UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to __________________. COMMISSION FILE NUMBER 1-9802 SYMBOL TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 11-2308681 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) One Symbol Plaza Holtsville, New York 11742-1300 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ] The number of shares outstanding of the registrant's classes of common stock, as of July 27, 2004, was as follows: Class Number of Shares ----- ---------------- Common Stock, par value $0.01 239,347,456 DOCUMENTS INCORPORATED BY REFERENCE: NONE. SYMBOL TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements.......................1 Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003.................1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (Unaudited) ...............................................2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (Unaudited) ....................................................3 Notes to Condensed Consolidated Financial Statements (Unaudited) .........................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................27 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......39 Item 4. Controls and Procedures..........................................39 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................41 Item 6. Exhibits and Reports on Form 8-K.................................41 Signatures....................................................................43 Certifications................................................................44 i PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) JUNE 30, DECEMBER 31, 2004 2003 -------------- -------------- ASSETS (Unaudited) - ------ Cash and cash equivalents.................................................... $ 143,686 $ 150,017 Accounts receivable, less allowance for doubtful accounts of $10,907 and $13,946, respectively..................................................... 110,482 152,377 Inventories.................................................................. 216,363 212,862 Deferred income taxes........................................................ 167,629 182,571 Other current assets......................................................... 31,610 36,204 -------------- -------------- Total current assets...................................................... 669,770 734,031 Property, plant and equipment, net........................................... 211,375 210,888 Deferred income taxes........................................................ 223,218 228,470 Investment in marketable securities.......................................... 100,004 102,136 Goodwill..................................................................... 303,584 302,467 Intangible assets, net....................................................... 30,147 33,729 Restricted cash.............................................................. 50,005 -- Other assets................................................................. 31,684 34,797 -------------- -------------- Total assets.............................................................. $ 1,619,787 $ 1,646,518 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses........................................ $ 413,447 $ 496,134 Current portion of long-term debt............................................ 7,017 234 Deferred revenue............................................................. 40,171 34,615 Accrued restructuring expenses............................................... 6,975 5,240 -------------- -------------- Total current liabilities................................................. 467,610 536,223 Long-term debt, less current maturities...................................... 107,926 99,012 Deferred revenue............................................................. 16,778 19,729 Other liabilities............................................................ 45,078 70,956 Contingencies (Note 9) 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 269,609 shares and 256,897 shares, respectively................................... 2,696 2,569 Additional paid-in capital................................................... 1,453,217 1,342,229 Accumulated other comprehensive (loss) / earnings, net....................... (7,537) 4,498 Deferred compensation........................................................ (12,630) -- Accumulated deficit.......................................................... (156,408) (189,669) -------------- -------------- 1,279,338 1,159,627 LESS: Treasury stock, at cost, 29,616 shares and 26,130 shares, respectively....... (296,943) (239,029) -------------- -------------- Total stockholders' equity................................................ 982,395 920,598 -------------- -------------- Total liabilities and stockholders' equity......................... $ 1,619,787 $ 1,646,518 ============== ============== See notes to Condensed Consolidated Financial Statements. SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited) FOR THE FOR THE THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------- ------------------------------------- 2004 2003 2004 2003 ------------- --------------- --------------- --------------- REVENUE: Product................................ $ 356,602 $ 290,296 $ 704,841 $ 600,999 Services............................... 76,183 83,523 147,595 159,167 ------------- --------------- --------------- --------------- 432,785 373,819 852,436 760,166 COST OF REVENUE: Product cost of revenue................ 186,123 165,047 352,318 321,386 Services cost of revenue............... 49,979 56,383 108,507 114,519 ------------- --------------- --------------- --------------- 236,102 221,430 460,825 435,905 ------------- --------------- --------------- --------------- Gross profit........................... 196,683 152,389 391,611 324,261 ------------- --------------- --------------- --------------- OPERATING EXPENSES: Engineering............................ 42,060 38,130 83,619 75,185 Selling, general and administrative.... 119,073 108,419 240,753 207,450 (Recovery)/provision for legal settlements......................... (9,000) -- (9,000) 72,000 Stock based compensation expense....... 375 1,456 2,609 2,232 Restructuring and impairment charges... 509 136 509 223 ------------- --------------- --------------- --------------- 153,017 148,141 318,490 357,090 ------------- --------------- --------------- --------------- Earnings/(loss) from operations........ 43,666 4,248 73,121 (32,829) Other (expense) / income, net.......... (7,958) 4,522 (6,952) 488 ------------- --------------- --------------- --------------- Earnings/(loss) before income taxes.... 35,708 8,770 66,169 (32,341) Provision for/(benefit from) income taxes......................... 6,937 2,155 30,570 (7,943) ------------- --------------- --------------- --------------- NET EARNINGS/(LOSS).................... $ 28,771 $ 6,615 $ 35,599 $ (24,398) ============= =============== =============== =============== EARNINGS/(LOSS) PER SHARE: Basic and diluted...................... $ 0.12 $ 0.03 $ 0.15 $ (0.11) ============= =============== =============== =============== CASH DIVIDENDS DECLARED PER COMMON SHARE......................... $ -- $ -- $ 0.01 $ 0.01 ============= =============== =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic.................................. 235,531 230,770 233,608 230,649 Diluted................................ 239,541 236,820 239,302 230,649 See notes to Condensed Consolidated Financial Statements. 2 SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, -------------------------- 2004 2003 ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings/(loss) .......................................... $ 35,599 $ (24,398) ADJUSTMENTS TO RECONCILE NET EARNINGS/(LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization of property, plant and equipment 28,462 26,202 Other amortization ........................................... 8,272 7,164 Provision for losses on accounts receivable .................. 973 8,420 Provision for inventory writedown ............................ 1,759 21,787 Deferred income tax provision/(benefit) ...................... 18,953 (7,943) Non-cash stock based compensation expense .................... 2,609 2,232 Loss on disposal of property, plant and equipment ............ 334 -- Gain on sale of property, plant and equipment and other assets -- (89) Change in fair value of derivative ........................... (164) 7,759 Unrealized holding loss / (gain) on marketable securities .... 2,454 (14,934) CHANGES IN OPERATING ASSETS AND LIABILITIES: Accounts receivable ....................................... 36,111 30,721 Inventories ............................................... (5,735) 31,966 Other assets .............................................. 6,710 (2,252) Accounts payable and accrued expenses ..................... (76,968) 24,828 Accrued restructuring expenses ............................ 1,735 2,386 Other liabilities and deferred revenue .................... 2,501 6,460 --------- --------- Net cash provided by operating activities .............. 63,605 120,309 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in other companies, net of cash acquired .......... (4,610) (1,777) Proceeds from sale of property, plant and equipment and other assets .................................................... -- 521 Purchases of property, plant and equipment ................... (30,055) (24,494) Restricted cash .............................................. (50,000) -- Investments in intangible and other assets ................... (1,862) (1,963) --------- --------- Net cash used in investing activities ..................... (86,527) (27,713) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable and long-term debt ................ (176) (71,636) Proceeds from long-term debt ................................. 13,825 -- Proceeds from exercise of stock options and warrants ......... 33,956 4,623 Purchase of treasury shares .................................. (26,374) (5,110) Dividends paid ............................................... (2,338) (2,312) --------- --------- Net cash provided by (used in) financing activities ....... 18,893 (74,435) --------- --------- Effects of exchange rate changes on cash ..................... (2,302) 3,694 --------- --------- Net (decrease) / increase in cash and cash equivalents ....... (6,331) 21,855 Cash and cash equivalents, beginning of period ............... 150,017 76,121 --------- --------- Cash and cash equivalents, end of period ............... $ 143,686 $ 97,976 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest ..................................................... $ 6,768 $ 3,463 Income taxes ................................................. $ 7,508 $ 886 See notes to Condensed Consolidated Financial Statements. 3 SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2004 AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (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 delivers 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 Condensed Consolidated Financial Statements include the accounts of Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries. References herein to "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 June 30, 2004, and the results of our operations and cash flows for the three and six months ended June 30, 2004 and 2003, 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 and six months ended June 30, 2004 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, 2003. 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 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 and in 2003, 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. 4 The following table illustrates the effect on net earnings/(loss) and earnings/(loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation: THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2004 2003 2004 2003 ---------- --------- ---------- ---------- Net earnings/(loss) - as reported ....................................... $ 28,771 $ 6,615 $ 35,599 $ (24,398) Stock based employee compensation expense included in reported net earnings/(loss), net of related tax effects ...................... 231 895 1,605 1,373 Less total stock based employee compensation expense determined under the fair value based method for all awards, net of related tax effects .................................................. (5,380) (4,812) (10,280) (9,374) ---------- --------- ---------- ---------- Pro forma net earnings/(loss) ........................................... $ 23,622 $ 2,698 $ 26,924 $ (32,399) ========== ========= ========== ========== Basic net earnings/(loss) per share: As reported .......................................................... $ 0.12 $ 0.03 $ 0.15 $ (0.11) Pro forma ............................................................ $ 0.10 $ 0.01 $ 0.12 $ (0.14) Diluted net earnings / (loss) per share: As reported .......................................................... $ 0.12 $ 0.03 $ 0.15 $ (0.11) Pro forma ............................................................ $ 0.10 $ 0.01 $ 0.11 $ (0.14) The weighted average fair value of options granted during the three and six months ended June 30, 2004 and 2003 was $7.16 and $8.41, and $7.31 and $7.01 per option, respectively. In determining the fair value of options and stock purchase warrants granted for purposes of calculating the pro forma results disclosed above for the three and six months ended June 30, 2004 and 2003, we used Black-Scholes option pricing model and assumed the following: a risk free interest rate of 2.8 percent; an expected option life of 4.7 years; an expected volatility of 61 percent; and a dividend yield of 0.16 percent per year. Restricted Cash Restricted cash at June 30, 2004 of $50,005 represents a deposit that 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. Interest income earned from this investment is paid to the Company. (See note 9c) 2. INVENTORIES JUNE 30, DECEMBER 31, 2004 2003 ----------- ----------- Raw materials............................ $ 71,369 $ 66,500 Work-in-process.......................... 25,502 24,422 Finished goods........................... 119,492 121,940 ----------- ----------- $ 216,363 $ 212,862 =========== =========== 5 The amounts shown above are net of inventory reserves of $68,048 and $109,331 as of June 30, 2004 and December 31, 2003, respectively, and include inventory on consignment of $46,779 and $34,564 as of June 30, 2004 and December 31, 2003, respectively. 3. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying amount of goodwill for the six months ended June 30, 2004 are as follows: PRODUCT SERVICES TOTAL ---------- ---------- ---------- Balance as of December 31, 2003................ $ 246,253 $ 56,214 $ 302,467 Brazil acquisition(a).......................... 1,552 253 1,805 Trio acquisition(b)............................ 560 -- 560 Translation adjustments........................ (1,067) (181) (1,248) ---------- ---------- ---------- Balance as of June 30, 2004.................... $ 247,298 $ 56,286 $ 303,584 ========== ========== ========== (a) See Note 8a. (b) See Note 8b. Other than goodwill, the Company's intangible assets, all of which are subject to amortization, consist of the following: JUNE 30, 2004 DECEMBER 31, 2003 ----------------------------- ------------------------------ ACCUMULATED ACCUMULATED GROSS AMOUNT AMORTIZATION GROSS AMOUNT AMORTIZATION ------------- -------------- ----------- ---------------- Patents, trademarks and tradenames............... $ 25,856 $ (16,034) $ 35,080 $ (24,670) Purchased technology............................. 27,800 (11,641) 27,800 (9,652) Other............................................ 7,250 (3,084) 7,250 (2,079) ------------- -------------- ----------- ---------------- $ 60,906 $ (30,759) $ 70,130 $ (36,401) ============= ============== =========== ================ The amortization expense for the three months ended June 30, 2004 and 2003 amounted to $2,474 and $2,285, respectively. The amortization expense for the six months ended June 30, 2004 and 2003 amounted to $5,444 and $4,458, respectively. Estimated amortization expense for the above intangible assets, assuming no additions or writeoffs, for the six months ended December 31, 2004 and for each of the subsequent years ending December 31 is as follows: 2004 (six months)................................................... $ 4,560 2005................................................................. 8,832 2006................................................................. 6,510 2007................................................................. 5,057 2008................................................................. 4,046 Thereafter........................................................... 1,142 -------- $ 30,147 ======== 4. EARNINGS/(LOSS) PER SHARE AND DIVIDENDS Basic earnings/(loss) per share are based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings/(loss) per share are based on the weighted average 6 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/(loss) per share: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ------------------------ 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Numerator: Earnings/(loss) applicable to common shares for basic and diluted calculation..... $ 28,771 $ 6,615 $ 35,599 $ (24,398) ========== ========== ========== ========== Denominator: Weighted-average common shares.................. 235,531 230,770 233,608 230,649 Effect of dilutive securities: Stock options and warrants................... 4,008 6,050 5,677 -- Restricted Stock............................. 2 -- 17 -- ---------- ---------- ---------- ---------- Denominator for diluted calculation............. 239,541 236,820 239,302 230,649 ========== ========== ========== ========== Stock options and warrants outstanding for the three months ended June 30, 2004 and 2003 aggregating 13,067 and 19,383, respectively, of potentially dilutive shares have not been included in the diluted per share calculations since their effect would be antidilutive. Stock options and warrants outstanding for the six months ended June 30, 2004 and 2003 aggregating to 12,566 and 20,069, respectively, of potentially dilutive shares have not been included in the diluted per share calculations since their effect would be antidilutive. 5. SHAREHOLDERS' EQUITY a. Restricted Stock In May 2004, the Company granted 920,000 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 20,000 shares and cliff-vest at January 1, 2005. The remaining 900,000 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 four consecutive quarters exceeds 16.4% or other greater return on net asset target percentages as defined in grant document, portions of the executive restricted stock awards vesting will be accelerated. b. Comprehensive Earnings The components of comprehensive earnings are as follows: 7 THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2004 2003 2004 2003 ---------- ---------- ----------- ---------- Net earnings/(loss) $ 28,771 $ 6,615 $ 35,599 $ (24,398) Other comprehensive income: Change in unrealized gains and losses on available-for-sale securities, net of tax (340) (3) 198 156 Change in unrealized fair value of derivative instruments, net of tax (20) 345 (132) 960 Translation adjustments, net of tax (11,026) 6,829 (12,099) 8,807 ---------- ---------- ---------- --------- Total $ 17,385 $ 13,786 $ 23,566 $ (14,475) ========== ========== ========== ========= c. Dividends 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. 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 $61 relating to lease obligation costs charges was included in accrued restructuring expenses as of December 31, 2003. During the six month period June 30, 2004, $28 was paid and as of June 30, 2004, $33 remained in accrued restructuring expenses. 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 $2,860 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 June 30, 2004 is $1,001 of net lease obligations relating to these manufacturing restructuring charges. 8 LEASE OBLIGATION COSTS ------------- Balance at December 31, 2003............................ $ 4,356 Utilization/payments.................................... (304) Provision reduction..................................... (2,860) ------------- Balance at March 31, 2004............................... 1,192 Utilization/payments.................................... (191) ------------- Balance at June 30, 2004................................ $ 1,001 ============= c. Global Services Transition During the first quarter of 2003, our global services organization initiated restructuring activities which included transitioning a portion 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 costs incurred in the first quarter of 2003 in connection with this restructuring which related almost entirely to workforce reductions, were approximately $1,066, of which $979 and $87 was recorded as a component of cost of revenue and operating expenses, respectively. These restructuring activities are expected to be completed by the end of 2004. During the first of quarter of 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 $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, during 2004 the Company recorded an additional provision of $1,629 in the first quarter of 2004 and $3,836 in the second quarter of 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 first and second quarters of 2004, respectively. Further global services transition restructuring activities are being considered and future benefits are not yet defined, therefore, we cannot reasonably estimate the remaining cost expected to be incurred. These restructuring activities are expected to be completed by the end of 2004. During the second quarter of 2004, the shared services organization initiated restructuring activities which 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 $509, all of which was recorded as a component of operating expenses in the second quarter of 2004. 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. These restructuring activities are expected to be completed in the first quarter of 2005. Details of the global services transition restructuring charges and remaining balances as of June 30, 2004 are as follows: 9 LEASE ASSET WORKFORCE OBLIGATION IMPAIRMENTS REDUCTIONS COSTS AND OTHER TOTAL ---------- ---------- ---------- ---------- Balance at December 31, 2003 $ 79 $ 572 $ 172 $ 823 Provision - cost of revenues 367 1,262 -- 1,629 Utilization/payments (41) (126) (23) (190) ---------- ---------- ---------- ---------- Balance at March 31, 2004 405 1,708 149 2,262 Provision - cost of revenues 1,463 2,323 50 3,836 Provision - operating expenses 509 -- -- 509 Translation adjustments -- -- 70 70 Utilization/payments (402) (269) (65) (736) ---------- ---------- ---------- ---------- Balance at June 30, 2004 $ 1,975 $ 3,762 $ 204 $ 5,941 ========== ========== ========== ========== 7. LONG-TERM DEBT On March 16, 2004, our $45,000 secured credit line was increased to $60,000. Borrowings, which are secured by U.S. trade receivables, bear interest at either LIBOR plus 175 basis points, which approximated 3.12% at June 30, 2004, or the base rate of the syndication agent bank, which approximated 4.25% at June 30, 2004. This secured credit line expires in May 2006. As of June 30, 2004 and December 31, 2003, there were no borrowings outstanding under the secured credit line. On March 31, 2004, we entered into a secured installment loan with a bank for $13,825. The loan is secured by U.S. trade receivables and is payable in four semiannual installments of $3,655 commencing October 1, 2004. The proceeds under the loan were used to finance certain software license arrangements. 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. 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. 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 No. 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 and is in accordance with Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts." The SAILS liability, net of the derivative asset, represents $100,974 and $98,927 of the total long-term debt balance outstanding at June 30, 2004 and December 31, 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. 10 8. ACQUISITIONS a. Brazil Acquisition 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 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. The initial 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 annual net revenue levels of Symbol Brazil. In the event that none of the specified revenue levels were attained, the minimum earnout payment was payable no later than March 31, 2009. Under the initial terms, with each earnout payment, we would obtain a portion of Symbol Brazil's shares owned by the minority shareholders such that we ultimately would have owned 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 initial agreement, which was due on the date of the first earnout payment. 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. 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 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. As we control Symbol Brazil, we have consolidated this subsidiary. The minority interest in earnings of operations of Symbol Brazil was immaterial for the three and six months ended June 30, 2004 and 2003, respectively. b. 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 and mobile applications for handheld devices, for $600, excluding 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 enhance and expand the range of applications that Symbol offers. The acquisition was accounted for as a purchase and accordingly, Trio's operating results since the acquisition date have been included in Symbol's condensed consolidated financial statements. Trio became part of the Company's Product segment. The assets acquired and liabilities assumed have been 11 recorded at their estimated fair values. Substantially all of the purchase price has been preliminarily allocated to goodwill at June 30, 2004. 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 condensed consolidated financial statements. 9. CONTINGENCIES a. Guarantees and Product Warranties 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 warranty liability, recorded as a component of accounts payable and accrued expenses, 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: Amount ------------- Balance at December 31, 2003..................... $ 20,828 Charges to expense--cost of revenue.............. 13,042 Utilization/payment.............................. (14,324) ------------- Balance at June 30, 2004......................... $ 19,546 ============= b. Derivative Instruments and Hedging Activities We 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. Changes in fair value of derivative instruments 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 income / (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 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 do not use these derivative financial instruments for trading purposes. As of June 30, 2004 and December 31, 2003, respectively, we had $42,653 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 period with the resulting gains and losses included as a component of cost of revenue in the Condensed Consolidated Statement of Operations. The fair value of these forward exchange contracts was ($153) as of June 30, 2004, which is recorded in current liabilities and $107 as of December 31, 2003, which was recorded in current assets. 12 c. 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 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 The SEC issued a Formal Order Directing Private Investigation and Designating Officers to Take Testimony with respect to certain accounting matters, principally concerning the timing and amount of revenue recognized by Symbol during the period of January 1, 2000 through 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. We cooperated with the SEC, and have produced hundreds of thousands of documents and numerous witnesses in response to the SEC's inquiries. Symbol and approximately ten or more former employees have received so-called "Wells Notices" stating that the SEC Staff in the Northeast Regional Office is considering recommending to the Commission that it authorize civil actions against Symbol and the individuals involved alleging violations of various sections of the federal securities laws and regulations. The United States Attorney's Office for the Eastern District of New York (the "Eastern District") commenced a related investigation. We cooperated with that investigation, and produced documents and witnesses in response to the Eastern District's inquiries. In addition, as a result of the investigations, various governmental entities at the federal, state and municipal levels may conduct a review of our supply arrangements with them to determine whether we should be considered for debarment. If we are debarred, we would be prohibited for a specific period of time from entering into new supply arrangements with such government entities. In addition, after a government entity has debarred Symbol, other government entities are likely to act similarly. The Company being subject to debarment from governmental supply arrangements at a significant level could have an adverse effect on our business, results of operations and financial condition. In March 2003, Robert Asti, Symbol's former Vice President--North America Sales & Services--Finance, who left Symbol in March 2001, pleaded guilty to two counts of securities fraud in connection with matters that are the subject of the Commission and the Eastern District investigations. These counts included allegations that Mr. Asti acted together with other unnamed high-ranking corporate executives at Symbol to, among other things, inflate revenue through sham "round-trip" transactions. The Commission has also filed a civil complaint asserting similar allegations against Mr. Asti. In June 2003, Robert Korkuc, Symbol's former Chief Accounting Officer, who left Symbol in March 2003, pleaded guilty to two counts of securities fraud in connection with matters that are the subject of the Commission and the Eastern District investigations. These counts included allegations that Mr. Korkuc acted with others at Symbol in a fraudulent scheme to inflate various measures of Symbol's financial performance. The Commission also has filed a civil complaint asserting similar allegations against Mr. Korkuc. In addition, on June 8, 2004, the Eastern District announced the indictment of eight former Symbol employees, including Tomo Razmilovic, former president and chief executive officer, Kenneth Jaeggi, former senior vice president and chief financial officer, Leonard Goldner, former 13 executive vice president and general counsel, Brian Burke, former senior vice president (operations), Michael DeGennaro, former senior vice president (finance), Frank Borghese, former senior vice president (worldwide sales and service), Christopher Desantis, former vice president (finance) and James Heuschneider, former director (finance). The Eastern District also announced that three additional former Symbol employees pled guilty to conspiracy charges. In addition, the Commission filed complaints against the 11 above identified individuals charging them with with securities fraud and other violations of the securities laws. On June 3, 2004, we announced that Symbol had resolved the investigation by the Eastern District by executing a non-prosecution agreement with the Eastern District. As a result, no criminal complaint will be filed against Symbol. In addition, Symbol announced an agreement with the Commission to resolve the allegations against Symbol that were under investigation by the Commission since May 2001. The agreements with the Eastern District and the Commission call for Symbol to pay $37,000 in cash to a restitution fund for members of the class consisting of purchasers of Symbol 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 Symbol's agreement to make those payments, as part of its agreements with the Eastern District and the Commission, Symbol acknowledged responsibility for previous misconduct by certain former employees; agreed to continue its cooperation with the Eastern District and Commission, to retain an independent, government-approved examiner to review Symbol's internal controls, financial reporting practices and its compliance with the settlement agreements, and to establish and maintain an annual training and education program designed to diminish the possibility of future violations of the federal securities laws. Should Symbol violate the agreement with the Eastern District or commit other crimes, Symbol shall be subject to prosecution for any offense, including any offense related to Symbol's past accounting practices. Pursuant to the agreement with the Commission, the Commission filed a proposed Final Consent Judgment in the Eastern District of New York providing for injunctive relief, enjoining Symbol from further violations of the securities laws, and a civil penalty in the amount of $37,000, as described above. Symbol has made the payments totaling $40,000 during the second quarter 2004, described above, as required by the agreements with the Eastern District and the Commission, and the proposed Final Consent Judgment has been entered by the Court. We currently estimate that this $40,000 may not be deductible for tax purposes. SECURITIES LITIGATION MATTERS Pinkowitz v. Symbol Technologies, Inc., et al. On March 5, 2002, a purported class action lawsuit was filed, entitled Pinkowitz v. Symbol Technologies, Inc., et al., in the United States District Court for the Eastern District of New York on behalf of purchasers of the common stock of Symbol between October 19, 2000 and February 13, 2002, inclusive, against Symbol, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi. The complaint alleged that defendants violated the federal securities laws by issuing materially false and misleading statements throughout the class period that had the effect of artificially inflating the market price of Symbol's securities. Subsequently, a number of additional purported class actions containing substantially similar allegations were also filed against Symbol and certain Symbol officers in the Eastern District of New York. On September 27, 2002, a consolidated amended complaint was filed in the United States District Court for the Eastern District of New York, consolidating the previously filed purported class actions. The consolidated amended complaint added Harvey P. Mallement, George Bugliarello and Leo A. Guthart (the then current members of the Audit Committee of Symbol's Board of Directors) and Brian Burke and Frank Borghese (former employees of Symbol) as additional individual defendants and broadened the scope of the allegations concerning revenue recognition. In addition, the consolidated 14 amended complaint extended the alleged class period to the time between April 26, 2000 and April 18, 2002. On June 3, 2004, we announced a settlement of the Pinkowitz lawsuit. For detailed information on this settlement, see the description under the Hoyle and Salerno caption below. Hoyle v. Symbol Technologies, Inc., et al. Salerno v. Symbol Technologies, Inc., et al. On March 21, 2003, a separate purported class action lawsuit was filed, entitled Edward Hoyle v. Symbol Technologies, Inc., Tomo Razmilovic, Kenneth V. Jaeggi, Robert W. Korkuc, Jerome Swartz, Harvey P. Mallement, George Bugliarello, Charles B. Wang, Leo A. Guthart and James H. Simons, in the United States District Court for the Eastern District of New York. On May 7, 2003, a virtually identical purported class action lawsuit was filed against the same defendants by Joseph Salerno. The Hoyle and Salerno complaints are brought on behalf of a purported class of former shareholders of Telxon Corporation ("Telxon") who obtained Symbol stock in exchange for their Telxon stock pursuant to Symbol's acquisition of Telxon effective as of November 30, 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 Symbol's securities. On October 3, 2003, Symbol and the individual defendants moved to dismiss the Hoyle action as barred by the applicable statute of limitations. Prior to a decision of the Court on the motion to dismiss, the parties have reached an agreement that the Hoyle and Salerno matters would be resolved as part of the Pinkowitz settlement described above. On June 3, 2004, we announced Symbol's settlement of the Pinkowitz, Hoyle and Salerno lawsuits. Under the settlement, Symbol agreed to pay $98,000 in cash and stock to the class. In addition, the $37,000 civil penalty by the Commission, will be distributed to class members as described above. The settlement is subject to court approval. Dr. Jerome Swartz, Symbol's co-founder and former chairman, agreed to pay $4,000 in cash to the class to settle the Pinkowitz and Hoyle class action claims with respect to him. This $4,000 has been recorded as a component of recovery for legal settlements within operating expenses during the three months ended June 30, 2004, as this was previously recorded in the amount estimated to be paid by the Company. Claims brought by the plaintiffs against former Symbol employees Tomo Razmilovic, Kenneth Jaeggi, Brain Burke and Frank Borghese were not settled. In connection with the above pending class actions and government investigations, Symbol has recorded an accrued liability for legal settlements of $98,000 as of June 30, 2004 which is reflected as a component of accounts payable and accrued expenses in the accompanying condensed consolidated financial statements. Additionally and in connection with the class actions and government settlement, the Company received $5,000 from one of its officer's liability insurance carriers, which has been recorded as a component of recovery for legal settlements within operating expenses during the three months ended June 30, 2004. Bildstein v. Symbol Technologies, Inc., et al. On April 29, 2003, a lawsuit was filed, entitled Bildstein v. Symbol Technologies, Inc., et. al., in the United States District Court for the Eastern District of New York against Symbol and Jerome Swartz, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Charles B. Wang, Tomo Razmilovic, 15 Leo A. Guthart, James Simons, Saul F. Steinberg and Lowell Freiberg. 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 seeks the cancellation of all affirmative votes at the annual meetings for 2000, 2001 and 2002, canceling all awards under the option plans, enjoining implementation of the option plans and any awards thereunder and an accounting by the defendants for all damage to Symbol, plus all costs and expenses in connection with the action. Symbol has filed a motion to dismiss that is now fully briefed. On February 4, 2004, Symbol argued its motion to dismiss before the Court and is awaiting the Court's decision. Symbol still intends to defend the case vigorously on the merits, but in the interim, has entered into negotiations with the plaintiff regarding a possible settlement. Gold v. Symbol Technologies, Inc., et al. On December 18, 2003, a purported derivative action lawsuit was filed, entitled Gold v. Symbol Technologies, Inc., et al., in the Court of Chancery of the State of Delaware against Symbol and Tomo Razmilovic, Kenneth V. Jaeggi, Dr. Jerome Swartz, Frank Borghese, Brian Burke, Richard M. Feldt, Satya Sharma, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Dr. Leo A. Guthart, Richard Bravman, Dr. James H. Simons, Leonard H. Goldner, Saul P. Steinberg, Lowell C. Freiberg and Charles Wang. 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 they 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, engaged in insider trading in Symbol's common stock, wasted corporate assets and improperly awarded a severance of approximately $13,000 to Mr. Razmilovic. Plaintiff seeks to recover incentive-based compensation paid to former senior members of Symbol's management in reliance on materially inflated financial statements and to impose a trust to recover cash and other valuable assets received by the former management defendants and former Symbol board members in the form of proceeds garnered from the sale of Symbol common stock (including option related sales) from at least January 1, 1998 through December 31, 2002. Symbol filed a motion to dismiss on March 29, 2004. On May 21, 2004, plaintiff filed an amended complaint. On June 9, 2004, Symbol filed a motion seeking to realign itself as plaintiff and take control of the litigation. That motion has not yet been fully briefed. On July 27, 2004, the Court approved a settlement that Symbol reached with the plaintiff in the Gold case. The settlement calls for the lawsuit to continue as direct litigation by Symbol on its own behalf against the defendants in Gold. As part of the settlement, the plaintiff in the Gold lawsuit consents to entry of Symbol's proposed order, under which Symbol will now be the plaintiff in this 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 lawyer. In addition, on June 3, 2004, Symbol announced it had reached a settlement with Dr. Jerome Swartz, Symbol's co-founder and former chairman. The agreement called for Dr. Swartz to pay $4,000 in cash to the class to settle the Pinkowitz and Hoyle class action lawsuits as described above. Subject to his dismissal from the Gold case, Dr. Swartz agreed to pay an additional $7,200 in cash to Symbol and forfeit stock options having a value of $2,900 or to exercise those options and pay approximately $2,900 in cash or stock to the Company. The ability for Dr. Swartz to forfeit stock options ended July 1, 2004, his last day of employment with the Company, therefore he will either pay $2,900 in cash or stock to the Company. This settlement with Dr. Swartz is in addition to his agreement in July 2003 to relinquish approximately two years of salary, bonus and stock options remaining under his prior employment agreement. 16 In re Telxon Corporation Securities Litigation From December 1998 through March 1999, a total of 27 class actions were filed in the United States District Court, Northern District of Ohio, by certain alleged stockholders of Telxon on behalf of themselves and purported classes consisting of Telxon stockholders, other than the defendants and their affiliates, who purchased stock during the period from May 21, 1996 through February 23, 1999, or various portions thereof, alleging claims for "fraud on the market" arising from alleged misrepresentations and omissions with respect to Telxon's financial performance and prospects and an alleged violation of generally accepted accounting principles by improperly recognizing revenues. The named defendants are Telxon, its former president and chief executive officer, Frank E. Brick, and its former senior vice president and chief financial officer, Kenneth W. Haver. The actions were referred to a single judge, consolidated and an amended complaint was filed by lead counsel. The amended complaint alleges that the defendants engaged in a scheme to defraud investors through improper revenue recognition practices and concealment of material adverse conditions in Telxon's business and finances. The amended complaint seeks certification of the identified class, unspecified compensatory and punitive damages, pre- and post-judgment interest, and attorneys' fees and costs. On November 13, 2003, Telxon and the plaintiff class reached a tentative settlement of all pending shareholder class actions against Telxon. Under the settlement, Telxon anticipated that it would pay $37,000 to the class. As a result of anticipated contributions by Telxon's insurers, Telxon expected that its net payment would be no more than $25,000. On December 19, 2003, the settlement received preliminary approval from the Court. On February 12, 2004, the Court granted its final approval of the settlement. On February 27, 2004, we paid $25,000 to the class in accordance with the settlement. Telxon has not settled its lawsuit against its former auditors, PricewaterhouseCoopers LLP ("PwC"), and, as part of the proposed settlement of the class action, Telxon has agreed to pay to the class, under certain circumstances, up to $3,000 of the proceeds of that lawsuit. On February 20, 2001, Telxon filed a motion for leave to file and serve a summons and third-party complaint against third-party defendant PwC in the shareholders' class action complaints. Telxon's third-party complaint against PwC concerns PwC's role in the original issuance and restatements of Telxon's financial statements for its fiscal years 1996, 1997 and 1998 and its interim financial statements for its first and second quarters of fiscal year 1999, which are the subject of the class action litigation against Telxon. Telxon states causes of action against PwC for contribution under federal securities law, as well as state law claims for accountant malpractice, fraud, constructive fraud, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of contract and breach of fiduciary duty. With respect to its federal claim against PwC, Telxon seeks contribution from PwC for all sums that Telxon may be required to pay in excess of Telxon's proportionate liability, if any, and attorney fees and costs. With respect to its state law claims against PwC, Telxon seeks compensatory damages, punitive damages, attorney fees and costs, in amounts to be determined at trial. Fact discovery was completed on December 19, 2003. Expert discovery was concluded on April 16, 2004. On April 20, 2004, PwC made a supplemental production of documents to Telxon which included thousands of pages of materials never previously produced in the litigation. Because fact and expert discovery had already closed, Telxon filed a motion for sanctions against PwC, requesting, among other things, the entry of default judgment against PwC for discovery misconduct. The district court referred the motion to the magistrate judge for a report and recommendation. On July 2, 2004, the magistrate judge issued a report and recommendation that the district court enter default judgment on liability against PwC and in favor of Telxon. PwC filed objections to the magistrate judge's report and recommendation on July 19, 2004. Telxon has to reply to the objections by August 2, 2004. The district court will then rule upon PwC's objections and either accept, reject, or modify the recommended disposition of the magistrate judge. The district court is not required to hold a hearing. 17 Assuming the district court follows the magistrate judge's report and recommendation and enters default judgment against PwC and in favor of Telxon, a trial on the issue of damages should occur in late 2004 or early 2005. Wyser-Pratte Management Co. v. Telxon Corporation, et al. On June 11, 2002, Wyser-Pratte Management Co., Inc. ("WPMC") filed a complaint against Telxon and its former top executives alleging violations of Sections 10(b), 18, 14(a) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act"), and alleging additional common law claims. This action is related to the same set of facts as the In re Telxon class action described above. On November 15, 2003, the parties reached an agreement in principle to resolve the litigation under which Telxon would pay WPMC $3,300. The settlement was finalized and paid by the Company in December 2003, and a stipulation of dismissal was filed in January 2004. PENDING PATENT AND TRADEMARK LITIGATION Proxim v. Symbol Technologies, Inc., 3 Com Corporation, Wayport Incorporated and SMC Networks Incorporated In March 2001, Proxim Incorporated ("Proxim") sued Symbol, 3 Com Corporation, Wayport Incorporated and SMC Networks Incorporated in the United States District Court in the District of Delaware for allegedly infringing three patents owned by Proxim (the "Proxim v. 3Com et al. Action"). Proxim also filed a similar lawsuit in March 2001 in the United States District Court in the District of Massachusetts against Cisco Systems, Incorporated and Intersil Corporation. The complaint against Symbol sought, among other relief, unspecified damages for patent infringement, treble damages for willful infringement and a permanent injunction against Symbol from infringing these three patents. Symbol answered and filed counterclaims against Proxim, asserting that Proxim's RF product offerings infringe on four of our patents relating to wireless LAN technology. On December 4, 2001, we filed a complaint against Proxim in the United States District Court in the District of Delaware (the "Symbol v. Proxim Action") asserting infringement of the same four patents that were asserted in our counterclaim against Proxim in the Proxim v. 3Com et al. Action prior to the severance of this counterclaim by the Court. On December 18, 2001, Proxim filed an answer and counterclaims in the Symbol v. Proxim Action, seeking declaratory judgments for non-infringement, invalidity and unenforceability of the four patents asserted by Symbol, injunctive and monetary relief for our alleged infringement of one additional Proxim patent (the "`634 Patent") involving wireless LAN technology, monetary relief for our alleged false patent marking, and injunctive and monetary relief for our alleged unfair competition under the Lanham Act, common law unfair competition and tortious interference. On March 17, 2003, Intersil and Proxim announced that a settlement between the companies had been reached, whereby Proxim agreed, inter alia, to dismiss with prejudice all of Proxim's claims in the Proxim v. 3Com et al. Action (the "Proxim/Intersil Agreement"). Proxim also agreed in the Proxim/Intersil Agreement to release us from past and future liability for alleged infringement of the `634 Patent in the Symbol v. Proxim Action, with respect to any of our products that incorporate Intersil's wireless radio chipsets. On April 5, 2003, the Court signed that Stipulation and Order of Dismissal, dismissing all of Proxim's claims in that action with prejudice. On July 30, 2003, among other rulings, the Court dismissed Proxim's unfair competition claim. 18 Trial on the Symbol patents began on September 8, 2003. On September 12, 2003, the jury returned a verdict finding that two of the three asserted patents (the '183 and '441 Patents) had been infringed by Proxim. Proxim dropped its claims of invalidity as to all three Symbol patents, and consented to judgment against Proxim on those invalidity claims. The jury awarded Symbol 6% royalties on Proxim's past sales of infringing products, which include Proxim's OpenAir, 802.11 and 802.11b products. Based on Proxim's sales of infringing products from 1995 to the present, we estimate that damages for past infringement by Proxim amount to approximately $23,000 before interest. On July 28, 2004, the Court issued its opinion rejecting Proxim's equitable defenses, and directing that judgment be entered in favor of the Company in the amount of $23,000 for damages, plus $3,000 in interest. The Court denied Symbol's request for a 6 % royalty on Proxim's future sales. Symbol therefore intends to seek an injunction to prevent future infringing sales. A one day bench trial on Proxim's remaining equitable defenses took place on November 24, 2003. The Court has not ruled on these defenses. Trial on the Proxim patent began on September 15, 2003. On September 29, 2003, the jury returned a verdict, finding the patent valid but not infringed by Symbol. Symbol Technologies, Inc. v. Hand Held Products, Inc. and HHP-NC, Inc. On January 21, 2003, we filed a complaint against Hand Held Products, Inc. and HHP-NC, Inc. (collectively, "HHP") for patent infringement and declaratory judgment. We alleged that HHP infringes 12 of our patents, that 36 of HHP's patents are not infringed by us, that the HHP patents are otherwise invalid or unenforceable, and that the court has jurisdiction to hear the declaratory judgment action. We requested that the court enjoin HHP from further infringement, declare that our products do not infringe HHP's patents, and award us costs and damages. On March 12, 2003, HHP filed a Motion to Dismiss, which was denied on November 14, 2003. With respect to our claim for a declaratory judgment that 36 of HHP's patents are not infringed by us, or that they are otherwise invalid or unenforceable, the Court denied HHP's motion to dismiss with respect to 10 of the patents, granted HHP's motion to dismiss with respect to 25 of the patents based on lack of subject matter jurisdiction, and granted HHP's motion to dismiss as to one HHP patent based on HHP's representation to the Court that the patent had been dedicated to the public and that HHP would not assert it against us. Pursuant to a stipulation between the parties, we have dismissed without prejudice our claim that HHP infringes 5 of the 12 Symbol patents and our action seeking a declaratory judgment with respect to the 10 HHP patents that remained in the case. On December 12, 2003, HHP asserted counterclaims against Symbol and Telxon (which had previously owned some of the patents asserted by Symbol) seeking a declaratory judgment that the Symbol patents were not infringed, were invalid and/or unenforceable. The parties have entered into a settlement agreement effective June 9, 2004, pursuant to which all asserted claims were dismissed, except HHP retained the right to reassert its third-party complaint to which the Company was not a party. Hand Held Products, Inc. and HHP-NC, Inc. v. Symbol Technologies, Inc. and Telxon Corporation On January 7, 2004, Symbol was served with a summons and complaint alleging that certain of its products infringe 4 patents owned by HHP. Three of the patents concern the design of a finger groove on the surface of a hand held computer, and the fourth concerns a decoding algorithm for 2 dimensional bar codes. These patents had been the subject of Symbol's declaratory judgment complaint, described above, but had been dismissed by the Court based on HHP's representation to the Court that Symbol had no reasonable apprehension of being sued by HHP for infringement of these patents. The parties have 19 entered into a settlement agreement effective June 9, 2004, pursuant to which all asserted claims were dismissed. Symbol Technologies, Inc. v. Metrologic Instruments, Inc. Symbol and Metrologic Instruments, Inc. ("Metrologic") entered into a cross-licensing agreement executed on December 16, 1996 and effective as of January 1, 1996 (the "Metrologic Agreement"). On April 12, 2002, we filed a complaint in the United States District Court in the Eastern District of New York against Metrologic, alleging a material breach of the Metrologic Agreement. We moved for summary judgment seeking a ruling on the issues, inter alia, that Metrologic had breached the Metrologic Agreement and that we had the right to terminate Metrologic's rights under the Metrologic Agreement. The Court denied the summary judgment motion on March 31, 2003, and held that the issues were subject to resolution by arbitration. We have appealed the Court's decision. On December 23, 2003, the Court of Appeals dismissed the appeal for lack of appellate jurisdiction because the District Court judgment was not final. In the interim, we are proceeding with the arbitration. Metrologic had filed a Demand for Arbitration in 2002 that was stayed pending the decisions by the Court. On June 26, 2003, we filed an Amended Answer and Counterclaims to Metrologic's Demand for Arbitration, asserting that (a) Metrologic's accused products are royalty bearing products, as defined under the Metrologic Agreement, and (b) in the alternative, those products infringe upon one or more of our patents. Metrologic replied to our counterclaims on July 31, 2003, denying infringement and asserting that the arbitrator was without jurisdiction to hear our counterclaims. Pursuant to the decision made by the arbitration panel, an arbitrator is now in place to hear the arbitration. On December 22, 2003, Metrologic withdrew its Demand for Arbitration, however, our counterclaims are still being heard. Discovery is ongoing and a 4 day hearing before the arbitrator has been scheduled to commence on October 28, 2004. In a separate matter relating to the Metrologic Agreement, we filed a demand for an arbitration against Metrologic seeking a determination that certain of our new bar code scanning products are not covered by Metrologic patents licensed to us under the Metrologic Agreement. We do not believe that the products infringe any Metrologic patents, but in the event there was a ruling to the contrary, our liability would be limited to the previously negotiated royalty rate. On June 6, 2003, the arbitrator ruled that whether we must pay royalties depends on whether our products are covered by one or more claims of Metrologic's patents, and that this issue must be litigated in court, not by arbitration. The arbitrator further ruled that we could not have materially breached the Metrologic Agreement, since the threshold infringement issue has not yet been determined. On June 19, 2003, after the arbitrator ruled that Metrologic's infringement allegations must be adjudicated in court, Metrologic filed a complaint against us in the District Court for the District of New Jersey, alleging patent infringement and breach of contract, and seeking monetary damages and termination of the Metrologic Agreement. On July 30, 2003, Symbol answered the complaint and asserted counterclaims for declaratory judgments of invalidity and noninfringement of Metrologic's patents and for non-breach of the Agreement. Discovery is proceeding. Symbol has moved for partial summary judgment on Metrologic's breach of contract claim, which has been fully briefed by the parties. Symbol intends to defend the case vigorously on the merits. 20 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 (the "Lemelson Partnership"). The suit, which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnership, was commenced in the U.S. District Court, District of Nevada in Reno, Nevada but was subsequently transferred to the Court in Las Vegas, Nevada. In the litigation, the Auto ID Companies seek, among other remedies, a declaration that certain patents, which have been asserted by the Lemelson Partnership against end users of bar code equipment, are invalid, unenforceable and not infringed. The 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. Symbol and the other Auto ID Companies have received many requests from their customers asking that they undertake the defense of these claims using their knowledge of the technology at issue. Certain of these customers have requested indemnification against the Lemelson Partnership's claims from Symbol and the other Auto ID Companies, individually and/or collectively with other equipment suppliers. Symbol believes, and its understanding is that the other Auto ID Companies believe, that generally they have no obligation to indemnify their customers against these claims and that the patents being asserted by the Lemelson Partnership against their customers with respect to bar code equipment are invalid, unenforceable and not infringed. A 27-day non-jury trial was held before the Court beginning on November 18, 2002, and concluding on January 17, 2003. Post-trial briefing was completed in late June 2003. 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 Symbol 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 written description and enablement even if construed in the manner urged by Lemelson. In so concluding, the Court found that judgment should be entered in favor of plaintiffs Symbol and the other members of the Auto ID Companies and against defendant Lemelson Partnership on Symbol's and the Auto ID Companies' complaint for declaratory judgment. The Court entered its judgment on January 23, 2004. The Lemelson Partnership filed a notice of appeal on June 23, 2004. Their brief on appeal is due on or about September 3, 2004 and further appellate briefs from the parties will be due in the two month period following the filing of the Lemelson Partnership's brief. OTHER LITIGATION Telxon v. Smart Media of Delaware, Inc. ("SMI") On December 1, 1998, Telxon filed suit against SMI in the Court of Common Pleas for Summit County, Ohio in a case seeking declaratory judgment that, contrary to SMI's position, Telxon did not contract to develop SMI's products or to fund SMI, and that it did not fraudulently induce SMI to refrain from engaging in business with others or interfere with SMI's business relations. On March 12, 1999, SMI filed its Answer and Counterclaim denying Telxon's allegations and alleging claims 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. 21 On September 17, 2003, a jury awarded approximately $218,000 in damages against Telxon. This sum included an award of approximately $6,000 to an individual. On September 24, 2003, the individual and SMI moved to add Symbol as a substitute or counterclaim defendant. That motion was subsequently withdrawn by SMI. On October 7, 2003, Telxon made a motion to impound and secure the trial record of certain exhibits, and on October 8, 2003, Telxon made motions for judgment in its favor notwithstanding the jury's verdicts, and for a new trial. In the event this relief is not granted, Telxon requested that the amount of the jury's verdicts be reduced. Also, Telxon requested that the execution of any judgment against Telxon entered by the Court be stayed without the posting of a bond, or in the alternative, that a bond be set at a maximum of $3,700. In support of its motions, Telxon argued that the jury's verdicts were based upon inadmissible evidence being improperly provided to the jury during its deliberations; that the absence of liability on the part of Telxon was conclusively established by the documents in evidence; and that the amounts awarded to SMI were based on legally irrelevant projections, and are wildly speculative, particularly given that SMI never had any revenue or profits. In addition, Telxon argued that the jury verdicts incorrectly awarded damages more than once for the same alleged injury by adding together two separate awards for lost profits, and by improperly combining different measures of damages. On May 6, 2004 the Court entered judgment against Telxon for approximately $218,000 in damages plus statutory interest from the date of the verdict. This amount includes an award to an individual for approximately $6,000. The Court also granted the individual's motion to add Symbol as a counterclaim defendant. The Court denied Telxon's motions for judgment in its favor, for a new trial, and for a reduction in the verdict. The Court rejected SMI's and the individual's motions for prejudgment interest. Symbol and Telxon have appealed these rulings, have posted $50,000 in cash as security for the judgment and have obtained a stay of execution of the judgment. We believe that Symbol and Telxon have strong grounds on which to appeal and do not currently believe that an unfavorable outcome with respect to the SMI judgment is probable at this time. Moreover, there can be no certainty at this time as to the likely amount of loss, if any. Accordingly, we have not recorded a liability in our consolidated financial statements with respect to the SMI judgment. However, there can be no assurance that Symbol and or Telxon will not be found to be ultimately liable for the damage awards. Barcode Systems, Inc. ("BSI") v. Symbol Technologies Canada, Inc., et al. On March 19, 2003, 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 Symbol deliberately, maliciously and willfully breached its agreement with BSI under which BSI purported to have the right to sell Symbol product 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 $1,281, representing the unpaid balance of product 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 is seeking an Order from the Tribunal that would require Symbol 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 Symbol on January 15, 2004. Symbol filed an appeal of the Tribunal's decision before the Federal Court of Appeals on April 22, 2004. 22 On November 17, 2003, BSI filed an additional lawsuit in British Columbia, Canada against Symbol and a number of its distributors alleging that Symbol 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. Symbol considers these claims to be meritless and intends 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 ("Plaintiff"), filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico") on or about October 21, 2003 for purposes of exercising an action to reclaim property on which Symbol's Reynosa facility is located. Such lawsuit was filed before the First Civil Judge of First Instance, 5th Judicial District, in Reynosa, Tamaulipas, Mexico. Additionally, 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. As of November 13, 2003, such lis pendens was still pending recordation. Plaintiff alleges that she is the legal owner of a tract of land of one hundred (100) hectares in area, located within the area comprising the Rancho La Alameda, Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas, irrigation district. Allegedly, such land was caused to be part of the Parque Industrial Del Norte in Reynosa, Tamaulipas. Plaintiff further alleges that Symbol Mexico, without any claim of right and without Plaintiff's consent entered upon the tract of land, occupied such, and refused to return to Plaintiff the portion of land and all improvements and accessions thereto occupied by Symbol Mexico. 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. Symbol intends to defend against this claim vigorously. Bruck Technologies Handels GmbH European Commission ("EC") Complaint In February 2004, Symbol became aware of a notice from the European Competition Commission (the "EC") of a complaint lodged with it by Bruck Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol PartnerSelect program violate Article 81 of the EC Treaty. Symbol considers these claims to be without merit and intends to vigorously defend against them. 10. INCOME TAXES In the quarter ended March 31, 2004, we changed our estimate of the amount for certain pending class action lawsuits and government fines, as discussed in Note 9c, which may not be deductible for tax purposes. At December 31, 2003, our estimate of the non-deductible amount was $5,000. Currently, we estimate such non-deductible amount to approximate $40,000. Accordingly, we reversed a previously recorded deferred tax asset of $13,475, as we believe this deferred tax asset is unlikely to be realizable. Below are the components of our provision for income taxes for the six months ended June 30, 2004. 23 Amount Percent --------- ---------- Earnings before income taxes $ 66,169 Deferred tax asset impairment $ 13,475 20.4 Income tax expense 17,095 25.8 --------- ---------- Total provision for income taxes 30,570 46.2 --------- ========== Net earnings $ 35,599 ========= 11. EXECUTIVE RETIREMENT PLAN We maintain an Executive Retirement Plan (the "Plan") in which certain highly compensated associates are eligible to participate. Our obligations under the Plan are not funded. The components of net periodic benefit cost for the three and six months ended June 30, 2004 and 2003 are as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ---------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost $ 370 $ 371 $ 740 $ 744 Interest cost 322 338 644 676 Amortization of prior service cost 66 66 132 132 Recognized actuarial loss -- 53 -- 106 ---------- ---------- ---------- ---------- Net periodic benefit cost $ 758 $ 828 $ 1,516 $ 1,658 ========== ========== ========== ========== EMPLOYER CONTRIBUTIONS TO THE PLAN We previously disclosed in our financial statements for the year ended December 31, 2003, that we expected to contribute approximately $372 to the Plan to cover expected benefit payments during 2004. As of June 30, 2004, $151 has been paid and we anticipate contributing an additional $230 to cover the expected benefit payments for the Plan in 2004 for a total of $381. 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, Products and Services. The Products segment sells products and solutions in the forms of advanced data capture equipment, mobile computing devices, wireless communication equipment and other peripheral products and receives royalties. The Services segment provides wireless communication solutions that connect our data capture equipment and mobile computing devices to wireless networks. This segment also provides worldwide comprehensive repair and 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 standard costs. 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 standard 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, 24 we do not allocate manufacturing variances, 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 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 three and six months ended June 30, 2004 as compared to the comparable period in 2003. 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 the three and six months ended June 30, 2004 were $182,346 and $348,831, respectively. Non-U.S. sales for the three and six months ended June 30, 2003 were $151,317 and $322,287, respectively. Identifiable assets are those tangible and intangible assets used in operations in each geographic region. Corporate assets are principally temporary investments and goodwill. 25 Summarized financial information concerning our reportable segments and geographic regions is shown in the following table. FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 ------------------------------------- -------------------------------------- PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL ----------- ----------- ----------- ----------- ----------- ----------- REVENUES: The Americas...................... $ 220,528 $ 50,256 $ 270,784 $ 191,627 $ 55,890 $ 247,517 EMEA.............................. 100,852 23,320 124,172 76,180 24,253 100,433 Asia Pacific...................... 35,222 2,607 37,829 22,489 3,380 25,869 ----------- ----------- ----------- ----------- ----------- ----------- Total net sales................... $ 356,602 $ 76,183 $ 432,785 $ 290,296 $ 83,523 $ 373,819 =========== =========== =========== =========== =========== =========== STANDARD GROSS PROFIT: The Americas...................... $ 122,230 $ 14,826 $ 137,056 $ 97,980 $ 13,670 $ 111,650 EMEA.............................. 59,126 8,505 67,631 40,587 8,812 49,399 Asia Pacific...................... 19,472 876 20,348 11,633 1,497 13,130 ----------- ----------- ----------- ----------- ----------- ----------- Total gross profit at standard.... $ 200,828 $ 24,207 225,035 $ 150,200 $ 23,979 174,179 =========== =========== =========== =========== Manufacturing variances & other related costs.................. 28,352 21,790 ----------- ----------- Total gross profit................ $ 196,683 $ 152,389 =========== =========== FOR THE SIX MONTHS ENDED ----------------------------------------------------------------------------- JUNE 30, 2004 JUNE 30, 2003 ------------------------------------- -------------------------------------- PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL ----------- ----------- ----------- ----------- ----------- ----------- REVENUES: The Americas...................... $ 449,622 $ 95,533 $ 545,155 $ 376,707 $ 106,138 $ 482,845 EMEA.............................. 190,093 46,280 236,373 181,016 47,082 228,098 Asia Pacific...................... 65,126 5,782 70,908 43,276 5,947 49,223 ----------- ----------- ----------- ----------- ----------- ----------- Total net sales................... $ 704,841 $ 147,595 $ 852,436 $ 600,999 $ 159,167 $ 760,166 =========== =========== =========== =========== =========== =========== STANDARD GROSS PROFIT: The Americas...................... $ 252,764 $ 23,358 $ 276,122 $ 192,860 $ 25,273 $ 218,133 EMEA.............................. 111,375 16,028 127,403 94,097 15,975 110,072 Asia Pacific...................... 37,381 2,249 39,630 22,072 2,326 24,398 ----------- ----------- ----------- ----------- ----------- ----------- Total gross profit at standard.... $ 401,520 $ 41,635 443,155 $ 309,029 $ 43,574 352,603 =========== =========== =========== =========== Manufacturing variances & other related costs.................. 51,544 28,342 ----------- ----------- Total gross profit................ $ 391,611 $ 324,261 =========== =========== AS OF AS OF DECEMBER JUNE 30, 2004 31,2003 -------------- ----------- IDENTIFIABLE ASSETS: The Americas...................... $ 904,873 $ 867,133 EMEA.............................. 303,350 316,406 Asia Pacific...................... 60,791 64,228 Corporate (principally goodwill, intangible assets and investments) 350,773 398,751 -------------- ----------- Total........................ $ 1,619,787 $ 1,646,518 ============== =========== 26 13. SUBSEQUENT EVENT On July 26, 2004, we reached an agreement to purchase 100 percent of the issued and outstanding capital stock of Matrics, Inc. ("Matrics"), a privately held leader in the design and manufacturing of EPC (Electronic Product Code) - compliant radio frequency identification ("RFID") system, for $230,000 cash, excluding transaction costs. The acquisition of Matrics is a significant step in executing our plan to be a leader in RFID, and is expected to expand our product offerings in the advance data capture industry. We intend to finance the acquisition with short-term borrowings under a new credit facility and expect to refinance the borrowings in a capital markets equity or equity linked transaction later this year, market conditions permitting. This acquisition, which is subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act, is expected to close by September 30, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FORWARD-LOOKING STATEMENTS; CERTAIN CAUTIONARY STATEMENTS This report contains forward-looking statements made in reliance upon the safe harbor provisions of 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 Symbol's 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. For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see Item 1, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2003 and Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors," in our quarterly report on Form 10-Q for the three months ended March 31, 2004. In light of the uncertainty inherent in such forward-looking statements, you should not consider the inclusion 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 Symbol's future performance. Actual results and performance may differ from Symbol's current projections, estimates and expectations, and the differences may be material, individually or in the aggregate, to Symbol's business, financial condition, results of operations, liquidity or prospects. Additionally, Symbol is not obligated to make public indication of changes in its forward looking statements unless required under applicable disclosure rules and regulations. The following discussion and analysis should be read in conjunction with Symbol's Condensed Consolidated Financial Statements and the notes thereto that appear elsewhere in this report. OVERVIEW 27 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 and six months ended June 30, 2004, we generated $432,785 and $852,436 of revenue, respectively. Symbol manufactures products and provides services to capture, move and manage data using four core technologies - bar code reading and image recognition, mobile computing, networking systems 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 do not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. We are engaged in two reportable business segments: (1) the design, manufacture and marketing of mobile computing, automatic data capture, and wireless network systems (the "Product Segment"); and (2) the servicing of, customer support for and professional services related to these systems (the "Services Segment"). Each of our operating segments uses its core competencies to provide building blocks for mobile computing solutions. EXECUTIVE OVERVIEW OF PERFORMANCE Our total revenue for the three and six months ended June 30, 2004 increased 15.8 percent and 12.1 percent to $432,785 and $852,436 from $373,819 and $760,166 in the comparable prior year periods. The increase in revenue is primarily attributable to expanding our available markets, gradual strengthening in the global economy and increased spending in the information technology sector which resulted in growth in our product segment, particularly in mobile computing. Our gross profit was 45.4 percent and 45.9 percent for the three and six months ended June 30, 2004, an increase from 40.8 percent and 42.7 percent for the three and six months ended June 30, 2003. The increase is primarily due to our increased sales of higher margin product and efficiencies we have achieved in our manufacturing, distribution and services operations. We are committed and continue to invest in our people, processes and systems to improve our control environments, our effectiveness with our customers and our operational efficiencies. Accordingly, our selling, general and administrative expenses were $119,073 and $240,753 for the three and six months ended June 30, 2004, a 9.8 percent and a 16.1 percent increase from the comparable prior years periods. With continued focus on our balance sheet, our cash balance has remained relatively consistent at $143,686 as of June 30, 2004 as compared to $150,017 at December 31, 2003, however this balance as of June 30, 2004, includes distributing approximately $65,000 in legal settlements and the posting of a $50,000 bond as security for a trial court judgment on appeal, all of which occurred during the six months ended June 30, 2004. Additionally, at June 30, 2004 and December 31, 2003, we had no current borrowings under our secured credit line. We have also invested $34,665 in our business during the six months ended June 30, 2004 through purchases of property and computer equipment and related software of $30,055 and investments in other companies of $4,610. We expect to continue to make investments in property plant and equipment over the next 12 to 18 months in the range of $100,000 related primarily to our information technology business transformation initiatives. 28 RESULTS OF OPERATIONS 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: FOR THE THREE MONTHS ENDED JUNE 30 FOR THE SIX MONTHS ENDED JUNE 30 ------------------------------------------------- ------------------------------------------------- VARIANCE VARIANCE VARIANCE VARIANCE IN IN IN IN 2004 2003 $'S PERCENT 2004 2003 $'S PERCENT ---------- ---------- ---------- ------- ---------- ---------- ---------- ----- Total Revenue The Americas........... $ 270,784 $ 247,517 $ 23,267 9.4% $ 545,155 $ 482,845 $ 62,310 12.9% EMEA................... 124,172 100,433 23,739 23.6 236,373 228,098 8,275 3.6 Asia Pacific........... 37,829 25,869 11,960 46.2 70,908 49,223 21,685 44.1 ---------- ---------- ---------- ------- ---------- ---------- ---------- ----- Total Revenue...... 432,785 373,819 58,966 15.8 852,436 760,166 92,270 12.1 ========== ========== ========== ======= ========== ========== ========== ===== Product Revenue The Americas........... 220,528 191,627 28,901 15.1 449,622 376,707 72,915 19.4 EMEA................... 100,852 76,180 24,672 32.4 190,093 181,016 9,077 5.0 Asia Pacific........... 35,222 22,489 12,733 56.6 65,126 43,276 21,850 50.5 ---------- ---------- ---------- ------- ---------- ---------- ---------- ----- Total Product Revenue. 356,602 290,296 66,306 22.8 704,841 600,999 103,842 17.3 ========== ========== ========== ======= ========== ========== ========== ===== Service Revenue The Americas........... 50,256 55,890 (5,634) (10.1) 95,533 106,138 (10,605) (10.0) EMEA................... 23,320 24,253 (933) (3.8) 46,280 47,082 (802) (1.7) Asia Pacific........... 2,607 3,380 (773) (22.9) 5,782 5,947 (165) (2.8) ---------- ---------- ---------- ------- ---------- ---------- ---------- ---- Total Service Revenue. $ 76,183 $ 83,523 $ (7,340) (8.8)% $ 147,595 $ 159,167 $ (11,572) (7.3)% ========== ========== ========== ======= ========== ========== ========== ===== Net product revenue for the three and six months ended June 30, 2004 was $356,602 and $704,841 an increase of $66,306 or 22.8 percent and $103,842 or 17.3 percent from the comparable prior year periods. The increase is primarily due to continued growth in our mobile computing product offerings, which is our largest product line and represented approximately 59.6 percent and 66.3 percent of the total product revenue growth, respectively. Contributing to this increase is the growth from both our next generation mobile gun and portable data mobile computing devices. Also contributing to the product revenue growth was growth in advanced data capture of approximately 26.5 percent and 15.0 percent over the comparable prior year periods which was primarily driven by continued growth in next generation scanners as well as a large rollout of wireless point-of-sale scanners to a nationwide retailer. In addition, wireless product revenue increased by approximately 28.0 percent and 32.6 percent for the three and six months ended June 30, 2004, respectively from the comparable prior year periods due to the introduction of a new wireless switch. Offsetting these increases were increases in rebates to our distributor and other channel partners of approximately $2,395 and $5,280 over the comparable prior year periods, which is recorded as a reduction to product revenue. Net services revenue of $76,183 and $147,595 for the three and six months ended June 30, 2004 decreased 8.8 percent and 7.3 percent respectively from comparable prior year periods due to our continued drive to utilize third party service providers for the lower margin professional service activities. Also contributing to the decrease was a lower level of cash collections compared to the comparable prior year period, as our U.S. service revenue is recognized on a billed and collected basis. Geographically, the Americas revenue increased 9.4 percent and 12.9 percent for the three and six months ended June 30, 2004 from the comparable prior year periods. EMEA revenue increased 23.6 percent and 3.6 percent, respectively, for the three and six months ended June 30, 2004, from the comparable periods in 2003. The increases in the America's and EMEA revenues is mainly attributable to strong growth in all of our product offerings. Asia Pacific revenue increased 46.2 percent and 44.1 percent for the three months and six months ended June 30, 2004, respectively, compared to the comparable prior year periods primarily the result of continued penetration of all of our product offerings into this marketplace. The Americas, EMEA and Asia Pacific represent approximately 62.6, 28.7 and 8.7 29 percent of revenue, respectively, for the three months ended June 30, 2004. The Americas, EMEA and Asia Pacific represent approximately 64.0, 27.7 and 8.3 percent of revenue, respectively, for the six months ended June 30, 2004. Product cost of revenue as a percentage of net product revenue was 52.2 percent and 50.0 percent for the three and six months ended June 30, 2004 as compared to 56.9 percent and 53.5 percent in the comparable prior year periods. This decrease is primarily due to product mix and increased efficiencies gained in our manufacturing and distribution operations. Additionally, during the first quarter of 2004, the Company recorded a $2,860 reduction in its accrued restructuring expenses related to manufacturing transition activities. This amount represents the estimated sub-lease income expected on our vacated facility space in Bohemia, New York. The initial charge was recorded as a charge to product cost of revenue. Services cost of revenue as a percentage of net services revenue was 65.6 percent and 73.5 percent for the three and six months ended June 30, 2004 as compared to 67.5 percent and 71.9 percent in the three and six months ended June 30, 2003, primarily due to increased efficiencies in our service depots, due to the efforts of our global services transition, increased reliability of our products and the transitioning of lower margin activities to outside third parties. Also included in services cost of revenue for the three and six months ended June 30, 2004 are global services transition restructuring costs of approximately $3,836 and $5,465, respectively which relate to workforce reductions and lease obligation costs as compared to $979 and $2,413 in the comparable prior year period. OPERATING EXPENSES Operating expenses consist of the following for the three and six months ended June 30: FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30, ------------------------------------------------- ----------------------------------------------- VARIANCE VARIANCE VARIANCE VARIANCE IN IN IN IN 2004 2003 $'S PERCENT 2004 2003 $'S PERCENT ------------ ------------ ------------ ----- ------------ ------------ ------------ ------- Engineering.............. $ 42,060 $ 38,130 $ 3,930 10.3% $ 83,619 $ 75,185 $ 8,434 11.2% Selling, general and administrative......... 119,073 108,419 10,654 9.8 240,753 207,450 33,303 16.1 (Recovery)/provision for legal settlements...... (9,000) - (9,000) (100.0) (9,000) 72,000 (81,000) (112.5) Stock based compensation expense... 375 1,456 (1,081) (74.2) 2,609 2,232 377 16.9 Restructuring and impairment charges..... 509 136 373 274.3 509 223 286 128.3 ------------ ------------ ------------ ----- ------------ ------------ ------------ ------- $ 153,017 $ 148,141 $ 4,876 3.3% $ 318,490 $ 357,090 $ (38,600) (10.8)% ============ ============ ============ ===== ============ ============ ============ ======= Total operating expenses $153,017 increased 3.3 percent for the three months ended June 30, 2004 from $148,141 for the comparable prior year period while total operating expenses of $318,490 decreased $38,600 or 10.8 percent for the six months ended June 30, 2004 from $357,090, for the comparable prior year period. The $4,876 increase in operating expenses for the three month comparable period is primarily the result of increases in our engineering expenses and selling, general and administrative expenses of $3,930 and $10,654 offset by a reduction in our provision for legal settlements of $9,000. The decrease of $38,600 for the six month comparable period is largely driven by the fact that the current year six months ended June 30, 2004 included a $9,000 reduction in our provision for legal settlements while the prior year six month period ended June 30, 2003 included a provision on legal settlements of $72,000. Offsetting this decrease are increases in our engineering expenses and selling, general and administrative expenses of $8,434 and $33,303 which represent a 11.2 percent and 16.1 percent increase respectively, for the six months ended June 30, 2004 as compared to the comparable prior period of 2003. 30 Also included in total operating expenses are amounts associated with non-cash compensation expenses associated with our stock option plans. 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 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. On February 25, 2004, the date on which we became current with our regulatory filings with the SEC, this suspension period ended. In addition, during the three month period ended June 30, 2004, the Board of Directors approved a restricted stock compensation plan for certain executives and the Board of Directors which cause non-cash compensation charges to be recognized for fair value of the restricted shares granted, towards their vesting. Such stock based compensation expenses amounted to $375, representing the compensation charge for the restricted shares and $2,234, representing the compensation charge related to the abeyance program for the six months ended June 30, 2004, respectively as compared to $1,456 and $2,232 for the comparable prior year periods. Engineering and selling, general and administrative expenses are summarized in the following table: FOR THE THREE MONTHS ENDED JUNE 30 FOR THE SIX MONTHS ENDED JUNE 30 --------------------------------------------- --------------------------------------------- VARIANCE VARIANCE VARIANCE VARIANCE IN IN IN IN 2004 2003 DOLLARS PERCENT 2004 2003 DOLLARS PERCENT -------- --------- ------------ ---- ------- --------- ------------ ---- Engineering.............. $ 42,060 $ 38,130 $ 3,930 10.3% $83,619 $ 75,185 $ 8,434 11.2% Percent of Net Sales... 9.7% 10.2% 9.8% 9.9% Selling, general and administrative......... $ 119,073 $ 108,419 $ 10,654 9.8% $240,753 $207,450 $ 33,303 16.1% Percent of Net Sales... 27.5% 29.0% 28.2% 27.3% Engineering costs for the three and six months ended June 30, 2004 increased 10.3 percent and 11.2 percent to $42,060 and $83,619 from $38,130 and $75,185 for the three and six months ended June 30, 2003. The increase was due to additional investments in mobility software, systems and solutions and RFID (Radio Frequency Identification). The increase was consistent with our projected expenditures and actual revenue growth as engineering spending as a percentage of revenue remained relatively consistent. Selling, general and administrative expenses for the three and six months ended June 30, 2004 increased 9.8 and 16.1 percent to $119,073 and $240,753 from $108,419 and $207,450 for the three and six months ended June 30, 2003. The increase is primarily due to our increased revenues and our increased investment in worldwide sales, marketing and financial personnel throughout 2003 and through the first half of 2004. In addition, included in selling, general and administrative expenses for the three and six months ended June 30, 2004, are external consulting costs of approximately $2,500 and $4,700 for assistance with the Company's efforts with compliance with the Sarbanes-Oxley Act of 2002. These costs represent approximately 2.1 percent and 2.0 percent of selling, general and administrative expenses for the three and six months ended June 30, 2004, respectively. Also included in selling, general and administrative expense for the six months ended June 30, 2004 is a pretax compensation and related benefits charge of $2,800 recorded in connection with the resignation of our former Chief Executive Officer, representing 1.2 percent of selling, general and administrative expenses during the period. Selling, general and administrative expenses for the three and six months ended June 30, 2003 included 31 expenses associated with our previously disclosed restatement and government investigations of $14,500 and $19,800, respectively. OTHER (EXPENSE)/INCOME, NET In accordance with the provisions of SFAS No. 133, the gain or loss on the change in fair value of the portion of our investment in Cisco common stock classified as trading, 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. The net impact of these fair value adjustments included in other (expense) / income is $(6,285) and $(4,501) for the three and six months ended June 30, 2004. Other (expense) / income was also increased by interest expense of $(1,674) and $(2,438) for the three and six months ended June 30, 2004. Included in other (expense) / income for the six months ended June 30, 2003 is a write-down of $(3,025) for a cost method investment for which impairment was considered to be other than temporary. PROVISION FOR INCOME TAXES Our effective rate for the six months ended June 30, 2004 and 2003 was 46.2% and 24.6%, respectively. In the quarter ended March 31, 2004 we changed our estimate of the amount for certain pending class action lawsuits and government fines, which may not be deductible for tax purposes. At December 31, 2003, our estimate of the non-deductible amount was $5,000, currently we estimate such non-deductible amount to approximate $40,000. Accordingly, we reversed a previously recorded deferred tax asset of $13,475, as we believe this deferred tax asset is unlikely to be realizable. Below are the components of our provision for income taxes for the six months ended June 30, 2004. Amount Percent ------------ ------------ Earnings before income taxes $66,169 Deferred tax asset impairment $13,475 20.4 Income tax expense 17,095 25.8 ------------ ------------ Total provision for income taxes 30,570 46.2 ------------- ============ Net earnings $35,599 ============= LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The following table summarizes Symbol's cash and cash equivalent balances as of June 30, 2004 and December 31, 2003 and the results of our statement of cash flows for the six months ended June 30. 2004 2003 $ CHANGE ------------- ------------- ------------- Cash and cash equivalents..................................... $ 143,686 $ 150,017 $ 6,331 ============= ============= ============= Net cash provided by /(used in): Operating activities...................................... 63,605 120,309 (56,704) Investing activities...................................... (86,527) (27,713) (58,814) Financing activities...................................... 18,893 (74,435) 93,328 Effect of exchange rate changes on cash and cash equivalents (2,302) 3,694 (5,996) ------------- ------------- ------------- Net (decrease) / increase in cash and cash equivalents......................................... $ (6,331) $ 21,855 $ (28,186) ============= ============= ============= 32 Net cash provided by operating activities during the six months ended June 30, 2004 was $63,605, as compared to $120,309 for the same period last year. Net cash provided by operating activities decreased $56,704 during the six months ended June 30, 2004 as compared to the comparable prior year period primarily due to our use of cash to reduce and pay down our outstanding accounts payable and accrued expenses. Included in the use of cash was the $40,000 payments as required by the Eastern District and the Securities and Exchange Commission to resolve the government investigations and the $25,000 settlement related to the Telxon class action lawsuit, that was paid in February 2004. Net cash used in investing activities for the six months ended June 30, 2004 was $86,527, as compared to $27,713 for the same period last year. Net cash used in investing activities principally consists of net investments in other companies and capital expenditures for property, plant and equipment. The increase of $58,814 during the six months ended June 30, 2004, when compared to the same period last year, was primarily due to the $50,000 bond we posted as security for a trail court judgment on appeal and our increased investments in other companies and capital expenditures as we invested $34,665 and $26,271 of cash during the six months ended June 30, 2004 and 2003, respectively. Net cash provided by financing activities during the six months ended June 30, 2004 was $18,893, as compared to net cash used in financing activities of $(74,435) during the same period last year. Net cash provided by financing activities during the six months ended June 30, 2004 consists of proceeds from stock option exercises and long-term debt of $33,956 and $13,825, respectively offset by purchases of treasury stock of $(26,374) as compared to cash used in financing activities for repayments on long-term debt of $(71,636) in the same period last year. The following table presents selected key performance measurements we use to monitor our business for the three months ended June 30, 2004 2003 ---- ---- Days sales outstanding (DSO)................ 23.0 31.0 Inventory turnover - product only........... 4.4 4.2 We continue to effectively manage our net accounts receivables, ending the six months ended June 30, 2004 with receivables of $110,482, a decrease of $41,895 from $152,377 at December 31, 2003. Through aggressive collection strategies we have been able to reduce our average days sales outstanding to 23.0 days during the three months ended June 30, 2004 from an average of 31.0 days in the three months ended June 30, 2003. We have also continued to improve our efficiencies in our manufacturing and distribution operations while supporting continued revenue growth. As a result of increased revenues and the efficiencies we have instituted in our manufacturing and distribution operations we have been able to increase the average number of times that our inventory turns to 4.4 from 4.2 for the three months ended June 30, 2004 as compared to the comparable period in 2003. 33 OTHER LIQUIDITY MEASURES Other measures of our liquidity including the following: JUNE 30, DECEMBER 31, 2004 2003 -------- ------------ Working capital............................................. $202,160 $197,808 (current assets minus current liabilities) Current ratio (current assets to current liabilities)....... 1.4:1 1.4:1 Current assets as of June 30, 2004 decreased by $64,261 from December 31, 2003, primarily due to the transfer of $50,000 of cash into long-term assets in satisfaction of bond requirement serving as security for a trial court judgment against the Company and a subsidiary which is currently on appeal and to short-term deferred tax assets being converted into net operating losses which are deemed to be long-term deferred tax assets. Additionally and as discussed in Note 10 of the notes to the condensed consolidated financial statements, we reversed a previously recorded deferred tax asset of $13,475 as we believe this asset may not be realized. Accounts receivable also decreased due to improved cash collections, however a portion of the cash generated was used to pay down and reduce our outstanding accounts payable and accrued expenses. Current liabilities as of June 30, 2004 decreased $68,613 from December 31, 2003 primarily due to a decrease in accounts payable and accrued expenses which was largely driven by the $40,000 payments as required by the Eastern District and the Commission to resolve the government investigations and a $25,000 payment made in February 2004 related to the settlement of the Telxon class action lawsuit which was included in accounts payable and accrued expenses at December 31, 2003. As a result, working capital increased $4,352 between June 30, 2004 and December 31, 2003. Our current ratio was 1.4:1 at June 30, 2004 and December 31, 2003. FINANCING ACTIVITIES As of June 30, 2004 and December 31, 2003, there were no borrowings outstanding under our $60,000 secured credit line. In addition to our secured credit line, we have additional uncommitted loan agreements with various overseas banks pursuant to which the banks have agreed to provide lines of credit totaling $25,132 with a range of borrowing rates and varying terms. As of June 30, 2004, we had no loans outstanding under these lines. These agreements continue until such time as either party terminates the agreements. During 2000, we entered into a $50,000 lease receivable securitization agreement. This agreement matured on December 31, 2003, and was subsequently renewed until March 2005 without the payment of amounts outstanding at such time. During the six months ended June 30, 2004 and 2003, we did not securitize any additional lease receivables. 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. 34 EXISTING INDEBTEDNESS At June 30, 2004 and December 31, 2003 long-term debt outstanding, excluding current maturities, was as follows: JUNE 30, 2004 DECEMBER 31, 2003 ----------- ----------- Secured credit line....................... $ -- $ -- Secured installment loan.................. 13,825 -- SAILS exchangeable debt................... 100,974 98,927 Other..................................... 144 319 ----------- ----------- 114,943 99,246 Less: current maturities.................. 7,017 234 ----------- ----------- Long-term debt............................ $ 107,926 $ 99,012 =========== =========== In March 2004, we entered into a secured installment loan agreement with a bank for $13,825. The loan is payable in four semiannual installments of $3,655 commencing October 1, 2004. The proceeds received under the loan were used to finance certain Company software license arrangements. 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 $98,592 at June 30, 2004 and $100,797 at December 31, 2003. Such shares are held as collateral to secure the debt instrument associated with the SAILS and are included in Investment in Marketable Securities in the Consolidated Balance Sheets. This debt has a seven-year maturity and we pay interest at a cash coupon rate of 3.625 percent. At maturity, the SAILS 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 outstanding under our revolving credit facility. The SAILS contain an embedded equity collar, which effectively hedges a large portion of 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," as amended. The gain or loss on changes in the fair value of the derivative is recognized through earnings in the period of change together with the offsetting gain or loss on the Cisco shares classified as trading securities. 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 FIN 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 $100,974 at June 30, 2004. The remaining portion of long-term debt outstanding relates primarily to capital lease obligations. CONTRACTUAL CASH OBLIGATIONS The following is a summary of the contractual commitments associated with our debt and lease obligations as of June 30, 2004. 35 YEARS ENDED DECEMBER 31, SIX MONTHS --------------------------------------------------------- TOTAL ENDED 2004 2005 2006 2007 2008 THEREAFTER -------- ------- ------- ------- ------- -------- ------- Long-term debt................. $114,817 $3,455 $6,920 $3,463 $5 $100,974 $ -- Capital lease commitments...... 126 82 44 -- - -- -- Operating lease commitments.... 104,483 11,865 19,271 16,383 14,081 12,133 30,750 -------- ------- ------- ------- ------- -------- ------- Total.......................... $219,426 $15,402 $26,235 $19,846 $14,086 $113,107 $30,750 ======== ======= ======= ======= ======= ======== ======= Additionally, through the normal course of our business, we purchase or place orders for the necessary components of our products from a variety of suppliers. We estimate that our purchase obligations at June 30, 2004 is between $100,000 and $150,000. This range does 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 fulfilled by our vendors within a short time frame. Currently, our primary source of liquidity is cash flow from operations and the secured credit line. 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 secured credit line will be adequate to meet our future liquidity needs for the next twelve months. 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 secured credit line in an amount sufficient to enable us to fund our other liquidity needs or pay our indebtedness. CRITICAL ACCOUNTING POLICIES, 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, derivative instrument valuations and income taxes. We base our estimates and judgments on historical experience 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. Note 1 of the Notes to the Consolidated Financial Statements "Summary of Significant Accounting Policies" summarizes each of our significant accounting policies in our Annual Report on Form 10-K. We believe 36 the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. REVENUE RECOGNITION, PRODUCT RETURN RESERVES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS 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 generally recognized when products are shipped or services are rendered, the title and risk of loss has passed to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. The recognition of revenues related to sales of our products or systems to our value-added resellers is contingent 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 generally recognized when products are shipped, the title and risk of loss has passed, the sales prices is fixed and 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 them to the end user. Service and maintenance sales are recognized when there is persuasive evidence of an arrangement, the services are rendered, the price is fixed and determinable and collectibility is reasonably assured, which is primarily upon receipt of payment. When a sale involves multiple elements, 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 is met. We accrue estimated product return reserves against our recorded revenue. The estimated amount is based on historical experience of similar products to our customers. If our product mix or customer base changes significantly, this could result in a change to our future estimated product return reserve. 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 slow down 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. Such estimates of outcome are derived from consultation with outside legal counsel, as well as an assessment of litigation and settlement strategies. Legal contingencies are often resolved over long time periods. The required accruals may change in the future due to new developments in each matter or changes in approach such as a change in settlement 37 strategy in dealing with these matters. Depending on how these matters are resolved, these costs could be material. 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. It is possible that significant changes in required inventory reserves may continue to occur in the future if there is further deterioration in market conditions or acceleration in technological change. 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 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. 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, changes in historical or projected operating performance and cash flows and significant negative economic trends. 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. 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 38 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. We do not believe we are exposed to more than a nominal amount of credit risk in our hedging activities as the counterparties are established, well capitalized financial institutions. INCOME TAXES 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 critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. ACCESS TO INFORMATION Symbol's Internet address is www.symbol.com. Through the Investor Relations section of our Internet website, we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act"), as well as any filings made pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. Copies are also available, without charge, from Symbol Investor Relations, One Symbol Plaza, Holtsville, New York 11742. Our Internet website and the information contained therein or incorporated therein are not incorporated into this Quarterly Report on Form 10-Q. You may also read and copy materials that we have filed with the Commission at the Commission's public reference room located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room. In addition, our filings with the Commission are available to the public on the Commission's web site at www.sec.gov. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes regarding Symbol's market risk position from the information provided under Item 7A of Symbol's Annual Report on Form 10-K for the year ended December 31, 2003. ITEM 4. CONTROLS AND PROCEDURES 39 Symbol is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and are subject to certain limitations, including the exercise of judgment by individuals, the inability to identify unlikely future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to management in a timely manner. During 2003 and 2002, we learned of certain deficiencies in our internal control that existed in 2002 and prior years. Additionally, as of December 31, 2003, we identified a material weakness related to the manner in which we process transactions to record our revenue as our current processes and procedures to record revenue transactions requires substantive manual intervention and are reliant on several departments in our sales and finance organization. These deficiencies are summarized as follows: o inadequate systems and systems interfaces; o inadequate and untimely account reconciliations; o numerous manual journal entries; and o informal worldwide policies and procedures. We have taken measures to improve the effectiveness of our internal controls and we believe these efforts address the matters described above. Certain measures we have taken since the discovery of such deficiencies include, but are not limited to, the following: o centralized the responsibility of revenue under a revenue controller's department, reporting directly to the Chief Accounting Officer; o undertaken a project to establish formalized worldwide policies and procedures to be approved by the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer; o undertaken a project to identify responsible associates for account reconciliations, including approvals; o implemented formal review processes of transactions where there still exists manual intervention; and o investing in software and hardware systems upgrades that will improve the integration of our sales, finance and accounting departments and improve the accuracy of our revenue reporting. As required by Rule 13a-15(b) of the Exchange Act, Symbol has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and 40 procedures. The evaluation examined those disclosure controls and procedures as of June 30, 2004, the end of the period covered by this report. Based upon the evaluation, Symbol's management, including its Chief Executive Officer and its Chief Financial Officer, concluded that, as of June 30, 2004, Symbol's disclosure controls and procedures were effective, except as described above, at the reasonable assurance level to ensure that information required to be disclosed in Symbol's reports filed or submitted under the Exchange Act was accumulated and communicated to Symbol's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. It will take some time before we have in place the rigorous disclosure controls and procedures, including internal controls and procedures, that our Board of Directors and senior management are striving for. As a result of our efforts, however, we believe that our Condensed Consolidated Financial Statements fairly present, in all material respects, our financial condition, results of operations and cash flows as of, and for, the periods presented and that this Quarterly Report on Form 10-Q contains the information required to be included in accordance with the Exchange Act. During the six months ended June 30, 2004, we continued to make improvements in our financial reporting by continuing to hire qualified personnel and refine our processes and procedures of manual transactions. We will continue to assess our disclosure controls and procedures and will take any further actions that we deem necessary. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 9 in the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is hereby incorporated by reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 41 (b) The following Reports on Form 8-K were filed during the quarter ended June 30, 2004: - ------------------------------------------------------------------------------------------- Date Filed Item No.(s) Description - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- April 1, 2004 5 and 7 Announcement and filing of new employment agreement with William R. Nuti. - ------------------------------------------------------------------------------------------- April 1, 2004 5 and 7 Announcement and filing of letter regarding change in Registrant's certifying accountant. - ------------------------------------------------------------------------------------------- May 7, 2004 5 and 7 Issuing of press release announcing adverse ruling in SmartMedia litigation. - ------------------------------------------------------------------------------------------- May 12, 2004 7 and 12 Issuing of press release announcing unaudited results for the first quarter of 2004. - ------------------------------------------------------------------------------------------- May 13, 2004 5 and 7 Issuing of press release announcing update to status of SmartMedia litigation. - ------------------------------------------------------------------------------------------- 42 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYMBOL TECHNOLOGIES, INC. Dated: July 30, 2004 By: /s/ William R. Nuti ------------------- William R. Nuti Chief Executive Officer, President and Director (principal executive officer) Dated: July 30, 2004 By: /s/ Mark T. Greenquist ---------------------- Mark T. Greenquist Senior Vice President and Chief Financial Officer (principal financial officer) Dated: July 30, 2004 By: /s/ James M. Conboy ------------------- James M. Conboy Vice President - Controller and Chief Accounting Officer (principal accounting officer) 43