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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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
COMMISSION FILE NUMBER 1-9802
SYMBOL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2308681
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Symbol Plaza
Holtsville, New York 11742-1300
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
The number of shares outstanding of the registrant's classes of common
stock, as of February 20, 2004, was as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $0.01 231,205,860
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
SYMBOL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2003
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.....................................................1
Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002...................1
Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
2003 and 2002 (Restated)...................................................................2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2003 and 2002 (Restated)...................................................................3
Notes to Condensed Consolidated Financial Statements............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........30
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................52
Item 4. Controls and Procedures........................................................................52
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................53
Item 6. Exhibits and Reports on Form 8-K...............................................................54
Signatures......................................................................................................55
Certifications..................................................................................................56
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)
(Unaudited)
MARCH 31, DECEMBER 31,
2003 2002
-------------- --------------
ASSETS
- ------
Cash and cash equivalents.................................................... $ 98,587 $ 76,121
Accounts receivable, less allowance for doubtful accounts of $38,343 and
$34,272, respectively..................................................... 140,037 151,417
Inventories.................................................................. 240,463 261,096
Deferred income taxes........................................................ 155,190 167,489
Other current assets......................................................... 41,899 34,293
-------------- --------------
Total current assets...................................................... 676,176 690,416
Property, plant and equipment, net........................................... 205,171 208,209
Deferred income taxes........................................................ 244,585 222,475
Investment in marketable securities.......................................... 54,698 54,939
Goodwill..................................................................... 301,640 301,023
Intangible assets, net....................................................... 35,339 37,125
Other assets................................................................. 44,222 58,008
-------------- --------------
Total assets.............................................................. $ 1,561,831 $ 1,572,195
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses........................................ $ 482,524 $ 427,568
Current portion of long-term debt............................................ 50,298 6,681
Deferred revenue............................................................. 37,561 32,903
Accrued restructuring expenses............................................... 7,640 6,948
-------------- --------------
Total current liabilities................................................. 578,023 474,100
Long-term debt, less current maturities...................................... 54,519 135,614
Deferred revenue............................................................. 12,200 15,821
Other liabilities............................................................ 59,635 58,921
Contingencies (Note 11)
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 256,896
shares and 256,589 shares, respectively................................... 2,569 2,566
Additional paid in-capital................................................... 1,325,924 1,323,085
Accumulated other comprehensive loss, net.................................... (10,345) (13,096)
Accumulated deficit.......................................................... (221,665) (188,340)
-------------- --------------
1,096,483 1,124,215
LESS:
Treasury stock, at cost, 26,130 shares and 25,962 shares, respectively....... (239,029) (236,476)
-------------- --------------
Total stockholders' equity................................................ 857,454 887,739
-------------- --------------
Total liabilities and stockholders' equity......................... $ 1,561,831 $ 1,572,195
============== ==============
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
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2002
(AS RESTATED -
2003 SEE NOTE 2)
--------------- ---------------
REVENUE:
Product......................................................................... $ 310,703 $ 254,902
Services........................................................................ 75,644 62,742
--------------- ---------------
386,347 317,644
COST OF REVENUE:
Product cost of revenue......................................................... 156,339 182,159
Services cost of revenue........................................................ 58,136 56,615
--------------- ---------------
214,475 238,774
--------------- ---------------
Gross profit.................................................................... 171,872 78,870
--------------- ---------------
OPERATING EXPENSES:
Engineering..................................................................... 37,055 35,533
Selling, general and administrative............................................. 99,031 80,295
Loss provision for legal settlements............................................ 72,000 --
Stock based compensation expense/(recovery)..................................... 776 (51,302)
Restructuring and impairment charges............................................ 87 2,634
--------------- ---------------
208,949 67,160
--------------- ---------------
(Loss)/earnings from operations................................................. (37,077) 11,710
Other expense, net.............................................................. 4,034 4,052
(Loss)/earnings before income taxes............................................. (41,111) 7,658
(Benefit from)/provision for income taxes....................................... (10,098) 2,304
--------------- ---------------
NET (LOSS)/EARNINGS............................................................. $ (31,013) $ 5,354
=============== ===============
(LOSS)/EARNINGS PER SHARE:
Basic and diluted............................................................... $ (0.13) $ 0.02
=============== ===============
CASH DIVIDENDS DECLARED PER COMMON SHARE........................................ $ 0.01 $ 0.01
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic........................................................................... 230,527 228,881
Diluted......................................................................... 230,527 234,286
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
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2002
(AS RESTATED -
-----------------
2003 SEE NOTE 2)
--------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/earnings................................................ $ (31,013) $ 5,354
ADJUSTMENTS TO RECONCILE NET (LOSS)/EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant and equipment..... 13,232 14,042
Other amortization................................................. 3,413 3,012
Provision for losses on accounts receivable........................ 4,788 4,839
Provision for inventory writedown.................................. 11,700 9,731
Deferred income tax (benefit)/provision............................ (10,098) 2,874
Non-cash stock based compensation expense/(recovery)............... 776 (51,302)
(Gain)/loss on sale of property, plant and equipment and other
assets (12) 803
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITIONS AND
DIVESTITURES:
Accounts receivable................................................ 18,866 6,977
Inventories........................................................ 9,327 36,567
Other assets....................................................... (4,515) 12,590
Accounts payable and accrued expenses.............................. 52,381 (21,041)
Accrued restructuring expenses..................................... 692 58
Other liabilities and deferred revenue............................. 1,751 4,734
--------------- -----------------
Net cash provided by operating activities....................... 71,288 29,238
--------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in other companies, net of cash acquired............... (1,777) (1,500)
Proceeds from sale of property, plant and equipment and other
assets.......................................................... 467 2,185
Purchases of property, plant and equipment......................... (10,649) (10,537)
Investments in intangible and other assets......................... (1,191) (1,143)
--------------- -----------------
Net cash used in investing activities........................... (13,150) (10,995)
--------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt...................... (36,575) (24,480)
Proceeds from issuance of notes payable and long-term debt......... -- 40,795
Repurchase of convertible notes and debentures..................... -- (39,963)
Proceeds from exercise of stock options, warrants and employee
stock purchase plan............................................. 4,623 6,951
Purchase of treasury shares........................................ (5,110) (5,409)
--------------- -----------------
Net cash used in financing activities........................... (37,062) (22,106)
--------------- -----------------
Effects of exchange rate changes on cash........................... 1,390 (996)
--------------- -----------------
Net increase/(decrease) in cash and cash equivalents............... 22,466 (4,859)
Cash and cash equivalents, beginning of period..................... 76,121 70,365
--------------- -----------------
Cash and cash equivalents, end of period..................... $ 98,587 $ 65,506
=============== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID/(REFUNDED) DURING THE PERIOD FOR:
Interest........................................................... $ 1,667 $ 5,289
Income taxes....................................................... $ 808 $ (15,239)
See notes to Condensed Consolidated Financial Statements.
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2003 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
-------------------------------------------------
Overview
- --------
Symbol Technologies, Inc. and subsidiaries is a provider of secure
mobile information systems that integrate application-specific hand-held
computers with wireless networks for data, voice and bar code data capture.
The Condensed Consolidated Financial Statements include the accounts of
Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "we" or "our" or "us" or "the Company" refer to Symbol
Technologies, Inc. and subsidiaries unless the context specifically requires
otherwise. The Condensed Consolidated Financial Statements have been prepared by
us, without audit, pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include
all necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of March 31, 2003, and the results of our
operations and cash flows for the three months ended March 31, 2003 and 2002, in
accordance with the instructions to Form 10-Q of the Commission and in
accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information. The results of operations
for the three months ended March 31, 2003 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/A for the year ended December 31, 2002.
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. We have adopted the disclosure-only requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net earnings and pro forma earnings per share disclosures for employee
stock grants made as if the fair value based method of accounting in SFAS No.
123 had been applied to these transactions.
4
The following table illustrates the effect on net (loss)/earnings and
net (loss)/earnings per share if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2003 2002
-------------- ---------------
Net (loss)/earnings - as reported....................................... $ (31,013) $ 5,354
Stock based employee compensation expense/(recovery) included in
reported net (loss)/earnings, net of related tax effects............. 477 (31,551)
Less total stock based employee compensation expense determined under the fair
value based method for all awards,
net of related tax effects........................................... (4,563) (4,871)
-------------- ---------------
Pro forma net loss...................................................... $ (35,099) $ (31,068)
============== ===============
Basic and diluted net (loss)/earnings per share:
As reported.......................................................... $ (0.13) $ 0.02
Pro forma............................................................ $ (0.15) $ (0.14)
The weighted average fair value of options granted during the three
months ended March 31, 2003 and 2002 was $5.34 and $4.22 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 months ended March 31, 2003 and 2002, we used the
Black-Scholes option pricing model and assumed the following: a risk free
interest rate of 4.0 percent; an expected option life of 4.7 years; an expected
volatility of 59 percent; and a dividend yield of 0.14 percent per year. As
required by SFAS No. 123, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculations.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
-----------------------------------------------------
Subsequent to the issuance of our March 31, 2002 financial statements,
our management identified certain accounting errors and irregularities, as
discussed below, in its previously issued financial statements beginning in 1998
through the nine months ended September 30, 2002.
The adjustments necessary to restate our financial statements relate
primarily to the correction of errors related to the timing and amount of
product and service revenue recognized, as well as certain reserves,
restructurings, the administration of certain option programs and several
categories of cost of revenue and operating expenses. As a result, the Condensed
Consolidated Financial Statements included herein for the three-month period
ended March 31, 2002 have been restated to give effect to the correction of
these errors.
5
The principal adjustments are summarized below:
Revenue Recognition
- -------------------
Errors identified in the area of revenue recognition included numerous
instances where the timing or amount of revenue recognized was not appropriate.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), expresses the SEC Staff's views regarding the
application of accounting principles generally accepted in the United States of
America ("U.S. GAAP") to revenue recorded in financial statements. Provided
below is a summary of the nature of the adjustments to revenue that were
necessary:
Persuasive evidence of an arrangement exists
We identified situations when the customer arrangements were not
available, were not documented or were superceded by separate written agreements
or verbal arrangements. In many of these instances, the customer returned most
or all of the merchandise shipped in a subsequent accounting period based on
these separate agreements or arrangements. The existence of these separate
agreements and arrangements indicates that the original agreement was not
binding and, therefore, the recognition of revenue was inappropriate at that
time and should have been deferred until such time as persuasive evidence of an
arrangement existed.
Delivery had not occurred or services had not been rendered
We identified situations in which we had recognized revenue at the time
we shipped our product to an intermediate staging area or location where we
performed additional configuration services to meet customer requirements. The
recognition of revenue was inappropriate at that time and should have been
deferred until such time as our products had been shipped or services had been
rendered to our customer.
The seller's price to the buyer was not fixed or determinable
We identified situations in which significant price concessions were
made based on prior or ongoing negotiations or in which subsequent credits were
issued to a customer based on sales volume or in which separate agreements
existed that were not considered in the revenue recognition process. These
arrangements indicate that the price of goods and services was not fixed or
determinable at the time of the sale and, therefore, the recognition of revenue
was inappropriate and should have been deferred until the price was fixed or
determinable.
Collectibility is reasonably assured
We identified situations in which sales were made to customers who had
no financial means for payment other than from the resale of our products to
third parties. Effectively, these customers were acting as our distributors or
agents and our sales to them were on a consignment basis because we accepted any
products they returned to us. Accordingly, the recognition of such sales to
distributors with unlimited or extremely broad return capability was
inappropriate and should have been deferred until such time as the sale was made
to the ultimate customer and collectibility was reasonably assured.
Restructuring Reserves
- ----------------------
In December 2000, we recorded restructuring, impairment and merger
integration charges associated with the Telxon acquisition. We determined that
both the amount and timing of certain
6
components of these charges, as well as the subsequent utilization of the
established reserve, were inappropriate.
In September 2001, we recorded a restructuring charge primarily
related to the reorganization of our manufacturing facilities. Similarly, we
determined that both the amount and timing of certain components of this charge,
as well as the subsequent utilization of the established reserve, were
inappropriate.
Inventory
- ---------
We identified numerous errors and irregularities in the area of
inventory. Our previous methodology for identifying excess and obsolete
inventory, which relied heavily on historical usage, did not properly consider
the rapid nature of technology changes and reduced product life cycles during
the past several years. The nature, timing and amount of these charges were
inappropriate.
Computer Hardware and Software Costs
- ------------------------------------
We determined that certain computer hardware costs had been
incorrectly capitalized. In addition, we determined that the criteria provided
in SFAS No. 86 to determine when technological feasibility has been established
had been misapplied resulting in an error in the capitalization of development
costs of software which should have been expensed.
Patent Costs
- ------------
Certain patent-related costs were being incorrectly amortized beyond
the life of the related patent. Additionally, other instances were noted in
which we could not associate various legal costs incurred with a specific
patent. Accordingly, adjustments were made to correct the amortization of costs
to coincide with the remaining life of the related patent and to write-off legal
costs that could not be directly associated with a patent. In addition, because
of rapidly changing technology, we determined that our prior policy of
amortizing patents generally over a 17 year period was not appropriate and we
made adjustments to reduce the patent amortization period to six years.
Telxon Transaction
- ------------------
On November 30, 2000, we completed the acquisition of the Telxon
Corporation. The acquisition was accounted for as a purchase and the excess of
the purchase price over the fair value of the assets acquired and liabilities
assumed was recorded as goodwill. Subsequent to the acquisition date, we
adjusted goodwill for revisions to the fair values of the assets and liabilities
acquired. We subsequently determined that certain of the adjustments to goodwill
did not relate to contingencies existing at the time of the acquisition.
Furthermore, we discovered that while certain adjustments to the net assets
acquired from Telxon were appropriate, the impact of these adjustments was
incorrectly recorded in accounts other than goodwill.
Brazil Acquisition
- ------------------
As discussed in Note 10 of the Condensed Consolidated Financial
Statements, during the second quarter of 2002, we entered into an agreement with
the owners of a Brazilian corporation that was a distributor of our products,
whereby we created a majority-owned subsidiary of Symbol. In our previously
reported financial statements, we recorded two payments ($3,250 and $2,050 in
2000 and 2002, respectively) to three individuals and one entity aggregating
approximately $5,300 as part of the
7
purchase price. We subsequently determined that we should have treated these
payments as operating expenses.
Accruals, Reserves and Prepayments
- ----------------------------------
We identified errors in the accounting for certain accruals and
prepayments. Specifically, we identified instances in which we established
reserves or released reserves in error.
Statement of Operations Reclassifications
- -----------------------------------------
We discovered numerous instances in which certain categories of
expenses were inappropriately classified in the statements of operations.
Stock Option Accounting
- -----------------------
We identified certain irregularities and improper administration of
option exercises related to our stock option plans. In particular, an informal
practice began in or around the early 1990's, whereby certain officers and
directors were afforded a look-back period (no more than 30 days) for purposes
of determining the market price to be used in connection with specific option
exercises. In addition, certain of these individuals were given an extended
period of time in which to pay for their option exercises. These practices were
contrary to the terms of the relevant option plans.
As this practice allowed certain participants to choose exercise dates
outside of the approved plan terms and also allowed these participants to extend
the period of time in which to pay for their option exercise, the price of the
option at the grant date was not fixed. Accordingly, in accordance with APB
Opinion No. 25, we have reflected in our financial statements the change in
market price of the common stock underlying these options granted to plan
participants that could have participated in this practice as compensation
expense.
Effective July 30, 2002, this practice of options exercise ended
resulting in ceasing the accounting for such options under variable plan
accounting.
Executive Life Insurance
- ------------------------
As a benefit to some of our key executives, we paid the premiums to
provide split dollar life insurance. As part of this program, the premiums on
the policies accumulate as cash surrender value that must be repaid to us upon
the termination of employment or death of the employee. We determined that the
amount we recorded as a recoverable asset exceeded the amount we could realize
as cash surrender value under the policies.
Interest Expense
- ----------------
Our primary source of liquidity during 1999 through most of 2003 was a
Credit Agreement signed in December 1998 and voluntarily terminated in November
2003. Pricing terms of this Credit Agreement were covered under a "credit grid"
that provided for interest charges on both drawn and undrawn committed lines of
credit, and was based on a quarterly calculation of a leverage ratio of
outstanding debt divided by earnings before income taxes, depreciation and
amortization. Interest charges were either lowered the further the leverage
ratio fell below 2.5 times or raised if the ratio moved toward 2.5 times. The
agreement also provided for additional fees in the event of additional leverage
or events of default. Through a series of waivers and amendments granted by the
bank group during the life
8
of the Credit Agreement, no event of default occurred. However, these waivers
and amendments did not provide protection from the obligations under the "credit
grid" pricing.
We determined that our previously recorded interest expense needed to
be recalculated based on our restated results, which resulted in adjustments to
our previously issued 2002 Condensed Consolidated Financial Statements to
appropriately reflect interest expense due under the terms of the Credit
Agreement.
Other Restatement-Related Adjustments
- -------------------------------------
We identified instances where marketable securities, property, plant
and equipment and other long-lived assets were carried at amounts exceeding
their net realizable values.
Income Taxes
- ------------
As a result of the adjustments described above, we have adjusted our
tax provisions and related accounts for the periods involved.
The following tables present the effects of the aforementioned
adjustments on earnings before income taxes as previously reported:
Increase to earnings before income taxes
(in thousands):
INCREASE/(DECREASE)
FOR THE
THREE MONTHS ENDED
MARCH 31, 2002
------------------
Earnings before income taxes, previously reported........... $ 2,576
------------------
REVENUE ADJUSTMENTS:
Product..................................................... 26,447
Services.................................................... (10,115)
------------------
16,332
------------------
COST OF REVENUE ADJUSTMENTS:
Product revenue cost........................................ (12,571)
Service revenue cost........................................ 1,194
Restructuring reserves...................................... (5,588)
Excess and obsolete inventory............................... (27,383)
Computer software........................................... 3,286
Telxon transaction.......................................... (2,587)
Accruals, reserves and prepayments.......................... 353
Other, net.................................................. 490
------------------
(42,806)
------------------
OPERATING AND OTHER EXPENSES:
Restructuring reserves...................................... (5,292)
Computer hardware and software costs........................ (10,009)
Patent costs................................................ (851)
Telxon transaction.......................................... (1,222)
Brazil acquisition.......................................... (2,050)
Accruals and prepayments.................................... 1,803
Stock option accounting..................................... 51,302
Executive life insurance.................................... (107)
Interest expense............................................ (125)
9
Increase to earnings before income taxes INCREASE/(DECREASE)
(in thousands): FOR THE
THREE MONTHS ENDED
MARCH 31, 2002
------------------
Bad debt impact on revenue adjustments...................... (334)
Other adjustments........................................... (1,559)
------------------
31,556
------------------
Increase in earnings before income taxes.................... 5,082
------------------
Earnings before income taxes, as restated................... $ 7,658
==================
The following is a summary of the significant effects of the
restatement on our previously reported results of operations.
THREE MONTHS ENDED
MARCH 31, 2002
----------------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
--------------- ---------------
(Amounts in thousands,
except per share data)
Revenue...................................................................... $ 301,312 $ 317,644
Cost of revenue.............................................................. 195,968 238,774
--------------- ---------------
Gross profit................................................................. 105,344 78,870
Stock based compensation recovery under variable plan accounting............. - (51,302)
Other operating expenses..................................................... 98,651 118,462
--------------- ---------------
Earnings from operations..................................................... 6,693 11,710
Other expense, net........................................................... (4,117) (4,052)
--------------- ---------------
Earnings before income taxes................................................. 2,576 7,658
Provision for income taxes................................................... 824 2,304
--------------- ---------------
Net earnings................................................................. $ 1,752 $ 5,354
=============== ===============
Net earnings per common share:
Basic and diluted............................................................ $ 0.01 $ 0.02
=============== ===============
The above as previously reported amounts have been adjusted to reflect
the reclassification of gains on the extinguishment of debt per the Company's
adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," in 2002.
3. INVENTORIES
-----------
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Raw materials................................................................ $ 78,058 $ 82,115
Work-in-process.............................................................. 44,892 39,931
Finished goods............................................................... 117,513 139,050
-------------- -----------------
$ 240,463 $ 261,096
============== =================
The amounts shown above are net of inventory reserves of $155,082 and
$170,057 as of March 31, 2003 and December 31, 2002, respectively, and include
inventory on consignment of $33,112 and $49,182 as of March 31, 2003 and
December 31, 2002, respectively.
10
4. GOODWILL AND INTANGIBLE ASSETS
------------------------------
The changes in the carrying amount of goodwill for the three months
ended March 31, 2003 are as follows:
PRODUCT SERVICES TOTAL
------------ ------------ -------------
Balance as of December 31, 2002............................... $ 244,014 $ 57,009 $ 301,023
Telxon goodwill adjustments................................... (438) (110) (548)
Foreign currency impact....................................... 912 228 1,140
@POS transaction costs........................................ 20 5 25
------------ ------------ -------------
Balance as of March 31, 2003........................... $ 244,508 $ 57,132 $ 301,640
============ ============ =============
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------- -----------------------------
ACCUMULATED GROSS ACCUMULATED
GROSS AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------- -------------- ----------- ----------------
Patents, trademarks and tradenames............... $ 32,230 $ (20,955) $ 31,624 $ (19,956)
Purchased technology............................. 24,600 (6,894) 24,817 (6,069)
Other............................................ 6,862 (504) 6,865 (156)
------------- -------------- ----------- ----------------
$ 63,692 $ (28,353) $ 63,306 $ (26,181)
============= ============= =========== ===============
The amortization expense for the three months ended March 31, 2003 and
2002 amounted to $2,173 and $1,638, respectively.
Estimated amortization expense for the above intangible assets,
assuming no additions or writeoffs, for the nine months ended December 31, 2003
and for each of the subsequent years ending December 31 is as follows:
2003 (nine months).............................................................. $ 6,395
2004 (full year)................................................................ 8,020
2005 (full year)................................................................ 7,661
2006 (full year)................................................................ 5,110
2007 (full year)................................................................ 3,318
----------
$ 30,504
==========
5. (LOSS)/EARNINGS PER SHARE AND DIVIDENDS
---------------------------------------
Basic (loss)/earnings per share are based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are based on the weighted average number of common and potentially
dilutive common shares (options and warrants) outstanding during the period,
computed in accordance with the treasury stock method.
11
The following table sets forth the computation of basic and diluted
(loss)/earnings per share:
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
2003 2002
------------- ----------
Numerator:
(Loss)/earnings applicable to common
shares for basic and diluted calculation........... $ (31,013) $ 5,354
============ ==========
Denominator:
Weighted-average common shares........................ 230,527 228,881
Effect of dilutive securities:
Stock options and warrants......................... -- 5,405
------------ ----------
Denominator for diluted calculation................... 230,527 234,286
============ ==========
Stock options and warrants outstanding and the effect of convertible
subordinated notes and debentures at March 31, 2003 and 2002 aggregating to
14,897 and 17,050, respectively, of potentially dilutive shares have not been
included in the diluted per share calculations since their effect would be
antidilutive.
On March 10, 2003, Symbol's Board of Directors approved a $0.01 per
share semi-annual cash dividend, which amounted to $2,312 and was paid on April
28, 2003 to shareholders of record on April 14, 2003.
6. COMPREHENSIVE (LOSS)/EARNINGS
-----------------------------
Comprehensive (loss)/earnings is the change in equity of a business
enterprise from transactions, other events, and circumstances from nonowner
sources during a period. The Company generated total comprehensive
(loss)/earnings of $(28,261) and $33,653 for the three months ended March 31,
2003 and 2002, respectively. The Company's comprehensive (loss)/earnings is
comprised of net (loss)/earnings, foreign currency translation adjustments,
unrealized gains/losses on available for sale marketable securities and
unrealized derivative gains/losses on our cash flow hedging activities.
7. 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 $1,354 relating to these charges was included in accrued
restructuring expenses as of December 31, 2002. As of March 31, 2003, $1,174
remained in accrued restructuring expenses.
LEASE
WORKFORCE OBLIGATION
REDUCTIONS COSTS TOTAL
-------------- -------------- ------------
Balance December 31, 2002.......................... $ 158 $ 1,196 $ 1,354
Utilization/payments............................... (138) (42) (180)
-------------- -------------- -----------
Balance March 31, 2003............................. $ 20 $ 1,154 $ 1,174
============== ============== ===========
12
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. As a result of these
activities, we incurred certain restructuring charges during 2002 and 2001. The
manufacturing restructuring charges recorded during the three months ended March
31, 2002 were $3,179, of which $1,868 was recorded as a component of operating
expenses and $1,311 was recorded as a component of cost of revenue, all of which
consist of workforce reduction costs. The anticipated sub-lease income under
these agreements was recorded as a reduction of the restructuring charge
recorded in 2002. Workforce reduction charges related to the termination of
approximately 350 employees, primarily manufacturing associates. As of December
31, 2002, all of these employees have been terminated. Included in accrued
restructuring expenses as of March 31, 2003 is $5,285 of lease obligations
relating to these manufacturing restructuring charges.
LEASE
OBLIGATION
COSTS
-----------------
Balance at December 31, 2002............................ $ 5,594
Utilization/payments.................................... (309)
-----------------
Balance at March 31, 2003............................... $ 5,285
=================
c. 2003 Restructuring Charges
--------------------------
During the first quarter of 2003, our global services organization
initiated restructuring activities which included transferring a large
percentage of our repair operations to Mexico and the Czech Republic,
reorganizing our professional services group to utilize third party service
providers for lower margin activities, and reorganizing our European management
structure from a country based structure to a regional structure. The total
costs incurred in connection with this restructuring in the first quarter were,
which related almost entirely to workforce reductions, was approximately $1,066,
of which $979 and $87 was recorded as a component of cost of revenue and
operating expenses, respectively, in the first quarter of 2003. These
restructuring activities are expected to be completed during the first quarter
of 2004.
During the first quarter of 2003, we initiated additional restructuring
activities in connection with our decision to relocate additional product lines
from New York to Mexico. The costs associated with this restructuring relate to
workforce reductions and transportation costs. The total amount incurred in
connection with this restructuring activity in the first quarter was $749 and
was recorded as a component of cost of revenue in the first quarter of 2003.
These restructuring activities were completed by June 30, 2003.
Details of the 2003 restructuring charges and remaining balances are as
follows:
ASSET
WORKFORCE IMPAIRMENTS
REDUCTIONS AND OTHER TOTAL
------------- ------------- -------------
Provision - cost of revenue....................... $ 1,574 $ 154 $ 1,728
Provision - operating expenses.................... 87 -- 87
Utilization/payments.............................. (519) (115) (634)
------------- ------------- -------------
Balance at March 31, 2003......................... $ 1,142 $ 39 $ 1,181
============= ============= =============
13
8. CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES AND OTHER DEBT
------------------------------------------------------------
In January and February 2002, Telxon, a wholly owned subsidiary of the
Company, purchased in the open market $34,790 of its 5.75 percent convertible
subordinated notes for $34,127 in cash, and $5,173 of its 7.5 percent
convertible subordinated debentures for $5,004 in cash. This represented a
redemption price of 100.8214 percent of the outstanding principal amount for the
5.75 percent notes and 100 percent of the outstanding principal amount of the
7.5 percent debentures. We obtained such funds from borrowings under our line of
credit. The gain on extinguishment of this debt of $566 has been included in
other expense, net in the Condensed Consolidated Statements of Operations for
the three-month period ended March 31, 2002.
As of March 31, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and international banks (the "Credit
Agreement"). These borrowings bear interest at either LIBOR plus 100 basis
points (which approximated 2.3 percent and 2.4 percent at March 31, 2003 and
December 31, 2002, respectively) or the base rate of the syndication agent bank,
contingent upon various stipulations by the lender (which approximated 4.25
percent at both March 31, 2003 and December 31, 2002). This Credit Agreement was
due to expire in January 2004, as such, the revolving credit facility amount is
recorded as a component of current portion of long-term debt as of March 31,
2003. During the quarter ended March 31, 2003, we paid down approximately
$30,000 on the revolving credit facility. As a result of the length of time
necessary to restate our financial statements (see Note 2 of the Condensed
Consolidated Financial Statements) beginning on September 16, 2003, we would
have been in violation of one of the covenants of our Credit Agreement that
requires the timely filing of financial statements with the SEC. On September
15, 2003, we reached an agreement with the bank group and obtained a waiver to
provide us additional time to become current with our periodic filings with the
SEC. Under the revised Credit Agreement, the credit facility was reduced from
$350,000 to $100,000 in September 2003 and was voluntarily terminated in
November 2003. In November 2003, this credit facility was replaced with a
$30,000 secured credit line which expires in May 2006.
9. AIRCLIC TRANSACTIONS AND OTHER ASSETS
-------------------------------------
AirClic
- -------
In November 2000, we invested $35,000 in and licensed certain
intellectual property to AirClic Inc. ("AirClic"), a business which allows
wireless devices to scan bar codes and transmit data to the Internet. In return,
we received convertible preferred stock in AirClic. We do not currently have the
right to convert the preferred stock into common stock of AirClic and our
ability to do so in the future is subject to certain contractual restrictions.
As we do not have the ability to exercise significant influence over AirClic, we
account for this investment using the cost method. We periodically test the
carrying value of our investments for impairment. In consideration of the
outlook of AirClic's business, the general decline in the economy and the
decline in information technology spending, we determined that the decline in
the value of our investment in AirClic was other than temporary in June 2002. We
obtained an independent appraisal of our investment in AirClic and wrote down
the carrying amount of the investment to the estimated fair value at June 30,
2002 of $2,800 by recording an impairment of the investment of $32,200.
In January 2003, we invested an additional $750 in AirClic in exchange
for additional convertible preferred stock. This additional investment has also
been accounted for under the cost method and increased our investment in AirClic
to $3,550.
In March 2003, AirClic received additional financing from other
investors but the negative outlook for AirClic's business and the lack of a
rebound in the information technology sector and the
14
economy in general prompted us to record an additional impairment charge of
$3,025 related to this investment for the three months ended March 31, 2003,
classified as other expense in the Condensed Consolidated Statements of
Operations. We subsequently wrote off our remaining investment in AirClic of
$525 during the third quarter of 2003.
During the year ended December 31, 2001, we had accumulated certain
component inventories in anticipation of orders from AirClic. As a result,
during 2001, AirClic paid $7,000 with respect to this component inventory. This
payment was accounted for as an advance payment for future inventory purchases.
At December 31, 2002, an accrued liability of $6,147 remained outstanding under
this obligation.
In July 2003, we reached an agreement with AirClic as it related to
this obligation. The remaining obligation of $4,992 as of July 2003 was settled
by making a cash payment of $2,497 to AirClic. Accordingly, we recognized other
income of $2,495 in the third quarter of 2003.
Employee Loan Receivable
- ------------------------
In January 2003, we loaned $500 to our Senior Vice President and Chief
Information Officer. This loan is payable upon the earlier of: (1) 180 days
after he ceases to be an employee of the Company if terminated without cause,
(2) 30 days after he ceases to be an employee of the Company for any other
reason, or (3) January 10, 2008. In addition, if the officer or his wife sell
any shares of our common stock now owned by either of them or hereafter acquired
(other than shares sold to pay the exercise price and taxes resulting from the
exercise of any options originally granted to this officer by us), 100 percent
of the net proceeds of such sales shall be applied immediately to reduce any
outstanding indebtedness under this loan if the equity in any real property
owned by this officer and his wife is insufficient to satisfy this loan.
Although this loan is currently non-interest bearing, if this loan is not paid
when due, interest will accrue at an annual rate of 12 percent or the highest
rate allowed by law. Our Senior Vice President and Chief Information Officer is
not considered to be an "officer" as such term is defined in Rule 16a-1(f) of
the Exchange Act and for purposes of Section 16(a) of the Exchange Act.
10. ACQUISITIONS
------------
a. Brazil Acquisition
------------------
During the second quarter of 2002, we entered into an agreement with
the owners of Seal Sistemas e Technologia Da Informacao Ltda. ("Seal"), a
Brazilian corporation that had operated as a distributor and integrator of our
products since 1987. The agreement resulted in the termination of distribution
rights for Seal and the creation of a majority-owned subsidiary of the Company
that would serve as the Brazilian distributor and customer service entity
("Symbol Brazil"). In accordance with the terms of the agreement, the owners of
Seal acquired a 49 percent ownership interest in Symbol Brazil.
Terms of the agreement included payments to the minority shareholders
that range from a minimum of $9,550 to a maximum of $14,800 contingent upon the
attainment of certain annual net revenue levels of Symbol Brazil. In the event
that none of the specified revenue levels are attained, the minimum earnout
payment is payable no later than March 31, 2009. With each earnout payment, we
are entitled to obtain a portion of Symbol Brazil's shares owned by the minority
shareholders such that we will ultimately own 100 percent of Symbol Brazil no
later than March 31, 2009. We loaned an entity affiliated with the minority
shareholders $5,000 at the time of the agreement, which was due on the date the
first earnout payment is triggered. The present value of net future minimum
earnout payments of $4,550 amounted to $1,992 and was recorded as part of the
purchase price resulting in a total purchase
15
price of $6,992. Any additional earnout payments will be accounted for as
additional purchase price and recorded as goodwill.
Management allocated the purchase price and considered a number of
factors, including independent appraisals, and as a result of such procedures,
the total purchase price has been classified as goodwill. We have not shown the
pro-forma effects of this acquisition as the results of operations of the
acquired company prior to our acquisition was immaterial in relation to our
consolidated financial statements.
As we control Symbol Brazil and are obligated to purchase the remaining
ownership interest, we have consolidated this subsidiary. The minority interest
is accounted for as accrued purchase price and is recorded in other liabilities.
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 Technologies
do Brazil Ltda. owned by two principals of Seal. The Company paid $4,050 and
also forgave the pre-existing $5,000 loan that had been made to an entity
affiliated with the principals of Seal. As a result of this transaction, the
Company and Symbol Technologies Holdings do Brasil Ltda. now owns 85% of the
capital of Symbol Technologies do Brasil Ltda. The principals of Seal can now
earn up to a maximum of approximately $3,900 if Symbol Technologies do Brasil
Ltda. meets certain sales targets over relevant time periods. Under the terms of
the relevant agreements, Symbol Technologies do Brasil Ltda. had its corporate
form changed into a corporation and it will eventually become a wholly owned
subsidiary of the Company, directly or indirectly.
b. @POS.Com Acquisition
--------------------
On September 16, 2002, we completed the acquisition of @POS.com, Inc.
("@POS") through a merger of @POS with one of our wholly owned subsidiaries.
@POS manufactures and markets a range of interactive customer transaction
terminals with advanced signature capture technology and features. In the
merger, we purchased all outstanding shares of @POS common stock and preferred
stock for approximately $5,446.
The assets acquired and liabilities assumed were recorded at their
estimated fair values. After allocating the purchase price including acquisition
costs to net tangible assets, purchased technology that has reached
technological feasibility was valued by independent appraisal at $1,800. This
purchased technology has been capitalized and is being amortized over four
years. In addition, a portion of the purchase price was allocated to other
intangible assets with an aggregate fair value as determined by independent
appraisal of $3,000 with a useful life of 9.5 years.
11. CONTINGENCIES
-------------
a. Legal Matters
-------------
We are a party to lawsuits in the normal course of business. Litigation
in the normal course of business, as well as the lawsuits and investigations
described below, can be expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings and government
investigations are difficult to predict. Unless otherwise specified, Symbol is
currently unable to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, for the lawsuits and investigations described herein. An
unfavorable resolution to any of the lawsuits or investigations
16
described below could have a material adverse effect on Symbol's business,
results of operations or financial condition.
GOVERNMENT INVESTIGATIONS
The SEC has issued a Formal Order Directing Private Investigation and
Designating Officers to Take Testimony with respect to certain accounting
matters, principally concerning the timing and amount of revenue recognized by
Symbol during the period of January 1, 2000 through December 31, 2001 as well as
the accounting for certain reserves, restructurings, certain option programs and
several categories of cost of revenue and operating expenses. We are cooperating
with the SEC, and have produced hundreds of thousands of documents and numerous
witnesses in response to the SEC's inquiries. Symbol and approximately ten or
more former employees have received so-called "Wells Notices" stating that the
SEC Staff in the Northeast Regional Office is considering recommending to the
Commission that it authorize civil actions against Symbol and the individuals
involved alleging violations of various sections of the federal securities laws
and regulations. Pursuant to an action against Symbol, the Commission may seek
permanent injunctive relief and appropriate monetary relief, including a fine,
from us.
The United States Attorney's Office for the Eastern District of New
York (the "Eastern District") has commenced a related investigation. We are
cooperating with that investigation, and have produced documents and witnesses
in response to the Eastern District's inquiries. The Eastern District could file
criminal charges against Symbol and seek to impose a fine upon us and other
relief the Eastern District deems appropriate.
Any criminal and/or civil action or any negotiated resolution may
involve, among other things, injunctive and equitable relief, including material
fines, which could have a material adverse effect on our business, results of
operations and financial condition.
In addition, as a result of the investigations, various governmental
entities at the federal, state and municipal levels may conduct a review of our
supply arrangements with them to determine whether we should be considered for
debarment. If we are debarred, we would be prohibited for a specified period of
time from entering into new supply arrangements with such government entities.
In addition, after a government entity has debarred Symbol, other government
entities are likely to act similarly, subject to applicable law. Governmental
entities constitute an important customer group for Symbol, and debarment from
governmental supply arrangements at a significant level could have an adverse
effect on our business, results of operations and financial condition.
In March 2003, Robert Asti, Symbol's former Vice President--North
America Sales & Services--Finance, who left Symbol in March 2001, pleaded guilty
to two counts of securities fraud in connection with matters that are the
subject of the Commission and the Eastern District investigations. These counts
included allegations that Mr. Asti acted together with other unnamed
high-ranking corporate executives at Symbol to, among other things, manufacture
revenue through sham "round-trip" transactions. The Commission has also filed a
civil complaint asserting similar allegations against Mr. Asti.
In June 2003, Robert Korkuc, Symbol's former Chief Accounting Officer,
who left Symbol in March 2003, pleaded guilty to two counts of securities fraud
in connection with matters that are the subject of the Commission and the
Eastern District investigations. These counts included allegations that Mr.
Korkuc acted with others at Symbol in a fraudulent scheme to inflate various
measures of Symbol's financial performance. The Commission also has filed a
civil complaint asserting similar allegations against Mr. Korkuc.
17
Symbol is attempting to negotiate a resolution with each of the
Commission and the Eastern District to the mutual satisfaction of the parties
involved. In either case, an agreement has not yet been reached and there is no
guarantee that Symbol will be able to successfully negotiate a resolution.
SECURITIES LITIGATION MATTERS
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a purported class action lawsuit was filed, entitled
Pinkowitz v. Symbol Technologies, Inc., et al., in the United States District
Court for the Eastern District of New York on behalf of purchasers of the common
stock of Symbol between October 19, 2000 and February 13, 2002, inclusive,
against Symbol, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi. The complaint
alleged that defendants violated the federal securities laws by issuing
materially false and misleading statements throughout the class period that had
the effect of artificially inflating the market price of Symbol's securities.
Subsequently, a number of additional purported class actions containing
substantially similar allegations were also filed against Symbol and certain
Symbol officers in the Eastern District of New York.
On September 27, 2002, a consolidated amended complaint was filed in
the United States District Court for the Eastern District of New York,
consolidating the previously filed purported class actions. The consolidated
amended complaint added Harvey P. Mallement, George Bugliarello and Leo A.
Guthart (the then current members of the Audit Committee of Symbol's Board of
Directors) and Brian Burke and Frank Borghese (former employees of Symbol) as
additional individual defendants and broadened the scope of the allegations
concerning revenue recognition. In addition, the consolidated amended complaint
extended the alleged class period to the time between April 26, 2000 and April
18, 2002.
Discovery in the Pinkowitz action has recently commenced. In addition,
on October 15, 2003, plaintiffs moved for class certification of the Pinkowitz
action. Trial of the Pinkowitz action is scheduled to commence on June 8, 2004.
Symbol continues to vigorously assert its defenses in this litigation.
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a separate purported class action lawsuit was filed,
entitled Edward Hoyle v. Symbol Technologies, Inc., Tomo Razmilovic, Kenneth V.
Jaeggi, Robert W. Korkuc, Jerome Swartz, Harvey P. Mallement, George
Bugliarello, Charles B. Wang, Leo A. Guthart and James H. Simons, in the United
States District Court for the Eastern District of New York. On May 7, 2003, a
virtually identical purported class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints are brought on behalf of a purported
class of former shareholders of Telxon Corporation ("Telxon") who obtained
Symbol stock in exchange for their Telxon stock pursuant to Symbol's acquisition
of Telxon effective as of November 30, 2000. The complaint alleges that the
defendants violated the federal securities laws by issuing a Registration
Statement and Joint Proxy Statement/Prospectus in connection with the Telxon
acquisition that contained materially false and misleading statements that had
the effect of artificially inflating the market price of Symbol's securities.
On October 3, 2003, Symbol and the individual defendants moved to
dismiss the Hoyle action as barred by the applicable statute of limitations. The
Court has not ruled on the motion. Symbol intends to defend the case vigorously
on the merits.
18
In connection with the above pending class actions and government
investigations, Symbol has recorded a loss provision on legal settlements of
$72,000 in the three month period ended March 31, 2003, bringing the estimated
liability to $142,000 as of March 31, 2003, which is reflected as a component of
accounts payable and accrued expenses in the accompanying Condensed Consolidated
Financial Statements.
Bildstein v. Symbol Technologies, Inc., et. al.
On April 29, 2003, a lawsuit was filed, entitled Bildstein v. Symbol
Technologies, Inc., et. al., in the United States District Court for the Eastern
District of New York against Symbol and Jerome Swartz, Harvey P. Mallement,
Raymond R. Martino, George Bugliarello, Charles B. Wang, Tomo Razmilovic, Leo A.
Guthart, James Simons, Saul F. Steinberg and Lowell Freiberg. The plaintiff
alleges that the defendants violated Section 14(a) of the Securities Exchange
Act of 1934 and Rule 14a-9 promulgated thereunder, and common and state law, by
authorizing the distribution of proxy statements in 2000, 2001 and 2002.
Plaintiff seeks the cancellation of all affirmative votes at the annual meetings
for 2000, 2001 and 2002, canceling all awards under the option plans, enjoining
implementation of the option plans and any awards thereunder and an accounting
by the defendants for all damage to Symbol, plus all costs and expenses in
connection with the action. Symbol has filed a motion to dismiss that is now
fully briefed. On February 4, 2004, Symbol argued its motion to dismiss before
the Court and is awaiting the Court's decision. Symbol intends to litigate the
case vigorously on the merits.
Gold v. Symbol Technologies, Inc., et al.
On December 18, 2003, a purported derivative action lawsuit was filed,
entitled Gold v. Symbol Technologies, Inc., et al., in the Court of Chancery of
the State of the State of Delaware against Symbol and Tomo Razmilovic, Kenneth
V. Jaeggi, Dr. Jerome Swartz, Frank Borghese, Brian Burke, Richard M. Feldt,
Satya Sharma, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Dr.
Leo A. Guthart, Richard Bravman, Dr. James H. Simons, Leonard H. Goldner, Saul
P. Steinberg, Lowell C. Freiberg and Charles Wang. The complaint alleges that
the defendants violated the federal securities laws by issuing materially false
and misleading statements from January 1, 1998 through December 31, 2002 that
had the effect of artificially inflating the market price of Symbol's securities
and that they failed to properly oversee or implement policies, procedures and
rules to ensure compliance with federal and state laws requiring the
dissemination of accurate financial statements, which ultimately caused Symbol
to be sued for, and exposed to liability for, violations of the anti-fraud
provisions of the federal securities laws, engaged in insider trading in
Symbol's common stock, wasted corporate assets and improperly awarded a
severance of approximately $13,000 to Mr. Razmilovic.
Plaintiff seeks to recover incentive-based compensation paid to senior
members of Symbol's management in reliance on materially inflated financial
statements and to impose a trust to recover cash and other valuable assets
received by the management defendants and former Symbol board members in the
form of proceeds garnered from the sale of Symbol common stock (including option
related sales) from at least January 1, 1998 through December 31, 2002. Symbol
intends to litigate the case vigorously.
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
19
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 anticipates that it will pay $37,000 to the class.
As a result of anticipated contributions by Telxon's insurers, Telxon expects
that its net payment will be no more than $25,000. 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 December 19, 2003, the settlement received preliminary approval from
the Court. On February 12, 2004, the Court granted its final approval of the
settlement.
Accordingly, we recorded a $25,000 pre-tax charge in the Consolidated
Statements of Operations for the quarter ended December 31, 2002 and have
reflected as an accrued liability as of December 31, 2002 and March 31, 2003 the
estimated settlement of $37,000 and have recorded a non-current asset for the
insurance proceeds of $12,000 which we expect to receive in the first quarter of
2004.
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 has been substantially completed. Trial is scheduled to
commence sometime in 2004.
Wyser-Pratte Management Co. v. Telxon Corporation, et. al.
On June 11, 2002, Wyser-Pratte Management Co., Inc. ("WPMC") filed a
complaint against Telxon and its former top executives alleging violations of
Sections 10(b), 18, 14(a) and 20(a) of the Securities and Exchange Act of 1934
(the "Exchange Act"), and alleging additional common law claims. This action is
related to the same set of facts as the In re Telxon class action described
above. On November 15, 2003, the parties reached an agreement in principle to
resolve the litigation under which Telxon would pay WPMC $3,300. Accordingly, we
recorded a $3,300 pre-tax charge in the Consolidated Statements of Operations
for the quarter ended December 31, 2002. The settlement was finalized in
December 2003, and a stipulation of dismissal was filed in January 2004.
20
PENDING PATENT AND TRADEMARK LITIGATION
Proxim v. Symbol Technologies, Inc., 3 Com Corporation, Wayport Incorporated and
SMC Networks Incorporated
In March 2001, Proxim Incorporated ("Proxim") sued Symbol, 3 Com
Corporation, Wayport Incorporated and SMC Networks Incorporated in the United
States District Court in the District of Delaware for allegedly infringing three
patents owned by Proxim (the "Proxim v. 3Com et al. Action"). Proxim also filed
a similar lawsuit in March 2001 in the United States District Court in the
District of Massachusetts against Cisco Systems, Incorporated and Intersil
Corporation. The complaint against Symbol sought, among other relief,
unspecified damages for patent infringement, treble damages for willful
infringement and a permanent injunction against Symbol from infringing these
three patents.
Symbol answered and filed counterclaims against Proxim, asserting that
Proxim's RF product offerings infringe on four of our patents relating to
wireless LAN technology.
On December 4, 2001, we filed a complaint against Proxim in the United
States District Court in the District of Delaware (the "Symbol v. Proxim
Action") asserting infringement of the same four patents that were asserted in
our counterclaim against Proxim in the Proxim v. 3Com et al. Action prior to the
severance of this counterclaim by the Court. On December 18, 2001, Proxim filed
an answer and counterclaims in the Symbol v. Proxim Action, seeking declaratory
judgments for non-infringement, invalidity and unenforceability of the four
patents asserted by Symbol, injunctive and monetary relief for our alleged
infringement of one additional Proxim patent (the "`634 Patent") involving
wireless LAN technology, monetary relief for our alleged false patent marking,
and injunctive and monetary relief for our alleged unfair competition under the
Lanham Act, common law unfair competition and tortious interference.
On March 17, 2003, Intersil and Proxim announced that a settlement
between the companies had been reached, whereby Proxim agreed, inter alia, to
dismiss with prejudice all of Proxim's claims in the Proxim v. 3Com et al.
Action (the "Proxim/Intersil Agreement"). Proxim also agreed in the
Proxim/Intersil Agreement to release us from past and future liability for
alleged infringement of the `634 Patent in the Symbol v. Proxim Action, with
respect to any of our products that incorporate Intersil's wireless radio
chipsets. On April 5, 2003, the Court signed that Stipulation and Order of
Dismissal, dismissing all of Proxim's claims in that action with prejudice. On
July 30, 2003, among other rulings, the Court dismissed Proxim's unfair
competition claim.
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 us 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. In
addition, Proxim continues to sell the infringing products, and we expect that
future sales would be subject to a 6%
21
royalty as well. A one day bench trial on Proxim's remaining equitable defenses
took place on November 24, 2003. The Court has not ruled on these defenses.
Trial on the Proxim patent began on September 15, 2003. On September
29, 2003, the jury returned a verdict, finding the patent valid but not
infringed by Symbol.
Symbol Technologies, Inc. v. Hand Held Products, Inc. and HHP-NC, Inc.
On January 21, 2003, we filed a complaint against Hand Held Products,
Inc. and HHP-NC, Inc. (collectively, "HHP") for patent infringement and
declaratory judgment. We alleged that HHP infringes 12 of our patents, that 36
of HHP's patents are not infringed by us, that the HHP patents are otherwise
invalid or unenforceable, and that the court has jurisdiction to hear the
declaratory judgment action. We requested that the court enjoin HHP from further
infringement, declare that our products do not infringe HHP's patents, and award
us costs and damages.
On March 12, 2003, HHP filed a Motion to Dismiss, which was denied on
November 14, 2003. With respect to our claim for a declaratory judgment that 36
of HHP's patents are not infringed by us, or that they are otherwise invalid or
unenforceable, the Court denied HHP's motion to dismiss with respect to 10 of
the patents, granted HHP's motion to dismiss with respect to 25 of the patents
based on lack of subject matter jurisdiction, and granted HHP's motion to
dismiss as to one HHP patent based on HHP's representation to the Court that the
patent had been dedicated to the public and that HHP would not assert it against
us. Pursuant to a stipulation between the parties, we have dismissed without
prejudice our claim that HHP infringes 5 of the 12 Symbol patents and our action
seeking a declaratory judgment with respect to the 10 HHP patents that remained
in the case. On December 12, 2003, HHP asserted counterclaims against Symbol and
Telxon (which had previously owned some of the patents asserted by Symbol)
seeking a declaratory judgment that the Symbol patents were not infringed, were
invalid and/or unenforceable. On the same day, HHP filed a third party complaint
against 12 of its suppliers which, HHP claims, are liable to defend and/or
indemnify HHP with respect to Symbol's infringement claims. We expect discovery
to commence in 2004.
Hand Held Products, Inc. and HHP-NC, Inc. v. Symbol Technologies, Inc. and
Telxon Corporation
On January 7, 2004, Symbol was served with a summons and complaint
alleging that certain of its products infringe 4 patents owned by HHP. Three of
the patents concern the design of a finger groove on the surface of a hand held
computer, and the fourth concerns a decoding algorithm for 2 dimensional bar
codes. These patents had been the subject of Symbol's declaratory judgment
complaint, described above, but had been dismissed by the Court based on HHP's
representation to the Court that Symbol had no reasonable apprehension of being
sued by HHP for infringement of these patents. Symbol intends to defend this
case vigorously on the merits.
Symbol Technologies, Inc. v. Metrologic Instruments, Inc.
Symbol and Metrologic Instruments, Inc. ("Metrologic") entered into a
cross-licensing agreement executed on December 16, 1996 and effective as of
January 1, 1996 (the "Metrologic Agreement").
On April 12, 2002, we filed a complaint in the United States District
Court in the Eastern District of New York against Metrologic, alleging a
material breach of the Metrologic Agreement. We moved for summary judgment
seeking a ruling on the issues, inter alia, that Metrologic had breached the
Metrologic Agreement and that we had the right to terminate Metrologic's rights
under the Metrologic Agreement. The Court denied the summary judgment motion on
March 31, 2003, and held that the issues were subject to resolution by
arbitration. We have appealed the Court's decision.
22
On December 23, 2003, the Court of Appeals dismissed the appeal for
lack of appellate jurisdiction because the District Court judgment was not
final.
In the interim, we are proceeding with the arbitration. Metrologic had
filed a Demand for Arbitration in 2002 that was stayed pending the decisions by
the Court. On June 26, 2003, we filed an Amended Answer and Counterclaims to
Metrologic's Demand for Arbitration, asserting that (a) Metrologic's accused
products are royalty bearing products, as defined under the Metrologic
Agreement, and (b) in the alternative, those products infringe upon one or more
of our patents. Metrologic replied to our counterclaims on July 31, 2003,
denying infringement and asserting that the arbitrator was without jurisdiction
to hear our counterclaims. Pursuant to the decision made by the arbitration
panel, an arbitrator is now in place to hear the arbitration.
On December 22, 2003, Metrologic withdrew its Demand for Arbitration,
however, our counterclaims are still being heard.
In a separate matter relating to the Metrologic Agreement, we filed a
demand for an arbitration against Metrologic seeking a determination that
certain of our new bar code scanning products are not covered by Metrologic
patents licensed to us under the Metrologic Agreement. We do not believe that
the products infringe any Metrologic patents, but in the event there was a
ruling to the contrary, our liability would be limited to the previously
negotiated royalty rate. On June 6, 2003, the arbitrator ruled that whether we
must pay royalties depends on whether our products are covered by one or more
claims of Metrologic's patents, and that this issue must be litigated in court,
not by arbitration. The arbitrator further ruled that we could not have
materially breached the Metrologic Agreement, since the threshold infringement
issue has not yet been determined. On June 19, 2003, after the arbitrator ruled
that Metrologic's infringement allegations must be adjudicated in court,
Metrologic filed a complaint against us in the District Court for the District
of New Jersey, alleging patent infringement and breach of contract, and seeking
monetary damages and termination of the Metrologic Agreement. On July 30, 2003,
Symbol answered the complaint and asserted counterclaims for declaratory
judgments of invalidity and noninfringement of Metrologic's patents and for
non-breach of the Agreement. Discovery is proceeding. Symbol intends 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 (the "Lemelson Partnership"). The suit, which is entitled
Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership, was commenced in the U.S. District Court,
District of Nevada in Reno, Nevada but was subsequently transferred to the Court
in Las Vegas, Nevada. In the litigation, the Auto ID Companies seek, among other
remedies, a declaration that certain patents, which have been asserted by the
Lemelson Partnership against end users of bar code equipment, are invalid,
unenforceable and not infringed.
The Lemelson Partnership has contacted many of the Auto ID Companies'
customers demanding a one-time license fee for certain so-called "bar code"
patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson.
Symbol and the other Auto ID Companies have received many requests from their
customers asking that they undertake the defense of these claims using their
knowledge of the technology at issue. Certain of these customers have requested
indemnification against the Lemelson Partnership's claims from Symbol and the
other Auto ID Companies, individually and/or collectively with other equipment
suppliers. Symbol believes, and its understanding is that the other Auto ID
Companies believe, that generally they have no obligation to indemnify their
customers against these
23
claims and that the patents being asserted by the Lemelson Partnership against
their customers with respect to bar code equipment are invalid, unenforceable
and not infringed.
A 27-day non-jury trial was held before the Court beginning on November
18, 2002, and concluding on January 17, 2003. Post-trial briefing was completed
in late June 2003 and the parties are awaiting a decision to be rendered by the
Court.
On January 23, 2004, the Court concluded that Lemelson's patent claims
are unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the Court are not infringed by Symbol
because use of the accused products does not satisfy one or more of the
limitations of each and every asserted claim; and that the claims are invalid
for lack of written description and enablement even if construed in the manner
urged by Lemelson. In so concluding, the Court found that judgment should be
entered in favor of plaintiffs Symbol and the other members of the Auto ID
Companies and against defendant Lemelson Partnership on Symbol's and the Auto ID
Companies' complaint for declaratory judgment. The Court entered its judgment on
January 23, 2004.
OTHER LITIGATION
Telxon v. Smart Media of Delaware, Inc. ("SMI")
On December 1, 1998, Telxon filed suit against SMI in the Court of
Common Pleas for Summit County, Ohio in a case seeking declaratory judgment
that, contrary to SMI's position, Telxon did not contract to develop SMI's
products or to fund SMI, and that it did not fraudulently induce SMI to refrain
from engaging in business with others or interfere with SMI's business
relations. On March 12, 1999, SMI filed its Answer and Counterclaim denying
Telxon's allegations and alleging claims against Telxon for negligent
misrepresentation, estoppel, tortious interference with business relationship
and intentional misrepresentation and seeking approximately $10,000 in
compensatory damages, punitive damages, fees and costs.
On September 17, 2003, a jury awarded approximately $218,000 in damages
against Telxon. This sum included an award of approximately $6,000 to an
individual. On September 24, 2003, the individual and SMI moved to add Symbol as
a substitute or counterclaim defendant. That motion has subsequently been
withdrawn by SMI although it is still being pursued by the individual. The
motion has been fully briefed and Symbol is awaiting a decision. There can be no
assurance that SMI will not renew this motion at a later date. On October 7,
2003, Telxon made a motion to impound and secure the trial record of certain
exhibits, and on October 8, 2003, Telxon made motions for judgment in its favor
notwithstanding the jury's verdicts, and for a new trial. In the event this
relief is not granted, Telxon requested that the amount of the jury's verdicts
be reduced. Also, Telxon requested that the execution of any judgment against
Telxon entered by the Court be stayed without the posting of a bond, or in the
alternative, that a bond be set at a maximum of $3,700. In support of its
motions, Telxon argued that the jury's verdicts were based upon inadmissible
evidence being improperly provided to the jury during its deliberations; that
the absence of liability on the part of Telxon was conclusively established by
the documents in evidence; and that the amounts awarded to SMI were based on
legally irrelevant projections, and are wildly speculative, particularly given
that SMI never had any revenue or profits. In addition, Telxon argued that the
jury verdicts incorrectly awarded damages more than once for the same alleged
injury by adding together two separate awards for lost profits, and by
improperly combining different measures of damages. The court has not ruled on
any post-trial motions.
There can be no assurance that Symbol will not be found to be
ultimately liable for the damage awards.
24
Barcode Systems, Inc. ("BSI") v. Symbol Technologies Canada, Inc., et al.
On March 19, 2003, BSI filed an amended statement of claim in the Court
of Queen's Bench in Winnipeg, Canada, naming Symbol Technologies Canada, Inc.
and Symbol as defendants. BSI alleges that Symbol deliberately, maliciously and
willfully breached its agreement with BSI under which BSI purported to have the
right to sell Symbol product in western Canada and to supply Symbol's support
operations for western Canada. BSI has claimed damages in an unspecified amount,
punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated
any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,281, representing the unpaid balance of product sold by Symbol to BSI.
On October 30, 2003, BSI filed an Application For Leave with the
Canadian Competition Tribunal ("Tribunal"). BSI is seeking an Order from the
Tribunal that would require Symbol to accept BSI as a customer on the "usual
trade terms" as they existed prior to the termination of their agreement in
April 2003. The Tribunal granted leave for BSI to proceed with its claim against
Symbol on January 15, 2004. Symbol intends to appeal the Tribunal's decision.
On November 17, 2003, BSI filed an additional lawsuit in British
Columbia, Canada against Symbol and a number of its distributors alleging that
Symbol refused to sell products to BSI, conspired with the other defendants to
do the same and used confidential information to interfere with BSI's business.
Symbol considers these claims to be meritless and intends to defend against
these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata
("Plaintiff"), filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de
C.V. ("Symbol Mexico") on or about October 21, 2003 for purposes of exercising
an action to reclaim property on which Symbol's Reynosa facility is located.
Such lawsuit was filed before the First Civil Judge of First Instance, 5th
Judicial District, in Reynosa, Tamaulipas, Mexico. Additionally, the First Civil
Judge ordered the recording of a list pendens with respect to this litigation
before the Public Register of Property in Cd. Victoria, Tamaulipas. As of
November 13, 2003, such list pendens was still pending recordation.
Plaintiff alleges that she is the legal owner of a tract of land of one
hundred (100) hectares in area, located within the area comprising the Rancho La
Alameda, Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan,
Tamaulipas, irrigation district. Allegedly, such land was caused to be part of
the Parque Industrial Del Norte in Reynosa, Tamaulipas. Plaintiff further
alleges that Symbol Mexico, without any claim of right and without Plaintiff's
consent entered upon the tract of land, occupied such, and refused to return to
Plaintiff the portion of land and all improvements and accessions thereto
occupied by Symbol Mexico. Plaintiff is asking the court to order Symbol Mexico
to physically and legally deliver to the Plaintiff the portion of land occupied
by Symbol Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial
Reynosa from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument.
An Owner's Policy of Title Insurance was issued by Stewart Title Guaranty
Company in connection with the above-mentioned transaction in the amount of
$13,400. A Notice of Claim and Request for Defense of Litigation was duly
delivered on behalf of Symbol
25
to Stewart Title Guaranty Company on November 4, 2003. Symbol intends to defend
against this claim vigorously.
Bruck Technologies Handels GmbH European Commission ("EC") Complaint
In February 2004, Symbol became aware of a notice from the European
Competition Commission (the "EC") of a complaint lodged with it by Bruck
Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol
PartnerSelect program violate Article 81 of the EC Treaty. Symbol considers this
claim to be without merit and intends to vigorously defend itself.
PSC Litigation
On June 26, 2002, Symbol filed an action against PSC Inc. and PSC
Scanning, Inc. (collectively, "PSC") in New York State Supreme Court in Suffolk
County, New York asserting claims for breach of contract and tortious
interference with prospective business relations stemming from PSC's failure to
deliver products to Symbol under a preexisting supply and distribution
agreement. On August 22, 2002, PSC filed a separate action in the same Court
against Symbol alleging that Symbol breached its obligations under a separate
supply and distribution agreement with PSC for the supply of Symbol's bar code
readers. On November 22, 2002, during the pendency of the two contract actions,
PSC filed petitions in the United States Bankruptcy Court for the Southern
District of New York seeking relief under Chapter 11 of the United States
Bankruptcy Code. As part of a Bankruptcy Court's mandated mediation process, on
April 7, 2003, the parties entered into a settlement agreement settling all
existing disputes between them. The settlement agreement was approved by the
Bankruptcy Court as part of PSC's Final Plan of Reorganization, as confirmed on
June 19, 2003, and became effective on June 30, 2003. On June 30, 2003, in
accordance with the terms of the settlement, PSC made a one-time payment of
$6,000 to Symbol. In addition, the parties executed an amended patent license
and supply agreements that permit PSC to purchase certain Symbol bar code scan
engine products for use by PSC in the manufacture of certain bar code reading
products. The parties also terminated the two pre-existing distribution
agreements that were the subject of pending litigations between the parties, and
dismissed, with prejudice, the two pending contract actions relating to those
agreements.
b. Guarantees and Product Warranties
---------------------------------
Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtness of Others" ("FIN 45"), requires that upon
issuance of a guarantee, the guarantor must disclose and recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
disclosure requirements of FIN 45 are applicable to the Company's product
warranty liability.
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, 2002................... $ 15,034
Charges to expense--cost of revenue............ 9,146
Utilization/payment............................ (9,322)
-----------
Balance at March 31, 2003...................... $ 14,858
===========
26
c. Derivative Instruments and Hedging Activities
---------------------------------------------
We utilize derivative financial instruments to hedge the risk exposures
associated with foreign currency fluctuations for payments denominated in
foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Changes
in fair value of derivative instruments are recognized immediately in earnings
unless the derivative qualifies as a cash flow hedge. For derivatives qualifying
as cash flow hedges, the effective portion of changes in fair value of the
derivative instrument is recorded as a component of other comprehensive income /
(loss) and is reclassified to earnings in the same period during which the
hedged transaction affects earnings. Any ineffective portion (representing the
remaining gain or loss on the derivative instrument in excess of the cumulative
change in the present value of future cash flows of the hedged transaction) is
recognized in earnings as it occurs. For fair value hedges, changes in fair
value of the derivative, as well as the offsetting changes in fair value of the
hedged item, are recognized in earnings each period. We do not use these
derivative financial instruments for trading purposes.
As of March 31, 2003 and December 31, 2002, respectively, we had $8,566
and $25,267 in notional amounts of forward exchange contracts outstanding. The
forward exchange contracts generally have maturities that do not exceed 12
months and require us to exchange foreign currencies for U.S. dollars at
maturity at rates agreed to at inception of the contracts. These contracts are
primarily denominated in British pounds, Euros, Australian dollars, Canadian
dollars and Japanese yen and have been marked to market each period with the
resulting gains and losses included in the Condensed Consolidated Statement of
Operations. The fair value of these forward exchange contracts was $(386) and
($1,732) as of March 31, 2003 and December 31, 2002, respectively, which was
recorded in current liabilities.
12. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS
----------------------------------------------------
Our business consists of the design, manufacture and marketing of
scanner integrated mobile and wireless information management systems, and the
servicing of, customer support for and professional services related to these
systems. These service activities 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 bar code data capture equipment, mobile
computing devices, wireless communication equipment and other peripheral
products and receives royalties. The Services segment provides wireless
communication solutions that connect our bar code reading equipment and mobile
computing devices to wireless networks. This segment also provides worldwide
comprehensive repair and maintenance integration and support in the form of
service contracts or repairs on an as-needed basis. We use many factors to
measure performance and allocate resources to these two reportable segments. The
primary measurements are sales and standard costs. The accounting policies of
the two reportable segments are essentially the same as those used to prepare
our consolidated financial statements. We rely on our internal management system
to provide us with necessary sales and standard cost data by reportable segment
and we make financial decisions and allocate resources based on the information
we receive from this management system. We do not allocate manufacturing
variances, research and development, sales and marketing, or general and
administrative expenses to these segments, nor to our
27
geographic regions, as we do not use that information to make key operating
decisions and do not believe that allocating these expenses is significant in
evaluating performance.
Our internal structure is in the form of a matrix organization whereby
certain managers are held responsible for products and services worldwide while
other managers are responsible for specific geographic areas. The operating
results of both components are reviewed on a regular basis.
We operate in three main geographic regions: The Americas (which
includes North and South America), EMEA (which includes Europe, Middle East and
Africa) and Asia Pacific (which includes Japan, the Far East and Australia).
Sales are allocated to each region based upon the location of the use of the
products and services. Non - U.S. sales for the three months ended March 31,
2003 and 2002 were $170,970 and $123,875, respectively.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic region. Corporate assets are principally temporary
investments and goodwill.
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table.
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------------
MARCH 31, 2003 MARCH 31, 2002
------------------------------------- --------------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
----------- ----------- ----------- ----------- ----------- -----------
REVENUES:
The Americas...................... $ 185,080 $ 50,248 $ 235,328 $ 170,948 $ 42,457 $ 213,405
EMEA.............................. 104,836 22,829 127,665 71,149 18,038 89,187
Asia Pacific...................... 20,787 2,567 23,354 12,805 2,247 15,052
----------- ----------- ----------- ----------- ----------- -----------
Total net sales................... $ 310,703 $ 75,644 $ 386,347 $ 254,902 $ 62,742 $ 317,644
=========== =========== =========== =========== =========== ===========
STANDARD GROSS PROFIT:
The Americas...................... $ 94,881 $ 11,603 $ 106,484 $ 84,605 $ 16,449 $ 101,054
EMEA.............................. 53,510 7,163 60,673 35,305 3,634 38,939
Asia Pacific...................... 10,439 830 11,269 6,908 987 7,895
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit at standard.... $ 158,830 $ 19,596 178,426 $ 126,818 $ 21,070 147,888
=========== =========== =========== ===========
Manufacturing variances & other
related costs..................... 6,554 69,018
----------- -----------
Total gross profit................ $ 171,872 $ 78,870
=========== ===========
AS OF AS OF
MARCH 31, DECEMBER 31,
2003 2002
----------- -------------
IDENTIFIABLE ASSETS:
The Americas...................... $ 886,079 $ 900,563
EMEA.............................. 281,284 280,538
Asia Pacific...................... 39,032 34,652
Corporate (principally goodwill,
intangible assets and investments) 355,436 356,442
----------- -----------
Total........................ $ 1,561,831 $ 1,572,195
=========== ===========
13. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue
No. 00-21, "Revenue Arrangements with
28
Multiple Deliverables," related to the timing of revenue recognition for
arrangements in which goods or services or both are delivered separately in a
bundled sales arrangement. The consensus requires that when the deliverables
included in this type of arrangement meet certain criteria they should be
accounted for separately. This may result in a difference in the timing of
revenue recognition but will not result in a change in the total amount of
revenue recognized over the life of the arrangement. The allocation of revenue
to the separate deliverables is based on the relative fair value of each item in
a bundled sales arrangement. If the fair value is not available for the
delivered items, the residual method must be used. This method requires that the
amount allocated for the undelivered items in the arrangement be recorded at
their full fair value. This results in the discount, if any, being allocated to
the delivered items. This consensus is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
this consensus is not expected to have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation requires that the assets, liabilities, and results
of activities of a Variable Interest Entity ("VIE") be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. FIN 46R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the end
of the first interim or annual reporting period ending after March 15, 2004,
except for those VIE's that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or annual
reporting period ending after December 15, 2003. For all entities that were
acquired subsequent to January 31, 2003, this interpretation is effective as of
the first interim or annual period ending after December 31, 2003. We are
currently evaluating the impact of adopting this interpretation on our
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly and clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component. SFAS No.
149 also amends the definition of an underlying to conform it to language used
in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003,
with certain exceptions. The adoption of SFAS No. 149 is not expected to have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that falls
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, which for us is the quarter ended
September 30, 2003. The adoption of SFAS No. 150 is not expected to have a
material impact on our consolidated financial statements.
In August 2003, the EITF reached consensus on EITF Issue No. 03-5
("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2, "Software
Revenue Recognition," to Non-Software
29
Deliverables in an Arrangement Containing More-than-Incidental Software." EITF
03-5, which became effective for us on October 1, 2003, provides guidance on
determining whether non-software deliverables are included within the scope of
SOP 97-2 and, accordingly, whether multiple element arrangements are to be
accounted for in accordance with EITF Issue No. 00-21 or SOP 97-2. We do not
believe that adoption of the provisions of EITF 03-5 will have a material impact
on our consolidated financial statements.
In November 2003, the EITF reached partial consensus on EITF 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 provides guidance on the new requirements for
other-than-temporary impairment and its application to debt and marketable
equity investments that are accounted for under SFAS No. 115. The new
requirements on disclosures are effective for fiscal years ending after December
15, 2003. The implementation of EITF 03-1 is not anticipated to have a material
impact on our consolidated financial statements.
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. These and other
important risk factors are included in the "Risk Factors" section of this
report.
In light of the uncertainty inherent in such forward-looking
statements, you should not consider the inclusion to be a representation that
such forward-looking events or outcomes will occur.
Because the information herein is based solely on data currently
available, it is subject to change and should not be viewed as providing any
assurance regarding Symbol's future performance. Actual results and performance
may differ from Symbol's current projections, estimates and expectations, and
the differences may be material, individually or in the aggregate, to Symbol's
business, financial condition, results of operations, liquidity or prospects.
Additionally, Symbol is not obligated to make public indication of changes in
its forward looking statements unless required under applicable disclosure rules
and regulations.
The following discussion and analysis should be read in conjunction with
Symbol's Condensed Consolidated Financial Statements and the notes thereto that
appear elsewhere in this report.
OVERVIEW
- --------
We are a leader in secure mobile information systems that integrate
application-specific handheld computers with wireless networks for data, voice
and bar code data capture. 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 year ended December 31, 2002, we generated $1,401,617
of net revenue.
30
Symbol manufactures products and provides services to capture, manage
and communicate data using three core technologies - bar code reading and image
recognition, mobile computing and networking systems. Our products and services
are sold to a broad and diverse base of customers on a worldwide basis and in
diverse markets such as retail, transportation, parcel and postal delivery
services, warehousing and distribution, manufacturing, healthcare, hospitality,
security, education and government. We do not depend upon a single customer, or
a few customers, the loss of which would have a material adverse effect on our
business.
We are engaged in two reportable business segments: (1) the design,
manufacture and marketing of mobile computing, automatic data capture, and
wireless network systems (the "Product Segment"); and (2) the servicing of,
customer support for and professional services related to these systems (the
"Services Segment"). Each of our operating segments uses its core competencies
to provide building blocks for mobile computing solutions.
EXECUTIVE OVERVIEW OF PERFORMANCE
- ---------------------------------
Overall our revenue performance in the three month period ended March
31, 2003 improved 21.6% to $386,347 from $317,644 in the comparable prior year
period, despite facing certain challenges beyond our control such as the
still-slow information technology spending, a deteriorating global economy, a
worsening geopolitical landscape, with the U.S. at war, and a rising global
health threat in SARS. We are continuing to invest in our people, processes and
systems to improve our margins. We are beginning to see benefits as our overall
gross profit improved to 44.5% for the three month period ended March 31, 2003,
from 24.8% in the comparable prior year period.
Our operating expenses of $208,949 for the three month period ended
March 31, 2003 included a provision for potential legal settlements related to
our class action suits of $72,000 and approximately $5,300 additional expenses
associated with our investigations and restatement.
A key focus of management has been on improving balance sheet
performance. For the three month period ended March 31, 2003, we saw continued
strength in cash flow from operations of $71,288. As such, we improved our
liquidity position, further paying down total debt by approximately $37,000 and
increased cash by $22,466 in the three month period ended March 31, 2003. As of
March 31, 2003, our cash was at $98,587 with only $50 million in short-term bank
debt.
Our net inventory at March 31, 2003 was reduced by $20,633 to $240,463
as compared to $261,096 at December 31, 2002. Our focus on improving our
inventory control processes and on improving inventory turns has aided
significantly in reducing our inventory levels.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
- -----------------------------------------------------
Subsequent to the issuance of the Company's March 31, 2002 financial
statements, management of the Company identified certain accounting errors and
irregularities in its previously issued financial statements beginning in 1998
through the nine months ended September 30, 2002. As a result, the condensed
consolidated financial statements for the three months ended March 31, 2002
included in Item 1 have been restated. Refer to Note 2 of the Condensed
Consolidated Financial Statements for further details on the restatement.
Management's discussion and analysis of financial condition and results of
operations give effect to the restatement of the March 31, 2002 financial
statements.
RESULTS OF OPERATIONS
- ---------------------
The following table summarizes our revenue by reportable segment and
geographic region:
31
FOR THE THREE MONTHS
--------------------
ENDED MARCH 31,
------------------
PERCENT
2003 2002 INCREASE INCREASE
---- ---- -------- --------
Product revenues:
The Americas $185,080 $170,948 $14,132 8.3
EMEA 104,836 71,149 33,687 47.4
Asia Pacific 20,787 12,805 7,982 62.3
----------------- --------------- -------------- ---------------
Total-product
revenues 310,703 254,902 55,801 21.9
----------------- --------------- -------------- ---------------
Services revenues:
The Americas 50,248 42,457 7,791 18.4
EMEA 22,829 18,038 4,791 26.6
Asia Pacific 2,567 2,247 320 14.2
----------------- --------------- -------------- ---------------
Total-services
revenues 75,644 62,742 12,902 20.6
----------------- --------------- -------------- ---------------
Total revenues $386,347 $317,644 $68,703 21.6
================= ================ ============= ===============
Net product revenue of $310,703 for the three months ended March 31,
2003 increased $55,801 or 21.9 percent from $254,902 in the comparable prior
year period. The increase is due to increased sales volume of the Company's
mobile computing products, particularly in the Americas. In addition, our
product revenue in EMEA grew $33,687 or 47.4% as compared to the comparable
prior year period, due to similar increases in our mobile computing products as
we further penetrated this market. Net services revenue of $75,644 for the three
months ended March 31, 2003 increased $12,902 or 20.6 percent, from $62,742 in
the comparable prior year period primarily due to an 18.4 percent increase in
the Americas and a 26.6 percent increase in EMEA. The increase in service
revenue in the Americas is largely due to significant cash collections, as
service revenue is recognized on a billed and collected basis. The increase in
service revenue in EMEA is the result of an increase in the contract base and
favorable exchange rates.
Geographically, the Americas product revenue increased $14,132 or 8.3
percent for the three months ended March 31, 2003, from the respective
comparable prior year period, primarily due to the strong performance of our
mobile computing product offering. Outside of the Americas, revenue between
periods were favorably impacted by exchange rates. EMEA product revenue
increased $33,687 or 47.4 percent for the three months ended March 31, 2003 from
the comparable prior year period. Asia Pacific product revenue increased $7,982
or 62.3 percent for the three months ended March 31, 2003 from the comparable
prior year period. The Americas, EMEA and Asia Pacific represent approximately
59 percent, 34 percent, and 7 percent of net product revenue for the three
months ended March 31, 2003.
Product cost of revenue as a percentage of net product revenue was 50.3
percent for the three months ended March 31, 2003 as compared to 71.5 percent in
the comparable prior year period. Included in product cost of revenue for the
three month period ended March 31, 2002 are the following charges: $4,896
provision for a loss contract; $1,311 related to the restructuring activities
for the transition of our manufacturing facilities; approximately $1,100 related
to the impairment of certain product software assets; severance charges of
approximately $2,000 and additional warranty expenses of $1,930. These charges,
aggregating $11,237 represent 6.2 percent of product cost of revenue in the
quarter ended March 31, 2002 or 4.4 percent of product cost of revenue as a
percentage of product revenue. In addition our manufacturing efficiencies and
favorable absorption during the quarter ended March 31, 2003 reduced our costs
by approximately 4.0 percent between the periods. The remaining decrease is due
to an overall shift
32
in product mix to higher margin products particularly in our scanner and mobile
computing products where the percent of cost of these products as a percentage
of revenue decreased for the quarter ended March 31, 2003 by 5.2 percent and 7.4
percent, respectively from the comparable prior year quarter, and favorable
impact of foreign exchange rates.
Services cost of revenue increased $1,521 or 2.7 percent to $58,136 for
the three months ended March 31, 2003 from $56,615 in the comparable prior year
period, primarily due to higher repair volumes.
Total operating expenses increased 211.1 percent to $208,949 for the
three-month period ended March 31, 2003 from $67,160 in the comparable period in
the prior year. This increase is largely driven by accounting consequences
related to our stock-based compensation plans which resulted in a recovery or
benefit of $51,302 in our prior year quarter, loss provision for legal
settlements of $72,000 in our current year quarter and additional costs of
$5,300 associated with our restatement and the ongoing government investigations
as further described below.
Engineering costs increased to $37,055 or 4.3 percent for the three
months ended March 31, 2003 from $35,533 for the respective prior year period.
This increase is due to the inclusion of @POS engineering resources and an
increase in engineering development activities. As a percentage of total net
revenue, engineering expenses decreased to 9.6 percent for the three months
ended March 31, 2003 compared to 11.2 percent for the comparable prior year
period primarily due to increased sales between the periods.
Selling, general and administrative expenses of $99,031 for the three
months ended March 31, 2003 increased 23.3 percent from $80,295 for the
comparable prior year period. The increase is a result of variable expenses
associated with our net sales growth over comparable periods of approximately
17.8 percent and additional costs of $5,300 or 5.3 percent of total selling,
general and administrative expenses for the quarter ended March 31, 2003
associated with the restatement and ongoing government investigations. As a
percentage of net revenue, such expenses increased to 25.6 percent for the three
months ended March 31, 2003 from 25.3 percent in the comparable prior year
period.
In February 2002, our former President and Chief Executive Officer
announced his retirement. In connection therewith, we recorded a pre-tax
compensation and related benefits charge of $8,597 for the three months ended
March 31, 2002 included as a component of selling, general and administrative
expenses.
As the Company continues to negotiate with regard to the
investigations and its outstanding class action lawsuits, we have recorded an
additional $72,000 loss provision for legal settlements in the three month
period ended March 31, 2003 bringing the estimated liability to $142,000 as of
March 31, 2003.
Included in total operating expenses, and as more fully described in
our Annual Report on Form 10-K/A as of and for the year ended December 31, 2002,
are amounts associated with the variable portion of our stock option plans. Such
amount was a recovery of $51,302 for the three-month period ended March 31,
2002. As of March 31, 2003, due to the inability of Symbol to make timely
filings with the Commission, our stock option plans were held in abeyance,
meaning that our employees could not exercise their options until we become
current with our filings. As an accommodation to both current and former Symbol
associates whose options have been impacted by this suspension, the Compensation
Committee of the Board approved an abeyance program that allows associates whose
options are affected during the suspension period the right to exercise such
options up to 90 days after the end of the suspension period. This results in a
new measurement date for those options, which leads to a non-cash
33
accounting compensation charge for the intrinsic value of those vested options
when the employee either terminates employment during the suspension period or
within the 90 day period after the end of the suspension period. Such expense
amounted to $776 for the three month period ended March 31, 2003.
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 manufacturing partners. Included in operating
expenses as restructuring and impairment charges for the three-month period
ended March 31, 2002 is $2,634 related to these transition activities, primarily
related to workforce reduction. (See Note 7 to the Condensed Consolidated
Financial Statements)
Our effective tax rate for the three months ended March 31, 2003 and
2002 was 24.6% and 30.1%, respectively, reflecting the increasing benefits for
research credits, income exemptions and lower foreign effective tax rates
partially offset by non-deductible expenses. The tax rate for the first three
months of 2003 reflects our current estimate of the full year effective income
tax rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We utilize a number of measures of liquidity including the following:
MARCH 31, 2003 DECEMBER 31, 2002
--------------------- ------------------------
Working Capital................................................ $98,153 $216,316
Current Ratio (Current Assets to Current Liabilities).......... 1.2:1 1.5:1
Long-Term Debt to Capital (long-term debt to long-term debt
plus equity)................................................ 6.0% 13.3%
Current assets decreased by $14,240 from December 31, 2002 principally
due to a decrease in inventories due to increased sales and a decrease in
accounts receivable due to increased cash collections, partially offset by an
increase in cash on hand due to improved cash flow from operations. Additionally
during the three months ended March 31, 2003 we paid down approximately $30,000
on the revolving credit facility.
Current liabilities increased $103,923 from December 31, 2002 primarily
due to an increase in accounts payable and accrued expenses, primarily due to
additional accruals recorded in connection with pending class action litigation
as well as increased short-term debt obligations due to maturities of amounts
under our revolving credit facility.
The aforementioned activity resulted in a working capital decrease of
$118,163 for the three months ended March 31, 2003. Our current ratio at March
31, 2003 decreased to 1.2:1 compared with 1.5:1 as of December 31, 2002.
During the three months ended March 31, 2003, we generated cash flow
from operating activities of $71,288 and experienced an overall increase in cash
of $22,466. The cash flows provided by operating activities as well as the
proceeds from the exercise of stock options, warrants and the employee stock
purchase plan were used primarily to repay long-term debt, purchase property,
plant and equipment, repurchase our common stock and invest in new companies and
other assets.
Net cash provided by operating activities for the three months ended
March 31, 2003 increased to $71,288 from $29,238 for the same period in 2002
primarily as a result of improved operating gross profit as well as improved
collections on customer accounts receivable. Net cash used in investing
activities for the three months ended March 31, 2003 increased to $13,150 from
$10,995 in the same period in 2002 as
34
a result of lower proceeds in 2003 from the sale of property, plant and
equipment. Net cash used in financing activities for the three months ended
March 31, 2003 increased to $37,062 from $22,106 primarily as a result of
increased net debt repayments.
Based on recent financial performance and current expectations, we
believe that our cash on hand, cash generated from operations and various credit
facilities available to us will satisfy our needs for working capital, capital
expenditures, investment requirements, stock repurchases, and other liquidity
requirements associated with our existing operations through at least the next
12 months.
During 2000, we entered into a $50,000 lease receivable securitization
agreement. This agreement matured on December 31, 2003 but was renewed for an
additional three months without the ability to draw upon additional funds
available under the agreement. Since December 31, 2003, we have not been able to
securitize additional lease receivables and will not be able to do so until we
provide certain financial information to the financial institution. During the
three months ended March 31, 2003 and 2002, we did not securitize any of our
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.
We had long-term debt outstanding as follows:
MARCH 31, 2003 DECEMBER 31, 2002
--------------- -----------------
Revolving Credit Facility.............. $ 50,000 $ 80,000
Senior Notes........................... -- 6,349
SAILS Exchangeable Debt................ 54,290 55,194
Other.................................. 527 752
--------------- -----------------
104,817 142,295
Less Current Maturities................ 50,298 6,681
--------------- -----------------
Long Term Debt......................... $ 54,519 $ 135,614
=============== =================
As of March 31, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and International banks (the "Credit
Agreement"). These borrowings bear interest at either LIBOR plus 100 basis
points (which approximated 2.3 percent and 2.4 percent at March 31, 2003 and
December 31, 2002, respectively) or the base rate of the syndication agent bank,
contingent upon various stipulations by the lender (which approximated 4.25
percent at both March 31, 2003 and December 31, 2002). This Credit Agreement was
due to expire in January 2004, as such, the revolving credit facility amount is
recorded as a component of current maturities in the above table as of March 31,
2003. As a result of the length of time necessary to restate our financial
statements (see Note 2 of the Condensed Consolidated Financial Statements)
beginning on September 16, 2003, we would have been in violation of one of the
covenants of our Credit Agreement that requires the timely filing of financial
statements with the SEC. On September 15, 2003, we reached an agreement with the
bank group and obtained a waiver to provide us additional time to become current
with our periodic filings with the SEC. Under the revised Credit Agreement, the
credit facility was reduced from $350,000 to $100,000 in September, 2003 and was
voluntarily terminated in November 2003. In November 2003, we refinanced the
Credit Agreement with a $30,000 secured credit line which expires in May 2006.
In addition to our secured credit line, we have loan agreements with various
banks pursuant to which, the banks have agreed to provide lines of credit
totaling $24,469 with a range of borrowing rates and varying terms. As of March
31, 2003 and December 31, 2002, the Company had no borrowings outstanding under
these lines. These agreements continue until such time as either party
terminates the agreements.
35
In March 1993, we issued $50,000 of our 7.76 percent Series Notes due
February 15, 2003 (the "Senior Notes"). The remaining balance of the Senior
Notes of $6,349 is classified as current at December 31, 2002 and was fully
repaid in February 2003.
In January 2001, we entered in to 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 $53,997 at March 31, 2003. Such shares are
held as collateral to secure the debt instrument associated with the SAILS and
are included in Investment in Marketable Securities in the Consolidated Balance
Sheets. This debt has a seven-year maturity and pays 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. Accordingly, the
derivative has been specifically designated as a hedge of the exposure to
changes in the fair value of the securities. 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 hedged item attributable
to the risk being hedged. The effect of that accounting is to reflect in
earnings the extent to which the hedge is not effective in achieving offsetting
changes in fair value.
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 $54,290 at March 31, 2003.
The remaining portion of long-term debt outstanding relates to capital
lease obligations and various other loans maturing through 2007.
The combined aggregate amount of long-term debt maturities for the nine
months ended December 31, 2003 and each of the subsequent years ending December
31 are as follows:
2003 (9 months) 50,298
2004 (full year) 144
2005 (full year) 73
2006 (full year) 6
2007 (full year) 6
Thereafter 54,290
--------
$104,817
========
Our long-term debt to capital ratio decreased to 6.0 percent at March
31, 2003 from 13.3 percent at December 31, 2002 primarily due to the repayment
of debt under our revolving credit facility from cash flows from operating
activities.
We continue to enter into obligations and commitments to make future
payments under lease agreements. Our capital lease obligations are included in
long-term debt as presented on the balance
36
sheet. The aggregate amount of required future minimum rental payments under
non-cancelable operating leases for the nine months ended December 31, 2003 and
each of the subsequent years ending December 31, are as follows:
OPERATING LEASES
----------------
2003 (9 months).................................. $ 14,537
2004 (full year)................................. 16,470
2005 (full year)................................. 14,769
2006 (full year)................................. 13,386
2007 (full year)................................. 11,591
Thereafter....................................... 34,686
----------------
Total minimum payments........................... $105,439
================
In our opinion, inflation has not had a material effect on our
operations.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
- -----------------------------------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
reported amounts of assets, liabilities, revenue and expenses, as well as the
disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments,
including those related to product return reserves, legal contingencies,
inventory valuation, warranty reserves, useful lives of long-lived assets,
derivative instrument valuations and income taxes. We base our estimates and
judgments on historical experience and on various other factors that we believe
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Note 1 to the
Consolidated Financial Statements "Summary of Significant Accounting Policies"
filed in our Annual Report on Form 10-K/A for the year ended December 31, 2002
summarizes each of our significant accounting policies. 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 and determinable and collectibility
is reasonably assured. Sales to resellers that lack economic substance or cannot
pay for our products without reselling them to their customers are recognized
when the revenue is billed and collected. Revenue on sales to distributors is
recognized when our products and systems are sold by them to the end user.
37
When a sale involves multiple elements, the entire revenue from the
arrangement is allocated to each respective element based on its relative fair
value and is recognized when the revenue recognition criteria for each element
is met.
We accrue estimated product return reserves against our recorded
revenue. The estimated amount is based on historical experience of similar
products to our customers. If our product mix or customer base changes
significantly, this could result in a change to our future estimated product
return reserve.
We record accounts receivable, net of an allowance for doubtful
accounts. Throughout the year, we estimate our ability to collect outstanding
receivables and establish an allowance for doubtful accounts. In doing so, we
evaluate the age of our receivables, past collection history, current financial
conditions of 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 of all of the accounts receivable. We believe
that analysis of historical trends and current knowledge of potential collection
problems provides us sufficient information to establish a reasonable estimate
for an allowance for doubtful accounts. However, since we cannot predict with
certainty future changes in the financial stability of our customers, our actual
future losses from uncollectible accounts may differ from our estimates, which
could have an adverse effect on our financial condition and results of
operations.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings and accruals are
established when we are able to estimate the probable outcome of these matters.
Such estimates of outcome are derived from consultation with outside legal
counsel, as well as an assessment of litigation and settlement strategies. Legal
contingencies are often resolved over long time periods. The required accruals
may change in the future due to new developments in each matter or changes in
approach such as a change in settlement strategy in dealing with these matters.
Depending on how these matters are resolved, these costs could be material.
INVENTORY VALUATION
We record our inventories at the lower of historical cost or market
value. In assessing the ultimate realization of recorded amounts, we are
required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. Projected demand levels,
economic conditions, business restructurings, technological innovation and
product life cycles are variables we assess when determining our reserve for
excess and obsolete inventories.
We have experienced significant changes in required reserves in recent
periods due to these variables. It is possible that significant changes in
required inventory reserves may continue to occur in the future if there is
further deterioration in market conditions or acceleration in technological
change.
WARRANTY RESERVES
We provide standard warranty coverage for most of our products for a
period of one year from the date of shipment. We record a liability for
estimated warranty claims based on historical claims, product failure rates and
other factors. This liability primarily includes the anticipated cost of
materials, labor and shipping necessary to repair and service the equipment. Our
warranty obligation is affected by product failure rates, material usage rates,
and the efficiency by which the product failure is corrected. Should our
warranty policy change or should actual failure rates, material usage and labor
efficiencies differ from our estimates, revisions to the estimated warranty
liability would be required.
38
USEFUL LIVES OF LONG-LIVED ASSETS
We estimate the useful lives of our long-lived assets, including
property, plant and equipment, identifiable finite life intangible assets and
software development costs for internal use in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting
period. The estimated lives are based on historical experience with similar
assets as well as taking into consideration anticipated technological or other
changes. If technological changes were to occur more rapidly or slowly than
anticipated, or in a different form, useful lives may need to be changed
accordingly, resulting in either an increase or decrease in depreciation and
amortization expense. We review these assets annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important and that could trigger an impairment review
include significant changes in the manner of our use of the acquired asset,
changes in historical or projected operating performance and cash flows and
significant negative economic trends.
DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FOREIGN CURRENCY
We utilize derivative financial instruments to hedge foreign exchange
rate risk exposures related to foreign currency denominated payments from our
international subsidiaries. We also utilize a derivative financial instrument to
hedge fluctuations in the fair value of our investment in Cisco common shares.
Our foreign exchange derivatives qualify for hedge accounting in accordance with
the provisions of SFAS No. 133. We do not participate in speculative derivatives
trading. While we intend to continue to meet the conditions for hedge
accounting, if hedges did not qualify as highly effective, or if we did not
believe the forecasted transactions would occur, the changes in fair value of
the derivatives used as hedges would be reflected in earnings and could be
material. We do not believe we are exposed to more than a nominal amount of
credit risk in our hedging activities as the counterparties are established,
well capitalized financial institutions.
INCOME TAXES
Deferred income taxes are provided for the effect of temporary
differences between the amounts of assets and liabilities recognized for
financial reporting purposes and the amounts recognized for income tax purposes.
We measure deferred tax assets and liabilities using enacted tax rates, that if
changed, would result in either an increase or decrease in the reported income
taxes in the period of change. A valuation allowance is recorded when it is more
likely than not that a deferred tax asset will not be realized. In assessing the
likelihood of realization, management considers estimates of future taxable
income, the character of income needed to realize future tax benefits, and other
available evidence.
Our critical accounting policies have been reviewed with the Audit
Committee of the Board of Directors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
In November 2002, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables," related to the
timing of revenue recognition for arrangements in which goods or services or
both are delivered separately in a bundled sales arrangement. The consensus
requires that when the deliverables included in this type of arrangement meet
certain criteria they should be accounted for separately. This may result in a
difference in the timing of revenue recognition but will not result in a change
in the total amount of revenue recognized over the life of the arrangement. The
allocation of revenue to the separate deliverables is based on the relative fair
value of each item in a bundled sales
39
arrangement. If the fair value is not available for the delivered items, the
residual method must be used. This method requires that the amount allocated for
the undelivered items in the arrangement be recorded at their full fair value.
This results in the discount, if any, being allocated to the delivered items.
This consensus is effective prospectively for arrangements entered into in
fiscal periods beginning after June 15, 2003. The adoption of this consensus is
not expected to have a material effect on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation
issues. This interpretation requires that the assets, liabilities, and results
of activities of a Variable Interest Entity ("VIE") be consolidated into the
financial statements of the enterprise that has a controlling interest in the
VIE. FIN 46R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the end
of the first interim or annual reporting period ending after March 15, 2004,
except for those VIE's that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or annual
reporting period ending after December 15, 2003. For all entities that were
acquired subsequent to January 31, 2003, this interpretation is effective as of
the first interim or annual period ending after December 31, 2003. We are
currently evaluating the impact of adopting this interpretation on our
consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly and clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative and when a derivative contains a financing component. SFAS No.
149 also amends the definition of an underlying to conform it to language used
in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." SFAS No.
149 is effective for contracts entered into or modified after June 30, 2003,
with certain exceptions. The adoption of SFAS No. 149 is not expected to have a
material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity,"
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that falls
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, which for us is the quarter ended
September 30, 2003. The adoption of SFAS No. 150 is not expected to have a
material impact on our consolidated financial statements.
In August 2003, the EITF reached consensus on EITF Issue No. 03-5
("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2, "Software
Revenue Recognition," to Non-Software Deliverables in an Arrangement Containing
More-than-Incidental Software." EITF 03-5, which became effective for us on
October 1, 2003, provides guidance on determining whether non-software
deliverables are included within the scope of SOP 97-2 and, accordingly, whether
multiple element arrangements are to be accounted for in accordance with EITF
Issue No. 00-21 or SOP 97-2. We do not believe that adoption of the provisions
of EITF 03-5 will have a material impact on our consolidated financial
statements.
40
In November 2003, the EITF reached partial consensus on EITF 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 provides guidance on the new requirements for
other-than-temporary impairment and its application to debt and marketable
equity investments that are accounted for under SFAS No. 115. The new
requirements on disclosures are effective for fiscal years ending after December
15, 2003. The implementation of EITF 03-1 is not anticipated to have a material
impact on our consolidated financial statements.
RISK FACTORS
- ------------
Set forth below are important risks and uncertainties that could have a material
adverse effect on Symbol's business, results of operations and financial
condition and cause actual results to differ materially from those expressed in
forward-looking statements made by Symbol or our management.
RISKS RELATING TO THE RESTATEMENT
---------------------------------
WE ARE BEING INVESTIGATED BY THE COMMISSION AND THE EASTERN DISTRICT FOR CERTAIN
OF OUR PRIOR ACCOUNTING PRACTICES AND WE CANNOT PREDICT THE OUTCOME OF THESE
INVESTIGATIONS. THE INVESTIGATIONS COULD RESULT IN CIVIL AND/OR CRIMINAL ACTIONS
SEEKING, AMONG OTHER THINGS, INJUNCTIVE AND MONETARY RELIEF FROM SYMBOL. IN
ADDITION, THE FILING OF ANY CHARGES COULD RESULT IN THE SUSPENSION OR DEBARMENT
FROM FUTURE GOVERNMENT CONTRACTS. ANY SUCH DEVELOPMENT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Commission and the Eastern District have commenced separate
investigations relating to certain of our prior accounting practices. In
response to an inquiry from the Commission, we conducted an initial internal
investigation, with the assistance of a law firm, in May 2001 relating to such
accounting practices, which we subsequently discovered was hindered by certain
of our former employees. The Commission expressed dissatisfaction with the
initial investigation. In March 2002, we undertook an approximately
eighteen-month internal investigation, with the assistance of a second law firm
and independent forensic accounting team, the results of which gave rise to the
restatement of our financial statements for the years ended December 31, 2000
and 2001, and unaudited selected quarterly information for each of the four
quarters of 2001 and the first three quarters of 2002. See Item 7 of our Annual
Report on Form 10-K/A for the year ended December 31, 2002. Symbol has also been
given notice that the Commission is considering recommending civil actions
against Symbol and certain of our former employees for violations of federal
securities laws.
We are fully cooperating with the Commission and Eastern District in
their respective investigations, and are engaging in discussions with each
entity to resolve the issues raised by such investigations. However, we cannot
predict when these investigations will be completed, the outcome of such
investigations, or when a negotiated resolution, if any, may be reached and the
likely terms of such a resolution. However, any criminal and/or civil action or
any negotiated resolution may involve, among other things, injunctive and
equitable relief, including material fines, which could have a material adverse
effect on our business, results of operations and financial condition.
In addition, as a result of the investigations, various governmental
entities at the federal, state and municipal levels may conduct a review of our
supply arrangements with them to determine whether we should be considered for
debarment. If we are debarred, we would be prohibited for a specified period of
time from entering into new supply arrangements with such government entities.
In addition, after a government entity has debarred Symbol, other government
entities are likely to act similarly, subject to applicable law. Governmental
entities constitute an important customer group for Symbol, and debarment from
governmental supply arrangements at a significant level could have an adverse
effect on our business, results of operations and financial condition.
41
PENDING LITIGATION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Symbol, certain members of our former senior management team and
certain former and current members of our Board of Directors are named
defendants in a number of purported class actions alleging violations of federal
securities laws, including issuing materially false and misleading statements
that had the effect of artificially inflating the market price of our common
stock, as well as related derivative actions. As of March 31, 2003, we have
accrued $142 million related to the pending class actions and the government
investigations. The plaintiffs have yet to specify the amount of damages being
sought in the related civil actions and, therefore, we are unable to estimate
what our ultimate liability in such lawsuits may be. Telxon, our wholly-owned
subsidiary, along with various former executive officers of Telxon, are named
defendants in a number of separate purported class actions alleging violations
of federal securities laws. On November 13, 2003, Telxon and the plaintiff class
reached a tentative settlement of all pending shareholder class actions against
Telxon. On February 12, 2004, the Court granted its final approval of the
settlement. Under the settlement, Telxon anticipates that it will pay $37
million to the class. As a result of anticipated contributions by Telxon's
insurers, Telxon expects that its net payment will be no more than $25 million.
Our insurance coverage is not sufficient to cover our total liabilities in any
of these purported class actions, and our ultimate liability in these actions
may have a material adverse effect on our results of operations and financial
condition.
In addition, in March and June 2003, Robert Asti, former Vice
President--North America Sales and Service--Finance, and Robert Korkuc, former
Chief Accounting Officer, respectively, pled guilty to two counts of securities
fraud in connection with the government investigations described above. The
Commission has also filed civil complaints against the two individuals based
upon similar facts. The resolution of these civil complaints, any additional
civil complaints against members of our current and/or former management team or
Board of Directors or the indictment of any members of our current management
team or Board of Directors could result in additional negative publicity for
Symbol and may impact the securities litigations in which we are a party.
In addition, we may be obligated to indemnify (and advance legal
expenses to) such former or current directors, officers or employees in
accordance with the terms of our certificate of incorporation, bylaws, other
applicable agreements, and Delaware law. We currently hold insurance policies
for the benefit of our directors and officers, although our insurance coverage
may not be sufficient in some or all of these matters. Furthermore, the
underwriters of our directors and officers insurance policy may seek to rescind
or otherwise deny coverage in some or all of these matters, in which case we may
have to self-fund the indemnification amounts owed to such directors and
officers. Our ultimate liability in these civil actions may have a material
adverse effect on our results of operations and financial condition.
On September 17, 2003, a jury awarded approximately $218 million in
damages against Telxon, which we acquired in November 2000, for claims relating
to an alleged contract with Smart Media of Delaware, Inc. Telxon has made
certain post-verdict motions seeking, among other things, a new trial or a
reduction in the amount of the jury verdict. While we are still vigorously
defending against this lawsuit, we may ultimately be liable for the full amount
of the jury verdict, which could have a material adverse effect on our results
of operations, financial condition and business.
We are also subject to lawsuits in the normal course of business, which
can be expensive, lengthy, disrupt normal business operations and divert
management's attention from ongoing business operations. An unfavorable
resolution to any lawsuit could have a material adverse effect on our business,
results of operations and financial condition. See Part II, Item I, "Legal
Proceedings" for additional information regarding material litigation.
42
IF WE ARE UNABLE TO EFFECTIVELY AND EFFICIENTLY IMPLEMENT OUR PLAN TO REMEDIATE
THE MATERIAL WEAKNESSES WHICH HAVE BEEN IDENTIFIED IN OUR INTERNAL CONTROLS AND
PROCEDURES, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR
FINANCIAL RESULTS.
Symbol's internal investigations, conducted with oversight by our Audit
Committee, identified material weaknesses in our internal controls and
procedures, as well as instances in which certain members of former management
engaged in, directed and/or created an environment that encouraged a variety of
inappropriate activities that necessitated the restatement. Through our
investigations, we discovered that a significant portion of the accounting
errors and irregularities related to the timing and amount of product and
service revenue recognized. Additionally, there were errors and irregularities
associated with the establishment and utilization of certain reserves and
restructurings, including certain end-of-quarter adjustments that were
apparently made in order to achieve previously forecasted financial results.
There were also errors and/or irregularities associated with the administration
of certain options programs, as well as several categories of revenue and
operating expenses, including efforts to artificially reduce reported inventory.
In the investigations, we also concluded that certain members of former
management who were primarily responsible for maintaining proper internal
controls and procedures failed to establish an appropriate control environment,
which, among other things, resulted from inadequate hiring of qualified and
experienced personnel, inadequate staffing, insufficient training and
supervision of personnel, a decentralized accounting structure for operations in
the United States and inadequate systems and systems interfaces.
We are implementing various initiatives intended to materially improve
our internal controls and procedures, address the systems and personnel issues
raised in the course of the restatement and help ensure a corporate culture that
emphasizes integrity, honesty and accurate financial reporting. These
initiatives address Symbol's control environment, organization and staffing,
policies, procedures and documentation, and information systems. See Part I,
Item 4, "Controls and Procedures" for a discussion of these initiatives.
The implementation of the initiatives set forth in Part I, Item 4 is
one of Symbol's highest priorities. Our Board of Directors, in coordination with
our Audit Committee, will continually assess the progress and sufficiency of
these initiatives and make adjustments as necessary. However, no assurance can
be given that we will be able to successfully implement our revised internal
controls and procedures or that our revised controls and procedures will be
effective in remedying all of the identified material weaknesses in our prior
controls and procedures. In addition, we may be required to hire additional
employees, and may experience higher than anticipated capital expenditures and
operating expenses, during the implementation of these changes and thereafter.
If we are unable to implement these changes effectively or efficiently, there
could be a material adverse effect on our operations or financial results.
ONGOING REVIEW OF OUR PUBLIC FILINGS BY THE COMMISSION MAY RESULT IN THE FURTHER
AMENDMENT OR RESTATEMENT OF OUR PERIODIC REPORTS, AND THE NEW YORK STOCK
EXCHANGE MAY DELIST OUR COMMON STOCK OR TAKE OTHER ACTION IF WE ARE UNABLE TO
COMPLY WITH ITS LISTING REQUIREMENTS. IF ANY OF THE FOREGOING OCCURRED, THERE
COULD BE A MATERIAL ADVERSE EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK AND
OUR ABILITY TO ACCESS THE CAPITAL MARKETS.
The investigations by Symbol and the resulting restatement of our
financial statements have led to a delay in the filing of this quarterly report.
We have been, and will continue to be, engaged in a dialogue with the Commission
with respect to the Consolidated Financial Statements and our delayed periodic
reports. However, the Commission may provide us with comments on this filing or
any of the delayed quarterly reports after such reports have been filed, which
could require us to amend or restate previously filed periodic reports. In
addition, as a result of the delay in filing our periodic reports with the
Commission, we are currently not in compliance with the listing requirements of
the New York Stock
43
Exchange, or NYSE, the exchange on which our common stock is listed. The NYSE
has not taken any delisting or other action against Symbol, but there can be no
assurance that the NYSE will not take any such action in the future. If we are
required to amend or restate our periodic filings, or if the NYSE delists, or
attempts to delist, our common stock, investor confidence may be reduced, our
stock price may substantially decrease and our ability to access the capital
markets may be limited.
TAXING AUTHORITIES MAY DETERMINE WE OWE ADDITIONAL TAXES FROM PREVIOUS YEARS DUE
TO THE RESTATEMENT.
As a result of the restatement, previously filed tax returns and
reports may be required to be amended to reflect tax related impacts of the
restatement. Where legal, regulatory or administrative rules would require or
allow us to amend our previous tax filings, we intend to comply with our
obligations under applicable law. To the extent that tax authorities do not
accept our conclusions regarding the tax effects of the restatement, liabilities
for taxes could differ from what has been recorded in our Consolidated Financial
Statements. If it is determined that we have additional tax liabilities, there
could be an adverse effect on our financial condition.
MANY OF THE INDIVIDUALS THAT COMPRISE OUR SENIOR MANAGEMENT TEAM ARE NEW TO
SYMBOL, AND THEY HAVE BEEN REQUIRED TO DEVOTE A SIGNIFICANT AMOUNT OF TIME ON
MATTERS RELATING TO THE RESTATEMENT.
In the past year, we have replaced a significant portion of our senior
management team. During this period, our senior management team has devoted a
significant amount of time conducting internal investigations, restating our
financial statements, reviewing and improving our internal controls and
procedures, developing effective corporate governance procedures and responding
to government inquiries. If senior management is unable to devote a significant
amount of time in the future towards developing and attaining our strategic
business initiatives and running ongoing business operations, there may be a
material adverse effect on our results of operations, financial condition and
business.
RISKS RELATING TO THE BUSINESS
OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND
MARKET CONDITIONS, AS WELL AS THE VOLATILE GEOPOLITICAL ENVIRONMENT.
Adverse worldwide economic and market conditions over the last few
years have contributed to slowdowns in the technology sector generally and the
mobile information systems industry specifically. While worldwide economic and
market conditions have begun recently to improve, if they do not continue to
improve or otherwise deteriorate, there may be:
o reduced demand for our products and services due to continued
restraints on technology-related capital spending by our
customers;
o increased price competition;
o increased risk of excess and obsolete inventories;
o higher overhead costs as a percentage of revenues; and
o limited investment by Symbol in new products and services.
Our current business and operating plan assumes that economic activity
in general, and IT spending in particular, will at least remain at current
levels; however, we cannot assure you that IT spending will not deteriorate,
which could have a material adverse effect on our results of operations and
growth rates. Our business is especially affected by the economic success of the
retail sector, which
44
accounts for a significant portion of our business, and our results of
operations may be adversely affected if the global economic and market
conditions in the retail sector do not improve. If historically low interest
rates rise, consumer demand and IT spending could be further dampened.
In addition, continuing turmoil in the geopolitical environment in many
parts of the world, including terrorist activities and military actions,
particularly in the aftermath of the September 11th attacks and the war in Iraq,
may continue to put pressure on global economic and market conditions and may
continue to have a material adverse effect on consumer and business confidence,
at least in the short term. As an international company with significant
operations located outside of the United States, we are vulnerable to
geopolitical instability. If worldwide economic and market conditions and
geopolitical stability do not improve or otherwise deteriorate, there could be a
materially adverse effect on our business, operating results, financial
condition and growth rates.
WE HAVE MADE STRATEGIC ACQUISITIONS AND ENTERED INTO ALLIANCES AND JOINT
VENTURES IN THE PAST AND INTEND TO DO SO IN THE FUTURE. IF WE ARE UNABLE TO FIND
SUITABLE ACQUISITIONS OR PARTNERS OR ACHIEVE EXPECTED BENEFITS FROM SUCH
ACQUISITIONS OR PARTNERSHIPS, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, GROWTH RATES AND RESULTS OF OPERATIONS.
As part of our ongoing business strategy to expand product offerings
and acquire new technology, we frequently engage in discussions with third
parties regarding, and enter into agreements relating to, possible acquisitions,
strategic alliances and joint ventures. If we are unable to identify future
acquisition opportunities or reach agreement with such third parties, there
could be a material adverse effect on our business, growth rates and results of
operations.
Even if we are able to complete acquisitions or enter into alliances
and joint ventures that we believe will be successful, such transactions,
especially those involving technology companies, are inherently risky.
Significant risks include:
o integration and restructuring costs, both one-time and ongoing;
o maintaining sufficient controls, procedures and policies;
o diversion of management's attention from ongoing business
operations;
o establishing new informational, operational and financial systems
to meet the needs of our business;
o losing key employees;
o failing to achieve anticipated synergies, including with respect
to complementary products; and
o unanticipated and unknown liabilities.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS, SUCH AS ENTERPRISE MOBILITY
PRODUCTS, AND ENHANCEMENTS TO EXISTING PRODUCTS, AND IF WE FAIL TO PREDICT AND
RESPOND TO EMERGING TECHNOLOGICAL TRENDS AND OUR CUSTOMERS' CHANGING NEEDS,
THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS AND
MARKET SHARE.
We are active in the research and development of new products and
technologies and enhancing our current products. However, research and
development in the mobile information systems industry is complex and filled
with uncertainty. If we expend a significant amount of resources and our efforts
do not lead to the successful introduction of new or improved products, there
could be a material adverse
45
effect on our business, operating results and market share. In addition, it is
common for research and development projects to encounter delays due to
unforeseen problems, resulting in low initial volume production, fewer features
than originally considered desirable and higher production costs than initially
budgeted, which may result in lost market opportunities. In addition, new
products may not be commercially well received. There could be a material
adverse effect on our business, operating results and market share due to such
delays or deficiencies in development, manufacturing and delivery of new
products.
We have made significant investments to develop enterprise mobility
products because we believe enterprise mobility is a new and developing market.
If this market does not grow, retailers and consumers react unenthusiastically
to enterprise mobility or we are unable to sell our enterprise mobility products
and services at projected rates, there could be a material adverse effect on our
business and operating results. Our efforts in enterprise mobility are also
dependent, in part, on applications developed and infrastructure deployed by
third parties. If third parties do not develop robust, new or innovative
applications, or create the appropriate infrastructure, for enterprise mobility
products, there could be a material adverse effect on our business and operating
results.
Once a product is in the marketplace, its selling price usually
decreases over the life of the product, especially after a new competitive
product is publicly announced because customers often delay purchases of
existing products until the new or improved versions of those products are
available. To lessen the effect of price decreases, our research and development
teams attempt to reduce manufacturing costs of existing products in order to
improve our margins on such products. However, if cost reductions do not occur
in a timely manner, there could be a material adverse effect on our operating
results and market share.
THE MOBILE INFORMATION SYSTEMS INDUSTRY IS HIGHLY COMPETITIVE AND COMPETITIVE
PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIALLY ADVERSE EFFECT
ON OUR BUSINESS.
The mobile information systems industry is a highly competitive
industry that is influenced by the following:
o advances in technology;
o new product introduction;
o product improvements;
o rapidly changing customer needs;
o marketing and distribution capabilities; and
o price competition.
If we do not keep pace with product and technological advances, there
could be a material adverse effect on our competitive position and prospects for
growth. There is also likely to be continued pricing pressure as competitors
attempt to maintain or increase market share.
The products manufactured and marketed by us and our competitors in the
mobile information systems industry are becoming more complex. As the
technological and functional capabilities of future products increase, these
products may begin to compete with products being offered by traditional
computer, network and communications industry participants who have
substantially greater financial, technical, marketing and manufacturing
resources than us. We may not be able to compete successfully
46
against these new competitors, and competitive pressures may result in a
material adverse effect on our business or operating results.
WE ARE SUBJECT TO RISKS RELATED TO OUR OPERATIONS OUTSIDE THE UNITED STATES.
A substantial portion of our net revenues have been from foreign sales.
For the quarter ended March 31, 2003, foreign sales accounted for approximately
44% of our net revenue. We also manufacture most of our products outside the
United States and we anticipate that an increasing percentage of new products
and subassemblies will be manufactured outside the United States. Overall
margins for our products have increased throughout 2003 partially as a result of
increased efficiencies due to the transfer of internal manufacturing to our
Reynosa facility and external manufacturing to lower cost producers in China,
Taiwan and Singapore.
These sales and manufacturing activities are subject to the normal
risks of foreign operations, including:
o political uncertainties;
o currency fluctuations;
o protective tariffs and taxes;
o trade barriers and export/import controls;
o transportation delays and interruptions;
o reduced protection for intellectual property rights in some
countries;
o the impact of recessionary or inflationary foreign economies;
o long receivables collection periods;
o adapting to different regulatory requirements;
o difficulties associated with repatriating cash generated or held
abroad in a tax-efficient manner; and
o different technology standards or customer expectations.
Many of these risks have affected our business in the past and may have
a material adverse effect on our business, results of operations and financial
condition in the future. We cannot predict whether the United States or any
other country will impose new quotas, tariffs, taxes or other trade barriers
upon the importation of our products or supplies or if new barriers would have a
material adverse effect on our results of operations and financial condition.
FLUCTUATIONS IN EXCHANGE RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS.
Most of our equipment sales in Western Europe and Asia are billed in
foreign currencies and are subject to currency exchange fluctuations. In
addition, much of Europe converted to mandatory use of the "Euro" currency in
2002, which has continued to appreciate throughout 2003. In prior years, changes
in the value of the U.S. dollar compared to foreign currencies have had an
impact on our sales and margins. We cannot predict the direction or magnitude of
currency fluctuations. A weakening of the currencies in
47
which we generate sales relative to the currencies in which our costs are
denominated may lower our results of operations and financial condition. For
example, we purchase a large number of parts, components and third-party
products from Japan. The value of the yen in relation to the U.S. dollar
strengthened during 2002 and has continued to appreciate throughout 2003. If the
value of the yen continues to strengthen relative to the dollar, there could be
a material adverse effect on our results of operations.
In all jurisdictions in which we operate, we are also subject to the
laws and regulations that govern foreign investment, foreign trade and currency
exchange transactions. These laws and regulations may limit our ability to
repatriate cash as dividends or otherwise to the United States and may limit our
ability to convert foreign currency cash flows in to U.S. dollars.
WE RELY ON OUR MANUFACTURING FACILITY IN REYNOSA, MEXICO TO MANUFACTURE A
SIGNIFICANT PORTION OF OUR PRODUCTS. ANY PROBLEMS AT THE REYNOSA FACILITY COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
In 2002, approximately 50% of our product cost of revenue can be
attributed to our facility in Reynosa, and we estimate that such percentage will
be similar or higher throughout the remainder of 2003.
In the past, we have experienced manufacturing problems that have
caused delivery delays. We may experience production difficulties and product
delivery delays in the future as a result of the following:
o changing process technologies;
o ramping production;
o installing new equipment at our manufacturing facilities; and
o shortage of key components.
If manufacturing problems in our Reynosa facility arise, and we are unable to
develop alternative sources for our production needs, we may not be able to meet
consumer demand for our products, which could have a material adverse effect on
our business, results of operations and financial condition.
We have been sued in Mexico by a plaintiff who alleges she is the legal
owner of some of the property that our facility in Reynosa is located. See Part
II, Item 1, "Legal Proceedings--Other Litigation--Lic. Olegario Cavazos Cantu,
on behalf of Maria Leonor Cepeda Zapata vs. Symbol de Mexico, Sociedad de R.L.
de C.V." If use of our manufacturing facility in Reynosa, Mexico were
interrupted by natural disaster, the aforementioned lawsuit or otherwise, there
could be a material adverse effect on our operations until we could establish
alternative production and service operations.
SOME COMPONENTS, SUBASSEMBLIES AND PRODUCTS ARE PURCHASED FROM A SINGLE SUPPLIER
OR A LIMITED NUMBER OF SUPPLIERS. THE LOSS OF ANY OF THESE SUPPLIERS MAY CAUSE
US TO INCUR ADDITIONAL SET-UP COSTS AND RESULT IN DELAYS IN MANUFACTURING AND
THE DELIVERY OF OUR PRODUCTS.
While components and supplies are generally available from a variety of
sources, we currently depend on a limited number of suppliers for several
components for our equipment, and certain subassemblies and products. Some
components, subassemblies and products are purchased from a single supplier or a
limited number of suppliers. In addition, for certain components, subassemblies
and products for which we may have multiple sources, we are still subject to
significant price increases and limited availability due to market demand for
such components, subassemblies and products. In the past,
48
unexpected demand for communication products caused worldwide shortages of
certain electronic parts, which had an adverse impact on our business. While we
have entered into contracts with suppliers of parts that we anticipate may be in
short supply, there can be no assurance that additional parts will not become
the subject of such shortages or that such suppliers will be able to deliver the
parts in fulfillment of their contracts. In addition, on occasion, we build up
our component inventory in anticipation of supply shortages, which may result in
us carrying excess or obsolete components if we do not anticipate customer
demand properly and could have a material adverse effect on our business and
results of operations.
If shortages or delays exist, we may not be able to secure enough
components at reasonable prices and acceptable quality and therefore, may not be
able to meet consumer demand for our products, which could have a material
adverse effect on our business and results of operations. Although the
availability of components did not materially impact our business in 2002 or
2003, we cannot predict when and if component shortages will occur. If we are
unable to develop alternative sources for our raw materials if and as required,
we could incur additional set-up costs, which could result in delays in
manufacturing and the delivery of our products and thereby have a material
adverse effect on our business, results of operations and financial condition.
WE SELL A MAJORITY OF OUR PRODUCTS THROUGH RESELLERS, DISTRIBUTORS AND ORIGINAL
EQUIPMENT MANUFACTURERS (OEMS). IF WE FAIL TO MANAGE OUR SALES SYSTEM PROPERLY,
OR IF THIRD-PARTY DISTRIBUTION SOURCES DO NOT PERFORM EFFECTIVELY, OUR BUSINESS
MAY SUFFER.
We sell a majority of our products through resellers, distributors and
OEMs. Some of our third-party distribution sources may have insufficient
financial resources and may not be able to withstand changes in worldwide
business conditions, including the current economic downturn, or abide by our
inventory and credit requirements. If the third-party distribution sources we
rely on do not perform their services adequately or efficiently or exit the
industry, and we are not able to quickly find adequate replacements, there could
be a material adverse effect on our revenues. In addition, we do not have
third-party distribution sources in certain parts of the world. If we are unable
to effectively and efficiently service customers outside our current geographic
scope, there may be a material adverse effect on our growth rates and result of
operations.
In 2003, we launched a new distribution system called the Symbol
PartnerSelect Program that is designed to increase our business and the business
of our resellers, distributors and OEMs and improve the quality of services and
products offered to the end user community. If the new program does not continue
to be well received by our resellers, distributors and OEMs, or the end user
community, there could be a material adverse effect on our operating results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF THIRD PARTIES
ASSERT WE ARE IN VIOLATION OF THEIR INTELLECTUAL PROPERTY RIGHTS, THERE COULD BE
A MATERIALLY ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND OUR ABILITY TO
COMPETE.
We protect our proprietary information and technology through licensing
agreements, third-party nondisclosure agreements and other contractual
provisions, as well as through patent, trademark, copyright and trade secret
laws in the United States and similar laws in other countries. There can be no
assurance that these protections will be adequate to prevent our competitors
from copying or reverse engineering our products, or that our competitors will
not independently develop products that are substantially equivalent or superior
to our technology, which in each case could affect our ability to compete and to
receive licensing revenues. In addition, third parties may seek to challenge,
invalidate or circumvent our applications for our actual patents, trademarks,
copyrights and trade secrets. Furthermore,
49
the laws of certain countries in which our products are or may be licensed do
not protect our proprietary rights to the same extent as the laws of the United
States.
Third parties have, and may in the future, assert claims of
infringement of intellectual property rights against us. Due to the rapid pace
of technological change in the mobile information systems industry, much of our
business and many of our products rely on proprietary technologies of third
parties, and we may not be able to obtain, or continue to obtain, licenses from
such third parties on reasonable terms. We have received, and have currently
pending, third-party claims and may receive additional notices of such claims of
infringement in the future. To date, such activities have not had a material
adverse affect on our business and we have either prevailed in all litigation,
obtained a license on commercially acceptable terms or otherwise been able to
modify any affected products or technology. However, there can be no assurance
that we will continue to prevail in any such actions or that any license
required under any such patent or other intellectual property would be made
available on commercially acceptable terms, if at all. Since there is a
significant number of U.S. and foreign patents and patent applications
applicable to our business, we believe that there is likely to continue to be
significant litigation regarding patent and other intellectual property rights,
which could have a material adverse effect on our business and our ability to
compete.
CHANGES IN SAFETY REGULATIONS RELATED TO OUR PRODUCTS, INCLUDING WITH RESPECT TO
THE TRANSMISSION OF ELECTROMAGNETIC RADIATION, COULD HAVE A MATERIALLY ADVERSE
EFFECT ON OUR PROSPECTS AND FUTURE SALES.
The use of lasers and radio emissions are subject to regulation in the
United States and in other countries in which we do business. In the United
States, various Federal agencies including the Center for Devices and
Radiological Health of the Food and Drug Administration, the Federal
Communications Commission, the Occupational Safety and Health Administration and
various state agencies have promulgated regulations which concern the use of
lasers and/or radio/electromagnetic emissions standards. Member countries of the
European community have enacted standards concerning electrical and laser safety
and electromagnetic compatibility and emissions standards.
While some of our products do emit electromagnetic radiation, we
believe that due to the low power output of our products and the logistics of
their use, there is no health risk to end-users in the normal operation of our
products. However, if any of our products becomes specifically regulated by
governments, or the safety of which is questioned by our customers, such as
electronic cash register manufacturers, or the public at large, there could be a
material adverse effect on our business and our results of operations.
In addition, our Spectrum 24 spread spectrum wireless communication
products operate through the transmission of radio signals. These products are
subject to regulation by the FCC in the United States and corresponding
authorities in other countries. Currently, operation of these products in
specified frequency bands does not require licensing by regulatory authorities.
Regulatory changes restricting the use of frequency bands or allocating
available frequencies could have a material adverse effect on our business and
our results of operations.
OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY EMPLOYEES.
In order to be successful, we must retain and motivate our executives
and other key employees, including those in managerial, technical, marketing and
information technology support positions. In particular, our product generation
efforts depend on hiring and retaining qualified engineers. Attracting and
retaining skilled solutions providers in the IT support business and qualified
sales representatives are also critical to our future.
50
Experienced management and technical, marketing and support personnel
in the information technology industry are in high demand, in spite of the
general economic slowdown, and competition for their talents is intense. The
loss of, or the inability to recruit, key employees could have a material
adverse effect on our business.
OUR OPERATING RESULTS FLUCTUATE EACH QUARTER. THIS FLUCTUATION HINDERS OUR
ABILITY TO FORECAST REVENUES AND TO VARY OUR OPERATING EXPENSES ACCORDINGLY.
Our operating results have been, and may continue to be, subject to
quarterly fluctuations as a result of a number of factors discussed in this
report, including: worldwide economic conditions; levels of IT spending; changes
in technology; new competition; customer demand; a shift in the mix of our
products; a shift in sales channels; the market acceptance of new or enhanced
versions of our products; the timing of introduction of other products and
technologies; component shortages; and acquisitions made by Symbol.
An additional reason for such quarterly fluctuations is that it is
difficult for us to forecast the volume and timing of sales orders we will
receive during a fiscal quarter, as most customers require delivery of our
products within 45 days of ordering and customers frequently cancel or
reschedule shipments. However, our operating expense levels are partly based on
our projections of future revenues at any given time. For example, in order to
meet the delivery requirements of our customers, we maintain significant levels
of raw materials. Therefore, in the event that actual revenues are significantly
less than projected revenues for any quarter, operating expenses are likely to
be unusually high and our operating profit may be adversely affected.
Our revenues may vary in the future to an even greater degree due to
our increasing focus on sales of mobile information systems instead of
individual products. Historically, we have sold individual bar code scanning
devices and scanner integrated mobile computing devices to customers.
Increasingly, our sales efforts have focused on sales of complete data
transaction systems. System sales are more costly, and require a longer selling
cycle and more complex integration and installation services. An increase in
system sales, therefore, may result in increased time between the manufacture of
product and the recognition of revenue, as well as the receipt of payment for
such transactions.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
Our stock price, like that of other technology companies, can be
volatile. Some of the factors that can affect our stock price include:
o the announcement of new products, services or technological
innovations by us or our competitors;
o quarterly increases or decreases in revenue, gross margin or
earnings, and changes in our business, operations or prospects for
any of our segments;
o changes in quarterly revenue or earnings estimates by the
investment community; and
o speculation in the press or investment community about our
strategic position, financial condition, results of operations,
business, significant transactions, the restatement or the
previously discussed government investigations.
General market conditions or domestic or international macroeconomic
and geopolitical factors unrelated to our performance may also affect the price
of our stock. For these reasons, investors should not rely on recent trends to
predict future stock prices, financial condition, results of operations or cash
51
flows. In addition, following periods of volatility in a company's securities or
a restatement of previously reported financial statements, securities class
actions may be filed against a company. We are currently litigating a number of
securities class action lawsuits. See "--Pending litigation may have a material
adverse effect on our results of operations and financial condition."
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/A, 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
----------------------------------------------------------
See Item 7A of Symbol's Annual Report on Form 10-K/A for the year ended
December 31, 2002 for a discussion of various market risks that Symbol is
exposed to. The market risks we are exposed to have not materially changed from
such disclosure.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
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 is 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.
As reported more fully in Symbol's Annual Report on Form 10-K/A for the
year ended December 31, 2002, through two internal investigations, we learned
that certain members of former management engaged in, directed and/or created an
environment that encouraged a variety of inappropriate activities that resulted
in accounting errors and irregularities affecting our previously issued
financial statements that we have now restated. The investigations also found
that, in addition to the specific items of misconduct giving rise to the need
for the restatement, there was a failure by Symbol's former management to
establish an appropriate control environment, and there were significant
failures in
52
Symbol's internal controls and procedures resulting from numerous causes,
including inadequate hiring of qualified and experienced personnel, insufficient
training and supervision of personnel, a decentralized accounting structure for
operations in the United States and inadequate systems and systems interfaces.
The investigations also found instances in which some members of former
management and sales and finance-related employees devoted insufficient
attention and resources to ensuring accurate accounting and financial reporting.
Indeed, as the guilty pleas of two former senior members of our finance group
illustrate, there were also instances in which such activity rose to the level
of criminal misconduct.
In 2002 and 2003, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures. We concluded that many of
the internal control deficiencies described more fully in our Annual Report on
Form 10-K/A for the year ended December 31, 2002 constituted "material
weaknesses," as defined under standards established by the American Institute of
Certified Public Accountants, during the restatement period.
As described more fully in our 2002 Annual Report on Form 10-K/A,
Symbol has implemented a number of initiatives to improve Symbol's disclosure
controls and procedures, including internal controls and procedures, and to
address the areas of weakness identified during the investigations and the
restatement. We believe the efforts we have and are taking address the material
weaknesses that previously affected our internal controls. However, it will take
some time before we have in place the rigorous disclosure controls and
procedures, including internal controls and procedures, that our Board of
Directors and senior management are striving for. As a result of our efforts as
of the date hereof, we believe that our Condensed Consolidated Financial
Statements fairly present, in all material respects, our financial condition,
results of operations and cash flows as of, and for, the periods presented and
that this Quarterly Report on Form 10-Q contains the information required to be
included in accordance with the Exchange Act.
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 March 31, 2003, the end of the period covered by this report.
Based upon the evaluation and the results of the investigations discussed above,
our management, including our Chief Executive Officer and Chief Financial
Officer, has concluded that, except for the internal control deficiencies as
described in Symbol's 2002 10-K/A and herein, as of the evaluation date and the
filing date of this report, our disclosure controls and procedures are designed,
and are effective, to give reasonable assurance that information we must
disclose in reports filed with the Commission is properly recorded, processed,
summarized and reported in conformance with the rules and regulations of the
Commission.
Other than as described in our 2002 Annual Report on Form 10-K/A and
herein, since the evaluation date, there have been no significant changes in our
internal control structure, policies and procedures over financial reporting or
in other areas that could significantly affect our internal controls. We will
continue to assess our disclosure controls and procedures as we prepare our
filings and will take any further actions that we deem necessary.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The information set forth in Note 11 in the Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q is hereby
incorporated by reference.
53
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The following exhibits are included herein:
31.1 Certification of Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) None.
54
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: February 25, 2004 By: /s/ William R. Nuti
--------------------------------
William R. Nuti
Chief Executive Officer, President,
Chief Operating Officer and Director
(principal executive officer)
Dated: February 25, 2004 By: /s/ Mark T. Greenquist
---------------------------------
Mark T. Greenquist
Senior Vice President and Chief
Financial Officer
(principal financial officer)
Dated: February 25, 2004 By: /s/ James M. Conboy
-------------------------------
James M. Conboy
Vice President - Controller and Chief
Accounting Officer
(principal accounting officer)
55