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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 September 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 [X] NO [ ]
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 November 1, 2004, was as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $0.01 240,642,080
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................................................. 1
Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited) and December
31, 2003............................................................................... 1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2004 and 2003 (Unaudited) ............................................... 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
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.................................. 41
Item 4. Controls and Procedures..................................................................... 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 44
Item 6. Exhibits................................................................................... 44
Signatures...................................................................................................... 45
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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- --------------
ASSETS (Unaudited)
Cash and cash equivalents.................................................... $ 231,528 $ 150,017
Accounts receivable, less allowance for doubtful accounts of $11,528 and
$13,946, respectively..................................................... 99,763 152,377
Inventories.................................................................. 223,284 212,862
Deferred income taxes........................................................ 174,616 182,571
Other current assets......................................................... 32,021 36,204
-------------- --------------
Total current assets...................................................... 761,212 734,031
Property, plant and equipment, net........................................... 228,057 210,888
Deferred income taxes........................................................ 217,296 228,470
Investment in marketable securities.......................................... 76,211 102,136
Goodwill..................................................................... 504,549 302,467
Intangible assets, net....................................................... 48,091 33,729
Restricted cash.............................................................. 50,147 --
Other assets................................................................. 32,213 34,797
-------------- --------------
Total assets.............................................................. $ 1,917,776 $ 1,646,518
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses........................................ $ 431,067 $ 490,666
Short term credit facility................................................... 250,000 --
Current portion of long-term debt............................................ 6,970 234
Deferred revenue............................................................. 43,025 34,615
Income taxes payable......................................................... 9,178 5,468
Accrued restructuring expenses............................................... 10,400 5,240
-------------- --------------
Total current liabilities................................................. 750,640 536,223
Long-term debt, less current maturities...................................... 84,572 99,012
Deferred revenue............................................................. 22,775 19,729
Other liabilities............................................................ 45,878 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 270,575
shares and 256,897 shares, respectively................................... 2,705 2,569
Additional paid-in capital................................................... 1,466,386 1,342,229
Accumulated other comprehensive earnings, net................................ 1,816 4,498
Deferred compensation........................................................ (17,146) --
Accumulated deficit.......................................................... (141,022) (189,669)
-------------- --------------
1,312,739 1,159,627
LESS:
Treasury stock, at cost, 29,735 shares and 26,130 shares, respectively....... (298,828) (239,029)
-------------- --------------
Total stockholders' equity................................................ 1,013,911 920,598
-------------- --------------
Total liabilities and stockholders' equity......................... $ 1,917,776 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------------------------
2004 2003 2004 2003
--------- ----------- ----------- -----------
REVENUE:
Product ................................... $ 353,887 $ 308,785 $ 1,058,728 $ 909,784
Services .................................. 75,265 68,325 222,860 227,492
--------- ----------- ----------- -----------
429,152 377,110 1,281,588 1,137,276
COST OF REVENUE:
Product cost of revenue ................... 174,357 158,861 526,675 480,247
Services cost of revenue .................. 54,082 51,347 162,589 165,866
--------- ----------- ----------- -----------
228,439 210,208 689,264 646,113
--------- ----------- ----------- -----------
Gross profit .............................. 200,713 166,902 592,324 491,163
--------- ----------- ----------- -----------
OPERATING EXPENSES:
Write-off of acquired in-process
research and development ............... 12,800 -- 12,800 --
Engineering ............................... 42,595 42,283 126,214 117,468
Selling, general and administrative ....... 125,102 98,023 366,230 305,473
(Recovery)/provision for legal
settlements ............................ (12,400) -- (21,400) 72,000
Stock based compensation expense .......... -- 7,640 2,234 9,872
Restructuring and impairment charges ...... 3,957 958 4,466 1,181
--------- ----------- ----------- -----------
172,054 148,904 490,544 505,994
--------- ----------- ----------- -----------
Earnings/(loss) from operations ........... 28,659 17,998 101,780 (14,831)
Other income/(expense), net ............... 25 (2,733) (6,927) (2,245)
--------- ----------- ----------- -----------
Earnings/(loss) before income taxes ....... 28,684 15,265 94,853 (17,076)
Provision for/(benefit from) income
taxes ............................ 10,893 3,746 41,463 (4,197)
--------- ----------- ----------- -----------
NET EARNINGS/(LOSS) ....................... $ 17,791 $ 11,519 $ 53,390 $ (12,879)
========= =========== =========== ===========
EARNINGS/(LOSS) PER SHARE:
Basic ..................................... $ 0.07 $ 0.05 $ 0.23 $ (0.06)
========= =========== =========== ===========
Diluted ................................... $ 0.07 $ 0.05 $ 0.22 $ (0.06)
========= =========== =========== ===========
CASH DIVIDENDS DECLARED PER COMMON
SHARE ............................ $ 0.01 $ 0.01 $ 0.02 $ 0.02
========= =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic ..................................... 239,342 230,770 235,533 230,690
Diluted ................................... 241,402 237,091 239,466 230,690
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
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2004 2003
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss)................................................ $ 53,390 $ (12,879)
ADJUSTMENTS TO RECONCILE NET EARNINGS/(LOSS) TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant and equipment..... 42,053 39,781
Other amortization................................................. 12,209 11,998
Provision for losses on accounts receivable........................ 1,989 7,363
Provision for inventory writedown.................................. 12,174 22,412
Deferred income tax provision/(benefit)............................ 41,463 (4,197)
Write-off of acquired in-process research and development.......... 12,800 --
Non-cash restructuring, asset impairment and other charges......... 14,233 3,560
Stock based compensation from variable accounting.................. 2,234 9,872
Stock based compensation from restricted shares.................... 1,138 --
Loss on disposal of property, plant and equipment and other assets. 334 4
Change in fair value of derivative................................. (24,608) 20,855
Unrealized holding loss/(gain) on marketable securities............ 25,750 (26,790)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable............................................. 49,210 26,099
Inventories..................................................... (17,798) 46,661
Other assets.................................................... 11,200 (1,425)
Accounts payable and accrued expenses........................... (70,840) 43,091
Accrued restructuring expenses.................................. (4,126) (1,182)
Other liabilities and deferred revenue.......................... 2,777 1,265
----------- ----------
Net cash provided by operating activities.................... 165,582 186,488
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in other companies, net of cash acquired................ (239,329) (15,104)
Proceeds from disposal of property, plant and equipment and other
assets.......................................................... -- 1,362
Purchases of property, plant and equipment......................... (60,248) (36,414)
Restricted cash.................................................... (50,000) --
Investments in intangible and other assets......................... (2,903) (4,642)
----------- ----------
Net cash used in investing activities........................... (352,480) (54,798)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt...................... (238) (86,713)
Proceeds from short-term financing and long-term debt.............. 257,150 --
Proceeds from exercise of stock options and warrants............... 40,452 4,623
Purchase of treasury shares........................................ (26,374) (5,110)
Dividends paid..................................................... (2,338) (4,624)
----------- ----------
Net cash provided by (used in) financing activities............. 268,652 (91,824)
----------- ----------
Effects of exchange rate changes on cash and cash equivalents...... (243) 4,930
----------- ----------
Net increase in cash and cash equivalents.......................... 81,511 44,796
Cash and cash equivalents, beginning of period..................... 150,017 76,121
----------- ----------
Cash and cash equivalents, end of period..................... $ 231,528 $ 120,917
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest........................................................... $ 16,584 $ 5,116
Income taxes....................................................... $ 10,721 $ 2,659
See notes to Condensed Consolidated Financial Statements.
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2004 AND
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 deliver products and solutions that capture, move and manage
information in real time to and from the point of business activity. Symbol
enterprise mobility solutions integrate advanced data capture products, mobile
computing platforms, wireless infrastructure, mobility software and services
programs under the Symbol Enterprise Mobility Services brand.
The Condensed Consolidated Financial Statements include the accounts of
Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "Symbol" or "we" or "our" or "us" or the "Company" refer to
Symbol Technologies, Inc. and subsidiaries unless the context specifically
requires otherwise. The Condensed Consolidated Financial Statements have been
prepared by us, without audit, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include
all necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of September 30, 2004, and the results of our
operations and cash flows for the three and nine months ended September 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 nine months ended September 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.
Reclassifications
Certain reclassifications were made to previously disclosed amounts to
conform to current presentations.
Stock-Based Compensation
We account for our employee stock option plans under the intrinsic value
method in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB Opinion No. 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of the grant. Except in connection with certain restricted stock
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-
4
Based Compensation," which allows entities to continue to apply the provisions
of APB Opinion No. 25 for transactions with employees and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock grants
made as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
The following table illustrates the effect on net earnings/(loss) and
earnings/(loss) per share if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- ---------- ---------- ----------
Net earnings/(loss) - as reported ......................................... $ 17,791 $ 11,519 $ 53,390 $ (12,879)
Stock based compensation expense included in reported net
earnings/(loss), net of related tax effects ............................ 469 4,699 2,074 6,071
Less total stock based compensation expense determined under the fair value
based method for all awards, net of related
tax effects ............................................................ (6,017) (5,450) (16,297) (14,824)
-------- ---------- ---------- ----------
Pro forma net earnings/(loss) ............................................. $ 12,243 $ 10,768 $ 39,167 $ (21,632)
======== ========== ========== ==========
Basic net earnings/(loss) per share:
As reported ............................................................ $ 0.07 $ 0.05 $ 0.23 $ (0.06)
Pro forma .............................................................. $ 0.05 $ 0.05 $ 0.17 $ (0.09)
Diluted net earnings / (loss) per share:
As reported ............................................................ $ 0.07 $ 0.05 $ 0.22 $ (0.06)
Pro forma .............................................................. $ 0.05 $ 0.05 $ 0.16 $ (0.09)
The weighted average fair value of options granted during the three and
nine months ended September 30, 2004 and 2003 was $6.80 and $8.07, and $6.86 and
$7.00 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 nine months ended September 30, 2004
and 2003, we used the 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 September 30, 2004 of $50,147 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 recognized by the Company. (See note 9c)
5
2. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Raw materials ..... $ 73,268 $ 66,500
Work-in-process.... 25,900 24,422
Finished goods..... 124,116 121,940
-------- --------
$223,284 $212,862
======== ========
The amounts shown above are net of inventory reserves of $62,503 and
$109,331 as of September 30, 2004 and December 31, 2003, respectively, and
include inventory on consignment of $56,875 and $34,564 as of September 30, 2004
and December 31, 2003, respectively.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2004 are as follows:
PRODUCT SERVICES TOTAL
-------- -------- --------
Balance as of December 31, 2003..... $246,253 $ 56,214 $302,467
Acquisition of Matrics(a) .......... 199,509 - 199,509
Brazil acquisition(b) .............. 1,552 253 1,805
Trio acquisition(c) ................ 660 - 660
Translation adjustments ............ 59 49 108
-------- -------- --------
Balance as of September 30, 2004.... $448,033 $ 56,516 $504,549
======== ======== ========
(a) See Note 8a.
(b) See Note 8b.
(c) See Note 8c.
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
----------------------------- -------------------------------
ACCUMULATED ACCUMULATED
GROSS AMOUNT AMORTIZATION GROSS AMOUNT AMORTIZATION
------------- -------------- ------------ ----------------
Patents, trademarks and tradenames............... $ 38,585 $ (16,858) $ 35,080 $ (24,670)
Purchased technology............................. 33,500 (12,636) 27,800 (9,652)
Other............................................ 9,850 (4,350) 7,250 (2,079)
------------- -------------- ------------ ----------------
$ 81,935 $ (33,844) $ 70,130 $ (36,401)
============= ============== ============ ================
The amortization expense for the three months ended September 30, 2004 and
2003 amounted to $2,214 and $3,336, respectively. The amortization expense for
the nine months ended September 30, 2004 and 2003 amounted to $7,658 and $7,794,
respectively. In addition, during the three months ended September 30, 2004, the
Company wrote-off $2,409 of certain acquired trademark and customer list
intangible assets from its acquisition of @pos.com that it determined was
impaired.
Estimated amortization expense for the above intangible assets, assuming
no additions or writeoffs, for the three months ended December 31, 2004 and for
each of the subsequent years ending December 31 is as follows:
6
2004 (three months)........................................ $ 3,175
2005....................................................... 12,675
2006....................................................... 10,061
2007....................................................... 9,559
2008....................................................... 8,347
Thereafter................................................. 4,274
----------
$ 48,091
==========
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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Numerator:
Earnings/(loss) applicable to common
shares for basic and diluted calculation $ 17,791 $ 11,519 $ 53,390 $(12,879)
======== ========= ======== ========
Denominator:
Weighted-average common shares ............ 239,342 230,770 235,533 230,690
Effect of dilutive securities:
Stock options and warrants ............. 2,059 6,321 3,894 --
Restricted Stock ....................... 1 -- 39 --
-------- --------- -------- --------
Denominator for diluted calculation ....... 241,402 237,091 239,466 230,690
======== ========= ======== ========
Stock options and warrants outstanding for the three months ended
September 30, 2004 and 2003 aggregating 17,068 and 16,264, 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 nine months ended September
30, 2004 and 2003 aggregating to 10,932 and 18,134, 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 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.
This deferred compensation is shown as a component of stockholders equity in the
accompanying condensed consolidated balance sheets. The non-employee director
restricted stock awards totaled 20 shares and cliff-vest at January 1, 2005. The
remaining 900 executive restricted stock awards cliff-vest in five years
provided the Company's return on net assets for four consecutive
7
quarters does not exceed 16.4%. If the Company's return on net assets for any
four consecutive quarters exceeds 16.4% as defined in the grant document,
portions of the executive restricted stock awards vesting will be accelerated.
Compensation expense related to these awards currently is estimated to be $749
per quarter and could accelerate if targets are met.
On September 27, 2004, the Company granted 420 shares of restricted stock
awards to certain employees associated with the Matrics, Inc. acquisition; one a
service based grant (210 shares) and another a performance accelerated grant
(210 shares). On the date of grant the market value of these awards aggregated
$5,279. This deferred compensation is shown as a component of stockholders
equity in the accompanying condensed consolidated balance sheets. The service
based grants vest 30 percent in eighteen months, with the remaining 70 percent
vesting three years from the date of the grant. The performance accelerated
grants cliff vest in five years from the date of the grant. Compensation expense
related to these awards currently is estimated to be $418 per quarter and can
accelerate if targets are met.
b. Comprehensive Earnings/(Loss)
The components of comprehensive earnings/(loss) are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------------
2004 2003 2004 2003
--------- ------------ ------------ ----------
Net earnings/(loss) $ 17,791 $ 11,519 $ 53,390 $ (12,879)
Other comprehensive income:
Change in unrealized gains and losses on
available-for-sale securities, net of tax (306) (122) (107) 34
Change in unrealized fair value of derivative
instruments, net of tax (98) (170) (232) 790
Translation adjustments, net of tax 9,759 (4,860) (2,343) (10,851)
--------- ------------ ----------- ----------
Total comprehensive earnings(loss) $ 27,146 $ 6,367 $ 50,708 $ (22,906)
========= ============ =========== ==========
c. Dividends
On July 26, 2004, Symbol's Board of Directors approved a $0.01 per share
semi-annual cash dividend, which amounted to $2,405 and was paid on October 8,
2004 to shareholders of record on September 17, 2004.
On February 10, 2004, Symbol's Board of Directors approved a $0.01 per
share semi-annual cash dividend, which amounted to $2,338 and was paid on April
9, 2004 to shareholders of record on March 19, 2004.
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 obligations was included in accrued
restructuring expenses as of December 31, 2003. During the nine months ended
8
September 30, 2004, $35 was paid and as of September 30, 2004, $26 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 September 30, 2004 is $819 of net lease obligations
relating to these manufacturing restructuring charges.
LEASE
OBLIGATION
COSTS
------------
Balance at December 31, 2003 ........... $ 4,356
------------
Utilization/payments ................... (304)
Anticipated sub-lease income adjustment. (2,860)
------------
Balance at March 31, 2004 .............. 1,192
Utilization/payments.................... (191)
------------
Balance at June 30, 2004................ 1,001
Utilization/payments ................... (182)
------------
Balance at September 30, 2004 .......... $ 819
============
c. Global Services Transition
During the first quarter of 2003, our global services organization
initiated restructuring activities that 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 were 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.
In connection with the global services transition, the Company recorded an
additional provision of $1,629 in the first quarter of 2004, $3,836 in the
second quarter of 2004 and $2,303 in the third 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, second and third quarters of 2004, respectively. These
restructuring activities are expected to be completed by the end of 2004.
d. General and Administrative Restructuring
During the second quarter of 2004, the shared services organization
initiated restructuring activities that included the consolidating and
transitioning of back office transactional activities to the Czech Republic. The
costs associated with this restructuring relate to workforce reductions. The
total amount incurred in connection with this restructuring activity was $509,
all of which was recorded as a
9
component of operating expenses in the second quarter of 2004. In the third
quarter of 2004, the Company recorded an additional provision of $3,957 relating
to workforce reductions. This was recorded as a component of operating expenses
in the third quarter of 2004. These restructuring activities are expected to be
completed in the first quarter of 2005. Further shared service restructuring
activities are being considered and future benefits are not yet defined,
therefore, we cannot reasonably estimate the remaining cost expected to be
incurred.
Details of the global services transition and general and administrative
restructuring charges and remaining balances as of September 30, 2004 are as
follows:
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
Provision - cost of revenues . 2,303 -- -- 2,303
Provision - operating expenses 3,957 -- -- 3,957
Translation adjustments ...... -- -- (48) (48)
Utilization/payments ......... (2,075) (502) (21) (2,598)
---------- ---------- -------- -------
Balance at September 30, 2004 $ 6,160 $ 3,260 $ 135 $ 9,555
========== ========== ======== =======
7. SHORT-TERM FINANCING AND LONG-TERM DEBT
In connection with the acquisition of Matrics, Inc. we entered into a
short-term credit facility in the amount of $250,000. The facility, which is a
senior unsecured borrowing, initially has an annual interest rate of three-month
LIBOR plus 400 basis points and matures on September 9, 2005. The annual
interest rate will increase by 100 basis points on November 1, 2004 and will
increase by an additional 50 basis points at the end of each one-month period
thereafter until September 9, 2005, but will not exceed 11.5% (or 13.5% if there
is an event of default). If the short-term credit facility is not repaid in full
prior to September 9, 2005, it may be converted to exchange notes pursuant to an
indenture that will mature on September 9, 2011.
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 3.59% at September 30,
2004, or the base rate of the syndication agent bank, which approximated 4.75%
at September 30, 2004. This secured credit line expires in May 2006. As of
September 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.
10
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 Systems, Inc. ("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 of $174,200 at September 30, 2004 and December 31, 2003, net of
the derivative asset of $96,565 and $75,273, respectively, represents $77,635
and $98,927 of the total long-term debt balance outstanding at September 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 have plans
to terminate the SAILS arrangement prior to its scheduled maturity date.
8. ACQUISITIONS
a. Matrics, Inc.
On September 9, 2004, we consummated the acquisition of privately held
Matrics, Inc. ("Matrics"). Based in Rockville, Maryland, Matrics is a leader in
developing Electronic Product Code ("EPC")-compliant Radio Frequency
Identification ("RFID") systems. RFID is a next generation data capture
technology that utilizes small tags that emit radio signals. Attaching a tag to
products or assets allows for remote reading of information relevant to the
asset. While similar to a bar code, RFID does not require physical contact
between the reader and the tag, or even a line of sight, it provides the ability
to capture more data more efficiently and is beneficial in areas such as supply
chain management, asset tracking and security. We believe the acquisition of
Matrics is an important step in executing our plan to be a leader in RFID, and
will expand our product offerings.
Matrics has focused its strategic RFID solutions efforts on Electronic
Product Code standards, which are the emerging global RFID standards. Matrics
has developed EPC-compliant RFID systems for retail, defense, transportation and
other vertical markets. The Matrics product portfolio features RFID systems
including multi-protocol, EPC-compliant fixed readers; readers designed for
embedded applications, such as RFID printers and mobile computers;
high-performance antennas for RFID tag reading; and EPC labels that can be
attached to items such as containers, pallets, cartons and more. The RFID tag
family includes both read-only and read/write functionality to address a wide
range of asset visibility applications. Matrics is also developing a proprietary
manufacturing process that is expected to provide for higher volume and more
cost effective manufacturing of tags. On October 29, 2004, Matrics was merged
with and into the Company.
The aggregate purchase price of $238,049 consisted of $230,000 in cash
payments to the sellers and $8,049 in direct transaction costs, primarily
professional fees. The purchase price was funded from borrowings under the
$250,000 short-term credit facility (see note 7).
11
The results of Matrics have been included in Symbol's consolidated
financial statements since September 9, 2004, the acquisition date. Shown below
is the preliminary purchase price allocation, which summarizes the fair value of
the assets acquired and liabilities assumed at the date of acquisition.
Current assets........................................... $ 12,703
Deferred income taxes.................................... 10,780
Other assets............................................. 763
Identifiable intangible assets:
Proprietary technology and know how (4 year useful life) $5,700
Patents (4 year useful life) ............................ 3,500
Customer relationships (5 year useful life) ............. 4,700
Covenants not to compete (1.5 year useful life) ......... 600
------
Total identifiable intangible assets..................... 14,500
In-process research and development...................... 12,800
Goodwill................................................. 199,509
Deferred tax liability................................... (5,583)
Other liabilities assumed................................ (7,423)
--------
Net assets acquired...................................... $238,049
========
In accordance with FASB Interpretation No. 4 "Applicability of FASB
Statement No. 2 to Business Combination Accounted for by the Purchase Method",
the $12,800 allocated to acquired in-process research and development was
written off immediately following the acquisition. Current assets above includes
acquired cash of $3,431.
The following unaudited pro forma consolidated financial information for
the three and nine months ended September 30, 2004 and 2003, give effect to the
acquisition as if it had been consummated as of the earliest period presented,
after giving effect to the following adjustments (i) amortization of acquired
intangible assets (ii) Symbol's financing costs, consisting of interest expense
on the $250,000 short term credit facility that would have been incurred had the
acquisition occurred as of January 1, 2003 and the amortization of the debt
issuance costs over the term (one-year) of the short term credit facility and
(iii) the related income tax effects.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------------
2004 2003 2004 2003
-------- -------- ---------- -----------
Revenue ......................... $431,629 $377,804 $1,288,773 $ 1,139,951
Net earnings/(loss) ............. 10,360 7,449 29,762 (29,849)
Diluted earnings/(loss) per share .04 .03 .12 (.13)
The unaudited pro forma consolidated financial information is presented
for comparative purposes only and is not intended to be indicative of the actual
results that would have been achieved had the transaction been consummated as of
the dates indicated above, nor does it purport to indicate results that may be
attained in the future.
b. Brazil Acquisition
12
During 2002, we entered into an agreement with the owners of Seal Sistem
as 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 was
reorganized into a corporation and it will eventually become a wholly owned
subsidiary of the Company.
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 nine months ended September 30, 2004 and 2003, respectively.
c. Trio Security, Inc.
In June 2004, we purchased all of the issued and outstanding capital stock
of Trio Security, Inc. ("Trio"), a privately held designer and developer of next
generation security solutions for enterprise networks to enable mobile
applications for handheld devices, for $600, excluding transaction costs.
Pursuant to the acquisition agreement, $500 of the purchase price was paid in
June 2004 and $100 was paid in July 2004. The acquisition is expected to enable,
enhance and expand the range of applications for which Symbol products can be
used. The acquisition was accounted for as a purchase and accordingly, Trio's
operating results since the acquisition date have been included in Symbol's
financial statements. Trio became part of the Company's Product segment. The
assets acquired and liabilities assumed have been recorded at their estimated
fair values. All of the purchase price has been allocated to goodwill.
We have not shown the pro forma effects of the Brazil and Trio
acquisitions as the results of their operations prior to each acquisition was
immaterial in relation to our consolidated financial statements.
13
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 ... 20,365
Utilization/payment ..................... (21,100)
--------
Balance at September 30, 2004 ........... $ 20,093
========
b. Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to hedge the 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 September 30, 2004 and December 31, 2003, respectively, we had
$18,486 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 statements of operations. The fair value
of these forward exchange contracts was ($455) as of September 30, 2004, which
is recorded in current liabilities and $107 as of December 31, 2003, which was
recorded in current assets.
c. Legal Matters
From time to time, we are a party to litigation matters arising in
connection with the normal course of our business, none of which is expected to
have material adverse effect on us. In addition to the litigation matters
arising in connection with the normal course of our business, we are party to
the
14
litigation described below. An unfavorable resolution to any of the lawsuits
described below could have a material adverse effect on our business, results of
operations or financial condition.
GOVERNMENT INVESTIGATIONS
On June 3, 2004, we announced that we resolved the investigation by the
Eastern District relating to our past accounting practices by entering into a
non-prosecution agreement with the Eastern District. The subject of this
investigation related principally to the timing and amount of revenue recognized
by us 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. As a result of
this non-prosecution agreement, no criminal complaint will be filed against us.
In addition, on June 3, 2004, we announced an agreement with the SEC to resolve
allegations against us relating to our past accounting practices that were under
investigation by the SEC since May 2001. Pursuant to the agreements with the
Eastern District and the SEC, prior to June 30, 2004, we paid a total of $37,000
in cash to a restitution fund for members of the class consisting of purchasers
of our common stock from February 15, 2000 to October 17, 2002, and $3,000 to
the United States Postal Inspection Service Consumer Fraud Fund.
In addition to these payments, we have acknowledged responsibility for
previous misconduct by certain former employees and board members and agreed to
continue our cooperation with the Eastern District and the SEC, to retain an
independent, government-approved examiner to review our internal controls,
financial reporting practices and our 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.
If we violate the agreement with the Eastern District or the SEC or commit other
violations, such as accounting offenses that were not the subject of the
investigations, we have waived certain defenses that may have otherwise been
available to us, including the statute of limitations, and will be subject to
prosecution for any offense, including any offense related to our past
accounting practices. Pursuant to the agreement with the SEC, the SEC filed, and
the court has approved, a Final Consent Judgment in the Eastern District of New
York providing for injunctive relief, enjoining us from further violations of
the securities laws, and a civil penalty in the amount of $37,000, as described
above.
SECURITIES LITIGATION MATTERS
On June 3, 2004, we announced our settlement of the Pinkowitz, Hoyle and
Salerno class action lawsuits, which are described below. Under the settlement,
we agreed to pay to the class members an aggregate of $1,750 in cash and an
aggregate number of shares of common stock having a market value of $96,250,
subject to a minimum and maximum number of shares based upon the volume-weighted
moving average trading price of our common stock for the five day period
immediately prior to our payment of the common stock to the class ("Determined
Price"). If the Determined Price is greater than $16.41 per share, then we will
issue 5,865.3 shares of our common stock to the class. If the Determined Price
is between $16.41 per share and $11.49 per share, then we will issue to the
class the number of shares of common stock equal to a market value of $96,250
divided by the Determined Price. If the Determined Price is less than $11.49 per
share, we will issue 8,376.8 shares of our common stock to the class. For
example, the number of shares issuable on November 1, 2004 pursuant to the
settlement agreement would have been approximately 6,600 shares. The settlement
also provides that we have the right to pay up to an additional $6,000 in cash
to reduce the number of shares of our common stock that we are required to
deliver in an amount equal to the amount of additional cash divided by the
Determined Price. If (i) there occurs any event that would lead to the
de-listing of our common stock or our board of directors recommends the approval
of a tender offer or the purchase of a majority of our common stock or (ii) the
Determined Price is less than $11.90 per share, then the lead counsel for the
plaintiffs can require
15
us to place into escrow the number of shares that would otherwise be payable to
the class and would have the right to sell all or any portion of the escrowed
shares and invest such proceeds until distribution to the class. If we do not
deliver our common stock as required by the settlement agreement within the ten
days of such requirement, the lead counsel for the plaintiffs may terminate the
settlement agreement. The court held a fairness hearing regarding the settlement
on October 4, 2004 and approved the fairness of the settlement by an order
entered on October 20, 2004.
In addition to the payments described above, the $37,000 civil penalty
imposed by the SEC will be distributed to the class. Also, as part of the
settlement, Dr. Jerome Swartz, our co-founder and former chairman, has paid
$4,000 in cash to the class to settle the claims against him in the Pinkowitz
and Hoyle class action lawsuits.
In connection with the settlement of the class actions and government
investigations, Symbol has paid the $1,750 to the class and has recorded an
accrued liability for legal settlements of $96,250 as of September 30, 2004
which is reflected as a component of accounts payable and accrued expenses in
the accompanying condensed consolidated balance sheets.
Additionally and in connection with the class actions and government
settlement, the Company received cash of $7,200 from Dr. Jerome Swartz and
$7,500 from its officer's liability insurance carriers. These cash recoveries
have been recorded as a component of recovery for legal settlements within
operating expenses in the accompanying condensed consolidated statements of
operations for the nine months ended September 30, 2004. In addition, under the
terms of the agreement, Dr. Swartz satisfied a $2,900 obligation with the
Company by returning the net share proceeds of the stock options identified in
the agreement. The Company has reflected this receipt of shares as a capital
contribution and receipt of treasury shares in the accompanying condensed
consolidated balance sheets.
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York on behalf of purchasers of
our common stock between October 19, 2000 and February 13, 2002, inclusive,
against us and certain members of our former management and our former board of
directors. The complaint alleged that the defendants violated the federal
securities laws by issuing materially false and misleading statements throughout
the class period that had the effect of artificially inflating the market price
of our securities. This case is subject to the settlement agreement described
above.
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a class action lawsuit was filed in the United States
District Court for the Eastern District of New York against us and certain
members of our former management and our former board of directors. On May 7,
2003, a virtually identical class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints were brought on behalf of a class of
former shareholders of Telxon Corporation ("Telxon") who obtained our common
stock in exchange for their Telxon stock in connection with our acquisition of
Telxon in November 2000. The complaint alleges that the defendants violated the
federal securities laws by issuing a Registration Statement and Joint Proxy
Statement/Prospectus in connection with the Telxon acquisition that contained
materially false and misleading statements that had the effect of artificially
inflating the market price of our securities. These cases are subject to the
settlement agreement described above.
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. In addition, the
Company received $2,700 in cash from its officers' liability insurance carriers
during the third quarter of 2004. This cash recovery is shown as a component of
recovery for legal settlements within operating expenses in the accompanying
condensed consolidated statements of operations for the nine months ended
September 30, 2004. 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
17
recommendation and the district court has stated its intention to hold an
evidentiary hearing on PwC's objections. The court has scheduled an evidentiary
hearing to be conducted in December 2004.
Assuming the district court follows the magistrate judge's recommendation,
trial on the issue of damages should occur in 2005.
SMART MEDIA LITIGATION
Telxon v. Smart Media of Delaware, Inc.
On December 1, 1998, Telxon filed suit against Smart Media of Delaware,
Inc. ("SMI") in the Court of Common Pleas for Summit County, Ohio in a case
seeking a declaratory judgment that Telxon did not contract to develop SMI's
products or invest approximately $3,000 in SMI's business and that it did not
fraudulently induce SMI to refrain from engaging in business with others or
interfere with SMI's business relationships. On March 12, 1999, SMI filed its
answer and counterclaim denying Telxon's allegations and alleging counterclaims
against Telxon for negligent misrepresentation, estoppel, tortious interference
with business relationship and intentional misrepresentation and seeking
approximately $10,000 in compensatory damages, punitive damages, fees and costs.
In addition, William Dupre, an individual employed by SMI at that time, asserted
similar counterclaims against Telxon. In November 2000, Symbol acquired Telxon
with these claims still pending.
On September 17, 2003, the jury awarded approximately $218,000 in damages
against Telxon, of which approximately $6,000 was awarded to Mr. Dupre. The
court denied Telxon's motion for judgment in its favor notwithstanding the
verdict, for a new trial and for a reduction in the amount of the jury verdicts.
On May 6, 2004, the court entered judgment against Telxon for
approximately $218,000 in damages, plus statutory interest from the date of the
verdicts and granted a motion to add Symbol as a counterclaim defendant with
respect to the counterclaims asserted by Mr. Dupre. Prior to these court
rulings, SMI withdrew its motion to add Symbol as a counterclaim defendant with
respect to the counterclaims asserted by SMI. We and Telxon have filed notices
of appeal of these rulings and the related verdicts. Symbol and Telxon have
deposited $50,000 into an interest-bearing court escrow account to stay
execution of the judgment against both Symbol and Telxon pending resolution of
the appeal.
Our available cash, including cash available under our existing lines of
credit, may not be sufficient to pay jury verdicts of this size and we may need
to obtain additional financing in order to pay the judgment entered against
Telxon in this matter. In addition, we currently have not recorded any liability
in our consolidated financial statements with respect to the jury verdicts and
the judgment entered as we believe that, in accordance with the relevant
guidance set forth in Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," an unfavorable outcome of this litigation is not
probable at this time. However, there can be no assurance that we will not be
found to be ultimately liable for the full amount of the judgment, plus
statutory interest from the date of the verdicts.
18
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.
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. Following the ruling on Proxim's equitable
defenses, the parties engaged in settlement discussions which culminated in a
settlement dated as of September 13, 2004. The specific terms of the settlement
are confidential. However, Symbol announced that Proxim will pay Symbol $22,750
over the ten quarters beginning the quarter ending September 30, 2004 for
previous sales of infringing products. Proxim will also pay Symbol a royalty fee
for future sales of WLAN products covered by Symbol patents for the life of
those patents, as well as transfer certain patents and patent applications to
Symbol. Symbol values these royalty payments and patent transfers as the
equivalent of a
19
six percent royalty rate. Symbol received $2,500 in cash from Proxim in
September 2004 which is reflected as a component of other income in the
accompanying condensed consolidated statements of operations for the three and
nine month period ended September 30, 2004. The Company will record other income
as additional cash is received from the settlement.
In addition, the patents transferred to Symbol from Proxim were valued by
the Company at approximately $8,600. Symbol has treated this transfer as part of
the six percent royalty due Symbol for royalties on future sales of WLAN
products covered by Symbol patents. Accordingly, Symbol recorded an asset of
$8,600 and a corresponding deferred credit in an equal amount and will amortize
these amounts over the life of the patents.
Metrologic Instruments, Inc. v. Symbol Technologies, Inc.
On June 19, 2003, Metrologic Instruments, Inc. ("Metrologic") filed a
complaint against us in the United States District Court, District of New
Jersey, alleging patent infringement and breach of contract, and seeking
monetary damages of approximately $2,300 (as of March 31, 2004) and termination
of the cross-licensing agreement between the parties. We answered the complaint
and asserted counterclaims for declaratory judgments of invalidity and
noninfringement of Metrologic's patents and for non-breach of the
cross-licensing agreement. We intend to defend the case vigorously on the
merits.
Symbol Technologies, Inc. et al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership
On July 21, 1999, we and six other members of the Automatic Identification
and Data Capture industry ("Auto ID Companies") jointly initiated a lawsuit
against the Lemelson Medical, Educational, & Research Foundation, Limited
Partnership ("Lemelson Partnership"). The suit was commenced in the United
States District Court, District of Nevada in Reno, Nevada, but was subsequently
transferred to the federal court in Las Vegas, Nevada. In the litigation, the
Auto ID Companies seek, among other remedies, a declaration that certain
patents, which have been asserted by the Lemelson Partnership against end users
of bar code equipment, are invalid, unenforceable and not infringed.
The Lemelson Partnership has contacted many of the Auto ID Companies'
customers demanding a one-time license fee for certain so-called "bar code"
patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson.
We have received many requests from our customers asking that we undertake the
defense of these claims using our knowledge of the technology at issue, and the
other Auto ID Companies have received similar requests. Certain of our customers
have requested indemnification against the Lemelson Partnership's claims from
us, and certain customers of the other Auto ID Companies have requested similar
indemnification from them, individually and/or collectively with other equipment
suppliers. We believe that generally we have no obligation to indemnify our
customers against these claims and that the patents being asserted by the
Lemelson Partnership against our customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
On January 23, 2004, the court concluded that Lemelson's patent claims are
unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the court are not infringed by us because
use of the accused products does not satisfy one or more of the limitations of
each and every asserted claim; and that the claims are invalid for lack of
enablement even if construed in the manner urged by Lemelson. The court entered
its judgment in favor of Symbol and the other Auto ID Companies on January 23,
2004. The Lemelson Partnership filed several post-trial motions all of which
were denied by the court. The Lemelson Partnership filed a notice of appeal on
June 23, 2004.
Intermec IP Corp. v. Matrics, Inc.
20
On June 7, 2004, Intermec IP Corporation ("Intermec") filed suit against
Matrics in the Federal District Court in Delaware asserting infringement of four
patents owned by Intermec relating to RFID readers and RFID tags. The complaint
against Matrics seeks payment of a "reasonable royalty" as well as an injunction
against Matrics from infringing such patents. On September 9, 2004, we
consummated the acquisition of Matrics. We intend to defend the case vigorously
on the merits.
Nanopower Technologies, Inc. v. Symbol Technologies, Inc. and Matrics Technology
Systems, Inc.
On August 11, 2004, Nanopower Technologies, Inc. ("Nanopower"), a
California corporation, filed a civil suit against Matrics and Symbol in state
court in California. The suit alleges that Matrics breached a consulting
agreement, confidentiality agreement and intellectual property licensing
agreement pertaining to certain ultra low voltage RFID tag start-up technology
to which Nanopower claims ownership and that the defendants violated California
state law relating to the protection of trade secrets. The suit also named
Symbol as a defendant because of Symbol's announced intention to purchase
Matrics. Nanopower alleges that Symbol (i) has improperly received disclosure of
Nanopower's confidential information, (ii) has, or will, misappropriate
Nanopower's trade secrets as a consequence of the acquisition of Matrics and
(iii) will benefit from the alleged breaches of intellectual property licensing
and consulting agreements. On September 9, 2004, Symbol consummated the
acquisition of Matrics.
Matrics' agreements with Nanopower provide for mandatory arbitration of
these disputes in Washington, DC and contain an exclusive venue clause requiring
any effort to obtaining injunctive relief to be filed in Maryland. The state
court complaint was removed to federal court and Matrics has filed a motion to
transfer the suit to Maryland in anticipation of a subsequent stay pending
arbitration. On October 1, 2004, before the Court heard Matrics' motion,
Nanopower agreed to and the parties filed a stipulation to stay the case pending
mediation, and, if necessary, arbitration.
OTHER LITIGATION
Barcode Systems, Inc. v. Symbol Technologies Canada, Inc. and Symbol
Technologies, Inc.
On March 19, 2003, Barcode Systems, Inc. ("BSI") filed an amended
statement of claim in the Court of Queen's Bench in Winnipeg, Canada, naming
Symbol Technologies Canada, Inc. and Symbol as defendants. BSI alleges that we
deliberately, maliciously and willfully breached our agreement with BSI under
which BSI purported to have the right to sell our products in western Canada and
to supply Symbol's support operations for western Canada. BSI has claimed
damages in an unspecified amount, punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated
any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,300, representing the unpaid balance of products sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the Canadian
Competition Tribunal ("Tribunal"). BSI is seeking an Order from the Tribunal
that would require us to accept BSI as a customer on the "usual trade terms" as
they existed prior to the termination of their agreement in April 2003. The
Tribunal granted leave for BSI to proceed with its claim against us on January
15, 2004. We filed an appeal of the Tribunal's decision before the Federal Court
of Appeals on January 26, 2004, and a brief in support of the appeal on April
22, 2004. On October 7, 2004, the Federal Court of Appeals dismissed Symbol's
appeal, allowing BSI to make its application before the Tribunal against Symbol.
21
On November 17, 2003, BSI filed an additional lawsuit in British Columbia,
Canada against us and a number of our distributors alleging that we refused to
sell products to BSI, conspired with the other defendants to do the same and
used confidential information to interfere with BSI's business. We intend to
defend against these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata v. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata filed
a lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico")
in October 2003 to reclaim property on which our Reynosa facility is located.
The lawsuit was filed before the First Civil Judge of First Instance, 5th
Judicial District, in Reynosa, Tamaulipas, Mexico. The First Civil Judge ordered
the recording of a lis pendens with respect to this litigation before the Public
Register of Property in Cd. Victoria, Tamaulipas.
The plaintiff alleges that she is the legal owner of a tract of land of
100 hectares, located within the area comprising the Rancho La Alameda,
Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas,
irrigation district. The plaintiff is asking the court to order Symbol Mexico to
physically and legally deliver to the plaintiff the portion of land occupied by
Symbol Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial Reynosa
from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument. An
Owner's Policy of Title Insurance was issued by Stewart Title Guaranty Company
in connection with the above-mentioned transaction in the amount of $13,400. A
Notice of Claim and Request for Defense of Litigation was duly delivered on
behalf of Symbol to Stewart Title Guaranty Company on November 4, 2003. The
matter is currently awaiting the decision of the Court.
Bruck Technologies Handels GmbH European Commission Complaint
In February 2004, we became aware of a notice from the European
Competition Commission ("EC") of a complaint lodged with it by Bruck
Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol
PartnerSelect(TM) program violate Article 81 of the EC Treaty. Bruck has asked
the EC to impose unspecified sanctions. We have provided all information
requested by the EC. No action has been taken and the matter is pending. We
intend to defend against these claims vigorously.
SECURITIES LITIGATION MATTERS IN WHICH SYMBOL HAS BEEN REALIGNED AS PLAINTIFF
Bildstein v. Symbol Technologies, Inc., et al.
On April 29, 2003, a shareholder derivative lawsuit was filed in the
United States District Court for the Eastern District of New York against
certain members of our former management and board of directors and against
Symbol as a nominal defendant. The plaintiff alleged that the defendants
violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9
promulgated thereunder and common and state law by authorizing the distribution
of proxy statements in 2000, 2001 and 2002. Plaintiff sought the cancellation of
all affirmative votes at the annual meetings for 2000, 2001 and 2002, the
cancellation of all awards under the option plans approved pursuant to those
proxy statements, an injunction preventing the implementation of those option
plans and all awards thereunder and an accounting by the defendants for all
injuries and damages suffered by Symbol, plus all costs and expenses, including
but not limited to attorneys' fees, incurred in connection with the action.
In September 2004, the court approved a settlement that Symbol reached
with the plaintiff. As part of the settlement, Symbol and the plaintiffs agreed
to a stipulation pursuant to which Symbol was
22
realigned as plaintiff, and the action dismissed without prejudice so as to
permit Symbol to pursue the claims asserted in the Gold litigation described
below. As part of the stipulation, Symbol agreed to pay and has since paid $120
to Bildstein's counsel for services rendered in the case.
Gold v. Symbol Technologies, Inc., et al.
On December 18, 2003, a derivative action lawsuit was filed in the Court
of Chancery of the State of Delaware against Symbol and certain of our former
senior management. The complaint alleges that the defendants violated the
federal securities laws by issuing materially false and misleading statements
from January 1, 1998 through December 31, 2002 that had the effect of
artificially inflating the market price of Symbol's securities and that the
defendants (1) failed to properly oversee or implement policies, procedures and
rules to ensure compliance with federal and state laws requiring the
dissemination of accurate financial statements, which ultimately caused Symbol
to be sued for, and exposed to liability for, violations of the anti-fraud
provisions of the federal securities laws, (2) engaged in insider trading in
Symbol's common stock, (3) wasted corporate assets and (4) improperly awarded a
severance of approximately $13,000 to Tomo Razmilovic, one of our former
Presidents and Chief Executive Officers. Plaintiff sought to recover
incentive-based compensation paid to certain of our former senior management in
reliance on materially inflated financial statements and to impose a trust to
recover cash and other valuable assets received by the former senior management
defendants and former Symbol board members.
On July 27, 2004, the court approved a settlement that Symbol reached with
the plaintiff. The settlement calls for the lawsuit to continue as direct
litigation by Symbol on its own behalf against the defendants. As part of the
settlement, the plaintiff consented to entry of Symbol's proposed order, under
which Symbol will now be the plaintiff in the case. Symbol plans to continue to
pursue this lawsuit vigorously and, as part of the settlement, has agreed to pay
$185 to cover the reasonable legal fees of the plaintiff's lawyers. On October
28, 2004, Symbol filed its amended complaint in this action.
10. INCOME TAXES
The Company's effective tax rate for the three months ended September 30,
2004 is 37.98 percent. This differs from the statutory rate of 35.0 percent
primarily due to the change in estimate of the deductible portion of the class
action settlement and the write-off of In-Process Research and Development
associated with the acquisition of Matrics, offset by the allocable portion of
the annual forecast of the tax benefits of research credits, the release of
valuation allowance and income exempt from taxation. Without the Matrics
acquisition, the tax rate for the three months ended September 30, 2004 would
have been 28.07 percent.
The overall tax rate of 43.71 percent remains higher than the 35.0 percent
statutory rate due to the items discussed above. Without the Matrics
acquisition, the tax rate would have been 39.0 percent.
23
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 nine months ended September 30, 2004 and 2003 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
------- -------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost .................................. $ 370 $ 371 $ 1,110 $ 1,115
Interest cost .................... ............ 322 338 966 1,014
Amortization of prior service cost ............ 66 66 198 198
Recognized actuarial loss ..................... -- 53 -- 159
------- -------- -------- --------
Net periodic benefit cost ..................... $ 758 $ 828 $ 2,274 $ 2,486
======= ======== ======== ========
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 September 30, 2004, $266
has been paid and we anticipate contributing an additional $115 before the end
of 2004 to cover the expected benefit payments for the Plan in 2004, bringing
the total to $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, RFID, wireless communication
equipment and other peripheral products and also receives royalties. The
Services segment provides solutions that connect our data capture equipment and
mobile computing devices to wireless networks. This segment also provides
worldwide comprehensive repair, maintenance, integration and support in the form
of service contracts or repairs on an as-needed basis. We use many factors to
measure performance and allocate resources to these two reportable segments. The
primary measurements are sales and gross profit. The accounting policies of the
two reportable segments are essentially the same as those used to prepare our
consolidated financial statements. We rely on our internal management system to
provide us with necessary sales and 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, we do not allocate research and development, sales and marketing,
or general and administrative expenses. We do not use that information to make
key operating decisions and do not believe that allocating these expenses is
significant in evaluating performance.
24
Beginning January 1, 2004, we revised our internal reporting of certain
manufacturing costs, including but not limited to costs of re-working product,
warranty costs, obsolescence costs and costs to scrap, and we no longer include
these in our standard costing structure. As reflected in the table below, there
is an increase in our standard gross profit and our manufacturing variances and
other related costs for the three and nine months ended September 30, 2004 as
compared to the comparable period in 2003. There is no change in the overall
gross profit of our segments.
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 customer utilizing
products and services. Non-U.S. sales for the three and nine months ended
September 30, 2004 were $177,011 and $525,842, respectively. Non-U.S. sales for
the three and nine months ended September 30, 2003 were $153,559 and $475,846,
respectively.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic region. Corporate assets are principally goodwill,
intangible assets and temporary investments.
25
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table.
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------------- --------------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
----------- ----------- ----------- ----------- ----------- -----------
REVENUES:
The Americas...................... $ 225,798 $ 49,979 $ 275,777 $ 204,153 $ 43,659 $ 247,812
EMEA.............................. 101,220 22,278 123,498 80,171 21,945 102,116
Asia Pacific...................... 26,869 3,008 29,877 24,461 2,721 27,182
----------- ----------- ----------- ----------- ----------- -----------
Total net sales................... $ 353,887 $ 75,265 $ 429,152 $ 308,785 $ 68,325 $ 377,110
=========== =========== =========== =========== =========== ===========
STANDARD GROSS PROFIT:
The Americas...................... $ 119,939 $ 17,745 $ 137,684 $ 110,223 $ 10,106 $ 120,329
EMEA.............................. 56,921 7,530 64,451 40,633 7,430 48,063
Asia Pacific...................... 16,317 1,129 17,446 12,515 1,109 13,624
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit at standard.... 193,177 26,404 219,581 163,371 18,645 182,016
Manufacturing variances & other
related costs.................. 13,647 5,221 18,868 13,447 1,667 15,114
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit................ $ 179,530 $ 21,183 $ 200,713 $ 149,924 $ 16,978 $ 166,902
=========== =========== =========== =========== =========== ===========
FOR THE NINE MONTHS ENDED
-----------------------------------------------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------------------------- --------------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
----------- ----------- ----------- ----------- ----------- -----------
REVENUES:
The Americas...................... $ 675,420 $ 145,512 $ 820,932 $ 580,861 $ 149,796 $ 730,657
EMEA.............................. 291,313 68,558 359,871 261,187 69,027 330,214
Asia Pacific...................... 91,995 8,790 100,785 67,736 8,669 76,405
----------- ----------- ----------- ----------- ----------- -----------
Total net sales................... $ 1,058,728 $ 222,860 $ 1,281,588 $ 909,784 $ 227,492 $ 1,137,276
=========== =========== =========== =========== =========== ===========
STANDARD GROSS PROFIT:
The Americas...................... $ 372,703 $ 41,103 $ 413,806 $ 303,082 $ 35,379 $ 338,461
EMEA.............................. 168,296 23,558 191,854 134,731 23,405 158,136
Asia Pacific...................... 53,698 3,378 57,076 34,587 3,436 38,023
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit at standard.... 594,697 68,039 662,736 472,400 62,220 534,620
Manufacturing variances & other
related costs.................. 62,644 7,768 70,412 42,863 594 43,457
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit................ $ 532,053 $ 60,271 $ 592,324 $ 429,537 $ 61,626 $ 491,163
=========== =========== =========== =========== =========== ===========
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
IDENTIFIABLE ASSETS:
The Americas............................. $ 894,530 $ 867,133
EMEA..................................... 319,562 316,406
Asia Pacific............................. 63,230 64,228
Corporate (principally goodwill,
intangible assets and investments).... 640,454 398,751
------------- ------------
Total............................... $ 1,917,776 $ 1,646,518
============= ============
26
Below is a summary of product revenues by product division for the three and
nine months ended September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------------
2004 2003 2004 2003
----------- ------------ -------------- -------------
PRODUCT DIVISION:
Mobile Computing $ 212,077 $ 188,575 $ 635,579 $ 567,549
Advanced Data Capture 101,245 89,622 310,802 254,583
Wireless Infrastructure 43,790 36,907 120,660 97,507
RFID 1,756 -- 1,756 --
Other, net (4,981) (6,319) (10,069) (9,855)
----------- ------------ -------------- -------------
Total $ 353,887 $ 308,785 $ 1,058,728 $ 909,784
=========== ============ ============== =============
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
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.
27
OVERVIEW
We are a recognized worldwide leader in enterprise mobility, delivering
products and solutions that capture, move and manage information in real time to
and from the point of business activity. Symbol enterprise mobility solutions
integrate advanced data capture products, mobile computing platforms, wireless
infrastructure, mobility software and services programs under the Symbol
Enterprise Mobility Services brand. Our goal is to be one of the world's
preeminent suppliers of mission-critical mobile computing solutions to both
business and industrial users. For the three and nine months ended September 30,
2004, we generated $429,152 and $1,281,588 of revenue, respectively.
Symbol manufactures products and provides services to capture, move and
manage data using five core technologies - bar code reading and image
recognition, mobile computing, wireless networking systems, RFID and mobility
software applications. Our products and services are sold to a broad and diverse
base of customers on a worldwide basis and in diverse markets such as retail,
transportation, parcel and postal delivery services, warehousing and
distribution, manufacturing, healthcare, hospitality, security, education and
government. We 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 operate in two reportable business segments: (1) the design,
manufacture and marketing of advanced data capture, mobile computing, wireless
infrastructure, RFID and mobility software, or 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.
Management continuously evaluates its financial condition and operational
performance by monitoring key performance measures such as revenue growth, gross
profit and gross profit percent, operating income and margin, cash flow from
operations, days sales outstanding and inventory turns.
In addition to these financial and operational measures, management has
established certain other key measures to evaluate its future business
performance, such as product bookings and product backlog as well as product
sales through its indirect channel from both Value Added Resellers ("VARs") and
distributors, and original equipment manufacturers ("OEMs"). In addition,
management has a strong focus on its customer satisfaction ratings in its
service business.
By evaluating our product bookings, we are able to gain visibility into
the momentum of our expected future sales volumes. This also enables us to see
areas where we may need to adjust our sales and marketing efforts and inventory
management. Our goal is to maintain our quarterly product bookings to our actual
product revenue recognized ratio above 1.0.
In addition, we evaluate the amount of backlog of products that we have
either shipped but have not been recognized as revenue, as well as those
products that are awaiting shipment. This evaluation, we believe, assists us in
improving our quarterly linearity of shipments, and improves our operational
efficiencies and overall inventory management. Our goal is to continually grow
our backlog.
We also believe that we need to build a strong partner ecosystem, which is
a key aspect in our ability to scale our business and important in our efforts
to penetrate new markets as well as boost our presence in our existing vertical
markets. To that extent, in 2002 we began a migration to a channel-centric
business model and introduced our PartnerSelect(TM) Program. Our goal is to have
over 80 percent of our products shipped through our indirect channels, that is
our VARs, distributors and OEMs.
28
In our service segment, a key measure we monitor is customer satisfaction,
particularly for technical assistance and depot service delivery. We continually
obtain customer satisfaction surveys, with an overall goal of achieving ratings
consistently above a 4.0 on a scale of 1.0 to 5.0.
We also monitor our attach rates of our service maintenance contracts to
our product sales which we believe gives us visibility into future growth of our
services segment.
OVERVIEW OF PERFORMANCE
Our total revenue for the three and nine months ended September 30, 2004
increased 13.8 percent and 12.7 percent, respectively, to $429,152 and
$1,281,588 from $377,110 and $1,137,276, respectively, 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 that resulted in growth in our
Product Segment, particularly in mobile computing.
Our gross profit as a percentage of total revenue was 46.8 percent and
46.2 percent for the three and nine months ended September 30, 2004, an increase
from 44.3 percent and 43.2 percent for the three and nine months ended September
30, 2003. The growth is primarily due to both increased sales of higher margin
product as well as efficiencies we have achieved in our manufacturing
operations.
We are committed to and continue to invest in engineering new products and
in investing in our people, processes and systems to expand our product
offerings, to improve our control environment and our effectiveness with our
customers and our operational efficiencies. Accordingly, our operating expenses
were $172,054 and $490,544 for the three and nine months ended September 30,
2004.
Our operating margins for the three and nine month periods ended September
30, 2004 were 6.7 percent and 7.9 percent, respectively. This includes negative
impact on operating margin of 3.1 percent and 1.1 percent, respectively, related
to the acquisition of Matrics, Inc. on September 9, 2004.
Our cash balance increased $81,511 to $231,528 as of September 30, 2004 as
compared to $150,017 at December 31, 2003. Our net cash provided by operating
activities for the nine month period ended September 31, 2004 was $165,582.
We continue to focus on effectively managing our accounts receivables. At
September 30, 2004, receivables were $99,763, a decrease of $52,614 from
$152,377 at December 31, 2003. Our days sales outstanding at September 30, 2004
were 21 days as compared to 31 days at December 31, 2003.
Our inventory turns decreased to 4.1 from 4.3 for the three months ended
September 30, 2004 as compared to the comparable period in 2003 primarily due to
an increase of consigned inventory held at our distributors which is offset by
improved efficiencies in our manufacturing and distribution operations.
Our gross product bookings increased approximately 12 percent to
approximately $363,000 at September 30, 2004 from September 30, 2003.
The ratio of our product bookings to product revenue was 1.03 for the
quarter ended September 30, 2004. Our product backlog, which is another measure
we monitor, continued to grow in the quarter, ending September 30, 2004 at
approximately $320,000, which included the additional backlog from Matrics that
we acquired.
29
Our percent of product revenue that was shipped through our indirect
channel in the three month period ended September 30, 2004 was approximately 71
percent. This is up approximately 20 percentage points from 2002, when we began
our migration to a channel-centric business model.
Current results of customer satisfaction surveys from our services
business have demonstrated improvement towards our goal of a consistent rating
greater than 4.0. Our most current results were a score of 4.02 and 3.67,
relating to satisfaction with our technical assistance and depot service
delivery, respectively.
While our attach rates have been improving in our sales in the Americas,
overall we believe we can achieve better attach rates and are making changes in
our business process and restructuring certain of our service activities to help
improve these attach rates in the future.
RESULTS OF OPERATIONS
The following table 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 SEPTEMBER 30 FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------- --------------------------------------------------
VARIANCE IN VARIANCE IN VARIANCE IN VARIANCE IN
2004 2003 $'S PERCENT 2004 2003 $'S PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenue
The Americas.............. $ 275,777 $ 247,812 $ 27,965 11.3% $ 820,932 $ 730,657 $ 90,275 12.4%
EMEA...................... 123,498 102,116 21,382 20.9 359,871 330,214 29,657 9.0
Asia Pacific.............. 29,877 27,182 2,695 9.9 100,785 76,405 24,380 31.9
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
Total Revenue........... 429,152 377,110 52,042 13.8 1,281,588 1,137,276 144,312 12.7
=========== =========== =========== ======= =========== =========== =========== =======
Product Revenue
The Americas.............. 225,798 204,153 21,645 10.6 675,420 580,861 94,559 16.3
EMEA...................... 101,220 80,171 21,049 26.3 291,313 261,187 30,126 11.5
Asia Pacific.............. 26,869 24,461 2,408 9.8 91,995 67,736 24,259 35.8
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
Total Product Revenue... 353,887 308,785 45,102 14.6 1,058,728 909,784 148,944 16.4
=========== =========== =========== ======= =========== =========== =========== =======
Service Revenue
The Americas.............. 49,979 43,659 6,320 14.5 145,512 149,796 (4,284) (2.9)
EMEA...................... 22,278 21,945 333 1.5 68,558 69,027 (469) (0.7)
Asia Pacific.............. 3,008 2,721 287 10.5 8,790 8,669 121 1.4
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
Total Service Revenue... $ 75,265 $ 68,325 $ 6,940 10.2% $ 222,860 $ 227,492 $ (4,632) (2.0)%
=========== =========== =========== ======= =========== =========== =========== =======
The following table summarizes our product revenue by product division:
FOR THE THREE MONTHS ENDED SEPTEMBER 30 FOR THE NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------------------- --------------------------------------------------
VARIANCE IN VARIANCE IN VARIANCE IN VARIANCE IN
2004 2003 $'S PERCENT 2004 2003 $'S PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Product Division
Mobile Computing......... $ 212,077 $ 188,575 $ 23,502 12.5% $ 635,579 $ 567,549 $ 68,030 12.0%
Advanced Data Capture.... 101,245 89,622 11,623 13.0 310,802 254,583 56,219 22.1
Wireless Infrastructure.. 43,790 36,907 6,883 18.6 120,660 97,507 23,153 23.7
RFID 1,756 -- 1,756 100.0 1,756 -- 1,756 100.0
Other, net (4,981) (6,319) 1,338 (21.2) (10,069) (9,855) (214) 2.2
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
Total ............. $ 353,887 $ 308,785 $ 45,102 14.6% $ 1,058,728 $ 909,784 $ 148,944 16.4%
=========== =========== =========== ======= =========== =========== =========== =======
Other, net represents royalty revenues and rebates which the Company does not
assign to a product division.
Product revenue for the three and nine months ended September 30, 2004 was
$353,887 and $1,058,728 an increase of $45,102 or 14.6 percent and $148,944 or
16.4 percent from the comparable
30
prior year periods. This increase included $1,756 of revenue related to Matrics,
Inc. from September 9, 2004, the acquisition date. The increase was also due to
continued growth in sales of our mobile computing product offerings, our largest
product line, which experienced growth of approximately $23,502 and $68,030 an
increase of 12.5 percent and 12.0 percent from the comparable prior year
periods. Contributing to this increase is the growth from both our next
generation mobile gun and handheld mobile computing devices. Also contributing
to the product revenue increase was growth in sales of our advanced data capture
product line of approximately $11,623 and $56,219 an increase of 13.0 percent
and 22.1 percent from 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 U.S. retailer during
the nine months ended September 30, 2004. In addition, wireless product revenue
increased by approximately $6,883 and $23,153 an increase of 18.6 percent and
23.7 percent for the three and nine months ended September 30, 2004,
respectively from the comparable prior year periods due to the introduction of a
new wireless switch. The decrease in other, net for the three months ended
September 30, 2004 was primarily due to a significant rebate earned by a partner
in connection with a large transaction during the three months ended September
30, 2003. The increase for the nine months ended September 30, 2004 from the
comparable prior year period was primarily due to changes to the PartnerSelect
model that increased rebates within our distribution partners combined with
their sales volume partially offset by an increase in royalty revenue.
Services revenue for the three and nine months ended September 30, 2004
was $75,265 and $222,860 an increase of 10.2 percent and a decrease of 2.0
percent respectively from comparable prior year periods. The increase for the
three months ended September 30, 2004 as compared to the comparable prior year
period was positively impacted by $3,200, primarily as a result of recording
most new contracts on an accrual basis from a billed and collected basis, in
addition to increased cash collections. This was partially offset by our
continued drive to utilize third party service providers for the lower margin
professional service activities. The decrease for the nine months ended
September 30, 2004 as compared to the comparable prior year period was 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
a portion of our U.S. service revenue is recognized on a billed and collected
basis.
Geographically, the Americas revenue increased 11.3 percent and 12.4
percent for the three and nine months ended September 30, 2004 from the
comparable prior year periods. Europe, Middle East and Africa ("EMEA") revenue
increased 20.9 percent and 9.0 percent, respectively, for the three and nine
months ended September 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 9.9
percent and 31.9 percent for the three and nine months ended September 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 64.3, 28.8 and 6.9
percent of revenue, respectively, for the three months ended September 30, 2004.
The Americas, EMEA and Asia Pacific represent approximately 64.1, 28.1 and 7.8
percent of revenue, respectively, for the nine months ended September 30, 2004.
Product gross profit for the three and nine months ended September 30,
2004 was $179,530 and $532,053, respectively an increase of $29,606 and $102,516
or 19.7 percent and 23.9 percent from the comparable prior year periods. The
increase in product gross profit was mainly attributed to an increase in revenue
which accounted for approximately $22,000 and $71,000 of the increase for the
three and nine months ended September 30, 2004. The remaining increase to
product gross profit of approximately $8,000 and $32,000 was attributed to an
increase in gross profit percentage of 2.2 percent and 3.0 percent,
respectively, for the three and nine months ended September 30, 2004. The
increase in our gross profit
31
percentage was primarily attributed to a change in our product mix and increased
efficiencies gained in our manufacturing operations.
Service gross profit for the three and nine months ended September 30,
2004 was $21,183 and $60,271, respectively, an increase of $4,205 or 24.8
percent and a decrease of $1,355 or 2.2 percent from the comparable prior year
periods. The increase in service gross profit for the three months ended
September 30, 2004 was mainly attributed to approximately $3,200 of revenue
recognized in the three months ended September 30, 2004 as a result of recording
new contracts on an accrual basis of accounting from a billed and collected
basis, as well as a change in mix from low margin professional services to
higher margin maintenance and support services off set by restructuring charges
relating to lease obligation costs and further workforce reductions. The
decrease in service gross profit for the nine months ended September 30, 2004 of
$1,355 was primarily attributed to restructuring charges relating to lease
obligation costs and further workforce reductions, coupled with the decline in
revenues partially offset by a change in mix from low margin professional
services to higher margin maintenance and support services. We anticipate that
the efficiencies that will be realized through our realigning and restructuring
of our services business, once finalized, will improve our margins in future
periods.
OPERATING EXPENSES
Total operating expenses of $172,054 increased 15.5 percent for the three
months ended September 30, 2004 from $148,904 for the comparable prior year
period while total operating expenses of $490,544 for the nine months ended
September 30, 2004 decreased $15,450 or 3.1 percent from $505,994, for the
comparable prior year period.
Operating expenses consist of the following for the three and nine months
ended September 30:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- --------------------------------------------------
VARIANCE IN VARIANCE IN VARIANCE IN VARIANCE IN
2004 2003 $'S PERCENT 2004 2003 $'S PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Write-off of acquired
in-process research and
development............ $ 12,800 $ -- $ 12,800 100.0% $ 12,800 $ -- $ 12,800 100.0%
Engineering.............. 42,595 42,283 312 0.7 126,214 117,468 8,746 7.4
Selling, general and
administrative......... 125,102 98,023 27,079 27.6 366,230 305,473 60,757 19.9
(Recovery)/provision for
legal settlements...... (12,400) -- (12,400) (100.0) (21,400) 72,000 (93,400) (129.7)
Stock based
compensation expense... -- 7,640 (7,640) (100.0) 2,234 9,872 (7,638) (77.4)
Restructuring and
impairment charges..... 3,957 958 2,999 313.0 4,466 1,181 3,285 278.2
----------- ----------- ----------- ------- ----------- ----------- ----------- -------
$ 172,054 $ 148,904 $ 23,150 15.5% $ 490,544 $ 505,994 $ (15,450) (3.1)%
=========== =========== =========== ======= =========== =========== =========== =======
The write-off of acquired in-process research and development costs of
$12,800 for the three and nine months ended September 30, 2004 is due to a
write-off in connection with our acquisition of Matrics, Inc.
Engineering expenses increased $8,746 or 7.4 percent for the nine months
ended September 30, 2004 as compared to the comparable prior year period, mainly
due to our increased investment in our research and development.
Selling, general and administrative expenses increased $27,079 or 27.6
percent and $60,757 or 19.9 percent for the three and nine months ended
September 30, 2004 as compared to the comparable prior year periods, mainly due
to higher compensation costs and related benefits, investment in technology,
infrastructure and financial systems, external consulting costs associated with
the Sarbanes
32
Oxley Act of 2002, partially offset by a decrease in expenses associated with
our restatement activities and legal fees associated with litigation activities.
The decrease of $12,400 and $93,400 in legal settlements for the three and
nine month comparable period is driven by the fact that the three and nine
months ended September 30, 2004 included recoveries of $12,400 and $21,400,
respectively, of amounts related to the Company's various legal matters, while
the prior year nine month period ended September 30, 2003 included a provision
related to certain legal settlements of $72,000.
Also included in total operating expenses is stock based compensation
associated with certain portions of our stock option plans. As of March 31,
2003, due to our inability to make timely filings with the SEC, our stock option
plans were held in abeyance, meaning that our employees could not exercise their
options until we became current with our filings. As an accommodation to both
current and former Symbol associates whose options were impacted by this
suspension, the Compensation Committee of the Board approved an abeyance program
that allowed associates whose options were affected during the suspension period
the right to exercise such options up to 90 days after the end of the suspension
period. This resulted in a new measurement date for those options, which led to
a non-cash accounting compensation charge for the intrinsic value of those
vested options when the employee either terminated employment during the
suspension period or within the 90 day period after the end of the suspension
period. Stock based compensation related to the abeyance program was $2,234
during the nine months ended September 30, 2004. On February 25, 2004, the date
on which we became current with our regulatory filings with the SEC, this
suspension period ended.
The stock based compensation expense during 2003 are amounts associated
with the variable portion of our stock option plans as more fully described in
our Annual Report on Form 10-K for the year ended December 31, 2003.
In the second quarter of 2004, we announced a restructuring of certain of
our EMEA general and administrative functions, whereby we are consolidating
certain functions centrally in Brno, Czech Republic. For the three month and
nine month periods ended September 30, 2004 we charged $3,957 and $4,466,
respectively, the majority of which such costs related to severance costs.
OTHER (EXPENSE)/INCOME, NET
Other (expense)/income, net consists of the following:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- ---------------------------------------
2004 2003 VARIANCE 2004 2003 VARIANCE
----------- ---------- --------- ----------- --------- -------------
Cisco SAILS(a)........... $ 43 $ (2,346) $ 2,389 $ (4,459) $ 2,619 $ (7,078)
Interest Expense......... (3,532) (3,153) (379) (7,208) (8,137) 929
Interest Income.......... 819 354 465 2,057 1,798 259
Other.................... 2,695 2,412 283 2,683 1,475 1,208
----------- ---------- --------- ----------- --------- -------------
$ 25 $ (2,733) $ 2,758 $ (6,927) $ (2,245) $ (4,682)
=========== ========== ========= =========== ========= =============
(a) In accordance with the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" the gain or loss on the change in
fair value of the portion of our investment in Cisco Systems, Inc. ("CISCO")
common stock, coupled with the gain or loss on the change in fair value of the
embedded derivative has been recorded as a component of other income or loss in
each reporting period.
33
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the three months ended September 30,
2004 is 37.98 percent. This differs from the statutory rate of 35.0 percent
primarily due to the change in estimate of the deductible portion of the class
action settlement and the write-off of In-Process Research and Development
associated with the acquisition of Matrics, offset by the allocable portion of
the annual forecast of the tax benefits of research credits, the release of
valuation allowance and income exempt from taxation. Without the Matrics
acquisition, the tax rate for the three months ended September 30, 2004 would
have been 28.07 percent.
The overall tax rate of 43.71 percent remains higher than the 35.0 percent
statutory rate due to the items discussed above. Without the Matrics
acquisition, the tax rate would have been 39.0 percent.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The following table summarizes Symbol's cash and cash equivalent balances
as of September 30, 2004 and December 31, 2003 and the results of our statement
of cash flows for the nine months ended September 30.
VARIANCE IN
2004 2003 DOLLARS
----------------- ------------- -----------
Cash and cash equivalents.................................... $ 231,528 (a) $ 150,017 $ 81,511
================= ============= ===========
Net cash provided by /(used in):
Operating activities..................................... $ 165,582 $ 186,488 $ (20,906)
Investing activities..................................... (352,480) (54,798) (297,682)
Financing activities..................................... 268,652 (91,824) 360,476
Effect of exchange rate changes on cash and cash
equivalents........................................... (243) 4,930 (5,173)
------------- ------------- -----------
Net increase in cash and cash
equivalents............................................... $ 81,511 $ 44,796 $ 36,715
============= ============= ===========
a) Does not include restricted cash of $50,147, which is the amount currently
in an interest-bearing court escrow account as security for a trial court
judgment on appeal.
Net cash provided by operating activities during the nine months ended
September 30, 2004 was $165,582 as compared to $186,488 for the same period last
year. Net cash provided by operating activities decreased $20,906 during the
nine months ended September 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 partially offset by increased net
earnings. 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 partially offset by cash
recoveries related to these legal settlements of $17,400 received through the
nine months ended September 30, 2004.
Net cash used in investing activities for the nine months ended September
30, 2004 was $352,480 as compared to $54,798 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 $297,682 during the nine months ended September 30, 2004, when
compared to the same period last year, was primarily due to approximately
$235,000 used in connection with the Matrics acquisition, approximately $24,000
in additional capital expenditures, primarily related to our investment
34
in technology, infrastructure and financial system and the $50,000 bond we
posted as security for a trial court judgment on appeal.
Net cash provided by financing activities during the nine months ended
September 30, 2004 was $268,652, as compared to net cash used in financing
activities of $91,824 during the same period last year. Net cash provided by
financing activities during the nine months ended September 30, 2004 consists of
proceeds from short-term financing and long-term debt and stock option exercises
of $257,150 and $40,452, partially offset by purchases of treasury stock of
$26,374 as compared to cash used in financing activities for repayments on
long-term debt of $86,713 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 September 30,
2004 2003
---- ----
Days sales outstanding (DSO)......................................... 21 32
Inventory turnover................................................... 4.1 4.3
We continue to effectively manage our net accounts receivables, ending
September 30, 2004 with receivables of $99,763, a decrease of $52,614 from
$152,377 at December 31, 2003. Through aggressive collection strategies we have
been able to reduce our average days sales outstanding to 21 days during the
three months ended September 30, 2004 from an average of 32 days in the three
months ended September 30, 2003.
Our inventory turns decreased to 4.1 from 4.3 for the three months ended
September 30, 2004 as compared to the comparable period in 2003 primarily due to
an increase of consigned inventory held at our distributors which is offset by
improved efficiencies in our manufacturing and distribution operations.
OTHER LIQUIDITY MEASURES
Other measures of our liquidity including the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Working capital...................................................... $10,572 $197,808
(current assets minus current liabilities)
Current ratio (current assets to current liabilities)................ 1:1 1.4:1
Long-term debt to capital 7.7% 9.7%
(Long-term debt as a percentage of long term debt plus equity)
Current assets as of September 30, 2004 increased by $27,181 from December
31, 2003, primarily due to an increase in cash partially offset by a reduction
in receivables and current deferred income taxes. Accounts receivable 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 September 30, 2004 increased $214,417 from
December 31, 2003 primarily due to our $250,000 short term credit facility
entered into in September, 2004 used to finance our acquisition of Matrics,
Inc., partially offset by a decrease in accounts payable and accrued expenses.
Subject to favorable market conditions, the Company currently anticipates an
equity offering before the end of the year, the proceeds from which will be
utilized to pay back the short-term credit facility. As a result, working
capital decreased $187,236 between September 30, 2004 and December 31, 2003.
Included in our current
35
liabilities at September 30, 2004 is $96,250 related to an amount due to our
settlement of certain litigation. We anticipate this amount will be paid through
the issuance of shares of stock, not cash. Our current ratio was 1:1 at
September 30, 2004 and 1.4:1 at December 31, 2003.
FINANCING ARRANGEMENTS
As of September 30, 2004 and December 31, 2003, there were no borrowings
outstanding under our $60,000 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
$22,480 with a range of borrowing rates and varying terms. As of September 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 nine months ended September 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.
EXISTING INDEBTEDNESS
At September 30, 2004 and December 31, 2003 our short-term financing and
long-term debt outstanding, excluding current maturities, was as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Short-term financing - credit facility $ 250,000 $ --
========== =========
Secured credit line .................. $ -- $ --
Secured installment loan ............. 13,825 --
SAILS exchangeable debt .............. 77,635 98,927
Other ................................ 82 319
---------- ---------
91,542 99,246
Less: current maturities ............. 6,970 234
---------- ---------
Long-term debt ....................... $ 84,572 $ 99,012
========== =========
In connection with the acquisition of Matrics, we entered into a
short-term credit facility in the amount of $250,000. The short-term credit
facility, which is a senior unsecured borrowing, initially has an annual
interest rate of three-month LIBOR plus 400 basis points and matures on
September 9, 2005. The annual interest rate will increase by 100 basis points on
November 1, 2004 and will increase by an additional 50 basis points at the end
of each one-month period thereafter until September 9, 2005, but will not exceed
11.5% (or 13.5% if there is an event of default). If the short-term credit
facility is not repaid in full prior to September 9, 2005, it may be converted
to exchange notes pursuant to an indenture that will mature on September 9,
2011.
36
Our credit agreement governing our secured credit line and our short-term
credit facility contain negative and affirmative covenants and requirements
affecting us and our subsidiaries, with certain exceptions set forth in those
agreements. Our credit agreement and short-term credit facility contain the
following negative covenants and restrictions, among others: restrictions on
indebtedness, liens, sale of assets, loans and investments, changes in the
nature of our business, sale and leaseback, dividends, transaction with
affiliates and negative pledges. These agreements also require us to meet
certain financial covenants, such as leverage ratios or interest coverage
ratios. We are currently in compliance with all covenants.
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 the purchase of certain software.
In January 2001, we entered into a private Mandatorily Exchangeable
Securities Contract for Shared Appreciation Income Linked Securities ("SAILS")
with a highly rated financial institution. The securities that underlie the
SAILS contract represent our investment in Cisco common stock, which was
acquired in connection with the Telxon acquisition. The 4,160 shares of Cisco
common stock had a market value of $75,296 at September 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 Condensed 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 $77,635 at September 30, 2004.
The remaining portion of long-term debt outstanding relates primarily to
capital lease obligations.
CONTRACTUAL CASH OBLIGATIONS
As of September 30, 2004, except for the $250,000 short-term credit
facility which expires on September 9, 2005, there have not been any material
changes in Symbol's contractual obligations as presented in its Annual Report on
Form 10-K for the year ended December 31, 2003.
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.
37
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.
The Company may also be required to make future cash outlays in connection
with outstanding legal contingencies. These potential cash outlays could be
material and might affect liquidity requirements and cause the Company to pursue
additional financing. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available to us under our secured credit line in an amount sufficient to enable
us to fund our other liquidity needs or pay our indebtedness.
CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
reported amounts of assets, liabilities, revenue and expenses, as well as the
disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments, including
those related to product return reserves, allowance for doubtful accounts, legal
contingencies, inventory valuation, warranty reserves, useful lives of
long-lived assets, goodwill, derivative instrument valuations and income taxes.
We base our estimates and judgments on historical experience 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 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 or determinable and collectibility
is reasonably assured. Sales to resellers that lack economic substance or cannot
pay for our products without reselling them to their customers are recognized
when the revenue is billed and collected. Revenue on sales to distributors is
recognized when our products and systems are sold by them to their customer.
Outbound shipping charges to our customers are included in our product sales.
Rebates are recorded as a reduction of product revenues when earned by our
customers.
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Service and maintenance sales are recognized when there is persuasive
evidence of an arrangement, the services are rendered, the price is fixed or
determinable and collectibility is reasonably assured, generally over the
contract term. Revenue from certain service contracts are recognized when billed
and collected if any of the above criteria are not met.
When a sale involves multiple elements, such as sales of products that
include services, the entire revenue from the arrangement is allocated to each
respective element based on its relative fair value and is recognized when the
revenue recognition criteria for each element is met. Fair value for each
element is established based on the sales price charged when the same element is
sold separately.
We record as reductions of revenue provisions for estimated product
returns. The estimated amount is based on historical experience of similar
products sold to our customers and then returned. If our product mix or customer
base changes significantly, this could result in a change to our future
estimated product return reserve. Management believes the reserve for product
returns is adequate to cover anticipated credits issued for such returns;
however, if future returns differ from our historical experience and estimates,
then this could result in an increase in the reserve. An increase of one percent
in the reserve percentage would result in an increase in our estimated product
return reserve of approximately $2,200 as of September 30, 2004.
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. In
many cases, outcomes of such matters are determined by third parties, including
governmental entities and judicial bodies. Any provisions made in our financial
statements, as well as related disclosures, represent management's best
estimates of the current status of such matters and its potential outcome based
on a review of the facts and in consultation with outside legal counsel.
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
39
that significant changes in required inventory reserves may continue to occur in
the future if there is a deterioration in market conditions or acceleration in
technological change.
WARRANTY RESERVES
We provide standard warranty coverage for most of our products for a
period of one year from the date of shipment. We record a liability for
estimated warranty claims based on historical claims, product failure rates and
other factors. This liability primarily includes the anticipated cost of
materials, labor and shipping necessary to repair and service the equipment. Our
warranty obligation is affected by the products actually under warranty, product
failure rates, material usage rates, and the efficiency by which the product
failure is corrected. Should our warranty policy change or should actual failure
rates, material usage and labor efficiencies differ from our estimates,
revisions to the estimated warranty liability would be required. A five percent
increase in our products under warranty would cause an approximate $1,000
increase to our warranty provision at September 30, 2004.
USEFUL LIVES OF LONG-LIVED ASSETS
We estimate the useful lives of our long-lived assets, including property,
plant and equipment, identifiable finite life intangible assets and software
development costs for internal use in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting
period. The estimated lives are based on historical experience with similar
assets as well as taking into consideration anticipated technological or other
changes. If technological changes were to occur more rapidly or slowly than
anticipated, or in a different form, useful lives may need to be changed
accordingly, resulting in either an increase or decrease in depreciation and
amortization expense. We review these assets annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important and that could trigger an impairment review
include significant changes in the manner of our use of the acquired asset,
technological advances, changes in historical or projected operating performance
and cash flows and significant negative economic trends.
GOODWILL IMPAIRMENTS
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques in the
high-technology mobile computing industry. Goodwill is measured as the excess of
the cost of acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired less liabilities assumed. We perform our
goodwill impairment test on an annual basis or more frequently if an event
occurs or circumstances change that would more likely than not reduce the fair
value of our business enterprise below its carrying value. In response to
changes in industry and market conditions, we could be required to strategically
realign our resources and consider restructuring, disposing of, or otherwise
exiting businesses, which could result in an impairment of goodwill.
DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FOREIGN CURRENCY
We utilize derivative financial instruments to hedge foreign exchange rate
risk exposures related to foreign currency denominated payments from our
international subsidiaries. We also utilize a derivative financial instrument to
hedge fluctuations in the fair value of our investment in Cisco common shares.
Our foreign exchange derivatives qualify for hedge accounting in accordance with
the provisions of SFAS No. 133. We do not participate in speculative derivatives
trading. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective, or if we did not
40
believe the forecasted transactions would occur, the changes in fair value of
the derivatives used as hedges would be reflected in earnings and could be
material.
INCOME TAXES
Assessment of the appropriate amount and classification of income taxes is
dependent on several factors, including estimates of the timing and probability
of the realization of deferred income taxes and the timing of tax payments.
Deferred income taxes are provided for the effect of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes. We measure deferred
tax assets and liabilities using enacted tax rates, that if changed, would
result in either an increase or decrease in the reported income taxes in the
period of change. A valuation allowance is recorded when it is more likely than
not that a deferred tax asset will not be realized. In assessing the likelihood
of realization, management considers estimates of future taxable income, the
character of income needed to realize future tax benefits, and other available
evidence.
Actual income taxes could vary from estimated amounts due to future
impacts of various items, including changes in tax laws, positions taken by
governmental authorities relative to the deductibility of certain expenses we
incur, changes in our financial condition and results of operations, as well as
final review of our tax returns by various taxing authorities.
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
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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
controls 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:
- inadequate systems and systems interfaces;
- inadequate and untimely account reconciliations;
- numerous manual journal entries; and
- informal worldwide policies and procedures.
Since the discovery of the material weakness and other deficiencies as described
above, we have taken various measures to improve the effectiveness of our
internal controls including, but not limited to, the following:
- centralized the responsibility of revenue under a revenue
controller's department, reporting directly to the Chief Accounting
Officer;
- established formalized worldwide policies and procedures that are
approved by the Chief Executive Officer, Chief Financial Officer and
Chief Accounting Officer;
- identified responsible associates for account reconciliations,
including approvals;
- implemented formal review processes of transactions where manual
intervention still exists; and
- invested 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 a result of these and other measures we have taken, we believe the material
weakness and other deficiencies described above have been remediated.
In November 2004, during the Company's inventory testing (including a
planned physical inventory at a company owned distribution center), two
unrelated errors were discovered. These errors were the result of two discrete
events. One event involved inaccurate inventory levels reported to the Company
by a large distribution partner. The underreported inventory levels resulted in
the Company inaccurately reporting $3,287 in revenues in its earnings release on
October 26,
42
2004 for the three and nine-month period ended September 30, 2004. No previous
periods were affected. This was an oversight on the part of the distribution
partner, which made the Company aware of the reporting error as soon as it was
discovered. The second discrepancy was the result of errors that occurred at a
Company-owned distribution facility that serves one of the Company's large
retail customers. The distribution center relies on its own internal reporting
system and misreported inventory. As a result of this second discrepancy, the
Company over reported revenue by $10,250 for the three and nine month period
ended September 30, 2004 in its earnings release on October 26, 2004. Based on
these findings, management believes it has significant deficiencies relating to
the controls for receiving, shipping and ultimately reporting the amount of
inventory. The errors reported as described above led to the delay in filing
this report on Form 10-Q as of and for the three and nine month period ended
September 30, 2004.
Since the discovery of the significant deficiencies in November 2004 as
described above, we have taken the following steps to ensure the financial
results as of and for the three and nine month period ended September 30, 2004
as filed in this Form 10-Q are fairly presented in all material respects:
- re-performed a physical inventory at this distribution center;
- performed a roll back of inventory amounts from the results of our
physical counts to each quarter end;
- re-performed cut-off procedures at March 31, 2004, June 30, 2004 and
September 30, 2004 to determine proper inventory amounts; and
- re-confirmed inventory amounts with the distributor.
Additionally, we have taken various measures to improve the effectiveness
of our internal controls, including:
- placed qualified individuals in the distribution center to manage
the movement of inventory within the distribution center; and
- developed prospective physical inventory procedures to be performed
for the year ending December 31, 2004 and quarterly thereafter at
certain of our distributors and our Company-owned distribution
center to ensure the value of consigned inventory at our
distributors and our Company-owned distribution center are
accurately recorded.
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 procedures. The evaluation examined those disclosure controls and
procedures as of September 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
September 30, 2004, Symbol's disclosure controls and procedures needed to be
strengthened and were not sufficiently effective at the reasonable assurance
level to ensure that information required to be disclosed in Symbol's reports
filed or submitted under the Exchange Act were accumulated and communicated to
Symbol's management, including its Chief Executive Officer and its Chief
Financial Officer, in a timely manner, to allow timely decisions regarding
required disclosure, thus resulting in the delay of this filing. However, based
upon the work performed to the date of this filing, management believes there
are no material inaccuracies or omissions of material fact in this filing on
Form 10-Q. Management, to the best of its knowledge, believes that the financial
statements presented herein are fairly stated in all material respects.
43
There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention and overriding of the controls and procedures. Accordingly,
even effective controls and procedures can only provide reasonable assurance of
achieving their control objectives.
Other than as described above, there has been no change in the Company's
internal control over financial reporting during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
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
(a) The following exhibits are included herein:
2.1 Agreement and Plan of Merger by and among Symbol, Marvin
Acquisition Corp. and Matrics, dated as of July 26, 2004
(Incorporated by reference to Exhibit 2.1 to the Current
Report on Form 8-K dated September 15, 2004).
10.1 Tolling Agreement by and between Symbol and Leonard Goldner,
dated as of June 9, 2004.
10.2 Agreement by and between Symbol and Leonard Goldner, dated as
of October 13, 2004, to extend tolling period under the
Tolling Agreement, dated as of June 9, 2004.
10.3 Amendment and Waiver, dated as of June 14, 2004, to the Credit
Agreement, dated as of November 17, 2003, by and among Symbol,
Fleet National Bank, as administrative agent and a lender,
Bank of Tokyo-Mitsubishi Trust Company, as co-documentation
agent and a lender, and JPMorgan Chase Bank, as
co-documentation agent and a lender, and the other lenders
from time to time party thereto (Incorporated by reference to
Exhibit 10.34 of the Registration Statement on Form S-1 dated
September 16, 2004)
10.4 Waiver, dated as of July 23, 2004, to the Credit Agreement,
dated as of November 17, 2003, by and among Symbol, Fleet
National Bank, as administrative agent and a lender, Bank of
Tokyo-Mitsubishi Trust Company, as co-documentation agent and
a lender, and JPMorgan Chase Bank, as co-documentation agent
and a lender, and the other lenders from time to time party
thereto (Incorporated by reference to Exhibit 10.35 of the
Registration Statement on Form S-1 dated September 16, 2004)
10.5 Amendment, dated as of September 8, 2004, to the Credit
Agreement, dated as of November 17, 2003, by and among Symbol,
Fleet National Bank, as administrative agent and a lender,
Bank of Tokyo-Mitsubishi Trust Company, as co-documentation
agent and a lender, and JPMorgan Chase Bank, as
co-documentation agent and a lender, and the other lenders
from time to time party thereto (Incorporated by reference to
Exhibit 10.36 of the Registration Statement on Form S-1 dated
September 16, 2004)
10.6 Bridge Loan Agreement, dated as of September 9, 2004, among
Symbol, the subsidiary guarantors and lending institutions
identified in the Bridge Loan Agreement, JPMorgan Chase Bank,
as administrative agent, J.P. Morgan Securities Inc., as sole
bookrunner and sole lead arranger and Fleet National Bank, as
documentation agent (Incorporated by reference to Exhibit 1.1
of the Current Report on Form 8-K dated September 15, 2004).
10.7 Exchange Note Indenture, dated as of September 9, 2004,
relating to Symbol's Senior Exchange Notes due 2011
(Incorporated by reference to Exhibit 1.2 of the Current
Report on Form 8-K dated September 15, 2004).
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.
44
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: November 15, 2004 By: /s/ William R. Nuti
-------------------------------
William R. Nuti
Chief Executive Officer, President
and Director
(principal executive officer)
Dated: November 15, 2004 By: /s/ Mark T. Greenquist
-------------------------------
Mark T. Greenquist
Senior Vice President
and Chief Financial Officer
(principal financial officer)
Dated: November 15, 2004 By: /s/ James M. Conboy
-------------------------------
James M. Conboy
Vice President - Controller
and Chief Accounting Officer
(principal accounting officer)
45