reorganizing our professional services group to
utilize third party service providers for lower margin activities, and
reorganizing our European management structure from a country based structure to
a regional structure. The total costs incurred in connection with this
restructuring, which related almost entirely to workforce reductions, was
approximately $2,856, of which $2,633 and $223 was recorded as a component of
cost of revenue and operating expenses, respectively, in 2003.
In 2003, we initiated additional restructuring activities in connection with our
decision to relocate additional product lines from New York to Mexico. The costs
associated with this restructuring relate to workforce reductions and
transportation costs. The total amount incurred in connection with this
restructuring activity was approximately $961, all of which was recorded as a
component of cost of revenue in 2003. These restructuring activities were
completed by June 30, 2003.
In connection with our global services transition, the Company recorded
additional provisions of $8,795 during 2004 which relate to lease obligation
costs net of sub-lease income and further work force reductions. These amounts
have been recorded as a component of service cost of revenue in the year ended
2004. An additional provision relating to work force reduction of $655 was
recorded as a component of cost of revenue in the first quarter of 2005. These
restructuring activities are expected to be completed in 2005.
d. GENERAL AND ADMINISTRATIVE RESTRUCTURING
During the second quarter of 2004, the shared services organization initiated
restructuring activities that included the consolidating and transitioning of
back office transactional activities to the Czech Republic. The costs associated
with this restructuring relate to workforce reductions. The total amount
incurred in connection with this restructuring activity was $5,025 in 2004, all
of which was recorded as a component of operating expenses. Further shared
service restructuring activities are being considered and future benefits are
not yet defined, therefore, we cannot reasonably estimate the remaining cost
expected to be incurred.
e. OTHER RESTRUCTURINGS
In 2003, we initiated additional restructuring activities to exit buildings that
were acquired with the acquisition of @POS and Covigo, Inc. The costs associated
with this restructuring relate primarily to lease obligation costs, adjusted for
anticipated sub-lease income. The total amount incurred in connection with this
restructuring activity was $958, all of which was recorded as a component of
operating expenses. These restructuring activities were completed by September
30, 2003. During the fourth quarter of 2004, we recorded an adjustment of $145
for @POS sub-lease assumptions that did not occur. This was recorded as a
component of operating expense.
F-71
Details of the global services transition and general and administrative
restructuring charges and remaining balances as of March 31, 2005 are as
follows:
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------
LEASE ASSET
WORKFORCE OBLIGATION IMPAIRMENTS
REDUCTIONS COSTS AND OTHER TOTAL
- ----------------------------------------------------------------------------------------------
Balance at December 31, 2004.................. $ 5,397 $ 2,805 $ 1,138 $9,340
Provision -- recorded to cost of revenues..... 655 -- -- 655
Revision of estimate -- recorded to operating
expense..................................... (123) -- -- (123)
Foreign exchange effect....................... -- -- (244) (244)
Utilization/payments.......................... (2,400) (563) (26) (2,989)
----------------------------------------------
Balance at March 31, 2005..................... $ 3,529 $ 2,242 $ 868 $6,639
- ----------------------------------------------------------------------------------------------
</Table>
7.LONG-TERM DEBT
<Table>
<Caption>
- --------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2005 2004
- --------------------------------------------------------------------------------------
Senior Secured Term Loan Facility(a)........................ $100,000 $ 100,000
Senior Secured Revolving Credit Facility(a)................. 50,000 100,000
Secured Installment Loan(b)................................. 10,369 10,369
SAILS exchangeable debt(c).................................. 81,463 83,727
Other(d).................................................... 60 63
------------------------
Total debt.................................................. 241,892 294,159
Less: Current maturities.................................... 79,183 118,072
------------------------
$162,709 $ 176,087
- --------------------------------------------------------------------------------------
</Table>
(a) On December 29, 2004, we entered into a credit facility to be used (i) to
repay in full our then outstanding senior indebtedness, comprised of a
short-term credit facility and a prior revolving credit facility; (ii) for
working capital and general corporate purposes; and (iii) to pay certain fees
and expenses incurred in connection with such transactions. Pursuant to this
credit facility, the lenders severally agreed to provide us the following: (a) a
senior secured term loan facility in an aggregate principal amount of $100,000
and (b) a senior secured revolving credit facility in an aggregate principal
amount of up to $150,000 with a $20,000 sub limit available for letters of
credit. This facility is secured on a first priority basis by (i) a pledge of
all of the capital stock or other equity interests of our domestic subsidiaries,
(ii) a pledge of 65% of the capital stock or other equity interests of selected
overseas subsidiaries located in the United Kingdom, the Netherlands and Japan,
(iii) 100% of the capital stock of the manufacturing entity in Reynosa, Mexico
and all of its other assets and (iv) all our other domestic assets (other than
real estate) and the stock of our domestic subsidiaries.
On December 29, 2004, we borrowed $100,000 under the term loan facility and
$100,000 under the revolving credit facility. On February 3, 2005, we repaid
$50,000 of the outstanding balance under the revolving credit facility. The term
loan facility is payable at approximately $11,111 per quarter, which commences
on December 15, 2005 through the term loan maturity date of December 30, 2007.
The revolving credit facility matures on December 30, 2009. The revolving credit
facility is classified as short term on the Condensed Consolidated Balance Sheet
as our intention is to pay it off currently. We incurred approximately $3,600 of
deferred financing costs related to the new credit facility. The interest rate
on the credit facility is the greater of (i) the prime rate and (ii) the federal
funds rate plus 0.5%, plus, in both cases, the applicable margin for U.S.-based
loans. For Eurodollar-based loans, the rate is the adjusted LIBO rate (defined
as the LIBO rate multiplied by the statutory reserve rate) plus the applicable
margin. The applicable margin is based upon our leverage ratio (defined as the
ratio of our total indebtedness to our consolidated EBITDA for the period of the
most recent four fiscal quarters) plus 0.25% to 1% for U.S.-based loans and
1.25% to 2% for Eurodollar-based loans. The interest rate on our outstanding
borrowings at March 31, 2005 for the $100,000 term loan facility was 4.50% for
$50,000 and 4.41% for $50,000. The interest rate on the $50,000
F-72
revolving credit facility at March 31, 2005 was 4.47%. The credit facility
contains a number of security and financial covenants; we are in compliance with
all covenants as of March 31, 2005.
(b) On March 31, 2004, we entered into a purchase money secured installment loan
with a bank for $13,825. The loan is payable in four semiannual installments of
$3,655, including interest which commenced October 1, 2004. The proceeds
received under the loan were used to finance the purchases of certain software.
The fixed interest rate on this installment loan is 5.33%. This installment loan
is collateralized by the purchased software. As of March 31, 2005, the
outstanding balance on this loan was $10,369.
(c) In order to provide additional liquidity to be used for general corporate
purposes, including the repayment of our then debt outstanding under a revolving
credit facility and to effectively lock in the gain recognized upon the sale of
our Cisco Systems, Inc. ("Cisco") shares, while deferring a tax liability in
January 2001, we entered into a private Mandatorily Exchangeable Securities
Contract for Shared Appreciation Income Linked Securities ("SAILS") with a
highly rated financial institution. The securities that underlie the SAILS
contract represent our investment in Cisco common stock, which was acquired in
connection with the Telxon acquisition. This debt has a seven-year maturity and
bears interest at a cash coupon rate of 3.625 percent of the original notional
amount of debt of $174,200. At maturity, the SAILS are exchangeable for shares
of Cisco common stock or, at our option, cash in lieu of shares. Net proceeds
from the issuance of the SAILS and termination of an existing freestanding
collar arrangement were approximately $262,246. The SAILS contain an embedded
equity collar, which effectively manages a large portion of our exposure to
fluctuations in the fair value of our holdings in Cisco common stock. We account
for the embedded equity collar as a derivative financial instrument in
accordance with the requirements of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. The change in fair value of
this derivative between reporting dates is recognized as other expense/income.
The derivative has been combined with the debt instrument in long-term debt as
there is a legal right of offset in accordance with FASB Interpretation No. 39,
"Offsetting of Amounts Related to Certain Contracts." Since inception, the gross
SAILS liability remains unchanged at $174,200. The derivative asset was valued
at $92,737 and $90,473 on March 31, 2005 and December 31, 2004, respectively.
The net SAILS liability, when offset by the derivative asset, represents $81,463
and $83,727 of the total long-term debt balance outstanding at March 31, 2005
and December 31 2004, respectively. We have the option to terminate the SAILS
arrangement prior to its scheduled maturity. If we terminate the SAILS
arrangement prior to its scheduled maturity by delivering our Cisco common stock
our cash payment would not exceed the present value of our future coupon
payments at the time of termination.
(d) Other long-term debt of $60 and $63 at March 31, 2005 and December 31, 2004,
respectively, represent capital lease obligations and various other loans
maturing through 2007.
Based on the borrowing rates currently available to us for bank loans with
similar terms, the fair values of borrowings under the credit facility and
promissory notes, approximate their carrying values.
8.ACQUISITIONS
a.BRAZIL ACQUISITION
The Company amended a previous agreement with certain shareholders of our
majority-owned subsidiary that serves as our Brazilian distributor and customer
service entity ("Symbol Brazil"), whereby on January 10, 2004, we purchased an
additional 34% ownership interest of Symbol Brazil. The Company paid $4,050 and
also forgave a pre-existing $5,000 loan and related accrued interest of $92 that
had been made to an entity affiliated with the minority shareholders.
Accordingly, the Company now owns 85 percent of Symbol Brazil. As a result of
the transaction, the Company satisfied the obligation related to a previous
minimum earnout requirement of approximately $2,337 at January 10, 2004 and
recorded the excess purchase price of approximately $1,805 as goodwill. Under
the terms of the relevant agreements, Symbol Brazil had its corporate form
changed into a corporation and it will eventually become a wholly owned
subsidiary of the Company, directly or indirectly. If Symbol Brazil meets
certain revenue targets over relevant time periods, the Company will be required
to purchase additional ownership interests from the minority shareholders.
b. MATRICS, INC.
On September 9, 2004, we consummated the acquisition of privately held Matrics.
Based in Rockville, Maryland, Matrics was a leader in developing Electronic
Product Code ("EPC")-compliant RFID systems. RFID is a next generation data
capture technology that utilizes small tags that emit radio signals. Attaching a
tag to products or assets allows for remote reading of information relevant to
the asset. While similar to a bar code, RFID does not require physical contact
between the reader and the tag, or even a line of sight, it provides the ability
to capture more data more efficiently and is beneficial in areas such as supply
chain
F-73
management, asset tracking and security. We believe the acquisition of Matrics
is an important step in executing our plan to be a leader in RFID, and will
expand our product offerings.
Matrics focused its strategic RFID solutions efforts on Electronic Product Code
standards, which are the emerging global RFID standards. Matrics developed
EPC-compliant RFID systems for retail, defense, transportation and other
vertical markets. The product portfolio acquired from Matrics features RFID
systems including multi-protocol, EPC-compliant fixed readers; readers designed
for embedded applications, such as RFID printers and mobile computers; high-
performance antennas for RFID tag reading; and EPC labels that can be attached
to items such as containers, pallets, cartons and more. The RFID tag family
includes both read-only and read/write functionality to address a wide range of
asset visibility applications. At the time of the acquisition, Matrics was also
developing a proprietary manufacturing process that is expected to provide for
higher volume and more cost effective manufacturing of tags.
The aggregate purchase price of $237,354 consisted of $230,000 in cash payments
to the sellers and $7,354 in transaction costs, primarily professional fees. The
purchase price was funded from borrowings under the $250,000 short-term credit
facility which was replaced in December 2004 with our existing credit facility
(see note 7a). The results of Matrics have been included in Symbol's
consolidated financial statements since September 9, 2004, the acquisition date.
The following unaudited pro forma consolidated financial information for the
three months ended March 31, 2004, give effect to the acquisition as if it had
been consummated as of the earliest period presented, after giving effect to the
following adjustments (i) amortization of acquired intangible assets (ii)
Symbol's financing costs, consisting of interest expense on the $250,000 short
term credit facility that would have been incurred had the acquisition occurred
as of January 1, 2004 and the amortization of the debt issuance costs over the
term (one-year) of the short term credit facility and (iii) the related income
tax effects:
<Table>
<Caption>
- ------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
2004
- ------------------------------------------------------------------------------------------
Revenue..................................................... $ 420,964
Net loss.................................................... (437)
Diluted loss per share...................................... $ -
- ------------------------------------------------------------------------------------------
</Table>
The unaudited pro forma consolidated financial information is presented for
comparative purposes only and is not intended to be indicative of the actual
results that would have been achieved had the transaction been consummated as of
the dates indicated above, nor does it purport to indicate results that may be
attained in the future.
9. CONTINGENCIES
a. PRODUCT WARRANTIES
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN
45"), requires that upon issuance of a guarantee, the guarantor must disclose
and recognize a liability for the fair value of the obligation it assumes under
that guarantee. The disclosure requirements of FIN 45 are applicable to the
Company's product warranty liability.
F-74
We provide standard warranty coverage for most of our products generally ranging
for periods of one year up to five years from the date of shipment. We record a
liability for estimated warranty claims based on historical claims, product
failure rates and other factors. Management reviews these estimates on a regular
basis and adjusts the warranty reserves as actual experience differs from
historical estimates or other information becomes available. This warranty
liability primarily includes the anticipated cost of materials, labor and
shipping necessary to repair and service the equipment.
The following table illustrates the changes in our warranty reserves from
December 31, 2004 to March 31, 2005:
<Table>
<Caption>
- ---------------------------------------------------------------------
AMOUNT
-------
- ---------------------------------------------------------------------
Balance at December 31, 2004................................ $20,956
Charges to expense--cost of revenue......................... 7,436
Utilization/payment......................................... (5,452)
-------
Balance at March 31, 2005................................... $22,940
- ---------------------------------------------------------------------
</Table>
b. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Assets and liabilities of foreign subsidiaries where the local currency is the
functional currency are translated at quarter-end exchange rates. Changes
arising from translation are recorded in the accumulated other comprehensive
earnings component of stockholders' equity. Results of operations are translated
using the average exchange rates prevailing throughout the year. Gains and
losses from foreign currency transactions are included in the Condensed
Consolidated Statements of Income for the periods presented and are not
material.
We follow the provisions of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. SFAS No. 133 requires the recognition of
all derivative instruments as either assets or liabilities in the consolidated
balance sheet measured at fair value. Changes in fair value are recognized
immediately in earnings unless the derivative qualifies as a cash flow hedge.
For derivatives qualifying as cash flow hedges, the effective portion of changes
in fair value of the derivative instrument is recorded as a component of other
comprehensive earnings and is reclassified to earnings in the same period during
which the hedged transaction affects earnings. Any ineffective portion
(representing the remaining gain or loss on the derivative instrument in excess
of the cumulative change in the present value of future cash flows of the hedged
transaction) is recognized in earnings as it occurs. For fair value hedges,
changes in fair value of the derivative, as well as the offsetting changes in
fair value of the hedged item, are recognized in earnings each period.
We formally designate and document each derivative financial instrument as a
hedge of a specific underlying exposure as well as the risk management
objectives and strategies for entering into the hedge transaction upon
inception. We also assess whether the derivative financial instrument is
effective in offsetting changes in the fair value or cash flows of the hedged
item. We did not recognize any gain or loss related to hedge ineffectiveness for
the three months ended March 31, 2005 and 2004, respectively.
We do not use derivative financial instruments for trading purposes. All of our
hedges qualify for either cash flow or fair value hedge accounting, other than a
portion of our embedded equity collar contained in the private Mandatorily
Exchangeable Contract for Shared
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Appreciation Income Linked Securities ("SAILS") arrangement (See Note 7c) as the
related Cisco shares have been designated as trading securities. However, the
aforementioned portion of the embedded equity collar and the related Cisco
shares result in an economic hedge as it effectively manages a large portion of
the fluctuation in the Cisco shares designated as trading securities.
Accordingly, any change in fair value of this embedded equity collar between
reporting dates is recognized through operations in other expense/income. In
addition, the change in market value of Cisco shares, designated as trading
securities, between reporting dates is recognized through operations in other
expense/income. As of April 1, 2003, we designated a portion of the embedded
equity collar as a fair value hedge of our Cisco shares designated as
available-for-sale securities.
We also utilize derivative financial instruments to hedge the risk exposures
associated with foreign currency fluctuations for payments denominated in
foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Gains
and losses on these derivative financial instruments and the offsetting losses
and gains on hedged transactions are reflected in the Consolidated Statements of
Income as a component of cost of revenue. Such (losses) and gains were ($2,407)
and $1,786 for the three months ended March 31, 2005 and 2004, respectively. We
do not use these derivative financial instruments for trading purposes.
As of March 31, 2005 and December 31, 2004, respectively, we had $45,789 and
$70,632 in notional amounts of forward exchange contracts outstanding. The
forward exchange contracts generally have maturities that do not exceed 12
months and require us to exchange foreign currencies for U.S. dollars at
maturity at rates agreed to at inception of the contracts. These contracts are
primarily denominated in British pounds, Euros, Australian dollars, Canadian
dollars and Japanese yen and have been marked to market each period with the
resulting gains and losses included in the Consolidated Statement of Income. The
fair value of these forward exchange contracts was $(1,157) and $(3,629) as of
March 31, 2005 and December 31, 2004 respectively, which was recorded in current
liabilities.
c. LEGAL MATTERS
We are a party to lawsuits arising in the normal course of business. Litigation
arising in the normal course of business, as well as the lawsuits and
investigations described below, can be expensive, lengthy and disruptive to
normal business operations. Moreover, the results of complex legal proceedings
and government investigations are difficult to predict. Unless otherwise
specified, Symbol is currently unable to estimate, with reasonable certainty,
the possible loss, or range of loss, if any, for the lawsuits and investigations
described herein. An unfavorable resolution to any of the lawsuits or
investigations described below could have a material adverse effect on Symbol's
business, results of operations or financial condition.
GOVERNMENT INVESTIGATIONS
In May 2001, in response to an inquiry from the SEC, we retained a law firm to
conduct an internal investigation into certain allegations concerning our
accounting practices, focusing on specific transactions with two of our
customers but also including a limited review of other large transactions. The
law firm retained an accounting firm to assist it in the investigation. We
subsequently discovered that this investigation was hindered by certain of our
former employees. As a result of actions by these former employees, the SEC
expressed dissatisfaction with the investigation.
F-76
In March 2002, we retained a second law firm to conduct a wide-ranging internal
investigation into our accounting practices. The investigation was conducted
over a period of approximately eighteen months with the assistance of an outside
forensic accounting team. The SEC and the Eastern District commenced separate
but related investigations relating to our accounting practices.
The investigation found that, during the period covered by the restatement,
certain members of former management engaged in, directed and/or created an
environment that encouraged a variety of inappropriate activities that resulted
in accounting errors and irregularities affecting our previously issued
financial statements that we have now restated. The errors and irregularities
caused by these actions primarily concerned the timing and amount of product and
service revenue recognized. In particular, the investigation found that revenue
was accelerated from the appropriate quarters to earlier quarters through a
variety of improper means and, on a more limited basis, revenue was improperly
created and inflated on a net basis. Additionally, there were errors and
irregularities associated with the establishment and utilization of certain
reserves and restructurings, including certain end-of-quarter adjustments that
were apparently made in order to achieve previously forecasted financial
results. There were also errors and/or irregularities associated with the
administration of certain options programs, as well as several categories of
cost of revenue and operating expenses, including efforts to artificially reduce
reported inventory.
In addition, the internal investigation uncovered efforts by certain then
employees, including certain members of then management, to impede both the
initial and second internal investigations. The employees responsible for
directing such conduct resigned or were terminated.
The investigation found that, in addition to the specific items of misconduct
giving rise to the need for the restatement, there was a failure by our former
management to establish an appropriate control environment, and there were
significant failures in our internal controls and procedures resulting from
numerous causes, including inadequate hiring of qualified and experienced
personnel, insufficient training and supervision of personnel, a decentralized
accounting structure for operations in the United States and inadequate systems
and systems interfaces. The investigation also found instances in which some
members of former management and sales and finance-related employees devoted
insufficient attention and resources to ensuring accurate accounting and
financial reporting. As the guilty pleas of three former senior members of our
finance group illustrate, there were also instances in which such activity rose
to the level of criminal misconduct. All of the members of senior management who
were primarily responsible for the errors and irregularities underlying the
restatement either have been terminated from employment at Symbol as part of the
internal investigation or have left Symbol, including Tomo Razmilovic, one of
our former Presidents, Chief Executive Officers and directors, and Kenneth
Jaeggi, our former Senior Vice President and Chief Financial Officer. We
assembled a new management team and appointed new board members beginning in
mid-2002.
In November 2002, we announced the unaudited, preliminary expected magnitude of
the anticipated restatement of our financial statements, and updated that
information on several occasions over the subsequent eleven months. Accordingly,
the selected financial data for 1998, 1999, 2000 and 2001, financial statements
for the years ended December 31, 2000 and 2001, and unaudited selected quarterly
information for each of the four quarters of 2001 and the first three quarters
of 2002 were restated in our 2002 Annual Report on Form 10-K/A.
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In connection with our accounting practices various class action lawsuits were
filed against us and certain of our former management and our former board of
directors in March 2002, March 2003 and May 2003. For more information see
"--Securities litigation matters."
On June 3, 2004, we announced that we resolved the investigation by the United
States Attorney's Office for the Eastern District of New York ("Eastern
District") relating to our past accounting practices by entering into a
non-prosecution agreement with the Eastern District. As a result of this
non-prosecution agreement, no criminal complaint will be filed against us. In
addition, on June 3, 2004, we announced an agreement with the SEC to resolve
allegations against us relating to our past accounting practices that were under
investigation by the SEC. Pursuant to the agreements with the Eastern District
and the SEC, we have paid a total of $37,000 in cash to a restitution fund for
members of the class consisting of purchasers of our common stock from February
15, 2000 to October 17, 2002, and $3,000 to the United States Postal Inspection
Service Consumer Fraud Fund. In addition to these payments, the non-prosecution
agreement included an acknowledgement by us that between 1999 and 2002, as a
result of the actions of certain of our former employees, we (a) violated
federal criminal law in connection with accounting practices involving improper
sales transactions, unsupported and fictitious accounting entries and the
manipulation of our accounting reserves and expenses; and (b) filed and caused
to be filed materially false and misleading financial statements and other
documents with the SEC. As part of the non-prosecution agreement, we agreed to
continue our cooperation with the Eastern District and the SEC, and to implement
remedial measures, including, but not limited to, retaining an independent,
government-approved examiner to review our internal controls, financial
reporting practices and our compliance with the settlement agreements and
establishing and maintaining an annual training and education program designed
to diminish the possibility of future violations of the federal securities laws.
If we violate the injunction with the SEC, the agreement with the Eastern
District or commit or attempt to commit other violations, such as accounting
offenses that were not the subject of the investigations, we will be subject to
federal criminal charges. Pursuant to the non-prosecution agreement we have
waived certain defenses that may have otherwise been available to us in the
event of a federal criminal charge, including the statute of limitations, and
will be subject to prosecution for any offense, including any offense related to
our past accounting practices. In addition, in the event of a violation of the
agreement and a federal criminal charge, statements that were made by or on
behalf of us to the Eastern District, SEC and the Postal Inspection Service,
including the acknowledgments of responsibility described above, will be deemed
admissible in evidence and certain evidentiary rules will not be available to
us. Pursuant to the agreement with the SEC, the SEC filed, and the court has
approved, a Final Consent Judgment in the Eastern District of New York providing
for injunctive relief, enjoining us from further violations of the antifraud,
reporting, books and records and internal control provisions of the federal
securities laws, and a civil penalty in the amount of $37,000, as described
above. We paid both the $37,000 and the $3,000 to the United States Postal
Inspection Service Consumer Fraud Fund prior to June 30, 2004.
On October 26, 2004, we issued a press release announcing our financial results
for the third quarter 2004. On November 8, 2004, we issued a second press
release, revising certain of the previously reported numbers. The revised
numbers included a reduction of approximately $13,600 in revenue for the nine
months ending September 30, 2004, as compared to the results previously reported
in the press release of October 26, 2004. The November 8, 2004 press release
stated that we had discovered certain discrepancies in the amount of inventory
at a
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distributor as well as inventory on hand that affected its previously-announced
results. On November 15, 2004, we filed our quarterly report on Form 10-Q for
the third quarter of 2004.
The non-prosecution agreement between us and the United States Attorney's Office
for the Eastern District of New York, described previously, provides that should
we violate the agreement or commit a crime in the future, we would be subject to
prosecution for any offense, including any offense related to our past
accounting practices. We retained outside counsel to investigate the facts and
circumstances surrounding the erroneous numbers included in the October 26, 2004
press release. We have been cooperating with the informal requests made by the
Eastern District and by the SEC regarding this matter, including whether we have
complied with the injunction issued in connection with the June 2004 settlement
with the SEC and non-prosecution agreement with the Eastern District. There can
be no assurance that these events will not give rise to an enforcement action or
other proceeding brought by the SEC or the Eastern District.
SECURITIES LITIGATION MATTERS
On June 3, 2004, we announced our settlement of the Pinkowitz, Hoyle and Salerno
class action lawsuits, which are described below. Under the settlement, we
agreed to pay to the class members an aggregate of $1,750 in cash and an
aggregate number of shares of common stock having a market value of $96,250,
subject to a minimum and maximum number of shares based upon the volume-weighted
moving average trading price of our common stock for the five day period
immediately prior to our payment of the common stock to the class ("Determined
Price"). If the Determined Price is greater than $16.41 per share, then we will
issue 5,865.3 shares of our common stock to the class. If the Determined Price
is between $16.41 per share and $11.49 per share, then we will issue to the
class the number of shares of common stock equal to a market value of $96,250
divided by the Determined Price. If the Determined Price is less than $11.49 per
share, we will issue 8,376.8 shares of our common stock to the class. For
example, the number of shares issuable on June 8, 2005, pursuant to the
settlement agreement would have been approximately 8,400 shares, of which 586.5
were delivered on November 17, 2004. The settlement also provides that we have
the right to pay up to an additional $6,000 in cash to reduce the number of
shares of our common stock that we are required to deliver in an amount equal to
the amount of additional cash divided by the Determined Price. If (i) there
occurs any event that would lead to the de-listing of our common stock or our
board of directors recommends the approval of a tender offer or the purchase of
a majority of our common stock or (ii) the Determined Price is less than $11.90
per share, then the lead counsel for the plaintiffs can require us to place into
escrow the number of shares that would otherwise be payable to the class and
would have the right to sell all or any portion of the escrowed shares and
invest such proceeds until distribution to the class. If we do not deliver our
common stock as required by the settlement agreement within the ten days of such
requirement, the lead counsel for the plaintiffs may terminate the settlement
agreement. The court held a fairness hearing regarding the settlement on October
4, 2004 and approved the fairness of the settlement by an order entered on
October 20, 2004. On November 17, 2004, we delivered 586.5 shares, or 10% of the
settlement amount (at $16.41 per share), as satisfaction of the plaintiffs'
attorneys' fees incurred as of October 2004, pursuant to the court's order. We
currently expect to deliver the balance of the shares required to be issued
under the settlement late in the second quarter or in the third quarter of 2005.
As of March 31, 2005, we have reflected $86,625 as accrued litigation costs in
our current liabilities. For every $1.00 per share above $16.41 per share on the
date the shares are issued, an
F-79
additional non-cash litigation charge of approximately $5,300 (pre-tax) and
$3,200 (after-tax) will be required to be recorded in our income statement in
2005. Included in our basic and diluted shares outstanding at March 31, 2005 is
6,642.5 shares for shares that would have been issued under this settlement
agreement.
In addition to the payments described above, the $37,000 civil penalty imposed
by the SEC, which we have already paid, will be distributed to the class. Also,
as part of the settlement, Dr. Jerome Swartz, our co-founder and former
chairman, paid $4,000 in cash in 2004 to the class to settle the claims against
him in the Pinkowitz and Hoyle class action lawsuits.
PINKOWITZ V. SYMBOL TECHNOLOGIES, INC., ET AL.
On March 5, 2002, a class action lawsuit was filed in the United States District
Court for the Eastern District of New York on behalf of purchasers of our common
stock between October 19, 2000 and February 13, 2002, inclusive, against us and
certain members of our former management and our former board of directors. The
complaint alleged that the 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 our
securities. This case is subject to the settlement agreement described above.
HOYLE V. SYMBOL TECHNOLOGIES, INC., ET AL.
SALERNO V. SYMBOL TECHNOLOGIES, INC., ET AL.
On March 21, 2003, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against us and certain
members of our former management and our former board of directors. On May 7,
2003, a virtually identical class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints were brought on behalf of a class of former
shareholders of Telxon Corporation ("Telxon") who obtained our common stock in
exchange for their Telxon stock in connection with our acquisition of Telxon in
November 2000. The complaint alleges that the defendants violated the federal
securities laws by issuing a Registration Statement and Joint Proxy
Statement/Prospectus in connection with the Telxon acquisition that contained
materially false and misleading statements that had the effect of artificially
inflating the market price of our securities. These cases are subject to the
settlement agreement described above.
SMART MEDIA LITIGATION
TELXON V. SMART MEDIA OF DELAWARE, INC.
On December 1, 1998, Telxon filed suit against Smart Media of Delaware, Inc.
("SMI") in the Court of Common Pleas for Summit County, Ohio in a case seeking a
declaratory judgment that Telxon did not contract to develop SMI's products or
invest approximately $3,000 in SMI's business and that it did not fraudulently
induce SMI to refrain from engaging in business with others or interfere with
SMI's business relationships. On March 12, 1999, SMI filed its answer and
counterclaim denying Telxon's allegations and alleging counterclaims against
Telxon for negligent misrepresentation, estoppel, tortious interference with
business relationship and intentional misrepresentation and seeking
approximately $10,000 in compensatory damages, punitive damages, fees and costs.
In addition, William Dupre, an individual employed by SMI at that time, asserted
similar counterclaims against Telxon. In November 2000, Symbol acquired Telxon
with these claims still pending.
F-80
On September 17, 2003, the jury awarded approximately $218,000 in damages
against Telxon, of which approximately $6,000 was awarded to Mr. Dupre. The
court denied Telxon's motion for judgment in its favor notwithstanding the
verdict, for a new trial and for a reduction in the amount of the jury verdicts.
On May 6, 2004, the court entered judgment against Telxon for approximately
$218,000 in damages, plus statutory interest from the date of the verdicts and
granted a motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by Mr. Dupre. Prior to these court rulings, SMI withdrew
its motion to add Symbol as a counterclaim defendant with respect to the
counterclaims asserted by SMI. We and Telxon have filed notices of appeal of
these rulings and the related verdicts. Symbol and Telxon have deposited
approximately $50,000 into an interest-bearing court escrow account to stay
execution of the judgment against both Symbol and Telxon pending resolution of
the appeal. The parties completed the submission of briefs on this appeal in
March 2005. The court has scheduled oral argument in response to the appellate
briefs for June 3, 2005.
Our available cash, including cash available under our existing lines of credit,
may not be sufficient to pay jury verdicts of this size and we would need to
obtain additional financing in order to pay the judgment entered against Telxon
in this matter. In addition, we currently have not recorded any liability in our
consolidated financial statements with respect to the jury verdicts and the
judgment entered as we believe that, in accordance with the relevant guidance
set forth in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," an unfavorable outcome of this litigation is not probable or
estimatable at this time. However, there can be no assurance that we will not be
found to be ultimately liable for the full amount of the judgment, plus
statutory interest from the date of the verdicts. In the event we are found
liable, and the judgment is not paid, we would be in violation of the terms of
our credit facility. See Note 7.
PENDING PATENT AND TRADEMARK LITIGATION
METROLOGIC INSTRUMENTS, INC. V. SYMBOL TECHNOLOGIES, INC.
On June 19, 2003, Metrologic Instruments, Inc. ("Metrologic") filed a complaint
against us in the United States District Court, District of New Jersey, alleging
patent infringement and breach of contract, and seeking monetary damages of
$2,300 (as of March 31, 2004) and termination of the cross-licensing agreement
between the parties. We answered the complaint and asserted counterclaims for
declaratory judgments of invalidity and noninfringement of Metrologic's patents
and for non-breach of the cross-licensing agreement. We moved for partial
summary judgment to dismiss Metrologic's breach of contract claim. On October
18, 2004, the Court granted Symbol's motion for summary judgment on Metrologic's
breach of contract claim, and also granted Symbol leave to assert certain
defenses. On October 25, 2004, Symbol asserted defenses of inequitable conduct
with respect to Metrologic's patents. We intend to defend the case vigorously on
the merits.
SYMBOL TECHNOLOGIES, INC. ET AL. V. LEMELSON MEDICAL, EDUCATIONAL & RESEARCH
FOUNDATION, LIMITED PARTNERSHIP
On July 21, 1999, we and six other members of the Automatic Identification and
Data Capture industry ("Auto ID Companies") jointly initiated a lawsuit against
the Lemelson Medical, Educational, & Research Foundation, Limited Partnership
("Lemelson Partnership"). The suit was commenced in the United States District
Court, District of Nevada in Reno, Nevada, but was subsequently transferred to
the federal court in Las Vegas, Nevada. In the litigation, the Auto ID Companies
sought, among other remedies, a declaration that certain patents, which had
F-81
been asserted by the Lemelson Partnership against end users of bar code
equipment, were invalid, unenforceable and not infringed.
The Lemelson Partnership had 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. We had
received many requests from our customers asking that we undertake the defense
of these claims using our knowledge of the technology at issue, and the other
Auto ID Companies had received similar requests. Certain of our customers had
requested indemnification against the Lemelson Partnership's claims from us, and
certain customers of the other Auto ID Companies had requested similar
indemnification from them, individually and/or collectively with other equipment
suppliers. We believe that generally we had no obligation to indemnify our
customers against these claims and that the patents being asserted by the
Lemelson Partnership against our customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
On January 23, 2004, the court concluded that Lemelson's patent claims are
unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the court are not infringed by us because
use of the accused products does not satisfy one or more of the limitations of
each and every asserted claim; and that the claims are invalid for lack of
enablement even if construed in the manner urged by Lemelson. The court entered
its judgment in favor of Symbol and the other Auto ID Companies on January 23,
2004. The Lemelson Partnership filed several post-trial motions all of which
were denied by the court. The Lemelson Partnership filed a notice of appeal on
June 23, 2004. Briefs on appeal have been filed by the parties. The court has
scheduled oral arguments for June 6, 2005.
INTERMEC IP CORP. V. MATRICS, INC.
On June 7, 2004, Intermec IP Corp., a subsidiary of Intermec Technologies
Corporation ("Intermec"), filed suit against Matrics in the Federal District
Court in Delaware asserting infringement of four patents owned by Intermec IP
Corp. relating to RFID readers and RFID tags. The complaint against Matrics
seeks payment of a "reasonable royalty" as well as an injunction against Matrics
from infringing such patents. On September 9, 2004, Symbol consummated the
acquisition of Matrics. Matrics was merged into Symbol on October 29, 2004, and
accordingly, Symbol is defending the case vigorously on the merits.
On January 21, 2005, Matrics filed an Amended Answer and Counterclaim to which
Intermec replied on February 4, 2005. On January 25, 2005, Matrics filed a
motion to dismiss Intermec IP Corp.'s damages claims insofar as they seek
damages for the period after October 29, 2004, the date on which Matrics was
merged into Symbol and ceased to exist. In the alternative, Matrics moved to
substitute Symbol for Matrics as successor-in-interest to Matrics. Intermec IP
Corp. initially opposed the motion, but subsequently withdrew its opposition to
substituting Symbol for Matrics. Symbol filed an amended answer and
counterclaims on April 6, 2005. On April 20, 2005, Intermec IP Corp. filed an
Amended and Supplemental Complaint which formally substituted Symbol for Matrics
as the defendant.
The Court entered a Scheduling Order on February 8, 2005. The Order provides for
a Markman claim construction hearing to be held September 7, 2005. The case is
scheduled for a ten day jury trial beginning on May 1, 2006. Discovery is under
way.
F-82
SYMBOL TECHNOLOGIES, INC. V. INTERMEC TECHNOLOGIES CORPORATION
On March 10, 2005, Symbol filed a patent infringement suit against Intermec in
the United States District Court for the District of Delaware, asserting
infringement of four Symbol patents relating to wireless technology. On March
23, 2005, Intermec asserted counterclaims against Symbol for alleged
infringement of six Intermec patents. The Intermec patents relate to wireless
scanners, signature capture technology and bar code readers with multi-tasking
operating systems. Symbol responded to Intermec's infringement claims on April
11, 2005 and asserted counterclaims seeking declarations that the Intermec
patents were invalid and not infringed. Symbol intends to defend the case
vigorously on the merits.
NANOPOWER TECHNOLOGIES, INC. V. SYMBOL TECHNOLOGIES, INC. AND MATRICS TECHNOLOGY
SYSTEMS, INC.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a California
corporation, filed a civil suit against Matrics and Symbol in state court in
California. The suit alleges that Matrics breached a consulting agreement,
confidentiality agreement and intellectual property licensing agreement
pertaining to certain ultra low voltage RFID tag start-up technology to which
Nanopower claims ownership and that the defendants violated California state law
relating to the protection of trade secrets. The suit also named Symbol as a
defendant because of Symbol's announced intention to purchase Matrics. Nanopower
alleges that Symbol (i) has improperly received disclosure of Nanopower's
confidential information, (ii) has, or will, misappropriate Nanopower's trade
secrets as a consequence of the acquisition of Matrics and (iii) will benefit
from the alleged breaches of the intellectual property licensing and consulting
agreements. On September 9, 2004, Symbol consummated the acquisition of Matrics.
Matrics was merged into Symbol on October 29, 2004, and accordingly, Symbol is
defending the case vigorously on the merits.
Matrics' agreements with Nanopower provide for mandatory arbitration of these
disputes in Washington, DC and contain an exclusive venue clause requiring any
effort to obtain injunctive relief to be filed in Maryland. The state court
complaint was removed to federal court and Matrics has filed a motion to
transfer the suit to Maryland in anticipation of a subsequent stay pending
arbitration. On October 1, 2004, before the Court heard Matrics' motion,
Nanopower agreed to and the parties filed a stipulation to stay the case pending
mediation, and if necessary, arbitration. A mediation was held on December 21,
2004, in an effort to resolve this matter. However, no resolution was reached.
Symbol has been informed by Nanopower's attorneys that they intend to pursue an
arbitration. One of Nanopower's claims is for breach of a consulting agreement,
based on Matrics' failure to pay an invoice in the amount of approximately $38.
On February 15, 2005, the Company sent to Nanopower a check in the amount of the
invoice, plus accrued interest. It is not yet known if Nanopower will seek to
arbitrate its other claims.
OTHER LITIGATION
BARCODE SYSTEMS, INC. V. SYMBOL TECHNOLOGIES CANADA, INC. AND SYMBOL
TECHNOLOGIES, INC.
On March 19, 2003, Barcode Systems, Inc. ("BSI") filed an amended statement of
claim in the Court of Queen's Bench in Winnipeg, Canada, naming Symbol
Technologies Canada, Inc. and Symbol as defendants. BSI alleges that we
deliberately, maliciously and willfully breached our agreement with BSI under
which BSI purported to have the right to sell our products in
F-83
western Canada and to supply Symbol's support operations for western Canada. BSI
has claimed damages in an unspecified amount, punitive damages and special
damages.
Symbol denies BSI's allegations and claims that it properly terminated any
agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,300, representing the unpaid balance of products sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the Canadian
Competition Tribunal ("Tribunal"). BSI sought an Order from the Tribunal that
would require us to accept BSI as a customer on the "usual trade terms" as they
existed prior to the termination of their agreement in April 2003. The Tribunal
granted leave for BSI to proceed with its claim against us on January 15, 2004.
We filed an appeal of the Tribunal's decision before the Federal Court of
Appeals on January 26, 2004, and a brief in support of the appeal on April 22,
2004. On October 7, 2004, the Federal Court of Appeals dismissed Symbol's
appeal, allowing BSI to make its application before the Tribunal against Symbol.
On November 17, 2003, BSI filed an additional lawsuit in British Columbia,
Canada against us and a number of our distributors alleging that we refused to
sell products to BSI, conspired with the other defendants to do the same and
used confidential information to interfere with BSI's business. We intend to
defend against these claims vigorously.
LIC. OLEGARIO CAVAZOS CANTU, ON BEHALF OF MARIA LEONOR CEPEDA ZAPATA VS. SYMBOL
DE MEXICO, SOCIEDAD DE R.L. DE C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata filed a
lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico") in
October 2003 to reclaim property on which our Reynosa facility is located. The
lawsuit was filed before the First Civil Judge of First Instance, 5th Judicial
District, in Reynosa, Tamaulipas, Mexico. The First Civil Judge ordered the
recording of a lis pendens with respect to this litigation before the Public
Register of Property in Cd. Victoria, Tamaulipas.
The plaintiff alleges that she is the legal owner of a tract of land of 100
hectares, located within the area comprising the Rancho La Alameda, Municipality
of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas, irrigation
district. The plaintiff is asking the court to order Symbol Mexico to physically
and legally deliver to the plaintiff the portion of land occupied by Symbol
Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial Reynosa from
Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument. An Owner's
Policy of Title Insurance was issued by Stewart Title Guaranty Company in
connection with the above-mentioned transaction in the amount of $13,400. A
Notice of Claim and Request for Defense of Litigation was duly delivered on
behalf of Symbol to Stewart Title Guaranty Company on November 4, 2003.
In late November 2004, the First Level Civil Judge entered a final judgment in
this matter for Symbol. In his decision, the judge held that, while the
plaintiff had established she had title to a tract of land, she failed to
establish that her parcel is the property on which Symbol's Reynosa
manufacturing facility is located. The judge further held that, based on the
plaintiff's complaint, it was not possible to identify the location of the
property to which plaintiff claims title.
F-84
The plaintiff has appealed the judgment to the Court of Second Instance. In
April 2005, the Court of Second Instance rejected the plaintiffs appeal. The
plaintiff has the right to further appeal this recent decision.
BRUCK TECHNOLOGIES HANDELS GMBH EUROPEAN COMMISSION COMPLAINT
In February 2004, we became aware of a notice from the European Competition
Commission ("EC") of a complaint lodged with it by Bruck Technologies Handels
GmbH ("Bruck") that certain provisions of the Symbol PartnerSelect(TM) program
violate Article 81 of the EC Treaty. Bruck has asked the EC to impose
unspecified sanctions. We have provided all information requested by the EC and
will respond to any additional inquiries. No action has been taken and the
matter is pending. We intend to defend against these claims vigorously.
10.INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 2005 is a
benefit of (24.85) percent. This differs from the statutory rate of 35 percent
primarily due to benefits in the three months ended March 31, 2005 attributable
to nonrecurring refunds and settlements relating to foreign and domestic tax
issues and the receipt of favorable rulings from tax authorities as well as the
allocable portion of the annual forecast of the tax benefits of research
credits. Excluding the nonrecurring items, the effective tax rate would have
been 33.8 percent.
Due to a change in New York State Tax law in April 2005, the Company's deferred
tax assets must be re-valued in the second quarter of 2005. Although the Company
expects future substantial tax savings as a result of the law change, a charge
of approximately $5,000 in the three months ended June 30, 2005, reflecting the
reduction of certain deferred tax assets, will increase the Company's effective
tax rate for the second quarter and year ended December 31, 2005.
On October 22, 2004 the President signed the American Jobs Creation Act of 2004
("AJCA"). The AJCA creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign corporations.
The deduction is subject to a number of limitations and, as of today,
uncertainty remains as to how to interpret numerous provisions of the AJCA. As
such, we are not yet in a position to decide on whether, and to what extent, we
might repatriate foreign earnings that have not yet been remitted to the U.S.
Based on analysis to date, we expect to repatriate up to $95,000 in accordance
with this temporary incentive. The resulting tax impact of repatriation cannot
be reasonably estimated at this time. We expect to finalize our assessment of
this new provision by September 30, 2005.
11.EXECUTIVE RETIREMENT PLANS
Effective January 1, 2005, Symbol changed certain aspects of its Executive
Retirement Plan (the "Plan"). The Plan change eliminated the participation of
certain highly compensated current associates who were formerly in the Plan.
Simultaneously, the Company commenced implementation of a non-qualified deferred
compensation plan for its eligible associates. These changes resulted in a Plan
settlement and curtailment and, accordingly, Symbol recognized in its Condensed
Consolidated Statement of Income a settlement benefit of $2,386 and an
additional expense associated with prior service of $1,397. This net benefit of
$989 was further reduced by on-going interest costs associated with the Plan of
$258. Our obligations under the Plan are
F-85
not funded. The components of the net periodic benefit cost for the three months
ended March 31, 2005 and 2004 are as follows:
<Table>
<Caption>
- --------------------------------------------------------------------------
THREE MONTHS
ENDED
MARCH 31,
------------
2005 2004
- --------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost................................................ $ - $370
Interest cost............................................... 258 322
Amortization of prior service cost.......................... - 66
Settlement and curtailment, net............................. (989) -
------------
Net periodic benefit cost................................... $(731) $758
- --------------------------------------------------------------------------
</Table>
EMPLOYER CONTRIBUTIONS TO THE EXECUTIVE RETIREMENT PLAN
We previously disclosed in our financial statements for the year ended December
31, 2004, that we expected to contribute approximately $461 to the Executive
Retirement Plan to cover expected benefit payments due to certain participants
during 2005. As of March 31, 2005, $115 has been paid and we anticipate
contributing an additional $346 before the end of 2005 to cover the expected
benefit payments for the Executive Retirement Plan in 2005, bringing the total
to $461.
DEFERRED COMPENSATION PLAN
Effective January 1, 2005, Symbol commenced implementation of a non-qualified
deferred compensation plan, in which certain highly compensated associates are
eligible to participate. Selected associates, including but not limited to those
former participants in the Executive Retirement Plan, will be eligible to
receive annual Company contributions made as deposits into accounts for their
benefit. The amount of the contribution will be based on the Company's
performance for the preceding fiscal year and may range from a minimum of 6
percent to a maximum of 12 percent of the participant's aggregate cash
compensation for the immediately preceding fiscal year. Such contributions will
be deemed to be 50 percent in cash and 50 percent in common stock and will vest
in accordance with the vesting schedule applicable to the deferred compensation
plan. As of March 31, 2005, $166 has been accrued for this benefit and we
anticipate contributing an additional $498 before the end of 2005 to cover the
expected benefit payments for the deferred compensation plan in 2005, bringing
the total to $664.
12.BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS
Our business consists of delivering products and solutions that capture, move
and manage information in real time to and from the point of business activity.
In addition, we provide customer support for our products and professional
services related to these products and solutions. These services are coordinated
under one global services organization. As a result, our activities are
conducted in two reportable segments, Product and Services.
The Product segment sells products and solutions in the form of advanced data
capture equipment, mobile computing devices, RFID, wireless communication
equipment and other
F-86
peripheral products and also receives royalties. The Services segment provides
solutions that connect our data capture equipment and mobile computing devices
to wireless networks. This segment also provides worldwide comprehensive repair,
maintenance, integration and support in the form of service contracts or repairs
on an as-needed basis. We use many factors to measure performance and allocate
resources to these two reportable segments. The primary measurements are sales
and gross profit. The accounting policies of the two reportable segments are
essentially the same as those used to prepare our consolidated financial
statements. We rely on our internal management system to provide us with
necessary sales and cost data by reportable segment, and we make financial
decisions and allocate resources based on the information we receive from this
management system. In the measurement of segment performance, we do not allocate
research and development, sales and marketing, or general and administrative
expenses. We do not use that information to make key operating decisions and do
not believe that allocating these expenses is significant in evaluating
performance.
Our internal structure is in the form of a matrix organization whereby certain
managers are held responsible for product and services worldwide while other
managers are responsible for specific geographic areas. The operating results of
both components are reviewed on a regular basis.
We operate 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). Sales are
allocated to each region based upon the location of the use of the products and
services. Non-U.S. sales for the three months ended March 31, 2005 and 2004 were
$168,447 and $166,485 respectively.
Identifiable assets are those tangible and intangible assets used in operations
in each geographic region. Corporate assets are principally goodwill, intangible
assets and temporary investments.
F-87
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table:
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, 2005 MARCH 31, 2004
------------------- -------------------
PRODUCT SERVICES TOTAL PRODUCT SERVICES TOTAL
- --------------------------------------------------------------------------------------------
Revenues:
The Americas(a)............ $263,833 $48,262 $312,095 $229,094 $45,277 $274,371
EMEA....................... 94,293 22,077 116,370 89,241 22,960 112,201
Asia Pacific............... 26,116 2,906 29,022 29,904 3,175 33,079
---------------------------------------------------------------
Total net sales............ $384,242 $73,245 $457,487 $348,239 $71,412 $419,651
---------------------------------------------------------------
Standard gross profit:
The Americas............... $142,091 $13,140 $155,231 $130,534 $ 8,532 $139,066
EMEA....................... 58,660 5,750 64,410 52,249 7,523 59,772
Asia Pacific............... 13,060 950 14,010 17,909 1,373 19,282
---------------------------------------------------------------
Total gross profit at
standard................. 213,811 19,840 233,651 200,692 17,428 218,120
Manufacturing variances &
other related costs...... 27,435 655 28,090 23,192 - 23,192
---------------------------------------------------------------
Total gross profit......... $186,376 $19,185 $205,561 $177,500 $17,428 $194,928
- --------------------------------------------------------------------------------------------
</Table>
(a) Included in The Americas are revenues of approximately $23,055 and $21,205
from non-US countries, mainly Canada, Brazil and Mexico, for the three month
period ended March 31, 2005 and 2004, respectively.
Below is a summary of product revenues by product division for the three months
ended March 31, 2005 and 2004:
<Table>
<Caption>
- ---------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------
2005 2004
- ---------------------------------------------------------------------------------
Product division:
Mobile Computing............................................ $246,919 $206,517
Advanced Data Capture....................................... 100,127 109,898
Wireless Infrastructure..................................... 35,879 34,111
RFID........................................................ 8,176 --
Other, net.................................................. (6,859) (2,287)
-------------------
Total....................................................... $384,242 $348,239
- ---------------------------------------------------------------------------------
</Table>
F-88
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
AS OF AS OF
MARCH 31, DECEMBER 31,
2005 2004
- ---------------------------------------------------------------------------------------
Identifiable assets:
The Americas................................................ $ 921,477 $ 915,565
EMEA........................................................ 309,565 322,490
Asia Pacific................................................ 58,915 52,385
Corporate (principally goodwill, intangible assets and
investments)............................................. 581,311 639,929
-------------------------
Total....................................................... $1,871,268 $ 1,930,369
- ---------------------------------------------------------------------------------------
</Table>
F-89
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Matrics, Inc.
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of Matrics, Inc. at
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
April 30, 2004
F-90
MATRICS, INC. BALANCE SHEETS
AT DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------
2003 2002
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 21,286,419 $ 6,027,063
Accounts receivable, net................................. 660,758 508,178
Inventories.............................................. 561,317 242,413
Prepaid expenses and other assets........................ 394,429 71,775
---------------------------
Total current assets.................................. 22,902,923 6,849,429
Property and equipment, net................................. 306,409 199,560
Other assets................................................ 45,127 35,716
---------------------------
Total assets.......................................... $ 23,254,459 $ 7,084,705
---------------------------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................... $ 2,630,195 $ 800,616
Capital lease obligation................................. - 6,419
Deferred revenue......................................... 4,119 14,416
---------------------------
Total current liabilities............................. 2,634,314 821,451
Deferred revenue............................................ 203,433 200,000
Credit facility............................................. - 730,000
Long term note.............................................. 2,000,000 -
---------------------------
Total liabilities..................................... 4,837,747 1,751,451
---------------------------
Commitments
Mandatorily redeemable convertible preferred stock:
Series A preferred stock, $0.001 par value; 2,050,000
shares authorized 2,050,000 shares issued and
outstanding (liquidation preference of $1,874,938).... 1,874,938 1,809,393
Series B preferred stock, $0.001 par value; 15,013,398
shares authorized, 14,998,043 shares issued and
outstanding (liquidation preference of $17,292,106)... 17,292,106 16,120,099
Series C preferred stock, $0.001 par value; 25,142,858
shares authorized, 12,571,429 shares issued and
outstanding (liquidation preference of $22,617,871)... 22,617,871 -
Stockholders' deficit:
Common stock, $0.001 par value, 62,000,000 shares
authorized, 10,944,763 and 10,944,763 shares issued,
10,514,518 and 10,594,518 shares outstanding.......... 10,944 10,944
Stock subscription receivable............................ (220,436) (220,436)
Additional paid-in capital............................... 1,553,484 1,585,545
Deferred compensation.................................... (42,690) (34,367)
Accumulated deficit...................................... (24,623,205) (13,891,624)
Treasury stock, at cost (350,245 shares at December 31,
2003 and 2002)........................................ (46,300) (46,300)
---------------------------
Total stockholders' deficit........................... (23,368,203) (12,596,238)
---------------------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit.......... $ 23,254,459 $ 7,084,705
- -----------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these financial statements.
F-91
MATRICS, INC. STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2003 2002
- ----------------------------------------------------------------------------------------
Revenue..................................................... $ 3,671,305 $ 1,192,647
Cost of revenue............................................. 2,387,666 523,138
--------------------------
Gross profit................................................ 1,283,639 669,509
--------------------------
Operating expenses
Sales and marketing...................................... 2,160,151 1,430,617
Research and development................................. 5,172,830 2,598,237
General and administrative............................... 2,885,107 2,305,221
--------------------------
Total operating expenses.............................. 10,218,088 6,334,075
--------------------------
Loss from operations........................................ (8,934,449) (5,664,566)
Other income (expenses)
Interest income.......................................... 123,741 144,660
Interest expense......................................... (65,449) (32,459)
--------------------------
58,292 112,201
--------------------------
Net loss.................................................... (8,876,157) (5,552,365)
Dividends to preferred shareholders......................... (1,855,424) (1,237,553)
--------------------------
Net loss attributable to common shareholders................ $(10,731,581) $(6,789,918)
- ----------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these financial statements.
F-92
MATRICS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK STOCK ADDITIONAL TOTAL
------------------- SUBSCRIPTION PAID-IN DEFERRED ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT RECEIVABLE CAPITAL COMPENSATION DEFICIT STOCK DEFICIT
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,
2001................. 10,486,377 $10,486 $ (370,436) $1,517,244 $ - $(7,101,706) $(46,300) $ (5,990,712)
Issuance of restricted
common stock......... 458,386 458 - 68,301 (68,759) - - -
Accretion to
redemption value of
Series A preferred
stock................ - - - - - (65,545) - (65,545)
Accrued dividends and
accretion on Series B
preferred stock...... - - - - - (1,172,008) - (1,172,008)
Amortization of
deferred
compensation......... - - - - 34,392 - - 34,392
Repayment of notes
receivable from
stockholders......... - - 150,000 - - - - 150,000
Net loss.............. - - - - - (5,552,365) - (5,552,365)
-------------------------------------------------------------------------------------------------------
Balance, December 31,
2002................. 10,944,763 10,944 (220,436) 1,585,545 (34,367) (13,891,624) (46,300) (12,596,238)
-------------------------------------------------------------------------------------------------------
Accretion of issuance
costs on Series C
preferred stock...... - - - (67,061) - - - (67,061)
Issuance of stock
options to non-
employees............ - - - 35,000 (35,000) - - -
Accretion to
redemption value of
Series A preferred
stock................ - - - - - (65,545) - (65,545)
Accrued dividends and
accretion on Series B
preferred stock...... - - - - - (1,172,008) - (1,172,008)
Accrued dividends and
accretion on Series C
preferred stock...... - - - - - (617,871) - (617,871)
Amortization of
deferred
compensation......... - - - - 26,677 - - 26,677
Net loss.............. - - - - - (8,876,157) - (8,876,157)
-------------------------------------------------------------------------------------------------------
Balance, December 31,
2003................. 10,944,763 $10,944 $ (220,436) $1,553,484 $ (42,690) $(24,623,205) $(46,300) $ (23,368,203)
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these financial statements.
F-93
MATRICS, INC. STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2002
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(8,876,157) $(5,552,365)
Adjustment to reconcile net loss to net cash used in
operating activities
Depreciation............................................ 101,299 56,977
Provision for doubtful accounts......................... 12,925 12,075
Deferred compensation................................... 26,677 34,392
Accrued interest receivable on stock subscription....... (9,410) (14,816)
Net change in operating assets and liabilities
Accounts receivable................................... (165,505) (520,253)
Inventories........................................... (318,904) (242,413)
Prepaid expenses and other assets..................... (322,654) -
Accounts payable and accrued expenses................. 1,829,577 (219,386)
Deferred revenue...................................... (6,864) 214,416
-------------------------
Net cash used in operating activities.............. (7,729,016) (6,231,373)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchases of property and equipment....................... (208,148) (86,902)
-------------------------
Net cash used in investing activities.............. (208,148) (86,902)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital leases................................ (6,419) (38,997)
Proceeds from issuance of long term note.................. 2,000,000 -
Net proceeds of credit facility........................... (730,000) 730,000
Proceeds from issuance of Series C preferred stock........ 22,000,000 -
Issuance costs on Series C preferred stock................ (67,061) -
Proceeds from payment of stock subscription receivable.... - 150,000
-------------------------
Net cash provided by financing activities.......... 23,196,520 841,003
-------------------------
Net (decrease) increase in cash and cash equivalents........ 15,259,356 (5,477,272)
Cash and cash equivalents, beginning of year................ 6,027,063 11,504,335
-------------------------
Cash and cash equivalents, end of year...................... $21,286,419 $ 6,027,063
-------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest.................................... $ 26,051 $ 15,806
Cash paid for income taxes................................ $ - $ -
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of Series A convertible preferred stock......... $ 65,545 $ 65,545
Accrued dividends and accretion of Series B convertible
preferred stock......................................... $ 1,172,008 $ 1,172,008
Accrued dividends and accretion of Series C convertible
preferred stock......................................... $ 617,871 $ -
- ---------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these financial statements.
F-94
MATRICS, INC. NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. NATURE OF THE BUSINESS
Matrics, Inc. (the Company), formerly Matrics Technology Systems, Inc., was
incorporated on July 5, 2000 in the State of Delaware. Prior to incorporation
the Company operated as a limited liability corporation beginning January 19,
1998. The Company provides radio frequency identification (RFID) technology and
visibility solutions for supply chain and asset management. The Company's
visibility solutions enable users to track assets globally, resulting in
improved productivity, reduced inventories and enhanced customer satisfaction.
For the years ended December 31, 2003 and 2002, the Company recorded net losses
of $8.9 million and $5.6 million, respectively, and has reported negative cash
flows from operations since inception. The Company believes that its current
working capital and committed financing will be sufficient to fund operations
through the remainder of 2004.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual amounts could differ from these estimates.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its product when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the fee is fixed and determinable and collectibility is reasonably
assured. In certain instances, the Company may enter into arrangements whereby
the customer is granted certain rights to test the delivered products or
arrangements which require the Company to perform additional services subsequent
to the delivery of the product. To the extent these arrangements exist, the
Company defers recognition of revenue until customer acceptance occurs or the
acceptance provisions lapse.
Revenue from service arrangements are deferred and recognized when the services
are performed and collectibility is reasonably assured.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out basis. Inventories consist of finished products held for
sale. The Company records a provision for excess and obsolete inventory when
identified. No such charges have been incurred to date.
F-95
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over the estimated useful lives of the assets. The estimated useful lives
are as follows: 3 years for computer and equipment, 7 years for furniture and
fixtures, and the shorter of 5 years or lease term for leasehold improvements.
Upon retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations. Repairs and maintenance costs are expensed as
incurred.
LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets based upon an
undiscounted cash flow analysis when factors indicating an impairment are
present. Impairments, if any, are measured based upon the difference between the
carrying value and fair value, which may be determined using discounted cash
flow analyses or other methods, and are recognized in the operating results in
the period in which an impairment in value is determined. No long-lived assets
were impaired for the years ended December 31, 2003 or 2002.
INCOME TAXES
Deferred tax liabilities and assets are recognized for the estimated future tax
consequences of temporary differences and income tax credits. Temporary
differences are primarily the result of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Deferred tax
liabilities and assets are measured by applying enacted statutory tax rates
applicable to the future years in which deferred tax liabilities or assets are
expected to be settled or realized. Valuation allowances are established to
reduce deferred tax assets to recognize the uncertainty in their realization.
Income tax expense, if any, consists of the taxes payable for the current period
and the change during the period in deferred tax assets and liabilities. For the
period presented, valuation allowances have been provided for the full amount of
deferred tax assets and no income tax expense or benefit has been recognized.
STOCK-BASED COMPENSATION
The Company has a Stock Option Incentive Plan and an Advisors and Consultants
Equity Plan, more fully described in Note 12. SFAS No. 123, as amended by SFAS
No. 148, permits companies to (i) recognize as expense the fair value of
stock-based awards, or (ii) continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB 25"), and provide pro forma net income and
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
continues to apply the provisions of APB 25 and provide the pro forma
disclosures in accordance with the provisions of SFAS No. 123 and 148. Under APB
25, the Company has not recorded any stock-based employee compensation cost
associated with the Company's stock option incentive plan, as all options
granted under the plan had an exercise price equal to the estimated fair value
of the underlying common stock on the date of grant.
The Company uses the minimum value option-pricing model to determine the pro
forma impact under SFAS Nos. 123 and 148 to the Company's net loss. This model
utilizes certain assumptions, such as the interest rate on a risk-free security
maturing generally at the same time as the option being valued, and requires
certain assumptions, such as the expected
F-96
amount of time an option will be outstanding until it is exercised or it
expires, to calculate the estimated fair value of stock options granted to the
company's employees. This information and the assumptions used for 2003 and 2002
are summarized as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------
Risk-free interest rate..................................... 2.73% 4.92%
Expected life............................................... 4.0 5.0
Expected volatility......................................... 0.00% 0.00%
Dividend yield.............................................. 0.00% 0.00%
- ---------------------------------------------------------------------------
</Table>
The following table illustrates the effect on operations had the Company applied
the fair value recognition provisions of SFAS No. 123 to its stock option plan:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------------
Net loss, as reported....................................... $(8,876,157) $(5,552,365)
Deduct: Net stock-based employee compensation expense
determined under fair value based method.................. (8,400) -
-------------------------
Pro forma net loss.......................................... $(8,884,557) $(5,552,365)
- ---------------------------------------------------------------------------------------
</Table>
RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs as incurred. The
research and development costs for the years ended December 31, 2003 and 2002
respectively, were $5,172,830 and $2,598,237. These amounts have been included
as operating costs in the accompanying Statement of Operations.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
These deposits may exceed amounts covered by the Federal Deposit Insurance
Corporation (FDIC). The Company performs ongoing evaluations of its financial
institutions, restricts placement of investments to financial institutions
evaluated as highly creditworthy and has not incurred any losses to date.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
financial statement presentation.
NEW ACCOUNTING PRONOUNCEMENT
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
This statement establishes standards for classifying and measuring as
liabilities certain financial instruments that includes obligations of the
issuer and have been traditionally recognized as equity. The FASB delayed the
SFAS 150 effective date for nonpublic companies with respect to instruments that
are mandatorily redeemable on fixed dates for amounts that are either fixed or
determined by reference to an
F-97
index to January 1, 2005. For all other mandatorily redeemable instruments SFAS
150 has been deferred indefinitely.
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31,
<Table>
<Caption>
- ---------------------------------------------------------------------------------
2003 2002
- ---------------------------------------------------------------------------------
Accounts receivable--trade.................................. $685,758 $520,253
Allowance for doubtful accounts............................. (25,000) (12,075)
-------------------
$660,758 $508,178
- ---------------------------------------------------------------------------------
</Table>
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at December
31,
<Table>
<Caption>
- ----------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------
Furniture and fixtures...................................... $ 203,357 $168,351
Computer equipment.......................................... 280,258 108,186
Leasehold improvements...................................... 23,385 22,315
--------------------
507,000 298,852
Less accumulated depreciation............................... (200,591) (99,292)
--------------------
Property and equipment, net................................. $ 306,409 $199,560
- ----------------------------------------------------------------------------------
</Table>
Depreciation expense for the year ended December 31, 2003 and 2002 was $101,299
and $56,977, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December 31,
<Table>
<Caption>
- -----------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------
Accounts payable--trade..................................... $1,745,246 $429,134
Accrued payroll and fringe benefits......................... 648,148 272,827
Other accounts payable and accruals......................... 236,801 98,655
---------------------
$2,630,195 $800,616
- -----------------------------------------------------------------------------------
</Table>
6. DEFERRED REVENUE
During 2002, the Company entered into a reseller arrangement for sale of its
radio frequency products. The reseller arrangement provides for certain
exclusivity rights through March 31, 2005 and a $200,000 advanced payment which
will be applied to future sales should the reseller fulfill their minimum
purchase requirements. The advanced payment will be applied to future purchases
in the period in which they occur. This advance payment has been classified as
deferred revenue.
F-98
7. DEBT OBLIGATIONS
In August 2002, the Company entered into a loan and security agreement
("Facility") with a commercial lender, which provided for a credit facility with
total borrowings of $750,000. Principal relating to the Facility was due on
February 9, 2004 with interest repayable in monthly installments and accrues at
a rate equal to one half of one percent (0.5%) above the prime rate. As of
December 31, 2003 there were no borrowings under the credit facility. In
February 2004, the term for the credit facility was extended to May 9, 2004. The
credit facility contains certain affirmative and negative covenants, of which
the Company was in compliance with as of December 31, 2003.
In September 2003, the Company executed a promissory note with Marubeni
Corporation, a Japanese corporation that at the same time invested $1,000,000 in
the Company, which provided for a loan with total borrowings of $2,000,000.
Principal and accrued interest shall be payable on September 4, 2007, or such
later date as may be agreed to by the Payee. Interest accrues at a rate equal to
five and nine tenths percent (5.9%) per annum calculated on the basis of a 365
day year. The loan agreement contains certain affirmative and negative
covenants, of which the Company was in compliance with as of December 31, 2003.
8. COMMON STOCK
As of December 31, 2003 and 2002, there were 10,944,763 shares issued, and
10,514,518 and 10,594,518 shares of the Company's $0.001 par value common stock
outstanding, respectively.
On July 21, 2000, the Company issued 5,934,686 shares of common stock ("Founder
Shares") to the founders for consideration for their interest in the limited
liability company. The Founder Shares were subject to stock restriction
agreements and vested over a period from the date of issuance to August 21,
2003. As of December 31, 2003 all of these shares are vested.
9. STOCK SUBSCRIPTION RECEIVABLE
On December 28, 2001, the Company issued 2,469,570 shares of the Company's
restricted common stock to an executive at a price of $0.15 per share for total
consideration of $370,436, paid in the form of a promissory note. The note
accrues interest at the rate of 4% per annum and is payable in full on December
28, 2005. The underlying restricted common stock shares vest as follows: 4% on
the purchase date, 36% on April 10, 2003 and the remaining 60% in equal monthly
installments for 32 consecutive months until fully vested. If the executive is
terminated for any reason, the Company shall have the right, but not the
obligation, to purchase all or any portion of the restricted shares at the
original issuance price. At December 31, 2003, 1,111,307 of these shares are
unvested and remain restricted common stock.
10. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
SERIES A CONVERTIBLE PREFERRED STOCK
During the six month period beginning July 21, 2000, the Company issued a total
of 1,050,000 shares of Series A Preferred Stock ("Series A"), at $1.00 per
share, with aggregate proceeds of $1,050,000. In January 2001, the Company
issued 1,000,000 additional shares of Series A for aggregate proceeds of
$1,000,000. In connection with the issuance of Series A preferred stock in 2000,
the Company issued warrants to purchase additional shares of Series A
F-99
preferred stock (See Note 11). The issuance costs on Series A preferred stock
was approximately $78,000, recorded in 2000.
SERIES B CONVERTIBLE PREFERRED STOCK
During 2001, the Company raised a second round of financing by issuing
14,998,043 shares of Series B Preferred Stock ("Series B"), at $0.9768 per
share, with aggregate proceeds of $14,650,088. In connection with the issuance
of Series B preferred stock, the Company issued warrants to purchase shares of
the Company's common stock (See Note 11). The issuance costs on Series B
preferred stock was approximately $91,000, recorded in 2001.
SERIES C CONVERTIBLE PREFERRED STOCK
During 2003, the Company raised a third round of financing by issuing 12,571,429
shares of Series C Preferred Stock ("Series C") at $1.75 per share, with
aggregate proceeds of $22,000,000. The issuance costs on Series C preferred
stock was approximately $67,000, recorded in 2003.
SERIES C-1 PREFERRED STOCK
The Company is authorized to issue 12,571,429 shares of Series C-1 Preferred
Stock ("Series C-1") at $1.75 per share. At December 31, 2003 there were no
issued shares of Series C-1 outstanding.
The Series A preferred stock, Series B preferred stock, Series C preferred stock
and Series C-1 preferred stock have the following rights to voting, dividends,
conversion, liquidation preferences and redemption:
VOTING RIGHTS
Each share of Series A preferred stock is entitled to the number of votes equal
to the number of whole shares of common stock into which each share of Series A
preferred stock could be converted. For so long as at least 500,000 shares of
Series A preferred stock remain outstanding, subject to adjustment for any stock
split, reverse stock split or any similar event effecting such stock, the
holders of Series A preferred stock, voting as a separate class, shall be
entitled to elect one member of the Board of Directors.
Each share of Series B preferred stock is entitled to the number of votes equal
to the number of whole shares of common stock into which each share of Series B
preferred stock could be converted. For so long as at least 500,000 shares of
Series B preferred stock remain outstanding, subject to adjustment for any stock
split, reverse stock split or any similar event effecting such stock, the
holders of Series B preferred stock, voting as a separate class, shall be
entitled to elect one members of the Board of Directors.
Each share of Series C preferred stock and Series C-1 preferred stock is
entitled to the number of votes equal to the number of whole shares of common
stock into which each share of Series C preferred stock and Series C-1 preferred
stock could be converted. For so long as at least 500,000 shares of Series C
preferred stock and Series C-1 preferred stock remain outstanding, subject to
adjustment for any stock split, reverse stock split or any similar event
effecting such stock, the holders of Series C preferred stock and Series C-1
preferred stock, voting together as a single class, shall be entitled to elect
two members of the Board of Directors.
DIVIDENDS
So long as any shares of Series C preferred stock, Series C-1 preferred stock or
Series B preferred stock shall be outstanding, no dividend, whether in cash or
property, shall be paid, declared or distributed, on the common stock or other
securities ranking junior to the Series C preferred stock, Series C-1 preferred
stock, or Series B preferred stock (the "junior stock"). No
F-100
junior stock shall be purchased, redeemed or otherwise acquired for value by the
Company until all series C accruing dividends and Series B accruing dividends
shall have been paid or declared and set apart except for dividends payable in
common stock and any repurchase of shares of common stock pursuant to
contractual rights held by the Company relating to the termination of employees
or the Company's right of first refusal to purchase such shares. If dividends
are paid on any share of junior stock, an additional dividend shall be paid
concurrently on the Series C preferred stock, Series C-1 preferred stock, Series
B preferred stock and Series A preferred stock in an amount per share equal to
the amount paid or set aside for each share of junior stock.
The Company, in general, shall not declare or pay any distributions on shares of
common stock or other securities ranking junior to the Series C preferred stock,
Series C-1 preferred stock or Series B preferred stock, until the holders of
these respective classes of shares have first received, out of any assets
legally available, a distribution on outstanding shares of respective series
preferred stock. Series C preferred stockholders, Series C-1 preferred
stockholders and Series B preferred stockholders are entitled to cumulative
dividends at an amount equal to 8 percent of the original purchase price per
annum. No dividends have been declared through December 31, 2003.
CONVERSION
At the option of the holder, each share of Series A preferred stock is
convertible into common stock at any time at a price of $0.915636. At December
31, 2003, 2,050,000 shares of Series A preferred stock are outstanding and
convertible into common shares.
At the option of the holder, each share Series B preferred stock is convertible
into common stock at the original purchase price of $0.9768. At December 31,
2003, 14,998,043 shares of Series B preferred stock are outstanding and
convertible into common shares.
At the option of the holder, each share Series C preferred stock and Series C-1
preferred stock is convertible into common stock at the original purchase price
of $1.75. At December 31, 2003, 12,571,429 shares of Series C preferred stock
and Series C-1 preferred stock are outstanding and convertible into common
shares.
LIQUIDATION PREFERENCES
In the event of any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, the holders of the Series A preferred stock
shall be entitled to a liquidation preference over the Company's common
stockholders for an amount per share equal to the Series A original purchase
price, subject to an adjustment for a stock split, stock dividend or other
similar recapitalization, plus all declared and unpaid dividends up to the date
of the distribution of the assets of the Company.
In the event of any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, the holders of the Series B preferred stock
shall be entitled to a liquidation preference over the Company's common
stockholders for an amount per share equal to the Series B original purchase
price, subject to an adjustment for a stock split, stock dividend or other
similar recapitalization, plus an amount equal to all Series B accruing
dividends unpaid and any other dividends declared but unpaid computed to the
date payment is made available.
In the event of any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, the holders of the Series C preferred stock
shall be entitled to a liquidation
F-101
preference over the Company's common stockholders for an amount per share equal
to the Series C original purchase price, subject to an adjustment for a stock
split, stock dividend or other similar recapitalization, plus an amount equal to
all Series C accruing dividends unpaid and any other dividends declared but
unpaid computed to the date payment is made available.
In the event of any liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, the holders of the Series C-1 preferred stock
shall be entitled to a liquidation preference over the Company's common
stockholders for an amount per share equal to the Series C-1 original purchase
price, subject to an adjustment for a stock split, stock dividend or other
similar recapitalization, plus an amount equal to all Series C-1 accruing
dividends unpaid and any other dividends declared but unpaid computed to the
date payment is made available.
After the payment of the full liquidation preference of the preferred stock, the
remaining assets of the Company legally available for distribution, if any,
shall be distributed to the holders of the Series A preferred stock, Series B
preferred stock, Series C preferred stock and Series C-1 preferred stock in an
amount equal to the greater of the amount a) ratably distributed to the holders
of common stock and Preferred Stock on an as-if converted to common stock basis
until the holders of Preferred Stock have received an aggregate amount per share
equal to two times the original purchase price or b) ratably distributed to the
holders of common stock and preferred stock on an as-if converted basis.
REDEMPTION
The holders of at least sixty-six and two-thirds percent of the then outstanding
shares of Series C preferred stock and Series C-1 preferred stock, voting
together as a separate class, may require the Company to redeem the Series C
preferred stock and Series C-1 preferred stock in three equal annual
installments beginning on the fifth anniversary of the Series C original issue
date and ending on the date two years from such first redemption date.
The Company shall promptly notify in writing the holders of the Series A
preferred stock and Series B preferred stock of any election to redeem by the
holders of the Series C preferred stock and Series C-1 preferred stock. Unless
the holders of at least sixty-six and two-thirds percent of the then outstanding
shares of Series A preferred stock and holders of at least sixty-six and
two-thirds percent of the then outstanding shares of Series B preferred stock,
each voting separately as a class, provide notice otherwise to the Company not
later than fifteen days from the receipt of the preferred notice, the Company
shall redeem the Series A preferred stock and Series B preferred stock, together
with the Series C preferred stock and Series C-1 preferred stock.
If at least sixty-six and two-thirds percent of the holders of the Series A
preferred stock or sixty-six and two thirds of the holders of the Series B
preferred stock, each voting as a separate class, provides notice to the Company
not later than fifteen days from the receipt of the preferred notice that such
Series A preferred stock or Series B preferred stock shall not be redeemed, then
with respect to such class of Series A preferred stock and Series B preferred
stock that provides such notice (a) no holder of shares of such class of Series
A preferred stock or Series B preferred stock shall have the right to require
the Company to redeem such shares hereunder and (b) any and all rights as
applicable to the holders of shares of Series A preferred stock or Series B
preferred stock shall thereupon terminate and expire as to all holders of Series
A preferred stock or Series B preferred stock.
The Company shall effect such redemptions by paying in cash, in exchange for the
shares of redeemable preferred stock, the original purchase price per share plus
declared and unpaid
F-102
dividends, including the Series C accruing dividends, as payable with respect to
the Series C preferred stock. The redemption price shall be paid in cash or by
one or more promissory notes, in form and substance reasonably satisfactory to
the holders of at least ninety percent of the redeemable preferred stock.
The Company accretes Series A, Series B and Series C preferred stock to their
redemption amount over the period from issuance dates to the dates of
redemption. The aggregate accrued dividends and accretion on Series A preferred
stock, Series B preferred stock and Series C preferred stock during the year
ended 2003 and 2002, respectively were approximately $1,855,000 and $1,238,000,
respectively.
11. WARRANTS
On July 21, 2000, in conjunction with the issuance of Series A preferred stock,
the Company issued 1,206,000 warrants to Series A investors to purchase
additional shares of Series A preferred stock for $1.00 per share. On the date
of issuance, the Company valued the warrants using the Black Scholes option
pricing model. The Company allocated $328,000 of the proceeds from the Series A
financing to the warrants and $1,222,000 to the Series A preferred stock, based
on their relative fair value. The warrants expired on July 21, 2002.
During 2001, in conjunction with the Series B financing, the Company issued to
the Series B investors, 1,049,863 warrants to purchase shares of common stock
for $0.9768 per share. The warrants expire five years from the date of issuance.
The warrants were valued using the Black Scholes option pricing model on the
date of issuance and were insignificant. No warrants have been exercised as of
December 31, 2003. At December 31, 2003, 1,049,863 shares of common stock have
been reserved for the exercise of these warrants.
During 2002, in conjunction with the Credit Agreement, the Company issued to the
commercial lender, 15,356 warrants to purchase shares of Series B preferred
stock for $0.9768 per share. The warrants expire seven years from the date of
issuance. The warrants were valued using the Black Scholes option pricing model
on the date of issuance and were insignificant. No warrants have been exercised
as of December 31, 2003. At December 31, 2003, 15,356 shares of common stock
have been reserved for the exercise of these warrants.
12. STOCK OPTION PLAN
In 2001, the Company established the Matrics, Inc. Stock Incentive Plan and the
Matrics, Inc. Advisors and Consultants Equity Plan under which employees,
directors, consultants, distributors or other persons who have rendered services
to the Company may be granted options to purchase shares of the Company's common
stock. Options granted to employees under the Stock Incentive Plan generally
vest ratably over a four-year period and expire ten years from the date of the
grant. Options granted to non-employees under the Advisors and Consultants
Equity Plan generally vest over a two-year period and expire five years from the
date of the grant. During 2003, 1,268,000 options were issued to employees.
During 2003, 250,000 options were issued to non-employees. The options were
valued using the Black Scholes option pricing model on the date of issuance and
and an amount of $35,000 was initially recorded as deferred compensation expense
and amortized into earnings over the expected life of the option of 2 years
resulting in a compensation expense for 2003 of $6,664.
F-103
The following table summarizes the weighted average of the assumptions used for
stock options granted to non-employees during 2003 and 2002.
<Table>
<Caption>
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Risk-free interest rate..................................... 1.76% 4.92%
Expected life............................................... 2.00 5.00
Expected volatility......................................... 100.00% 100.00%
Dividend yield.............................................. 0.00% 0.00%
- -------------------------------------------------------------------------------
</Table>
Transactions in stock options are summarized as follows:
<Table>
<Caption>
- -----------------------------------------------------------------------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
- -----------------------------------------------------------------------------------
Balance, December 31, 2000.................................. - $ -
Granted.................................................. 951,660 1.00
Exercised................................................ (200,000) 1.00
Forfeited................................................ (181,750) 1.00
---------------------
Balance, December 31, 2001.................................. 569,910 1.00
Granted.................................................. 920,340 0.15
Exercised................................................ - -
Forfeited................................................ (600,250) 0.15
---------------------
Balance, December 31, 2002.................................. 890,000 0.15
Granted.................................................. 1,518,000 0.20
Exercised................................................ - -
Forfeited................................................ (200,000) 0.15
---------------------
Balance, December 31, 2003.................................. 2,208,000 0.18
---------------------
Shares exercisable at December 31, 2003..................... 355,100 $ 0.16
- -----------------------------------------------------------------------------------
</Table>
The Plans permit the payment for shares purchased under the plans in cash, or
where expressly approved by the Company, a) by cancellation of indebtedness of
the Company to the optionee; b) by surrender of shares that have been owned by
optionee for more than six months and fully paid for; c) by tender of a full
recourse promissory note bearing interest at a rate sufficient to avoid
imputation of income under the relevant tax code; or d) by waiver of
compensation due to the optionee for services rendered.
All options, under the plan, were issued with an exercise price equal to or
exceeding the fair value of the underlying common stock at the date of grant.
The fair value of the common stock was determined by the Board based on all
relevant factors, including operating results, financial conditions, recent
sales prices of the Company's securities and other pertinent information.
In February 2002, the Company amended the stock option awards to allow holders
of stock options to exchange their options for shares of restricted common stock
on a one-to-one basis. 458,386 of stock options outstanding as of December 31,
2001 were exchanged for shares of restricted common stock and the respective
stock options were cancelled. 111,524 of stock
F-104
options outstanding as of December 31, 2001 were forfeited due to employee
termination. Consequently, in 2002 the Company recorded deferred compensation
expense of $68,759, amortized into earnings over the respective vesting periods.
Pursuant to the respective restricted common stock issuance agreements, so long
as the option holder is in the continuous employment of, or in a service
relationship with the Company from the grant date through the applicable date
upon which vesting is scheduled to occur, 25% of the shares of restricted common
stock shall vest and become nonforfeitable on the one year anniversary of the
date of issuance and the remaining 75% of the shares shall vest and become
nonforfeitable in equal monthly installments for 36 consecutive calendar months,
beginning with the first month that follows the initial vesting date. The
vesting schedule is subject to adjustment upon a change in control as defined in
the restricted common stock share agreement. During 2003, 80,000 shares were
forfeited and as of December 31, 2003, 95,688 of these shares are unvested and
remain restricted common stock.
13. INCOME TAXES
The tax effect of temporary differences that give rise to significant portions
of the deferred assets is as follows:
<Table>
<Caption>
- ---------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
2003 2002
- ---------------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards......................... $ 7,688,925 $ 4,497,398
Accrued expenses......................................... 41,109 33,801
Accrued interest......................................... 14,983 --
Allowance for doubtful accounts.......................... 9,655 4,663
Amortization of legal fees for patients.................. 216,056 49,381
Depreciation............................................. 19,807 9,016
-------------------------
7,990,535 4,594,259
Less: valuation allowance............................. (7,990,535) (4,594,259)
-------------------------
Net deferred tax assets..................................... $ - $ -
- ---------------------------------------------------------------------------------------
</Table>
The Company has provided a valuation allowance for the full amount of its net
deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards cannot
be sufficiently assured at December 31, 2003.
At December 31, 2003, the Company has a net operating loss carryforwards of
approximately $19,909,000 available to reduce future taxable income. The net
operating loss carryforwards will begin to expire in 2021. Under the Tax Reform
Act of 1986, the amounts of and benefits from net operating loss carryforwards
may be impaired or limited in certain circumstances. Events which cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three-year period.
F-105
The actual tax benefits for the years ended December 31, 2003 and 2002 differed
from the expected tax benefit as a result of the following:
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31,
2003 2002
- -----------------------------------------------------------------------------------------
Expected tax benefit........................................ $ (3,372,940) $ (2,109,899)
Nondeductible expenses...................................... 18,128 25,285
State Taxes................................................. (383,155) (239,696)
Change in Valuation Allowance............................... 3,737,967 2,324,310
---------------------------
Provision for income taxes.................................. $ - $ -
- -----------------------------------------------------------------------------------------
</Table>
14. 401(K) SAVINGS PLAN
During 2001, the Company established a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. This plan covers substantially all
employees who meet minimum age and service requirements and allows participants
to defer a portion of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the Board of
Directors. To date there were no contributions made to the plan by the Company.
15. COMMITMENTS
LEASES
In March 2004, the Company entered into a new operating lease agreement for
office space with a least term expiring at the end of December, 2007. Future
minimum lease payments under non-cancelable operating leases are as follows:
<Table>
<Caption>
- ------------------------------------------------------------------------
OPERATING
YEAR ENDING DECEMBER 31, LEASE
- ------------------------------------------------------------------------
2004........................................................ $481,363
2005........................................................ 688,105
2006........................................................ 589,355
2007........................................................ 543,357
2008........................................................ --
----------
$2,302,180
- ------------------------------------------------------------------------
</Table>
Rent expense for the years ended December 31, 2003 and 2002, was $205,707 and
$158,173, respectively.
16. RELATED PARTY TRANSACTIONS
In September 2003, the Company entered into a distributor agreement with a
Japanese Corporation, one of its new Series C preferred shareholders for 2003
that at the same time invested $1,000,000 in the Company by purchasing 571,429
shares of Series C preferred stock and provided a loan of $2,000,000 to the
Company (see note 7). The investment was made at a share price consistent with
other investors. The distributor agreement provides for the exclusive
F-106
authorized distributor rights to sell, market and otherwise distribute certain
RFID products in the exclusive territory of the nation of Japan and all its
territories and as a non-exclusive authorized distributor to sell, market and
otherwise distribute the same products in the remainder of the world and its
nations, excluding Korea. The effective date for the agreement was September 2,
2003 with an exclusivity term for a period of three years from the date on which
certain approval for the products is obtained in the exclusive territory and a
non-exclusivity term continuing until terminated by either party. Total revenue
for the Company under the distributor agreement was approximately $14,000 for
year 2003.
In September 2003, the Company entered into a sales agreement for sales of RFID
inlets with a total commitment to purchase 10,000,000 inlets for a total amount
of $3,000,000 during the twenty-four months following the agreement date as of
September 30, 2003. In November 2003, the same party to the agreement invested
$3,500,000 in the Company by purchasing 2,000,000 shares of Series C preferred
stock and became a preferred shareholder of the Company. The investment was made
at a share price consistent with other investors. Total revenue from the
arrangement after the investment date as of November 20, 2003 was approximately
$2,000 for year 2003.
F-107
MATRICS, INC. CONDENSED BALANCE SHEETS
JUNE 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
<Table>
<Caption>
- -----------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
---------------------------
2004 2003
- -----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 7,325,358 $ 21,286,419
Accounts receivable, net................................. 3,607,107 660,758
Inventories.............................................. 2,949,262 561,317
Prepaid expenses and other assets........................ 505,088 394,429
---------------------------
Total current assets.................................. 14,386,815 22,902,923
Property and equipment, net................................. 413,090 306,409
Other assets................................................ 161,004 45,127
---------------------------
Total assets.......................................... $ 14,960,909 $ 23,254,459
---------------------------
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................... $ 3,741,056 $ 2,630,195
Deferred revenue......................................... 709,885 4,119
---------------------------
Total current liabilities............................. 4,450,941 2,634,314
Deferred revenue............................................ -- 203,433
Long term note.............................................. 2,000,000 2,000,000
Other liabilities........................................... 2,380 -
---------------------------
Total liabilities..................................... 6,453,321 4,837,747
---------------------------
Commitments
Mandatorily redeemable convertible preferred stock:
Series A preferred stock, $0.001 par value; 2,050,000
shares authorized 2,050,000 shares issued and
outstanding (liquidation preference of $1,907,711).... 1,907,711 1,874,938
Series B preferred stock, $0.001 par value; 15,013,398
shares authorized, 14,998,043 shares issued and
outstanding (liquidation preference of $17,878,110)... 17,878,110 17,292,106
Series C preferred stock $0.001 par value; 25,142,858
shares authorized, 12,571,429 shares issued and
outstanding (liquidation preference of $23,497,875)... 23,497,875 22,617,871
Stockholders' deficit:
Common stock, $0.001 par value, 62,000,000 shares
authorized, 10,993,763 and 10,944,763 shares issued,
10,643,518 and 10,594,518 shares outstanding.......... 10,989 10,944
Stock subscription receivable............................ (70,436) (220,436)
Additional paid-in capital............................... 1,556,255 1,553,484
Deferred compensation.................................... (42,692) (42,690)
Accumulated deficit...................................... (36,183,924) (24,623,205)
Treasury stock, at cost (350,245 shares at June 30, 2004
and 2003)............................................. (46,300) (46,300)
---------------------------
Total stockholders' deficit........................... (34,776,108) (23,368,203)
---------------------------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit.......... $ 14,960,909 $ 23,254,459
- -----------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-108
MATRICS, INC. CONDENSED STATEMENTS OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
- ----------------------------------------------------------------------------------------
Revenue..................................................... $ 4,707,567 $ 1,980,868
Cost of revenue............................................. 5,383,467 945,839
--------------------------
Gross (deficit)/profit...................................... (675,900) 1,035,029
--------------------------
Operating expenses
Sales and marketing...................................... 3,223,728 937,734
Research and development................................. 3,598,564 1,543,825
General and administrative............................... 2,578,277 1,150,101
--------------------------
Total operating expenses.............................. 9,400,569 3,631,660
--------------------------
Loss from operations........................................ (10,076,469) (2,596,631)
Other income (expenses)
Interest income.......................................... 82,045 24,820
Interest expense......................................... (67,518) (16,932)
--------------------------
14,527 7,888
--------------------------
Net loss.................................................... (10,061,942) (2,588,743)
Dividends to preferred shareholders...................... (1,498,777) (618,776)
--------------------------
Net loss attributable to common shareholders............. $(11,560,719) $(3,207,519)
- ----------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-109
MATRICS, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE
30, 2004 AND 2003 (UNAUDITED)
<Table>
<Caption>
- ----------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(10,061,942) $(2,588,743)
Adjustment to reconcile net loss to net cash used in
operating activities
Depreciation............................................. 68,920 39,757
Provision for doubtful accounts.......................... 75,000 --
Net changes in operating assets and liabilities.......... (4,020,254) (951,606)
--------------------------
Net cash used in operating activities................. (13,938,276) (3,500,592)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment...................... (175,601) (125,280)
--------------------------
Net cash used in investing activities................. (175,601) (125,280)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on capital leases............................... -- (6,419)
Proceeds from issuance of common stock................... 6,750 --
Issuance costs on Series C preferred stock............... (3,934) --
Proceeds from collection of stock subscription
receivable............................................ 150,000 --
--------------------------
Net cash provided by/(used in) financing activities... 152,816 (6,419)
--------------------------
Net decrease in cash and cash equivalents................... (13,961,061) (3,632,291)
Cash and cash equivalents, beginning of year................ 21,286,419 6,027,063
--------------------------
Cash and cash equivalents, end of year...................... $ 7,325,358 $ 2,394,772
- ----------------------------------------------------------------------------------------
</Table>
The accompanying notes are an integral part of these condensed financial
statements.
F-110
MATRICS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003 (UNAUDITED)
1. NATURE OF THE BUSINESS
Matrics, Inc. (the Company), formerly Matrics Technology Systems, Inc., was
incorporated on July 5, 2000 in the State of Delaware. Prior to incorporation
the Company operated as a limited liability corporation beginning January 19,
1998. The Company provides radio frequency identification (RFID) technology and
visibility solutions for supply chain and asset management. The Company's
visibility solutions enable users to track assets globally, resulting in
improved productivity, reduced inventories and enhanced customer satisfaction.
In the opinion of management, the accompanying unaudited interim financial
information reflects all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation on a going concern basis. Certain information
and footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to instructions, rules and regulations
prescribed by the Securities and Exchange Commission. The company believes that
the disclosures provided herein are adequate to make the information presented
not misleading when these unaudited interim condensed consolidated financial
statements are read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2003.
Operating results for the six months ended June 30, 2004 are not necessarily
indicative of the results expected for the full year.
2. PREPARATION OF CONDENSED FINANCIAL STATEMENTS
The preparation of condensed financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and earnings during the current reporting
period. Management periodically assesses and evaluates the adequacy and/or
deficiency of estimated liabilities recorded for various reserves, liabilities,
contract risks and uncertainties. Actual results could differ from these
estimates.
3. REVENUE RECOGNITION
The Company recognizes revenue upon shipment of its product when persuasive
evidence of an arrangement exists, delivery has occurred or services have been
rendered, the fee is fixed and determinable and collectibility is reasonably
assured. In certain instances, the Company may enter into arrangements whereby
the customer is granted certain rights to test the delivered products or
arrangements which require the Company to perform additional services subsequent
to the delivery of the product. To the extent these arrangements exist, the
Company defers recognition of revenue until customer acceptance occurs or the
acceptance provisions lapse.
Revenue from service arrangements are deferred and recognized when the services
are performed and collectibility is reasonably assured.
F-111
4. INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out basis. Inventories consist of finished products held for
sale. The Company records a provision for excess and obsolete inventory when
identified. No such charges have been incurred to date.
5. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at June 30, 2004 and December 31,
2003
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------------------
Accounts receivable--trade............................... $3,707,107 $685,758
Allowance for doubtful accounts.......................... (100,000) (25,000)
---------------------------------
$3,607,107 $660,758
- --------------------------------------------------------------------------------------------
</Table>
6. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at June 30,
2004 and December 31, 2003
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------------------
Furniture and fixtures................................... $258,288 $203,357
Computer equipment....................................... 400,928 280,258
Leasehold improvements................................... 23,385 23,385
---------------------------------
682,601 507,000
Less: Accumulated depreciation........................... (269,511) (200,591)
---------------------------------
Property and equipment, net.............................. $413,090 $306,409
- --------------------------------------------------------------------------------------------
</Table>
Depreciation expense for the periods ended June 30, 2004 and 2003 was $68,920
and $39,757, respectively.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at June 30,
2004 and December 31, 2003
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
JUNE 30, 2004 DECEMBER 31, 2003
- --------------------------------------------------------------------------------------------
Accounts payable--trade.................................. $2,708,084 $1,745,246
Accrued payroll and fringe benefits...................... 540,465 648,148
Warranty accrual......................................... 94,141 -
Other accounts payable and accruals...................... 398,366 236,801
---------------------------------
$3,741,056 $2,630,195
- --------------------------------------------------------------------------------------------
</Table>
F-112
8. DEBT OBLIGATIONS
In August 2002, the Company entered into a loan and security agreement
("Facility") with a commercial lender, which provided for a credit facility with
total borrowings of $750,000. Principal relating to the Facility was due on
February 9, 2004 with interest repayable in monthly installments and accrues at
a rate equal to one half of one percent (0.5%) above the prime rate. As of June
30, 2004 there were no borrowings under the credit facility. On September 9,
2004, the credit facility was closed.
In September 2003, the Company executed a promissory note with Marubeni
Corporation, a Japanese corporation that at the same time invested $1,000,000 in
the Company, which provided for a loan with total borrowings of $2,000,000.
Principal and accrued interest shall be payable on September 4, 2007, or such
later date as may be agreed to by the Payee. Interest accrues at a rate equal to
five and nine tenths percent (5.9%) per annum calculated on the basis of a 365
day year. The loan agreement contains certain affirmative and negative
covenants, of which the Company was in compliance with as of June 30, 2004.
9. STOCK SUBSCRIPTION RECEIVABLE
On December 28, 2001, the Company issued 2,469,570 shares of the Company's
restricted common stock to an executive at a price of $0.15 per share for total
consideration of $370,436, paid in the form of a promissory note. The note
accrues interest at the rate of 4% per annum and is payable in full on December
28, 2005. The underlying restricted common stock shares vest as follows: 4% on
the purchase date, 36% on April 10, 2003 and the remaining 60% in equal monthly
installments for 32 consecutive months until fully vested. If the executive is
terminated for any reason, the Company shall have the right, but not the
obligation, to purchase all or any portion of the restricted shares at the
original issuance price. At June 30, 2004, 833,486 of these shares are unvested
and remain restricted common stock.
10. LEGAL MATTERS
Intermec IP Corp. v. Matrics, Inc.
On June 7, 2004, Intermec IP Corp. ("Intermec") filed suit against Matrics in
the Federal District Court in Delaware asserting infringement of four patents
owned by Intermec relating to RFID readers and RFID tags. The complaint against
Matrics seeks payment of a "reasonable royalty" as well as an injunction against
Matrics from infringing such patents. The Company intends to defend the case
vigorously.
Nanopower Technologies, Inc. v. Matrics, Inc., and Symbol Technologies, Inc., et
al.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a California
corporation, filed a civil suit against Matrics and Symbol in state court in
California. The suit alleges that Matrics breached a consulting agreement,
confidentiality agreement and intellectual property licensing agreement
pertaining to certain ultra low voltage RFID tag start-up technology to which
Nanopower claims ownership and that the defendants violated California state law
relating to the protection of trade secrets. Among other things, it claims that
Matrics misappropriated the intellectual property of Nanopower without paying
royalties. It also claims that Matrics improperly disclosed Nanopower's trade
secrets to Symbol and third parties or used them without Nanopower's consent.
The suit also named Symbol as a defendant because of Symbol's announced
intention to purchase Matrics. Nanopower alleges that Symbol (i) has improperly
received disclosure of Nanopower's confidential information, (ii) has, or will,
F-113
misappropriate Nanopower's trade secrets as a consequence of the proposed
Matrics transaction and (iii) will benefit from the alleged breaches of the
intellectual property licensing and consulting agreements.
Nanopower seeks a preliminary injunction prohibiting Matrics and Symbol from
marketing for sale any RFID tags that allegedly use Nanopower's technology. It
also seeks a declaratory judgment that (1) Nanopower's technology and any
products derived from that technology are the exclusive property of Nanopower;
(2) even if they are not Nanopower's exclusive property, that Nanopower can
license the technology and product derived from the technology to others; and
(3) if Symbol and Matrics have the proprietary rights to the technology, that
Nanopower is entitled to receive royalty payments pursuant to the intellectual
property licensing agreement it entered into with Matrics. Nanopower also seeks
an unspecified amount of compensatory and exemplary damages, as well as
attorneys' fees and costs. We intend to vigorously defend against them.
11. RELATED PARTY TRANSACTIONS
In September 2003, the Company entered into a distributor agreement with the
Japanese Corporation, Marubeni Corporation, one of its new Series C preferred
shareholders for 2003 that at the same time invested $1,000,000 in the Company
by purchasing 571,429 shares of Series C preferred stock and provided a loan of
$2,000,000 to the Company (see note 8). The investment was made at share price
consistent with other investors. The distributor agreement states that Marubeni
will be the exclusive authorized distributor to sell, market and otherwise
distribute certain RFID products in the exclusive territory of the nation of
Japan and all its territories and as a non-exclusive authorized distributor to
sell, market and otherwise distribute the same products in the remainder of the
world and its nations, excluding Korea. The effective date for the agreement is
September 2, 2003 with an exclusivity term for a period of three years from the
date on which certain approval for the products is obtained in the exclusive
territory and a non-exclusivity term continuing until terminated by either
party. Total revenue for the Company under the distributor agreement was
approximately $233,000 for period through June 30, 2004. An accounts receivable
amount of approximately $202,000 is due from Marubeni Corporation as per period
end June 30, 2004.
In September 2003, the Company entered into a sales agreement with International
Paper Company for sales of RFID inlets for a total commitment from International
Paper Company to purchase 10,000,000 inlets for a total amount of $3,000,000
during the twenty-four months following the agreement date as of September 30,
2003. In November 2003, International Paper Company invested $3,500,000 in the
Company by purchasing 2,000,000 shares of Series C preferred stock and became a
preferred shareholder of the Company. The investment was made at a share price
consistent with other investors. Total revenue from International Paper Company
after the investment date as of November 20, 2003 was approximately $285,000 for
period ended June 30, 2004. An accounts receivable amount of approximately
$181,000 is due from International Paper Company as per period end June 30,
2004.
12. SUBSEQUENT EVENT
On July 26, 2004, the Company reached an agreement to be acquired by Symbol
Technologies, Inc. and closed the transaction on September 9, 2004.
F-114
PROSPECTUS
(SYMBOL LOGO)
SYMBOL TECHNOLOGIES, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
, 2005
WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS PROSPECTUS. YOU MUST NOT RELY
UPON ANY INFORMATION OR REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE, NOR DO THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
INFORMATION CONTAINED IN THIS PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS
PROSPECTUS IS ACCURATE AS OF THE DATES ON THEIR COVERS. WHEN WE DELIVER THIS
PROSPECTUS OR A SUPPLEMENT OR MAKE A SALE PURSUANT TO THIS PROSPECTUS OR A
SUPPLEMENT, WE ARE NOT IMPLYING THAT THE INFORMATION IS CURRENT AS OF THE DATE
OF THE DELIVERY OR SALE.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The actual and estimated expenses in connection with the distribution of the
securities being registered, all of which will be borne by us, are as follows:
<Table>
- ----------------------------------------------------------------------
SEC Registration Fee........................................ $ 36,490
Printing and Engraving Expense.............................. 150,000
Legal Fees.................................................. 300,000
Accounting Fees............................................. 150,000
Blue Sky Fees............................................... 5,000
Trustee/Issuing & Paying Agent Fees and Expenses............ 10,000
Miscellaneous............................................... 100,000
--------
Total.................................................... $751,490
- ----------------------------------------------------------------------
</Table>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
We are incorporated under the laws of the State of Delaware. Section 145 of the
Delaware General Corporation Law, or the DGCL, provides that a Delaware
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement in connection with specified actions, suits and
proceedings, whether civil, criminal, administrative or investigative (other
than action by or in the right of the corporation--a "derivative action"), if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, bylaws, disinterested director vote, stockholder vote, agreement
or otherwise.
The DGCL further authorizes a Delaware corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Our certificate of incorporation and by-laws provide for the indemnification of
our directors and officers to the fullest extent permitted under Delaware law.
We have purchased insurance on behalf of our directors and officers against
certain liabilities that may be asserted against, or incurred by, such persons
in their capacities as our directors or
II-1
officers, or that may arise out of their status as our directors or officers,
including liabilities under the federal and state securities laws.
Mr. Nuti's employment contract provides for indemnification as set forth in our
by-laws to the fullest extent allowable under Delaware law. Additionally, he is
entitled to the protection of any insurance policies we hold generally for the
benefit of our directors and officers against all costs, charges and expenses
incurred or sustained by him in connection with any action, suit or proceeding
to which he may be made a party by reason of his position as our Chief Executive
Officer, President and Director. These rights survive the termination or
expiration of his employment for any reason and the expiration of his employment
agreement for any reason.
In addition, the employment agreements that we had with Messrs. Bravman, Goldner
and Razmilovic, our former executives, provide for indemnification as set forth
in our by-laws to the fullest extent allowable under Delaware law. Additionally,
they are entitled to the protection of any insurance policies we hold generally
for the benefit of our directors and officers against all costs, charges and
expenses incurred or sustained by them in connection with any action, suit or
proceeding to which they may be made a party by reason of their positions as our
former directors and officers. These rights survive the termination of their
respective employment agreements for any reason.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 3, 2004, the Registrant announced the settlement of the Pinkowitz v.
Symbol Technologies, Inc., et al., Hoyle v. Symbol Technologies, Inc., et al.
and Salerno v. Symbol Technologies, Inc., et al. class action lawsuits.
Pursuant to the settlement agreement, the Registrant agreed to pay to the class
members of the class action lawsuits (i) $1.8 million in cash and (ii) an
aggregate number of shares of common stock equal to a market value of $96.25
million, subject to a minimum and maximum number of shares as set forth in the
settlement agreement. For example, the total number of shares issuable pursuant
to the settlement agreement would have been approximately 8.4 million shares on
June 8, 2005. On November 17, 2004, the Registrant delivered 586,533 shares, or
10% of the settlement amount (at $16.4 per share), as satisfaction of the
plaintiffs' attorneys' fees, pursuant to the court's order. The Registrant
expects to deliver the balance of the shares required to be issued under the
settlement agreement in the first half of 2005.
The issuance of securities were determined to be exempt from registration under
Section 3(a)(10) of the Securities Act. There were no underwriters employed in
connection with the issuance of the securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
<Table>
1.1+++ Forms of Underwriting Agreements (debt securities, preferred
stock and common stock)
2.1 Agreement and Plan of Merger by and among Symbol, Marvin
Acquisition Corp. and Matrics, dated as of July 26, 2004
(Incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K dated September 15, 2004)
3.1+ Certificate of Incorporation of Symbol Technologies, Inc.,
as amended
3.2 Amended and Restated By-Laws of Symbol (Incorporated by
reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2002)
</Table>
II-2
<Table>
4.1 Form of Certificate for Shares of the Common Stock of Symbol
(Incorporated by reference to Symbol's Form SE on March 3,
1999)
4.2 Rights Agreement, dated as of August 13, 2001, between
Symbol and The Bank of New York, as Rights Agent, which
includes the Form of Certificate of Designations with
respect to the Series A Junior Participating Preferred Stock
as Exhibit A, the Form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Shares of Preferred Stock
as Exhibit C (Incorporated by reference to Exhibit 4 to
Symbol's Current Report on Form 8-K dated August 21, 2001)
4.3+ Certificate of Designation of Series A Junior Participating
Preferred Stock of Symbol Technologies, Inc.
4.4+++ Form of Indenture for the issuance of debt securities
4.5+++ Form of Notes (included in Exhibit 4.4)
4.6+++ Form of Certificate of Designation for Preferred Stock
4.7+++ Form of Preferred Stock Certificate
5.1++ Opinion of Latham & Watkins LLP regarding the validity of
the securities
10.1 Form of 2008 Stock Purchase Warrant issued to certain
directors (Incorporated by reference to Exhibit 10.1 to
Symbol's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.2 1994 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 4.1 to Registration Statement No. 33-78678 on
Form S-8)
10.3 2000 Directors' Stock Option Plan, as amended and restated
(Incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004)
10.4 2002 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 4.1 to Registration Statement No. 333-89668 on
Form S-8)
10.5 1997 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Exhibit 4.3 to Registration Statement No.
333-89668 on Form S-8)
10.6 1997 Employee Stock Option Plan (Incorporated by reference
to Exhibit 4.2 to Registration Statement No. 333-73322 on
Form S-8)
10.7 1991 Employee Stock Option Plan (Incorporated by reference
to Exhibit 10.1 to Symbol's Annual Report on Form 10-K for
the year ended December 31, 1991)
10.8 1990 Non-Executive Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.1 of Symbol's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K"))
10.9 2001 Non-Executive Stock Option Plan, as amended and
restated (Incorporated by reference to Exhibit 10.9 on Form
10-K/A for the year ended December 31, 2002)
10.10 Telxon Corporation 1990 Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.9 of Symbol's
Annual Report on Form 10-K for the year ended December 31,
2002 (the "2002 Form 10-K"))
10.11 Symbol Technologies, Inc. Executive Bonus Plan, as amended
and restated (Incorporated by referenced to Exhibit 10.2 to
the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004)
10.12 Symbol Technologies, Inc. 2004 Equity Incentive Award Plan
(Incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004)
10.13 Telxon Corporation 1990 Non-Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.10 of the 2002 Form
10-K)
</Table>
II-3
<Table>
10.14 2001 Non-Executive Stock Option Plan (Incorporated by
reference to Exhibit 10.8 of Symbol's Annual Report on Form
10-K for the year ended December 31, 2000 (the "2000 Form
10-K"))
10.15 Employment Agreement by and between Symbol and Jerome
Swartz, dated as of July 1, 2000 (Incorporated by reference
to Exhibit 10.9 to the 2000 Form 10-K)
10.16 Separation, Release and Employment Agreement by and between
Symbol and Jerome Swartz, dated as of July 7, 2003
(Incorporated by reference to Exhibit 10.13 of the 2002 Form
10-K)
10.17+ Settlement Agreement by and between Symbol and Jerome
Swartz, dated as of June 1, 2004
10.18 Employment Agreement by and between Symbol and Leonard R.
Goldner, dated as of December 15, 2000 (Incorporated by
reference to Exhibit 10.11 to the 2000 Form 10-K)
10.19 Without Prejudice Resignation Agreement by and between
Symbol and Leonard Goldner, dated as of June 30, 2003
(Incorporated by reference to Exhibit 10.15 to the 2002
10-K)
10.20 Tolling Agreement by and between Symbol and Leonard Goldner,
dated as of June 9, 2004 (Incorporated by reference to
Exhibit 10.1 to Symbol's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.21 Agreement by and between Symbol and Leonard Goldner, dated
as of October 13, 2004, to extend tolling period under the
Tolling Agreement, dated as of June 9, 2004 (Incorporated by
reference to Exhibit 10.2 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004)
10.22* Settlement Agreement by and between Symbol Technologies,
Inc. and Leonard Goldner dated, April 25, 2005
10.23 Employment Agreement by and between Symbol and William R.
Nuti, dated as of March 31, 2004 (Incorporated by referenced
to Exhibit 10.1 to Symbol's Report on Form 8-K filed on
April 1, 2004)
10.24 Employment Agreement by and between Symbol and William R.
Nuti, dated as of July 15, 2002 (Incorporated herein by
reference to Exhibit 10.1 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002)
10.25 Employment Agreement by and between Symbol and Richard
Bravman, dated as of August 1, 2002 (Incorporated herein by
reference to Exhibit 10.1 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002)
10.26 Letter Agreement by and between Symbol and Richard Bravman,
dated as of March 1, 2004 (Incorporated herein by reference
to Exhibit 10.19 of Symbol's Annual Report on Form 10-K for
the year ended December 31, 2003 the "2003 Form 10-K")
10.27 Employment Agreement by and between Symbol and Tomo
Razmilovic, dated as of February 14, 2002 (Incorporated by
reference to Exhibit 10.12 to the 2001 Form 10-K)
10.28 Separation, Release and Non-Disclosure Agreement between
Symbol and Tomo Razmilovic, dated as of February 14, 2002
(Incorporated by reference to Exhibit 10.13 to the 2001 Form
10-K)
10.29 Tolling Agreement by and between Symbol and Tomo Razmilovic,
dated as of May 6, 2003 (Incorporated by reference to
Exhibit 10.20 to the 2002 Form 10-K)
10.30+ Agreement by and between Symbol and Tomo Razmilovic, dated
as of March 18, 2004, to extend tolling period under the
Tolling Agreement, dated as of May 6, 2003.
10.31 Executive Retirement Plan, as amended (Incorporated by
reference to Exhibit 10.2 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002)
</Table>
II-4
<Table>
10.32 2002 Executive Stock Ownership and Option Retention Program,
dated as of December 16, 2002 (Incorporated by reference to
Exhibit 10.22 of the 2002 Form 10-K)
10.33 Summary of Symbol Technologies, Inc. Executive Bonus Plan
(Incorporated by reference to Exhibit 10.13 of the 1999 Form
10-K)
10.34 Credit Agreement, dated as of December 29, 2004, among
Symbol, the lenders identified therein, JPMorgan Chase Bank,
N.A., in its capacity as administrative and collateral
agent, Fleet National Bank, as syndication agent, and J.P.
Morgan Securities, Inc. and Banc of America Securities LLC,
as co-lead arrangers and joint bookrunners (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K
dated December 29, 2004)
10.35 Guarantee and Collateral Agreement, dated as of December 29,
2004, among Symbol, the material subsidiaries therein and
JPMorgan Chase Bank, N.A., in its capacity as collateral
agent (Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K dated December 29, 2004)
12.1* Statement of Computation of Ratios of Earnings to Fixed
Charges
16 Letter, dated March 31, 2004, from Deloitte & Touche LLP to
the United States Securities and Exchange Commission
(Incorporated by reference to Exhibit 16.1 of the Current
Report on Form 8-K dated April 1, 2004)
21+ Subsidiaries
23.1* Consent of Ernst & Young LLP
23.2* Consent of Deloitte & Touche LLP
23.3* Consent of PricewaterhouseCoopers LLP
23.4++ Consent of Latham & Watkins LLP (included in Exhibit 5.1)
24.1+ Power of Attorney
25.1+++ Statements of Eligibility and Qualification of Trustees on
Form T-1 under the Trust Indenture Act of 1939
- --------------------------------------------------------------------
</Table>
+ Incorporated by reference to our Registration Statement on Form S-1 (File No.
333-119076) filed September 16, 2004.
++ Incorporated by reference to Amendment No. 2 to our Registration Statement
filed January 27, 2005.
+++ To be filed by amendment or as an exhibit to a current report on Form 8-K
filed under the Securities Exchange Act of 1934, as amended, and incorporated
herein by reference.
* Filed herewith.
II-5
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Symbol Technologies, Inc.
We have audited the consolidated financial statements of Symbol Technologies,
Inc. and subsidiaries (the "Company") as of December 31, 2004 and for the year
ended December 31, 2004, and have issued our report thereon dated March 1, 2005
(included elsewhere in this Registration Statement). Our audit also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
March 1, 2005
II-6
SCHEDULE II
(b) Financial Statements Schedule:
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ------------ ----------------------- ---------- -----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
DESCRIPTION BEGINNING OF COSTS AND OTHER BALANCE AT
(ALL AMOUNTS IN THOUSANDS) YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
- -------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts:
2004.......................... $ 13,946 $ 3,514 $ $ 8,075(a) $ 9,385
-----------------------------------------------------------------
2003.......................... $ 34,272 $ 7,564 $ - $ 27,890(a) $ 13,946
-----------------------------------------------------------------
2002.......................... $ 27,168 $ 15,975 $ - $ 8,871(a) $ 34,272
-----------------------------------------------------------------
Inventory reserve:
2004.......................... $ 109,331 $ 16,189 $ - $ 70,273(b) $ 55,247
-----------------------------------------------------------------
2003.......................... $ 170,057 $ 20,132 $ 863 $ 81,721(b) $ 109,331
-----------------------------------------------------------------
2002.......................... $ 211,621 $ 26,339 $ - $ 67,903(b) $ 170,057
-----------------------------------------------------------------
Deferred tax valuation
allowance:
2004.......................... $ 43,936 $ (6,981) $ 333 $ - $ 37,288
-----------------------------------------------------------------
2003.......................... $ 31,436 $ 6,523 $ 5,977(c) $ - $ 43,936
-----------------------------------------------------------------
2002.......................... $ 8,098 $ 6,166 $ 17,172(d) $ - $ 31,436
- -------------------------------------------------------------------------------------------------
</Table>
(a) Write-off of uncollectible accounts. In 2003, $19,752 related to Telxon was
written off.
(b) Disposal of obsolete inventory.
(c) Valuation allowances recorded in goodwill for deferred tax assets related to
acquired businesses.
(d) Adjustment for true-up for tax rates on Pre-2002 State Net Operating Losses
and valuations allowances recorded in goodwill for deferred tax assets related
to acquired businesses.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which,
II-7
individually or in the aggregate, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;-
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(3) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offering therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Holtsville, State of New
York, on June 10, 2005.
SYMBOL TECHNOLOGIES, INC.
(Registrant)
By: /s/ Mark T. Greenquist
------------------------------------
Mark T. Greenquist
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and as of
the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman of the Board of Directors June 10, 2005
------------------------------------------------
Robert J. Chrenc
* Senior Vice President, Chief June 10, 2005
------------------------------------------------ Administrative and Control Officer
Salvatore Iannuzzi and Director
* Director June 10, 2005
------------------------------------------------
Edward Kozel
* President, Chief Executive Officer June 10, 2005
------------------------------------------------ and Director (principal executive
William R. Nuti officer)
* Director June 10, 2005
------------------------------------------------
George Samenuk
* Director June 10, 2005
------------------------------------------------
Melvin A. Yellin
/s/ Mark T. Greenquist Senior Vice President--Finance and June 10, 2005
------------------------------------------------ Chief Financial Officer (principal
Mark T. Greenquist financial officer)
/s/ James M. Langrock Vice President--Controller and June 10, 2005
------------------------------------------------ Chief Accounting Officer
James M. Langrock (principal accounting officer)
*By: /s/ Mark T. Greenquist June 10, 2005
------------------------------------------
Mark T. Greenquist
Attorney-in-Fact
</Table>
II-9
EXHIBIT INDEX
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
1.1+++ Forms of Underwriting Agreements (debt securities, preferred
stock and common stock)
2.1 Agreement and Plan of Merger by and among Symbol, Marvin
Acquisition Corp. and Matrics, dated as of July 26, 2004
(Incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K dated September 15, 2004)
3.1+ Certificate of Incorporation of Symbol Technologies, Inc.,
as amended
3.2 Amended and Restated By-Laws of Symbol (Incorporated by
reference to Exhibit 3.2 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2002)
4.1 Form of Certificate for Shares of the Common Stock of Symbol
(Incorporated by reference to Symbol's Form SE on March 3,
1999)
4.2 Rights Agreement, dated as of August 13, 2001, between
Symbol and The Bank of New York, as Rights Agent, which
includes the Form of Certificate of Designations with
respect to the Series A Junior Participating Preferred Stock
as Exhibit A, the Form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Shares of Preferred Stock
as Exhibit C (Incorporated by reference to Exhibit 4 to
Symbol's Current Report on Form 8-K dated August 21, 2001)
4.3+ Certificate of Designation of Series A Junior Participating
Preferred Stock of Symbol Technologies, Inc.
4.4+++ Form of Indenture for issuance of debt securities
4.5+++ Form of Notes (included in Exhibit 4.4)
4.6+++ Form of Certificate of Designation for Preferred Stock
4.7+++ Form of Preferred Stock Certificate
5.1++ Opinion of Latham & Watkins LLP regarding the validity of
the securities
10.1 Form of 2008 Stock Purchase Warrant issued to certain
directors (Incorporated by reference to Exhibit 10.1 to
Symbol's Annual Report on Form 10-K for the year ended
December 31, 1997)
10.2 1994 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 4.1 to Registration Statement No. 33-78678 on
Form S-8)
10.3 2000 Directors' Stock Option Plan, as amended and restated
(Incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004)
10.4 2002 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 4.1 to Registration Statement No. 333-89668 on
Form S-8)
10.5 1997 Employee Stock Purchase Plan, as amended (Incorporated
by reference to Exhibit 4.3 to Registration Statement No.
333-89668 on Form S-8)
10.6 1997 Employee Stock Option Plan (Incorporated by reference
to Exhibit 4.2 to Registration Statement No. 333-73322 on
Form S-8)
10.7 1991 Employee Stock Option Plan (Incorporated by reference
to Exhibit 10.1 to Symbol's Annual Report on Form 10-K for
the year ended December 31, 1991)
10.8 1990 Non-Executive Stock Option Plan, as amended
(Incorporated by reference to Exhibit 10.1 of Symbol's
Annual Report on Form 10-K for the year ended December 31,
1995 (the "1995 Form 10-K"))
10.9 2001 Non-Executive Stock Option Plan, as amended and
restated (Incorporated by reference to Exhibit 10.9 on Form
10-K/A for the year ended December 31, 2002)
</Table>
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
10.10 Telxon Corporation 1990 Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.9 of Symbol's
Annual Report on Form 10-K for the year ended December 31,
2002 (the "2002 Form 10-K"))
10.11 Symbol Technologies, Inc. Executive Bonus Plan, as amended
and restated (Incorporated by referenced to Exhibit 10.2 to
the Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004)
10.12 Symbol Technologies, Inc. 2004 Equity Incentive Award Plan
(Incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004)
10.13 Telxon Corporation 1990 Non-Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.10 of the 2002 Form
10-K)
10.14 2001 Non-Executive Stock Option Plan (Incorporated by
reference to Exhibit 10.8 of Symbol's Annual Report on Form
10-K for the year ended December 31, 2000 (the "2000 Form
10-K"))
10.15 Employment Agreement by and between Symbol and Jerome
Swartz, dated as of July 1, 2000 (Incorporated by reference
to Exhibit 10.9 to the 2000 Form 10-K)
10.16 Separation, Release and Employment Agreement by and between
Symbol and Jerome Swartz, dated as of July 7, 2003
(Incorporated by reference to Exhibit 10.13 of the 2002 Form
10-K)
10.17+ Settlement Agreement by and between Symbol and Jerome
Swartz, dated as of June 1, 2004
10.18 Employment Agreement by and between Symbol and Leonard R.
Goldner, dated as of December 15, 2000 (Incorporated by
reference to Exhibit 10.11 to the 2000 Form 10-K)
10.19 Without Prejudice Resignation Agreement by and between
Symbol and Leonard Goldner, dated as of June 30, 2003
(Incorporated by reference to Exhibit 10.15 to the 2002
10-K)
10.20 Tolling Agreement by and between Symbol and Leonard Goldner,
dated as of June 9, 2004 (Incorporated by reference to
Exhibit 10.1 to Symbol's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004)
10.21 Agreement by and between Symbol and Leonard Goldner, dated
as of October 13, 2004, to extend tolling period under the
Tolling Agreement, dated as of June 9, 2004 (Incorporated by
reference to Exhibit 10.2 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004)
10.22* Settlement Agreement by and between Symbol Technologies,
Inc. and Leonard Goldner, dated April 25, 2005
10.23 Employment Agreement by and between Symbol and William R.
Nuti, dated as of March 31, 2004 (Incorporated by referenced
to Exhibit 10.1 to Symbol's Report on Form 8-K filed on
April 1, 2004)
10.24 Employment Agreement by and between Symbol and William R.
Nuti, dated as of July 15, 2002 (Incorporated herein by
reference to Exhibit 10.1 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002)
10.25 Employment Agreement by and between Symbol and Richard
Bravman, dated as of August 1, 2002 (Incorporated herein by
reference to Exhibit 10.1 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002)
10.26 Letter Agreement by and between Symbol and Richard Bravman,
dated as of March 1, 2004 (Incorporated herein by reference
to Exhibit 10.19 to Symbol's Annual Report on Form 10-K for
the year ended December 31, 2003 the "2003 Form 10-K")
10.27 Employment Agreement by and between Symbol and Tomo
Razmilovic, dated as of February 14, 2002 (Incorporated by
reference to Exhibit 10.12 to the 2001 Form 10-K)
</Table>
<Table>
<Caption>
NUMBER DESCRIPTION
- ------ -----------
10.28 Separation, Release and Non-Disclosure Agreement between
Symbol and Tomo Razmilovic, dated as of February 14, 2002
(Incorporated by reference to Exhibit 10.13 to the 2001 Form
10-K)
10.29 Tolling Agreement by and between Symbol and Tomo Razmilovic,
dated as of May 6, 2003 (Incorporated by reference to
Exhibit 10.20 to the 2002 Form 10-K)
10.30+ Agreement by and between Symbol and Tomo Razmilovic, dated
as of March 18, 2004, to extend tolling period under the
Tolling Agreement, dated as of May 6, 2003
10.31 Executive Retirement Plan, as amended (Incorporated by
reference to Exhibit 10.2 to Symbol's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002)
10.32 2002 Executive Stock Ownership and Option Retention Program,
dated as of December 16, 2002 (Incorporated by reference to
Exhibit 10.22 of the 2002 Form 10-K)
10.33 Summary of Symbol Technologies, Inc. Executive Bonus Plan
(Incorporated by reference to Exhibit 10.13 of the 1999 Form
10-K)
10.34 Credit Agreement, dated as of December 29, 2004, among
Symbol, the lenders identified therein, JPMorgan Chase Bank,
N.A., in its capacity as administrative and collateral
agent, Fleet National Bank, as syndication agent, and J.P.
Morgan Securities, Inc. and Banc of America Securities LLC,
as co-lead arrangers and joint bookrunners (Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K
dated December 29, 2004)
10.35 Guarantee and Collateral Agreement, dated as of December 29,
2004, among Symbol, the material subsidiaries therein and
JPMorgan Chase Bank, N.A., in its capacity as collateral
agent (Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K dated December 29, 2004)
12.1* Statement of Computation of Ratios of Earnings to Fixed
Charges
16 Letter, dated March 31, 2004, from Deloitte & Touche LLP to
the United States Securities and Exchange Commission
(Incorporated by reference to Exhibit 16.1 of the Current
Report on Form 8-K dated April 1, 2004)
21+ Subsidiaries
23.1* Consent of Ernst & Young LLP
23.2* Consent of Deloitte & Touche LLP
23.3* Consent of PricewaterhouseCoopers LLP
23.4++ Consent of Latham & Watkins LLP (included in Exhibit 5.1)
24.1+ Power of Attorney
25.1+++ Statements of Eligibility and Qualification of Trustees on
Form T-1 under the Trust Indenture Act of 1939
- ---------------------------------------------------------------------
</Table>
+ Incorporated by reference to our Registration Statement on Form S-1 (File No.
333-119076) filed September 16, 2004.
++ Incorporated by reference to Amendment No. 2 to our Registration Statement
filed January 27, 2005.
+++ To be filed by amendment or as an amendment to a current report on Form 8-K
filed under the Securities Exchange Act of 1934, as amended, and incorporated
herein by reference.
* Filed herewith.