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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................1
Condensed Consolidated Balance Sheets at
September 30, 2003 and December 31,
2002......................................................1
Condensed Consolidated Statements of
Operations Three and Nine Months Ended
September 30, 2003 and 2002 (restated)....................2
Condensed Consolidated Statements of Cash
Flows Nine Months Ended September 30,
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...............................................32
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................54
Item 4. Controls and Procedures......................................55
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................56
Item 6. Exhibits and Reports on Form 8-K.............................56
Signatures ..................................................................58
Certifications...............................................................59
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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Cash and cash equivalents................................................................... $120,917 $ 76,121
Accounts receivable, less allowance for doubtful accounts of $36,396
and $34,272, respectively............................................................... 131,562 151,417
Inventories................................................................................. 197,184 261,096
Deferred income taxes....................................................................... 151,734 167,489
Other current assets........................................................................ 39,227 34,293
---------- ----------
Total current assets.................................................................... 640,624 690,416
Property, plant and equipment, net.......................................................... 203,536 208,209
Deferred income taxes....................................................................... 246,337 222,475
Investment in marketable securities......................................................... 82,466 54,939
Goodwill.................................................................................... 308,023 301,023
Intangible assets, net...................................................................... 37,179 37,125
Other assets................................................................................ 36,411 58,008
---------- ----------
Total assets............................................................................ $1,554,576 $1,572,195
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................................................... $466,117 $427,568
Current portion of long-term debt........................................................... 275 6,681
Deferred revenue............................................................................ 29,542 32,903
Accrued restructuring expenses.............................................................. 5,766 6,948
---------- ----------
Total current liabilities............................................................... 501,700 474,100
Long-term debt, less current maturities..................................................... 79,479 135,614
Deferred revenue............................................................................ 17,690 15,821
Other liabilities........................................................................... 64,698 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 256,897 shares and
256,589 shares, respectively............................................................ 2,569 2,566
Additional paid in-capital.................................................................. 1,335,022 1,323,085
Accumulated other comprehensive loss, net................................................... (1,710) (13,096)
Accumulated deficit......................................................................... (205,843) (188,340)
---------- ----------
1,130,038 1,124,215
LESS:
Treasury stock, at cost, 26,130 shares and 25,962 shares, respectively...................... (239,029) (236,476)
---------- ----------
Total stockholders' equity.............................................................. 891,009 887,739
---------- ----------
Total liabilities and stockholders' equity....................................... $1,554,576 $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 FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------------
2002 2002
(AS RESTATED - (AS RESTATED -
2003 SEE NOTE 2) 2003 SEE NOTE 2)
-------- -------- ---------- ----------
REVENUE:
Product ............................................... $308,785 $303,499 $ 909,784 $ 810,895
Services .............................................. 68,325 78,529 227,492 217,864
-------- -------- ---------- ----------
377,110 382,028 1,137,276 1,028,759
COST OF REVENUE:
Product cost of revenue ............................... 158,861 166,869 480,247 528,592
Services cost of revenue .............................. 51,347 54,695 165,866 162,481
-------- -------- ---------- ----------
210,208 221,564 646,113 691,073
-------- -------- ---------- ----------
Gross profit .......................................... 166,902 160,464 491,163 337,686
-------- -------- ---------- ----------
OPERATING EXPENSES:
Engineering ........................................... 42,283 35,662 117,468 105,435
Selling, general and administrative ................... 98,023 77,727 305,473 235,020
Loss provision for legal settlements .................. -- -- 72,000 --
Stock based compensation expense/(recovery) ........... 7,640 8,818 9,872 (70,132)
Restructuring and impairment charges .................. 958 21 1,181 2,747
-------- -------- ---------- ----------
148,904 122,228 505,994 273,070
-------- -------- ---------- ----------
Earnings/(loss) from operations ....................... 17,998 38,236 (14,831) 64,616
Other (expense)/income ................................ (2,733) 6,900 (2,245) (28,126)
-------- -------- ---------- ----------
Earnings/(loss) before income taxes ................... 15,265 45,136 (17,076) 36,490
Provision for /(benefit from) income taxes ............ 3,746 13,581 (4,197) 12,738
-------- -------- ---------- ----------
NET EARNINGS/(LOSS) ................................... $ 11,519 $ 31,555 $ (12,879) $ 23,752
======== ======== ========== ==========
EARNINGS/(LOSS) PER SHARE:
Basic and diluted ..................................... $ 0.05 $ 0.14 $ (0.06) $ 0.10
======== ======== ========== ==========
CASH DIVIDENDS DECLARED AND PAID PER COMMON SHARE ..... $ 0.01 $ 0.01 $ 0.02 $ 0.02
======== ======== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ................................................. 230,770 230,108 230,690 229,324
Diluted ............................................... 237,091 233,138 230,690 233,088
See notes to Condensed Consolidated Financial Statements.
2
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002
(AS RESTATED -
2003 SEE NOTE 2)
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/earnings ................................................................................ $ (12,879) $ 23,752
ADJUSTMENTS TO RECONCILE NET (LOSS)/EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant and equipment ..................................... 39,781 41,810
Other amortization ................................................................................. 11,998 9,043
Provision for losses on accounts receivable ........................................................ 7,363 11,115
Provision for inventory writedown .................................................................. 22,412 21,080
Deferred income tax (benefit)/provision ............................................................ (4,197) 13,897
Non-cash restructuring, asset impairment and other charges ......................................... 3,560 45,217
Non-cash stock-based compensation expense/(recovery) ............................................... 9,872 (67,140)
Loss on sale of property, plant and equipment and other assets ..................................... 4 3,160
Change in fair value of derivative ................................................................. 20,855 (45,626)
Unrealized holding (gain) / loss on marketable securities .......................................... (26,790) 26,028
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITIONS AND DIVESTITURES:
Accounts receivable ................................................................................ 26,099 (36,091)
Inventories ........................................................................................ 46,661 61,778
Other assets ....................................................................................... (1,425) 6
Accounts payable and accrued expenses .............................................................. 43,091 10,040
Accrued restructuring expenses ..................................................................... (1,182) (2,027)
Other liabilities and deferred revenue ............................................................. 1,265 (2,850)
--------- ---------
Net cash provided by operating activities ........................................................ 186,488 113,192
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in other companies, net of cash acquired ............................................... (15,104) (10,084)
Proceeds from sale of property, plant and equipment and other assets ............................... 1,362 6,243
Purchases of property, plant and equipment ......................................................... (36,414) (26,476)
Investments in intangible and other assets ......................................................... (4,642) (2,366)
--------- ---------
Net cash used in investing activities ............................................................ (54,798) (32,683)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt ...................................................... (86,713) (78,522)
Proceeds from issuance of notes payable and long-term debt ......................................... -- 75,635
Repurchase of convertible notes and debentures ..................................................... -- (84,432)
Proceeds from exercise of stock options, warrants and employee stock purchase plan ................. 4,623 12,525
Purchase of treasury shares ........................................................................ (5,110) (8,582)
Dividends paid ..................................................................................... (4,624) (2,291)
--------- ---------
Net cash used in financing activities ............................................................ (91,824) (85,667)
--------- ---------
Effects of exchange rate changes on cash ........................................................... 4,930 4,407
--------- ---------
Net increase/(decrease) in cash and cash equivalent ................................................ 44,796 (751)
Cash and cash equivalents, beginning of period ..................................................... 76,121 70,365
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 120,917 $ 69,614
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID/(REFUNDED) DURING THE PERIOD FOR:
Interest ........................................................................................... $ 5,116 $ 12,651
Income taxes ....................................................................................... $ 2,659 $ (12,532)
See notes to Condensed Consolidated Financial Statements.
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003 AND FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 September 30, 2003, and the results of our
operations and cash flows for the three and nine months ended September 30, 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 and nine months ended September 30, 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 earnings/(loss) and net
earnings/(loss) per share if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings/(loss) as reported ........................................... $ 11,519 $ 31,555 $(12,879) $ 23,752
Stock based employee compensation expense/(recovery) included in
reported net earnings/(loss), net of related tax effects .............. 4,699 5,423 6,071 (43,131)
Less total stock based employee compensation expense determined
under the fair value based method for all awards,
net of related tax effects ............................................ (5,450) (5,386) (14,824) (15,269)
-------- -------- -------- --------
Pro forma net earnings/(loss) ............................................. $ 10,768 $ 31,592 $(21,632) $(34,648)
======== ======== ======== ========
Basic and diluted net earnings/(loss) per share:
As reported ........................................................... $ 0.05 $ 0.14 $ (0.06) $ 0.10
Pro forma ............................................................. $ 0.05 $ 0.14 $ (0.09) $ (0.15)
The weighted average fair value of options granted during the three and
nine month periods ended September 30, 2003 and 2002 was $6.86 and $7.00, and
$4.68 and $4.53 per option, respectively. In determining the fair value of
options and stock purchase warrants granted for purposes of calculating the pro
forma results disclosed above for the three and nine month periods ended
September 30, 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 September 30, 2002 financial statements,
our management identified certain accounting errors and irregularities, as
discussed below, in previously issued financial statements beginning in 1998
through the nine months ended September 30, 2002. As a result, the Condensed
Consolidated Financial Statements included herein for the three- and nine-month
periods ended September 30, 2002 have been restated from the amounts previously
reported.
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- and nine-month
periods ended September 30, 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.
AirClic Transaction
- -------------------
In the third quarter of 2000, we received a non-cancelable purchase order
from AirClic for the development of certain technologies, molding designs and
other rights and recorded $15,000 of revenue and gross profit. In the fourth
quarter of 2000, the terms of the purchase order were materially changed and
were tied to a $50,000 cash investment we made in AirClic, a cost method
investee. In the second quarter of 2002, we determined that a decline in the
value of our investment in AirClic was other than temporary and wrote off
$47,200 of the $50,000 investment as an impairment charge as a component of
operating expenses. We have determined that our previous accounting for the
transactions with AirClic was inappropriate and the accompanying Condensed
Consolidated Financial Statements reflect the elimination of the $15,000 revenue
and gross profit originally recognized in the third quarter of 2000 and the
previously recorded $50,000 investment has been recorded as $35,000, which
reflects the net effect of the 2000 transactions. Lastly, the $47,200 impairment
charge recorded in the quarter ended June 30, 2002 has been reduced to $32,200
and is shown as an impairment in investment as a component of other
income/(expense) in the Condensed Consolidated Statements of Operations.
7
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 purchase price. Subsequently, we 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.
8
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 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.
9
The following tables present the effects of the aforementioned adjustments
on earnings/(loss) before income taxes as previously reported:
Increase/(decrease) (in thousands):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------ ------------------
Earnings/(loss) before income taxes previously reported .... $ 19,200 ($11,673)
REVENUE ADJUSTMENTS:
Product .................................................... 36,902 69,145
Services ................................................... 5,616 2,943
-------- --------
42,518 72,088
COST OF REVENUE ADJUSTMENTS:
Product revenue cost ....................................... (24,467) (39,687)
Service revenue cost ....................................... 1,004 3,555
Restructuring reserves ..................................... (3,865) (26,592)
Excess and obsolete inventory .............................. 17,322 (36,920)
Computer software .......................................... 4,407 11,799
Telxon transaction ......................................... (904) (3,471)
Accruals, reserves and prepayments ......................... (2,858) 2,970
Other, net ................................................. (532) 3,793
-------- --------
(9,893) (84,553)
OPERATING AND OTHER EXPENSES:
Restructuring reserves ..................................... (1,888) 11,589
Computer hardware and software costs ....................... (3,017) (19,145)
Patent costs ............................................... (759) (5,461)
AirClic .................................................... -- 47,200
Telxon transaction ......................................... (2,939) (6,382)
Brazil acquisition ......................................... -- (2,050)
Accruals and prepayments ................................... 963 3,572
Stock option accounting .................................... (8,818) 70,132
Executive life insurance ................................... (477) (743)
Interest expense ........................................... (97) (381)
Bad debt impact on revenue adjustments ..................... (788) (200)
Impairment of investments .................................. -- (32,200)
Other adjustments .......................................... 11,131 (5,303)
-------- --------
(6,689) 60,628
Increase in earnings before income taxes ................... 25,936 48,163
-------- --------
Earnings before income taxes, as restated .................. $ 45,136 $ 36,490
======== ========
10
The following is a summary of the significant effects of the restatement on
our previously reported results of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
-------------------- -----------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -----------
(Amounts in thousands, except per share data)
Revenue ........................................................................ $339,510 $382,028 $956,671 $ 1,028,759
Cost of revenue ................................................................ 211,671 221,564 606,520 691,073
-------- -------- -------- -----------
Gross profit ................................................................... 127,839 160,464 350,151 337,686
Stock based compensation expense/(recovery) under variable plan accounting ..... -- 8,818 -- (70,132)
Other operating expenses ....................................................... 105,578 113,410 351,097 343,202
-------- -------- -------- -----------
Earnings/(loss) from operations ................................................ 22,261 38,236 (946) 64,616
Other (expense)/income, net .................................................... (3,061) 6,900 (10,727) (28,126)
-------- -------- -------- -----------
Earnings/(loss) before income taxes ............................................ 19,200 45,136 (11,673) 36,490
Provision for /(benefit from) income taxes ..................................... 6,144 13,581 (3,736) 12,738
-------- -------- -------- -----------
Net earnings/(loss) ............................................................ $ 13,056 $ 31,555 $ (7,937) $ 23,752
======== ======== ======== ===========
Net earnings/(loss) per common share:
Basic and diluted .............................................................. $ 0.06 $ 0.14 $ (0.03) $ 0.10
======== ======== ======== ===========
3. INVENTORIES
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------- --------
Raw materials .................................... $ 58,113 $ 82,115
Work-in-process .................................. 25,142 39,931
Finished goods ................................... 113,929 139,050
-------- --------
$197,184 $261,096
======== ========
The amounts shown above are net of inventory reserves of $ 142,592, and
$170,057 as of September 30, 2003 and December 31, 2002, respectively, and
include inventory on consignment of $31,242 and $49,182 as of September 30, 2003
and December 31, 2002, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003 are as follows:
PRODUCT SERVICES TOTAL
--------- -------- ---------
Balance as of December 31, 2002 ........ $ 244,014 $ 57,009 $ 301,023
Covigo acquisition ..................... 4,648 -- 4,648
Telxon goodwill adjustments ............ (1,942) (485) (2,427)
Foreign currency impact ................ 3,236 809 4,045
Sweden earnout payment ................. 709 -- 709
@ POS transaction costs ................ 20 5 25
--------- -------- ---------
Balance as of September 30, 2003 ....... $ 250,685 $ 57,338 $ 308,023
========= ======== =========
11
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------- ---------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Patents, trademarks and tradenames ............... $ 34,432 $(23,661) $ 31,624 $(19,956)
Purchased technology ............................. 27,800 (8,545) 24,817 (6,069)
Other ............................................ 8,912 (1,759) 6,865 (156)
-------- -------- -------- --------
$ 71,144 $(33,965) $ 63,306 $(26,181)
======== ======== ======== ========
The amortization expense for the three months ended September 30, 2003 and
2002 amounted to $3,336 and $1,664, respectively. The amortization expense for
the nine months ended September 30, 2003 and 2002 amounted to $7,794 and $4,923,
respectively.
Estimated amortization expense for the above intangible assets, assuming no
additions or writeoffs, for the three months ended December 31, 2003 and for
each of the subsequent years ending December 31 is as follows:
2003 (three months)................................................. $2,224
2004 (full year).................................................... 8,387
2005 (full year).................................................... 8,028
2006 (full year).................................................... 5,477
2007 (full year).................................................... 3,685
-------
$27,801
=======
5. EARNINGS/(LOSS) PER SHARE AND DIVIDENDS
Basic earnings/(loss) per share are based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
are based on the weighted average number of common and potentially dilutive
common shares (options and warrants) outstanding during the period, computed in
accordance with the treasury stock method.
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Numerator:
Earnings/(loss) applicable to common shares for basic and
diluted calculation ........................................ $ 11,519 $ 31,555 $ (12,879) $ 23,752
======= ======= ======= =======
Denominator:
Weighted-average common shares ................................. 230,770 230,108 230,690 229,324
Effect of dilutive securities:
Stock options and warrants ..................................... 6,321 3,030 -- 3,764
------- ------- ------- -------
Denominator for diluted calculation ............................ 237,091 233,138 230,690 233,088
======= ======= ======= =======
Stock options and warrants outstanding and the effect of convertible
subordinated notes and debentures for the three-month period ended September 30,
2003 and 2002 aggregating to 16,264 and
12
23,832, potentially dilutive shares, respectively, have not been included in the
diluted per share calculations since their effect would be antidilutive.
Stock options and warrants outstanding and the effect of convertible
subordinated notes and debentures for the nine-month period ended September 30,
2003 and 2002 aggregating to 18,134 and 19,684 of potentially dilutive shares,
respectively, 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.
On August 11, 2003, the Board of Directors approved a $0.01 semi-annual
cash dividend which amounted to $2,312 and was paid on September 26, 2003 to
shareholders of record on September 5, 2003.
6. COMPREHENSIVE EARNINGS
Comprehensive earnings are 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 earnings of $6,367 and
$22,906 for the three and nine months ended September 30, 2003, respectively and
generated total comprehensive earnings of $28,380 and $50,342 for the three and
nine months ended September 30, 2002, respectively. The Company's comprehensive
earnings is comprised of net 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 September 30, 2003, $75
remained in accrued restructuring expenses.
LEASE
WORKFORCE OBLIGATION
REDUCTIONS COSTS TOTAL
---------- ----- -----
Balance at December 31, 2002 ........... $ 158 $ 1,196 $ 1,354
Utilization/payments ................... (158) (1,121) (1,279)
---- ------ ------
Balance at September 30, 2003 .......... $-- $ 75 $ 75
==== ====== ======
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
September 30, 2002 were $380, of which $22 was recorded as a component of
operating expenses and $358 was recorded as a component of cost of revenue, all
of which consisted 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
13
employees, primarily manufacturing associates. As of December 31, 2002, all of
these employees have been terminated. Included in accrued restructuring expenses
as of September 30, 2003 is $4,744 of lease obligations relating to these
manufacturing restructuring charges.
LEASE
OBLIGATION
COSTS
----------
Balance at December 31, 2002 .......................... $ 5,594
Utilization/payments .................................. (850)
-------
Balance at September 30, 2003 ......................... $ 4,744
=======
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, which related almost
entirely to workforce reductions, is approximately $2,856, of which $979 and $87
was recorded as a component of cost of revenue and operating expenses,
respectively, in the first quarter of 2003, $1,434 and $136 was recorded as a
component of cost of revenue and operating expenses, respectively, in the second
quarter of 2003 and $220 was recorded as a component of cost of revenue in the
third 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 is approximately $961, of which $749
was recorded as a component of cost of revenue in the first quarter of 2003 and
$212 was recorded as a component of cost of revenue in the second quarter of
2003. These restructuring activities were completed by June 30, 2003.
During the third quarter of 2003, we initiated additional restructuring
activities to exit buildings that were acquired with the acquisition of @POS and
Covigo, Inc. The costs associated with this restructuring relate primarily to
lease obligation costs, adjusted for anticipated sub-lease income. The total
amount incurred in connection with this restructuring activity is $958, all of
which was recorded as a component of operating expenses. These restructuring
activities were completed by September 30, 2003.
14
Details of the 2003 restructuring charges and remaining balances are as
follows:
LEASE
WORKFORCE OBLIGATION ASSET
REDUCTIONS COSTS IMPAIRMENT TOTAL
---------- ----- ---------- -----
Balance at December 31, 2002 ........... $ -- $-- $-- $ --
Provision-cost of revenue .............. 1,574 2 152 1,728
Provision-operating expenses ........... 87 -- -- 87
Utilization/Payments ................... (519) -- (115) (634)
------- ----- ----- -------
Balance at March 31, 2003 .............. 1,142 2 37 1,181
Provision-cost of revenue .............. 1,521 -- 138 1,659
Provision-operating expenses ........... 136 -- -- 136
Utilization/Payments ................... (2,006) -- (35) (2,041)
------- ----- ----- -------
Balance at June 30, 2003 ............... 793 2 140 935
Provision-cost of revenue .............. 181 -- 40 221
Provision-operating expenses ........... -- 753 205 958
Utilization/Payments ................... (963) (75) (129) (1,167)
------- ----- ----- -------
Balance at September 30, 2003 .......... $ 11 $ 680 $ 256 $ 947
======= ===== ===== =======
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 $0 and $566 has been included
in other income in the Condensed Consolidated Statements of Operations for the
three- and nine month periods ended September 30, 2002.
Through September 15, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and international banks. These borrowings bore
interest at either LIBOR plus 75 basis points (which approximated 1.86 percent
at September 15, 2003) or the base rate of the syndication agent bank,
contingent upon various stipulations by the lender (which approximated 4.0
percent at September 15, 2003). During the nine months ended September 30, 2003,
we paid down the entire revolving credit facility amount of approximately
$80,000. This Credit Agreement was due to expire in January 2004. 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. As of September 30, 2003, there were no borrowings
outstanding under the revised credit agreement. In November 2003, this credit
facility was replaced with a $30,000 secured credit line which expires in May
2006.
15
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, classified as other
expense in the condensed consolidated statements of operations.
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 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. 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 which is classified as a component
of other income / (expense) in the condensed consolidated statements of
operations.
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
16
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 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 specified time periods as determined by the terms of the
agreement. 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.
17
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. Management allocated the purchase price and considered a
number of factors, including independent appraisals. After allocating the
purchase price including acquisition costs to net tangible assets, purchased
technology that has reached technological feasibility was valued 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 of $3,000 with a useful life of
9.5 years.
c. Covigo Acquisition
In July 2003, we purchased all of the outstanding common and preferred
shares of Covigo, Inc., a creator of software used in developing and deploying
mobile computing applications, for approximately $12,500. The acquisition is
expected to enhance and expand the range of such applications that Symbol
offers. Covigo's operating results since the acquisition date have been included
in Symbol's Condensed Consolidated Financial Statements. The assets acquired and
liabilities assumed have been recorded at their estimated fair values and are
subject to refinement.
The following table summarizes the allocation of the purchase price to the
assets acquired and liabilities assumed at the date of acquisition.
Current assets $ 137
Property, plant and equipment 60
Deferred income taxes 7,665
Purchased software 3,200
Customer relationship 200
Goodwill 4,648
Other assets 18
Liabilities (3,480)
-------
$12,448
=======
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.
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
18
investigations described herein. An unfavorable resolution to any of the
lawsuits or investigations described below could have a material adverse effect
on Symbol's business, results of operations or financial condition.
GOVERNMENT INVESTIGATIONS
The SEC 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.
19
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 litigate the case vigorously on
the merits.
20
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 September 30, 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 defend 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
21
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 September 30, 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.
22
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% 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.
23
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.
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
24
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 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.
25
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.
26
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
27
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. Approximately
$1,500 of such amount has been included within other income in the Condensed
Consolidated Statements of Operations for the quarter ended June 30, 2003. As of
June 30, 2003, the remaining balance of approximately $4,500 is recorded as
deferred revenue and is being deferred over the fifty-four month term of the OEM
Agreement which was signed in conjunction with the settlement agreement. 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.
28
The following table illustrates the changes in our warranty reserves:
Amount
--------
Balance at December 31, 2002 $ 15,034
Charges to expense-cost of revenue 25,159
Utilization/payment (24,657)
--------
Balance at September 30, 2003 $ 15,536
========
c. Derivative Investments 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.
There were no forward exchange contracts outstanding at September 30, 2003.
As of December 31, 2002, we had $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 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 $(1,732) as of 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
29
development, sales and marketing, or general and administrative expenses to
these segments, nor to our 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 and nine months ended September 30,
2003 were $153,559 and $475,846, respectively. Non-U.S. sales for the three and
nine months ended September 30, 2002 were $138,783 and $379,508, respectively.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic region. Corporate assets are principally temporary
investments and goodwill.
30
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table.
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------------- ---------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
-------- ------- -------- -------- ------- --------
REVENUES:
The Americas .......................................... $204,153 $43,659 $247,812 $203,715 $55,136 $258,851
EMEA .................................................. 80,171 21,945 102,116 77,225 20,781 98,006
Asia Pacific .......................................... 24,461 2,721 27,182 22,559 2,612 25,171
-------- ------- -------- -------- ------- --------
Total net sales ....................................... $308,785 $68,325 $377,110 $303,499 $78,529 $382,028
======== ======= ======== ======== ======= ========
STANDARD GROSS PROFIT:
The Americas .......................................... $110,223 $10,106 $120,329 $ 94,610 $18,430 $113,040
EMEA .................................................. 40,633 7,430 48,063 38,583 4,198 42,781
Asia Pacific .......................................... 12,515 1,109 13,624 11,249 1,218 12,467
-------- ------- -------- -------
Total gross profit at standard ........................ $163,371 $18,645 182,016 $144,442 $23,846 168,288
======== ======= ======== =======
Manufacturing variances & other related costs ......... 15,114 7,824
-------- --------
Total gross profit .................................... $166,902 $160,464
======== ========
FOR THE NINE MONTHS ENDED
-----------------------------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
--------------------------------- ---------------------------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
-------- -------- ---------- -------- -------- ----------
REVENUES:
The Americas .......................................... $580,861 $149,796 $ 730,657 $550,924 $151,925 $ 702,849
EMEA .................................................. 261,187 69,027 330,214 207,760 58,824 266,584
Asia Pacific .......................................... 67,736 8,669 76,405 52,211 7,115 59,326
-------- -------- ---------- -------- -------- ----------
Total net sales ....................................... $909,784 $227,492 $1,137,276 $810,895 $217,864 $1,028,759
======== ======== ========== ======== ======== ==========
STANDARD GROSS PROFIT:
The Americas .......................................... $303,082 $ 35,379 $ 338,461 $267,194 $ 53,931 $ 321,125
EMEA .................................................. 134,731 23,405 158,136 102,284 12,294 114,578
Asia Pacific .......................................... 34,587 3,436 38,023 26,372 3,127 29,499
-------- -------- -------- --------
Total gross profit at standard ........................ $472,400 $ 62,220 534,620 $395,850 $ 69,352 465,202
======== ======== ======== ========
Manufacturing variances & other related costs ......... 43,457 127,516
-------- --------
Total gross profit .................................... $491,163 $337,686
======== ========
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------- ----------
IDENTIFIABLE ASSETS:
The Americas .......................................... $ 834,715 $ 900,563
EMEA .................................................. 297,777 280,538
Asia Pacific .......................................... 52,054 34,652
Corporate (principally goodwill, intangible assets and
investments) .......................................... 370,030 356,442
---------- ----------
Total ............................................ $1,554,576 $1,572,195
========== ==========
13. RECENT ACCOUNTING PRONOUNCEMENTS
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
31
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 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 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.
32
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.
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
Our net revenue for the three month and nine month periods ended September
30, 2003 was $377,110 and $1,137,276, a decrease of 1.3 percent and an increase
of 10.5 percent respectively from net revenues of $382,028 and $1,028,759 in the
comparable prior year periods. The main driver in the three month period
decrease is due to a decrease of 13.0 percent in our reported service revenue
for the three month period ended September 30, 2003 as compared to the
comparable prior year period, the cause of which is the timing of our cash
collections which results in our reported revenue for a period. We collected
less of our service billings in the three month period ended September 30, 2003
as compared to the comparable prior period. The majority of the increase in our
net revenue for the nine month period ended September 30, 2003 has primarily
been a result of the growth in our product segment, particularly in our mobile
computing and wireless infrastructure product offerings.
Our gross profit overall was 44.3 percent and 43.2 percent for the three
and nine month periods ended September 30, 2003, an increase from 42.0 percent
and 32.8 percent in the comparable prior year periods. The increase is mainly
caused by our sales of higher margin product and efficiencies we have achieved
in our manufacturing and distribution operations.
We have continued to incur costs related to our restatement and ongoing
investigations. Such costs were approximately $11.0 million or 11.2 percent of
our selling, general and administration costs of $98,023 for the three month
period ended September 30, 2003. This brings these costs to approximately
$30,800 for the nine month period ended September 30, 2003.
With continued focus on our balance sheet, we have increased our cash to
$120,917 at September 30, 2003 an increase of $44,796 from $76,121 at December
31, 2002, while paying off $86,713 in long-term debt, and ending September 2003
with no current borrowings under our bank credit facility. We
33
have also invested $54,798 in our business during the nine month period ended
September 30, 2003 through purchases of property and equipment as well as
certain strategic acquisitions.
We also continued to effectively manage our net accounts receivables,
ending September 30, 2003 with $131,562, a decrease of $19,855 from $151,417 at
December 31, 2002.
Similarly, we have continued to improve our efficiencies in our
manufacturing and distribution operations and have decreased our inventory
levels by $63,912 to $197,184 at September 30, 2003 from $261,096 at December
30, 2002.
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's September 30, 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 and nine months ended September
30, 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 restatement of the September 30, 2002 consolidated
financial statements.
RESULTS OF OPERATIONS
The following table summarizes our revenue by reportable segment and
geographic region:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- -----------------------------------------
PERCENT PERCENT
INCREASE/ INCREASE/ INCREASE/ INCREASE/
2003 2002 (DECREASE) (DECREASE) 2003 2002 (DECREASE) (DECREASE)
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Product revenues:
The Americas $204,153 $203,715 $ 438 0.2 $ 580,861 $ 550,924 $ 29,937 5.4
EMEA 80,171 77,225 2,946 3.8 261,187 207,760 53,427 25.7
Asia Pacific 24,461 22,559 1,902 8.4 67,736 52,211 15,525 29.7
-------- -------- -------- ---- ---------- ---------- --------- ----
Total-product 308,785 303,499 5,286 1.7 909,784 810,895 98,889 12.2
revenues -------- -------- -------- ---- ---------- ---------- --------- ----
Services revenues:
The Americas 43,659 55,136 (11,477) (20.8) 149,796 151,925 (2,129) (1.4)
EMEA 21,945 20,781 1,164 5.6 69,027 58,824 10,203 17.3
Asia Pacific 2,721 2,612 109 4.2 8,669 7,115 1,554 21.8
-------- -------- -------- ---- ---------- ---------- --------- ----
Total-services 68,325 78,529 (10,204) (13.0) 227,492 217,864 9,628 4.4
revenues -------- -------- -------- ---- ---------- ---------- --------- ----
Total revenues $377,110 $382,028 $ 4,918 (1.3) $1,137,276 $1,028,759 $ 108,517 10.5
======== ======== ======== ==== ========== ========== ========= ====
Net product revenue of $308,785 and $909,784 for the three and nine months
ended September 30, 2003 increased 1.7 percent and 12.2 percent, respectively,
from the comparable prior year periods. The increase in net product revenue in
the three month period ended September 30, 2003 is due to continued growth we
have seen in 2003 in our mobile computing product offering. This growth and
34
the growth of our wireless networking product offering throughout the nine month
period ending September 30, 2003 are the major causes of our increase from the
comparable prior year period. Net services revenue of $68,325 and $227,492 for
the three and nine months ended September 30, 2003 (decreased)/increased (13.0)
percent and 4.4 percent, respectively, from the comparable prior year periods
primarily due to a decrease of approximately 21 percent in service revenue in
the Americas due to the timing of cash collections in the quarter ended
September 30, 2003, partially offset by an approximate 6.0 percent increase in
cash collections in EMEA. The increase in service revenue for the nine-month
period ended September 30, 2003 is due to stronger period-over-period cash
collections, increased contract base and favorable exchange rates.
Geographically, the Americas product revenue increased 0.2 percent and 5.4
percent, respectively, for the three and nine months ended September 30, 2003
from the comparable prior year periods. EMEA product revenue increased 3.8
percent and 25.7 percent for the three and nine months ended September 30, 2003
from the comparable prior year periods. Asia Pacific product revenue increased
8.4 percent and 29.7 percent for the three and nine months ended September 30,
2003 from the comparable prior year periods. The Americas, EMEA and Asia Pacific
represent approximately 66.1 and 63.9 percent, 26.0 and 28.7 percent, and 7.9
and 7.4 percent of net product revenue for the three and nine months ended
September 30, 2003.
Product cost of revenue (as a percentage of net product revenue) was 51.4
percent and 52.8 percent for the three and nine months ended September 30, 2003
as compared to 55.0 percent and 65.2 percent in the comparable prior year
periods. This decrease is due to an overall shift in product mix to higher
margin products, increased manufacturing absorption due to higher sales volumes,
increased efficiencies gained in our manufacturing and distribution operations
and favorable impact of foreign exchange rates.
Services cost of revenue (as a percentage of net services revenue) was 75.2
percent and 72.9 percent for the three and nine months ended September 30, 2003
as compared to 69.6 percent and 74.6 percent in the comparable prior year
periods. The majority of the increase for the three months is due to the
decreased revenue due to the timing of cash collections as well as increased
repair volume.
Total operating expenses increased 21.8 and 85.3 percent to $148,904 and
$505,994 for the three and nine-month periods ended September 30, 2003 from
$122,228 and $273,070 in the comparable prior year periods. These increases are
largely driven by accounting consequences related to our stock-based
compensation plans which resulted in a recovery of $70,132 in the prior year
nine month period, loss provisions for legal settlements of $72,000 recorded in
the quarter ended March 31, 2003 and additional costs of $30,800 for the nine
months ended September 30, 2003 associated with our restatement and the ongoing
government investigation as further described below.
Engineering costs increased to $42,283 from $35,662 for the three months
ended September 30, 2003 and to $117,468 from $105,435 for the nine months ended
September 30, 2003, as compared to the respective prior year periods. This
represents an increase of 18.6 percent and 11.4 percent, respectively, from the
comparable prior year periods. The increase for the three-month period is
partially due to the acquisition of Covigo to expand our software solutions
offerings and increase our engineering presence in India, continued investment
in our product offerings and a rebalancing of the quality and size of our
engineering organization. As a percentage of total net revenue, engineering
expenses increased to 11.2 percent and 10.3 percent for the three and nine
months ended September 30, 2003 compared to 9.3 percent and 10.2 percent for the
comparable prior year periods primarily due to our expansion of our software
solution offerings throughout the year.
35
Selling, general and administrative expenses of $98,023 and $305,473 for
the three and nine months ended September 30, 2003 increased from $77,727 and
$235,020 for the comparable prior year periods. Selling, general and
administrative expenses increased 26.1 percent and 30.0 percent from the
comparable prior year periods. The majority of the increase is due to an
increase in variable expenses associated with supporting our net revenue growth
of 10.5 percent for the nine months ended September 30, 2003. As a percentage of
net revenue, such expenses increased to 25.2 percent for the three months ended
September 30, 2003 from 20.3 percent, and increased to 26.9 percent for the nine
months ended September 30, 2003 as compared to 22.8 percent for the nine months
ended September 30, 2002. Included in selling, general and administrative
expenses are costs of $11,000 and $30,800 associated with the restatement and
ongoing government investigations for the three and nine months ended September
30, 2003.
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 September 30, 2003.
Included in total operating expenses, and as more fully described in our
Annual Report on Form 10-K/A for the year ended December 31, 2002, are amounts
associated with the variable portion of our stock option plans. Such amounts
were expenses of $8,818 and recoveries of $70,132 for the three- and nine-month
periods ended September 30, 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 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 $7,640 and $9,872 for the three- and nine-month
periods ended September 30, 2003.
Included in other income/(expense) for the nine month period ended
September 30, 2002 is a write-down of our investment in AirClic, Inc. of $32,200
which is considered to be other-than-temporary.
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- and nine-month periods ended
September 30, 2002 is $22 and $2,747, respectively, related to these transition
activities, primarily related to workforce reductions. (See Note 7 to the
Condensed Consolidated Financial Statements).
Our effective tax rate for the nine months ended September 30, 2003 and
2002 was 24.6% and 34.9%, 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 nine month
period ending September 30, 2003 reflects our current estimate of the full year
effective income tax rate.
36
LIQUIDITY AND CAPITAL RESOURCES
We utilize a number of measures of liquidity including the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Working Capital ..................................................................... $ 138,924 $ 216,316
Current Ratio (Current Assets to Current Liabilities) ............................... 1.3:1 1.5:1
Long-Term Debt to Capital (long-term debt to long-term debt plus equity) ............ 8.2% 13.3%
Current assets as of September 30, 2003 decreased by $49,792 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 nine months ended September 30, 2003 we paid down our
entire credit facility of approximately $80,000.
Current liabilities as of September 30, 2003 increased by $27,600 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 partially offset by lower debt obligations due
to repayments.
The aforementioned activity resulted in a working capital decrease of
$77,392 for the nine months ended September 30, 2003. The Company's current
ratio at September 30, 2003 decreased to 1.3 compared with 1.5 as of December
31, 2002.
During the nine months ended September 30, 2003, we generated cash flow
from operating activities of $186,488 and experienced an overall increase in
cash of $44,796. The cash flows provided by operating activities were used
primarily to repay long-term debt, purchase property, plant and equipment,
invest in new companies and other assets, repurchase our common stock and pay
dividends.
Net cash provided by operating activities for the nine months ended
September 30, 2003 increased to $186,488 from $113,192 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 nine months ended September 30, 2003 increased to $54,798
from $32,683 in the same period in 2002 as a result of increased purchases of
property, plant and equipment as well as amounts paid for the acquisition of new
companies, principally Covigo, Inc. Net cash used in financing activities for
the nine months ended September 30, 2003 increased to $91,824 from $85,667
primarily as a result of lower proceeds received in 2003 from the exercise of
options, warrants and the employee stock purchase plan. Net debt repayments in
both 2003 and 2002 were approximately $87 million.
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.
37
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
nine months ended September 30, 2003 and 2002, we securitized $7,275 and $7,373,
respectively of lease receivables, which resulted in proceeds of $4,400 and
$4,200 respectively. 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:
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------- --------
Revolving Credit Facility ......................... $ -- $ 80,000
Senior Notes ...................................... -- 6,349
SAILS Exchangeable Debt ........................... 79,366 55,194
Other ............................................. 388 752
-------- --------
79,754 142,295
Less Current Maturities ........................... 275 6,681
-------- --------
$ 79,479 $135,614
======== ========
Through September 15, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and International banks (the "Credit
Agreement"). These borrowings bore interest at either LIBOR plus 75 basis points
(which approximated 1.86 percent at September 15, 2003) or the base rate of the
syndication agent bank, contingent upon various stipulations by the lender
(which approximated 4.0 percent at September 15, 2003). This Credit Agreement
was due to expire in January 2004. 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 September 30, 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.
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
38
acquired in connection with the Telxon acquisition. The 4,160 shares of Cisco
common stock had a market value of $81,494 at September 30, 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 $79,366 at September 30, 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 three
months ended December 31, 2003 and each of the subsequent years ending December
31 are as follows:
2003 (three months) ......................... $ 275
2004 (full year) ............................ 30
2005 (full year) ............................ 72
2006 (full year) ............................ 6
2007 (full year) ............................ 5
Thereafter .................................. 79,366
-------
$79,754
=======
Our long-term debt to capital ratio decreased to 8.2 percent at September
30, 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 Condensed Consolidated Balance Sheet. The
aggregate amount of required future minimum rental payments under non-cancelable
operating leases for the three months ended December 31, 2003 and each of the
subsequent years ending December 31, are as follows:
39
OPERATING LEASES
----------------
2003 (3 months) .............................................. $ 5,324
2004 (full year) ............................................. 18,660
2005 (full year) ............................................. 16,456
2006 (full year) ............................................. 14,528
2007 (full year) ............................................. 12,637
Thereafter ................................................... 37,043
--------
Total minimum payments ....................................... $104,648
========
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.
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.
40
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 for an allowance for doubtful accounts.
Throughout the year, we estimate our ability to collect outstanding receivables
and establish an allowance for doubtful accounts. In doing so, we evaluate the
age of our receivables, past collection history, current financial conditions
for key customers, and economic conditions. Based on this evaluation, we
establish a reserve for specific accounts receivable that we believe are
uncollectible. A deterioration in the financial condition of any key customer or
a significant slow down in the economy could have a material negative impact on
our ability to collect a portion of all of the accounts receivable. We believe
that analysis of historical trends and current knowledge of potential collection
problems provides us significant information to establish a reasonable estimate
for an allowance for doubtful accounts. However, since we cannot predict with
certainty future changes in the financial stability of our customers, our actual
future losses from uncollectible accounts may differ from our estimates, which
could have an adverse effect on our financial condition and results of
operations.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings and accruals are
established when we are able to estimate the probable outcome of these matters.
Such estimates of outcome are derived from consultation with outside legal
counsel, as well as an assessment of litigation and settlement strategies. Legal
contingencies are often resolved over long time periods. The required accruals
may change in the future due to new developments in each matter or changes in
approach such as a change in settlement 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.
41
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 January 2003, the Financial Accounting Standards Board ("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
42
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 August 2003, the Emerging Issues Task Force ("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.
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.
43
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.
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. We have accrued $142 million related to these
pending class actions and government investigations as of September 30, 2003.
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
44
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 1, "Legal
Proceedings" for additional information regarding material litigation.
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
45
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 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.
46
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 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;
47
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 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;
48
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 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 three and nine months ended September 30, 2003, foreign sales accounted for
approximately 41% and 42%, respectively 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;
49
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 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.
50
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, 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
51
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, 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.
52
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.
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
53
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
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.
54
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 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
55
procedures. The evaluation examined those disclosure controls and procedures as
of September 30, 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.
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. The following Reports on Form 8-K were filed during the three months
ended September 30, 2003:
Date Filed Item No(s). Description
- ---------- ----------- -----------
September 16, 2003 5 and 12 Filing of a press release announcing
the extension of a waiver on Symbol's
credit facility and reporting
Symbol's current worldwide cash
balances.
September 18, 2003 5 Filing of a press release announcing
adverse ruling against Telxon in
Smart Media litigation.
56
September 19, 2003 5 and 12 Amendment to September 16, 2003
filing of a press release announcing
the extension of a waiver on Symbol's
credit facility and reporting
Symbol's current worldwide cash
(8-K/A) balances.
57
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)
58