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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----------------
COMMISSION FILE NUMBER 1-9802
SYMBOL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2308681
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Symbol Plaza
Holtsville, New York 11742-1300
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
The number of shares outstanding of the registrant's classes of common
stock, as of May 6, 2004, was as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $0.01 234,500,056
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
SYMBOL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements...................1
Condensed Consolidated Balance Sheets at March 31, 2004 and
December 31, 2003..........................................1
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2004 and 2003 ......................2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 and 2003 ......................3
Notes to Condensed Consolidated Financial Statements..........4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk...46
Item 4. Controls and Procedures......................................46
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................47
Item 4. Submission of Matters to a Vote of Security Holders..........47
Item 6. Exhibits and Reports on Form 8-K.............................48
Signatures....................................................................50
Certifications................................................................51
i
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
ASSETS
Cash and cash equivalents ................................................ $ 179,033 $ 150,017
Accounts receivable, less allowance for doubtful accounts of $12,661 and
$13,946, respectively ................................................. 119,624 152,377
Inventories .............................................................. 211,692 212,862
Deferred income taxes .................................................... 141,014 182,571
Other current assets ..................................................... 25,846 36,204
----------- -----------
Total current assets .................................................. 677,209 734,031
Property, plant and equipment, net ....................................... 207,522 210,888
Deferred income taxes .................................................... 236,506 228,470
Investment in marketable securities ...................................... 99,808 102,136
Goodwill ................................................................. 304,028 302,467
Intangible assets, net ................................................... 31,535 33,729
Other assets ............................................................. 33,352 34,797
----------- -----------
Total assets .......................................................... $ 1,589,960 $ 1,646,518
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses .................................... $ 442,667 $ 496,134
Current portion of long-term debt ........................................ 3,633 234
Deferred revenue ......................................................... 39,159 34,615
Accrued restructuring expenses ........................................... 3,496 5,240
----------- -----------
Total current liabilities ............................................. 488,955 536,223
Long-term debt, less current maturities .................................. 104,436 99,012
Deferred revenue ......................................................... 18,163 19,729
Other liabilities ........................................................ 44,021 70,956
Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized 10,000 shares, none issued or
outstanding ........................................................... -- --
Series A Junior Participating preferred stock, par value $1.00; authorized
500 shares, none issued or outstanding ................................ -- --
Common stock, par value $0.01; authorized 600,000 shares; issued 261,930
shares and 256,897 shares, respectively ............................... 2,619 2,569
Additional paid-in capital ............................................... 1,381,511 1,342,229
Accumulated other comprehensive earnings, net ............................ 3,848 4,498
Accumulated deficit ...................................................... (185,179) (189,669)
----------- -----------
1,202,799 1,159,627
LESS:
Treasury stock, at cost, 27,681 shares and 26,130 shares, respectively ... (268,414) (239,029)
----------- -----------
Total stockholders' equity ............................................ 934,385 920,598
----------- -----------
Total liabilities and stockholders' equity ..................... $ 1,589,960 $ 1,646,518
=========== ===========
See notes to Condensed Consolidated Financial Statements.
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
REVENUE:
Product ............................................. $ 348,239 $ 310,703
Services ............................................ 71,412 75,644
--------- ---------
419,651 386,347
COST OF REVENUE:
Product cost of revenue ............................. 166,195 156,339
Services cost of revenue ............................ 58,528 58,136
--------- ---------
224,723 214,475
--------- ---------
Gross profit ........................................ 194,928 171,872
--------- ---------
OPERATING EXPENSES:
Engineering ......................................... 41,559 37,055
Selling, general and administrative ................. 121,680 99,031
Provision for legal settlements ..................... -- 72,000
Stock based compensation expense .................... 2,234 776
Restructuring and impairment charges ................ -- 87
--------- ---------
165,473 208,949
--------- ---------
Earnings/(loss) from operations ..................... 29,455 (37,077)
Other income/(expense), net ......................... 1,006 (4,034)
--------- ---------
Earnings/(loss) before income taxes ................. 30,461 (41,111)
Provision for/(benefit from) income taxes ........... 23,633 (10,098)
--------- ---------
NET EARNINGS/(LOSS) ................................. $ 6,828 $ (31,013)
========= =========
EARNINGS/(LOSS) PER SHARE:
Basic and diluted ................................... $ 0.03 $ (0.13)
========= =========
CASH DIVIDENDS DECLARED PER COMMON SHARE ............ $ 0.01 $ 0.01
========= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic ............................................... 231,685 230,527
Diluted ............................................. 239,401 230,527
See notes to Condensed Consolidated Financial Statements.
2
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
FOR THE
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings/(loss) ............................................. $ 6,828 $ (31,013)
ADJUSTMENTS TO RECONCILE NET EARNINGS/(LOSS) TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant and equipment .. 14,428 13,232
Other amortization .............................................. 3,598 3,413
Provision for losses on accounts receivable ..................... 542 4,788
Provision for inventory writedown ............................... 1,183 11,700
Deferred income tax provision/(benefit) ......................... 23,633 (10,098)
Non-cash stock based compensation expense ....................... 2,234 776
Loss on disposal of property, plant and equipment ............... 109 --
Gain on sale of property, plant and equipment and other assets .. -- (12)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ............................................. 27,645 18,866
Inventories ..................................................... 199 9,327
Other assets .................................................... 7,933 (4,515)
Accounts payable and accrued expenses ........................... (47,876) 52,381
Accrued restructuring expenses .................................. (1,744) 692
Other liabilities and deferred revenue .......................... 2,077 1,751
--------- ---------
Net cash provided by operating activities .................... 40,789 71,288
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in other companies ................................... (4,050) (1,777)
Proceeds from sale of property, plant and equipment and other
assets ....................................................... -- 467
Purchases of property, plant and equipment ...................... (11,171) (10,649)
Investments in intangible and other assets ...................... -- (1,191)
--------- ---------
Net cash used in investing activities ........................ (15,221) (13,150)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt ................... (80) (36,575)
Proceeds from long-term debt .................................... 13,825 --
Proceeds from exercise of stock options and warrants ............ 10,293 4,623
Purchase of treasury shares ..................................... (19,956) (5,110)
--------- ---------
Net cash provided by (used in) financing activities .......... 4,082 (37,062)
--------- ---------
Effects of exchange rate changes on cash ........................ (634) 1,390
--------- ---------
Net increase in cash and cash equivalents ....................... 29,016 22,466
Cash and cash equivalents, beginning of period .................. 150,017 76,121
--------- ---------
Cash and cash equivalents, end of period .................. $ 179,033 $ 98,587
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest ........................................................ $ 3,551 $ 1,667
Income taxes .................................................... $ 3,578 $ 808
See notes to Condensed Consolidated Financial Statements.
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF MARCH 31, 2004 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(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 and other forms of
data capture.
The Condensed Consolidated Financial Statements include the accounts of
Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "we" or "our" or "us" or "the Company" refer to Symbol
Technologies, Inc. and subsidiaries unless the context specifically requires
otherwise. The Condensed Consolidated Financial Statements have been prepared by
us, without audit, pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include
all necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of March 31, 2004, and the results of our
operations and cash flows for the three months ended March 31, 2004 and 2003, in
accordance with the instructions to Form 10-Q of the Commission and in
accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information. The results of operations
for the three months ended March 31, 2004 are not necessarily indicative of the
results to be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2003.
Stock-Based Compensation
We account for our employee stock option plans under the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB Opinion No. 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of the grant. No stock based compensation expense has been
recognized for the fixed portion of our plans; however, during the first quarter
2004 and in 2003, certain stock-based compensation expenses have been recognized
through our operating results related to options of certain current and former
associates. We have adopted the disclosure-only requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which allows entities to continue to apply the provisions of APB
Opinion No. 25 for transactions with employees and provide pro forma net
earnings and pro forma earnings per share disclosures for employee stock grants
made as if the fair value based method of accounting in SFAS No. 123 had been
applied to these transactions.
4
The following table illustrates the effect on net earnings/(loss) and
earnings/(loss) per share if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
---- ----
Net earnings/(loss) - as reported ............................................ $ 6,828 $(31,013)
Stock based employee compensation expense included in reported net
earnings/(loss), net of related tax effects ............................... 1,374 477
Less total stock based employee compensation expense determined under the fair
value based method for all awards, net of related tax effects ............. (4,900) (4,563)
-------- --------
Pro forma net earnings/(loss) ................................................ $ 3,302 $(35,099)
======== ========
Basic and diluted net earnings/(loss) per share:
As reported ............................................................... $ 0.03 $ (0.13)
Pro forma ................................................................. $ 0.01 $ (0.15)
The weighted average fair value of options granted during the three
months ended March 31, 2004 and 2003 was $8.70 and $5.34 per option,
respectively. In determining the fair value of options and stock purchase
warrants granted for purposes of calculating the pro forma results disclosed
above for the three months ended March 31, we used the Black-Scholes option
pricing model and assumed the following: a risk free interest rate of 2.8
percent for 2004 and 4.0 percent for 2003; an expected option life of 4.7 years
for 2004 and 2003; an expected volatility of 61 percent for 2004 and 59 percent
for 2003; and a dividend yield of 0.16 percent for 2004 and 0.14 percent for
2003.
2. INVENTORIES
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Raw materials........................ $ 73,514 $ 66,500
Work-in-process...................... 23,895 24,422
Finished goods....................... 114,283 121,940
----------- -----------
$ 211,692 $ 212,862
=========== ===========
The amounts shown above are net of inventory reserves of $86,522 and
$109,331 as of March 31, 2004 and December 31, 2003, respectively, and include
inventory on consignment of $47,320 and $34,564 as of March 31, 2004 and
December 31, 2003, respectively.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the three months
ended March 31, 2004 are as follows:
5
PRODUCT SERVICES TOTAL
------- -------- -----
Balance as of December 31, 2003.... $ 246,253 $ 56,214 $ 302,467
Brazil acquisition(a) ............. 1,552 253 1,805
Translation adjustments ........... (203) (41) (244)
--------- --------- ---------
Balance as of March 31, 2004 ...... $ 247,602 $ 56,426 $ 304,028
========= ========= =========
(a) See Note 8.
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Patents, trademarks and tradenames $ 31,140 $(21,166) $ 35,080 $(24,670)
Purchased technology ............. 27,800 (10,647) 27,800 (9,652)
Other ............................ 7,250 (2,842) 7,250 (2,079)
-------- -------- -------- --------
$ 66,190 $(34,655) $ 70,130 $(36,401)
======== ======== ======== ========
The amortization expense for the three months ended March 31, 2004 and
2003 amounted to $2,970 and $2,173, respectively.
Estimated amortization expense for the above intangible assets,
assuming no additions or writeoffs, for the nine months ended December 31, 2004
and for each of the subsequent years ending December 31 is as follows:
2004 (nine months).............................................. $ 7,053
2005................................................................ 8,726
2006................................................................ 6,404
2007................................................................ 4,651
2008................................................................ 4,043
Thereafter.......................................................... 658
----------
$ 31,535
==========
4. EARNINGS/(LOSS) PER SHARE AND DIVIDENDS
Basic earnings/(loss) per share are based on the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings/(loss) per share are based on the weighted average number of common and
potentially dilutive common shares (options and warrants) outstanding during the
period, computed in accordance with the treasury stock method.
6
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
THREE MONTHS ENDED
------------------
MARCH 31, MARCH 31,
2004 2003
---- ----
Numerator:
Earnings/(loss) applicable to common
shares for basic and diluted calculation $ 6,828 $ (31,013)
========= =========
Denominator:
Weighted-average common shares ............ 231,685 230,527
Effect of dilutive securities:
Stock options and warrants ............. 7,716 --
--------- ---------
Denominator for diluted calculation ....... 239,401 230,527
========= =========
Stock options and warrants outstanding at March 31, 2004 and 2003
aggregating 13,026 and 38,067, respectively, of potentially dilutive shares have
not been included in the diluted per share calculations since their effect would
be antidilutive.
On February 10, 2004, Symbol's Board of Directors approved a $0.01 per
share semi-annual cash dividend, which amounted to $2,338 and was paid on April
9, 2004 to shareholders of record on March 19, 2004.
5. COMPREHENSIVE EARNINGS/(LOSS)
Comprehensive earnings/(loss) is the change in equity of a business
enterprise from transactions, other events, and circumstances from nonowner
sources during a period. The Company generated total comprehensive
earnings/(loss) of $6,178 and $(28,261) for the three months ended March 31,
2004 and 2003, respectively. The Company's comprehensive earnings/(loss) is
comprised of net earnings/(loss), foreign currency translation adjustments,
unrealized gains/losses on available for sale marketable securities and
unrealized derivative gains/(losses) on our cash flow hedging activities.
6. RESTRUCTURING AND IMPAIRMENT CHARGES
a. Telxon Acquisition
We recorded certain restructuring, impairment and merger integration
related charges related to our Telxon acquisition during 2001 and 2002.
Approximately $61 relating to lease obligation costs charges was included in
accrued restructuring expenses as of December 31, 2003. During the quarter ended
March 31, 2004, $19 was paid and as of March 31, 2004, $42 remained in accrued
restructuring expenses.
b. Manufacturing Transition
In 2001, we began to transition volume manufacturing away from our
Bohemia, New York facility to lower cost locations, primarily our Reynosa,
Mexico facility and Far East contract manufacturing partners. As a result of
these activities, we incurred restructuring charges during 2002 and 2001. During
the first quarter of 2004, the Company entered into a sub-lease arrangement at
its Bohemia, New York facility and recorded the anticipated sub-lease income of
approximately $2,860 as a reduction of the lease obligation cost, which had been
previously recorded in 2001. This amount has been recorded
7
as a reduction to product cost of revenue as of March 31, 2004. Included in
accrued restructuring expenses as of March 31, 2004 is $1,192 of net lease
obligations relating to these manufacturing restructuring charges.
LEASE
OBLIGATION
COSTS
-----
Balance at December 31, 2003....... $ 4,356
Utilization/payments .............. (304)
Provision reduction ............... (2,860)
-------
Balance at March 31, 2004 ......... $ 1,192
=======
c. Global Services Transition
During the first quarter of 2003, our global services organization
initiated restructuring activities which included transitioning a portion of our
repair operations to Mexico and the Czech Republic, reorganizing our
professional services group to utilize third party service providers for lower
margin activities, and reorganizing our European management structure from a
country based structure to a regional structure. The costs incurred in the first
quarter of 2003 in connection with this restructuring which related almost
entirely to workforce reductions, was approximately $1,066, of which $979 and
$87 was recorded as a component of cost of revenue and operating expenses,
respectively. These restructuring activities are expected to be completed by the
end of 2004.
During the first of quarter of 2003, we initiated additional
restructuring activities in connection with our decision to relocate additional
product lines from New York to Mexico. The costs associated with this
restructuring relate to workforce reductions and transportation costs. The total
amount incurred in connection with this restructuring activity was $961 all of
which was recorded as a component of cost of revenue in 2003. These
restructuring activities were completed by June 30, 2003.
In connection with the global services transition, during the first
quarter of 2004 the Company recorded an additional provision of $1,629, which
relates to lease obligation costs net of sub-lease income and further work force
reductions. This amount has been recorded as a component of service cost of
revenue in the first quarter of 2004. Further global services transition
restructuring activities are being considered and future benefits are not yet
defined, therefore, we cannot reasonably estimate the remaining cost expected to
be incurred. These restructuring activities are expected to be completed by the
end of 2004.
Details of the global services transition restructuring charges and
remaining balances as of March 31, 2004 are as follows:
LEASE ASSET
WORKFORCE OBLIGATION IMPAIRMENTS
REDUCTIONS COSTS AND OTHER TOTAL
---------- ----- --------- -----
Balance at December 31, 2003......... $ 79 $ 572 $ 172 $ 823
Provision - cost of revenues......... 367 1,262 -- 1,629
Utilization/payments ................ (41) (126) (23) (190)
------- ------- ------- -------
Balance at March 31, 2004 ........... $ 405 $ 1,708 $ 149 $ 2,262
======= ======= ======= =======
8
7. LONG-TERM DEBT
On March 16, 2004, our $45,000 secured credit line was increased to
$60,000. Borrowings, which are secured by U.S. trade receivables, bear interest
at either LIBOR plus 200 basis points, which approximated 3.09% at March 31,
2004, or the base rate of the syndication agent bank, which approximated 4.0% at
March 31, 2004. This secured credit line expires in May 2006. As of March 31,
2004 and December 31, 2003, there were no borrowings outstanding under the
secured credit line.
On March 31, 2004, we entered into a secured installment loan with a
bank for $13,825. The loan is secured by U.S. trade receivables and is payable
in four semiannual installments of $3,655 commencing October 1, 2004. The
proceeds under the loan were used to finance certain software license
arrangements.
In January 2001, we entered into a private Mandatorily Exchangeable
Securities Contract for Shared Appreciation Income Linked Securities ("SAILS")
with a highly rated financial institution. The securities that underlie the
SAILS contract represent our investment in Cisco common stock. This debt has a
seven-year maturity and bears interest at a cash coupon rate of 3.625 percent of
the original notional amount of debt of $174,200. At maturity, the SAILS are
exchangeable for shares of Cisco common stock or, at our option, cash in lieu of
shares. The SAILS contain an embedded equity collar, which effectively manages a
large portion of our exposure to fluctuations in the fair value of our holdings
in Cisco common stock. We account for the embedded equity collar as a derivative
financial instrument in accordance with the requirements of SFAS No. 133. The
change in fair value of this derivative between reporting dates is recognized as
other income. The derivative has been combined with the debt instrument in
long-term debt as there is a legal right of offset and is in accordance with
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts." The SAILS liability, net of the
derivative asset, represents $94,005 and $98,927 of the total long-term debt
balance outstanding at March 31, 2004 and December 31, 2003, respectively. We
have the option to terminate the SAILS arrangement prior to its scheduled
maturity. If we terminate the SAILS arrangement prior to its scheduled maturity
by delivering our Cisco common stock our cash payment would not exceed the
present value of our future coupon payments at the time of termination. At the
present time, we do not anticipate terminating the SAILS arrangement prior to
its scheduled maturity date.
8. ACQUISITIONS
Brazil Acquisition
During 2002, we entered into an agreement with the owners of Seal
Sistemas e Technologia Da Informacao Ltda. ("Seal"), a Brazilian corporation
that had operated as a distributor and integrator of our products since 1987.
The agreement resulted in the termination of distribution rights for Seal and
the creation of a majority-owned subsidiary of the Company that would serve as
the Brazilian distributor and customer service entity ("Symbol Brazil"). In
accordance with the terms of the agreement, the owners of Seal acquired a 49
percent ownership interest in Symbol Brazil.
The initial terms of the agreement included payments to the minority
shareholders that range from a minimum of $9,550 to a maximum of $14,800
contingent upon the attainment of certain annual net revenue levels of Symbol
Brazil. In the event that none of the specified revenue levels were attained,
the minimum earnout payment was payable no later than March 31, 2009. Under the
initial terms, with each earnout payment, we would obtain a portion of Symbol
Brazil's shares owned by the minority shareholders such that we ultimately would
have owned 100 percent of Symbol Brazil no later than March 31, 2009. We loaned
an entity affiliated with the minority shareholders $5,000 at the time of the
initial agreement, which was due on the date of the first earnout payment. The
present value of net future
9
minimum earnout payments of $4,550 amounted to $1,992 and was recorded as part
of the purchase price resulting in a total purchase price of $6,992.
On January 10, 2004, the parties amended this transaction, whereby
Symbol Technologies Holdings do Brasil Ltda., a wholly owned subsidiary of the
Company, purchased an additional 34% ownership interest of Symbol Brazil owned
by two principals of Seal. The Company paid $4,050 and also forgave the
pre-existing $5,000 loan and related accrued interest of $92 that had been made
to an entity affiliated with the principals of Seal. Accordingly, the Company
and Symbol Technologies Holdings do Brasil Ltda. now own 85% of the capital of
Symbol Brazil. As a result of the transaction, the Company satisfied the
obligation related to the minimum earnout requirement of approximately $2,337 at
January 10, 2004 and recorded the excess purchase price of approximately $1,805
as goodwill. Under the terms of the relevant agreements, Symbol Brazil had its
corporate form changed into a corporation and it will eventually become a wholly
owned subsidiary of the Company, directly or indirectly. If Symbol Brazil meets
certain revenue targets over relevant time periods, the Company will be required
to purchase additional ownership interests from the minority shareholders.
As we control Symbol Brazil, we have consolidated this subsidiary. The
minority interest in earnings of operations of Symbol Brazil was immaterial at
March 31, 2004 and 2003, respectively.
9. CONTINGENCIES
a. Legal Matters
We are a party to lawsuits in the normal course of business. Litigation
in the normal course of business, as well as the lawsuits and investigations
described below, can be expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings and government
investigations are difficult to predict. Unless otherwise specified, Symbol is
currently unable to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, for the lawsuits and investigations described herein. An
unfavorable resolution to any of the lawsuits or investigations described below
could have a material adverse effect on Symbol's business, results of operations
or financial condition.
GOVERNMENT INVESTIGATIONS
The Securities and Exchange Commission ("SEC" or the "Commission") 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
10
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, inflate
revenue through sham "round-trip" transactions. The Commission has also filed a
civil complaint asserting similar allegations against Mr. Asti.
In June 2003, Robert Korkuc, Symbol's former Chief Accounting Officer,
who left Symbol in March 2003, pleaded guilty to two counts of securities fraud
in connection with matters that are the subject of the Commission and the
Eastern District investigations. These counts included allegations that Mr.
Korkuc acted with others at Symbol in a fraudulent scheme to inflate various
measures of Symbol's financial performance. The Commission also has filed a
civil complaint asserting similar allegations against Mr. Korkuc.
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.
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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 is ongoing. In addition, on October
15, 2003, plaintiffs moved for class certification of the Pinkowitz action.
Trial of the Pinkowitz action is scheduled to commence in or about September
2004. Symbol has engaged in settlement negotiations with counsel for the
plaintiffs.
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.
In connection with the above pending class actions and government
investigations, Symbol has recorded an accrued liability for legal settlements
of $142,000 as of March 31, 2004 and December 31, 2003 which is reflected as a
component of accounts payable and accrued expenses in the accompanying condensed
consolidated financial statements. Based upon recent discussions, we currently
estimate that approximately $40,000 of the estimated $142,000 may not be
deductible for income tax purposes.
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.
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Gold v. Symbol Technologies, Inc., et al.
On December 18, 2003, a purported derivative action lawsuit was filed,
entitled Gold v. Symbol Technologies, Inc., et al., in the Court of Chancery of
the State of Delaware against Symbol and Tomo Razmilovic, Kenneth V. Jaeggi, Dr.
Jerome Swartz, Frank Borghese, Brian Burke, Richard M. Feldt, Satya Sharma,
Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Dr. Leo A. Guthart,
Richard Bravman, Dr. James H. Simons, Leonard H. Goldner, Saul P. Steinberg,
Lowell C. Freiberg and Charles Wang. The complaint alleges that the defendants
violated the federal securities laws by issuing materially false and misleading
statements from January 1, 1998 through December 31, 2002 that had the effect of
artificially inflating the market price of Symbol's securities and that they
failed to properly oversee or implement policies, procedures and rules to ensure
compliance with federal and state laws requiring the dissemination of accurate
financial statements, which ultimately caused Symbol to be sued for, and exposed
to liability for, violations of the anti-fraud provisions of the federal
securities laws, engaged in insider trading in Symbol's common stock, wasted
corporate assets and improperly awarded a severance of approximately $13,000 to
Mr. Razmilovic.
Plaintiff seeks to recover incentive-based compensation paid to former
senior members of Symbol's management in reliance on materially inflated
financial statements and to impose a trust to recover cash and other valuable
assets received by the former management defendants and former Symbol board
members in the form of proceeds garnered from the sale of Symbol common stock
(including option related sales) from at least January 1, 1998 through December
31, 2002. Symbol filed a motion to dismiss on March 29, 2004. Plaintiff has
indicated its intention to file an amended complaint, which is due on or before
May 20, 2004. 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 misrepresentations and omissions with respect
to Telxon's financial performance and prospects and an alleged violation of
generally accepted accounting principles by improperly recognizing revenues. The
named defendants are Telxon, its former president and chief executive officer,
Frank E. Brick, and its former senior vice president and chief financial
officer, Kenneth W. Haver. The actions were referred to a single judge,
consolidated and an amended complaint was filed by lead counsel. The amended
complaint alleges that the defendants engaged in a scheme to defraud investors
through improper revenue recognition practices and concealment of material
adverse conditions in Telxon's business and finances. The amended complaint
seeks certification of the identified class, unspecified compensatory and
punitive damages, pre- and post-judgment interest, and attorneys' fees and
costs.
On November 13, 2003, Telxon and the plaintiff class reached a
tentative settlement of all pending shareholder class actions against Telxon.
Under the settlement, Telxon anticipated that it would pay $37,000 to the class.
As a result of anticipated contributions by Telxon's insurers, Telxon expected
that its net payment would be no more than $25,000. On December 19, 2003, the
settlement received preliminary approval from the Court. On February 12, 2004,
the Court granted its final approval of the settlement. On February 27, 2004, we
paid $25,000 to the class in accordance with the settlement. Telxon has not
settled its lawsuit against its former auditors, PricewaterhouseCoopers LLP
("PwC"), and, as part of the proposed settlement of the class action, Telxon has
agreed to pay to the class, under certain circumstances, up to $3,000 of the
proceeds of that lawsuit.
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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. The settlement
was finalized and paid by the Company in December 2003, and a stipulation of
dismissal was filed in January 2004.
PENDING PATENT AND TRADEMARK LITIGATION
Proxim v. Symbol Technologies, Inc., 3 Com Corporation, Wayport Incorporated and
SMC Networks Incorporated
In March 2001, Proxim Incorporated ("Proxim") sued Symbol, 3 Com
Corporation, Wayport Incorporated and SMC Networks Incorporated in the United
States District Court in the District of Delaware for allegedly infringing three
patents owned by Proxim (the "Proxim v. 3Com et al. Action"). Proxim also filed
a similar lawsuit in March 2001 in the United States District Court in the
District of Massachusetts against Cisco Systems, Incorporated and Intersil
Corporation. The complaint against Symbol sought, among other relief,
unspecified damages for patent infringement, treble damages for willful
infringement and a permanent injunction against Symbol from infringing these
three patents.
Symbol answered and filed counterclaims against Proxim, asserting that
Proxim's RF product offerings infringe on four of our patents relating to
wireless LAN technology.
On December 4, 2001, we filed a complaint against Proxim in the United
States District Court in the District of Delaware (the "Symbol v. Proxim
Action") asserting infringement of the same four patents that were asserted in
our counterclaim against Proxim in the Proxim v. 3Com et al. Action prior to the
severance of this counterclaim by the Court. On December 18, 2001, Proxim filed
an answer and counterclaims in the Symbol v. Proxim Action, seeking declaratory
judgments for non-infringement, invalidity and unenforceability of the four
patents asserted by Symbol, injunctive and monetary relief for our alleged
infringement of one additional Proxim patent (the "`634 Patent") involving
wireless LAN technology, monetary relief for our alleged false patent marking,
and injunctive and monetary relief for
14
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.
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 later in 2004.
Hand Held Products, Inc. and HHP-NC, Inc. v. Symbol Technologies, Inc. and
Telxon Corporation
15
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. Discovery is underway. A final
pretrial conference is scheduled for June 17, 2004. It is expected that a trial
date will be set at the conference. 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 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.
16
Symbol has moved for partial summary judgment on Metrologics breach of contract
claim, which has been fully briefed by the parties. 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.
A 27-day non-jury trial was held before the Court beginning on November
18, 2002, and concluding on January 17, 2003. Post-trial briefing was completed
in late June 2003.
On January 23, 2004, the Court concluded that Lemelson's patent claims
are unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the Court are not infringed by Symbol
because use of the accused products does not satisfy one or more of the
limitations of each and every asserted claim; and that the claims are invalid
for lack of written description and enablement even if construed in the manner
urged by Lemelson. In so concluding, the Court found that judgment should be
entered in favor of plaintiffs Symbol and the other members of the Auto ID
Companies and against defendant Lemelson Partnership on Symbol's and the Auto ID
Companies' complaint for declaratory judgment. The Court entered its judgment on
January 23, 2004.
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.
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On September 17, 2003, a jury awarded approximately $218,000 in damages
against Telxon. This sum included an award of approximately $6,000 to an
individual. On September 24, 2003, the individual and SMI moved to add Symbol as
a substitute or counterclaim defendant. That motion was subsequently withdrawn
by SMI. On October 7, 2003, Telxon made a motion to impound and secure the trial
record of certain exhibits, and on October 8, 2003, Telxon made motions for
judgment in its favor notwithstanding the jury's verdicts, and for a new trial.
In the event this relief is not granted, Telxon requested that the amount of the
jury's verdicts be reduced. Also, Telxon requested that the execution of any
judgment against Telxon entered by the Court be stayed without the posting of a
bond, or in the alternative, that a bond be set at a maximum of $3,700. In
support of its motions, Telxon argued that the jury's verdicts were based upon
inadmissible evidence being improperly provided to the jury during its
deliberations; that the absence of liability on the part of Telxon was
conclusively established by the documents in evidence; and that the amounts
awarded to SMI were based on legally irrelevant projections, and are wildly
speculative, particularly given that SMI never had any revenue or profits. In
addition, Telxon argued that the jury verdicts incorrectly awarded damages more
than once for the same alleged injury by adding together two separate awards for
lost profits, and by improperly combining different measures of damages.
On May 6, 2004 the Court entered judgment against Telxon for
approximately $218,000 in damages plus statutory interest from the date of the
verdict. This amount includes an award to an individual for approximately
$6,000. The Court also granted the individual's motion to add Symbol as a
counterclaim defendant. The Court denied Telxon's motions for judgment in its
favor, for a new trial, and for a reduction in the verdict. The Court also
rejected Telxon's motion for a stay of the execution of the judgment. The Court
rejected SMI's and the individual's motions for prejudgment interest, and did
not set a bond amount for appeal. Symbol and Telxon have appealed these rulings
in the Court of Common Pleas for Summit County, Ohio and have filed a motion to
stay execution of the judgment. In the alternative, Symbol and or Telxon will
post a bond to appeal the judgment. We believe the maximum bond allowed under
Ohio law is $50,000 and that Symbol and Telxon have the ability to post a bond
of that amount. We believe that Symbol and Telxon have strong grounds on which
to appeal and do not currently believe that an unfavorable outcome with respect
to the SMI judgment is probable at this time. Moreover, there can be no
certainty at this time as to the likely amount of loss, if any. Accordingly, as
of March 31, 2004 we have not recorded a liability in our consolidated financial
statements with respect to the SMI judgment. However, there can be no assurance
that Symbol and or Telxon will not be found to be ultimately liable for the
damage awards.
Barcode Systems, Inc. ("BSI") v. Symbol Technologies Canada, Inc., et al.
On March 19, 2003, BSI filed an amended statement of claim in the Court
of Queen's Bench in Winnipeg, Canada, naming Symbol Technologies Canada, Inc.
and Symbol as defendants. BSI alleges that Symbol deliberately, maliciously and
willfully breached its agreement with BSI under which BSI purported to have the
right to sell Symbol product in western Canada and to supply Symbol's support
operations for western Canada. BSI has claimed damages in an unspecified amount,
punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated
any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,281, representing the unpaid balance of product sold by Symbol to BSI.
Discovery in the matter is ongoing.
On October 30, 2003, BSI filed an Application For Leave with the
Canadian Competition Tribunal ("Tribunal"). BSI is seeking an Order from the
Tribunal that would require Symbol to accept
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BSI as a customer on the "usual trade terms" as they existed prior to the
termination of their agreement in April 2003. The Tribunal granted leave for BSI
to proceed with its claim against Symbol on January 15, 2004. Symbol filed an
appeal of the Tribunal's decision before the Federal Court of Appeals on April
22, 2004.
On November 17, 2003, BSI filed an additional lawsuit in British
Columbia, Canada against Symbol and a number of its distributors alleging that
Symbol refused to sell products to BSI, conspired with the other defendants to
do the same and used confidential information to interfere with BSI's business.
Symbol considers these claims to be meritless and intends to defend against
these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata
("Plaintiff"), filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de
C.V. ("Symbol Mexico") on or about October 21, 2003 for purposes of exercising
an action to reclaim property on which Symbol's Reynosa facility is located.
Such lawsuit was filed before the First Civil Judge of First Instance, 5th
Judicial District, in Reynosa, Tamaulipas, Mexico. Additionally, the First Civil
Judge ordered the recording of a lis pendens with respect to this litigation
before the Public Register of Property in Cd. Victoria, Tamaulipas. As of
November 13, 2003, such lis pendens was still pending recordation.
Plaintiff alleges that she is the legal owner of a tract of land of one
hundred (100) hectares in area, located within the area comprising the Rancho La
Alameda, Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan,
Tamaulipas, irrigation district. Allegedly, such land was caused to be part of
the Parque Industrial Del Norte in Reynosa, Tamaulipas. Plaintiff further
alleges that Symbol Mexico, without any claim of right and without Plaintiff's
consent entered upon the tract of land, occupied such, and refused to return to
Plaintiff the portion of land and all improvements and accessions thereto
occupied by Symbol Mexico. Plaintiff is asking the court to order Symbol Mexico
to physically and legally deliver to the Plaintiff the portion of land occupied
by Symbol Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial
Reynosa from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument.
An Owner's Policy of Title Insurance was issued by Stewart Title Guaranty
Company in connection with the above-mentioned transaction in the amount of
$13,400. A Notice of Claim and Request for Defense of Litigation was duly
delivered on behalf of Symbol to Stewart Title Guaranty Company on November 4,
2003. Symbol intends to defend against this claim vigorously.
Bruck Technologies Handels GmbH European Commission ("EC") Complaint
In February 2004, Symbol became aware of a notice from the European
Competition Commission (the "EC") of a complaint lodged with it by Bruck
Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol
PartnerSelect program violate Article 81 of the EC Treaty. Symbol considers
these claims to be without merit and intends to vigorously defend against them.
b. Guarantees and Product Warranties
We provide standard warranty coverage for most of our products for a
period of one year from the date of shipment. We record a liability for
estimated warranty claims based on historical claims, product failure rates and
other factors. This warranty liability, recorded as a component of accounts
19
payable and accrued expenses, primarily includes the anticipated cost of
materials, labor and shipping necessary to repair and service the equipment.
The following table illustrates the changes in our warranty reserves:
Amount
Balance at December 31, 2003 .................... $ 20,828
Charges to expense--cost of revenue.............. 7,668
Utilization/payment ............................. (7,901)
--------
Balance at March 31, 2004 ....................... $ 20,595
========
c. Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to hedge the risk exposures
associated with foreign currency fluctuations for payments denominated in
foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Changes
in fair value of derivative instruments are recognized immediately in earnings
unless the derivative qualifies as a cash flow hedge. For derivatives qualifying
as cash flow hedges, the effective portion of changes in fair value of the
derivative instrument is recorded as a component of other comprehensive income /
(loss) and is reclassified to earnings in the same period during which the
hedged transaction affects earnings. Any ineffective portion (representing the
remaining gain or loss on the derivative instrument in excess of the cumulative
change in the present value of future cash flows of the hedged transaction) is
recognized in earnings as it occurs. For fair value hedges, changes in fair
value of the derivative, as well as the offsetting changes in fair value of the
hedged item, are recognized in earnings each period. We do not use these
derivative financial instruments for trading purposes.
As of March 31, 2004 and December 31, 2003, respectively, we had
$27,195 and $40,673 in notional amounts of forward exchange contracts
outstanding. The forward exchange contracts generally have maturities that do
not exceed 12 months and require us to exchange foreign currencies for U.S.
dollars at maturity at rates agreed to at inception of the contracts. These
contracts are primarily denominated in British pounds, Euros, Australian
dollars, Canadian dollars and Japanese yen and have been marked to market each
period with the resulting gains and losses included as a component of cost of
revenue in the Condensed Consolidated Statement of Operations. The fair value of
these forward exchange contracts was $(133) as of March 31, 2004, which is
recorded in current liabilities and $107 as of December 31, 2003, which was
recorded in current assets.
10. INCOME TAXES
As discussed in Note 9a in the notes to the condensed consolidated
financial statements, in April 2004 we changed our estimate of the amount for
certain pending class action lawsuits and government fines, which may not be
deductible for tax purposes. At December 31, 2003, our estimate of the
non-deductible amount was $5,000, currently we estimate such non-deductible
amount to approximate $40,000. Accordingly, we reversed a previously recorded
deferred tax asset of $13,475, as we believe this deferred tax asset is unlikely
to be realizable. Below are the components of our provision for income taxes for
the three months ended March 31, 2004.
Amount Percent
------ -------
Earnings before income taxes $ 30,461
Deferred tax asset impairment $13,475 44.3
20
Income tax expense 10,158 33.3
------- ----
Total provision for income taxes 23,633 77.6
------ ====
Net earnings $ 6,828
========
11. EXECUTIVE RETIREMENT PLAN
We maintain an Executive Retirement Plan (the "Plan") in which certain
highly compensated associates are eligible to participate. Our obligations under
the Plan are not funded. The components of net periodic benefit cost at March
31, 2004 and 2003 are as follows:
THREE MONTHS ENDED
MARCH 31,
---------
2004 2003
---- ----
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ................................. $370 $372
Interest cost ................................ 322 338
Amortization of prior service cost............ 66 66
Recognized actuarial loss .................... 0 53
---- ----
Net periodic benefit cost .................... $758 $829
==== ====
EMPLOYER CONTRIBUTIONS TO THE PLAN
We previously disclosed in our financial statements for the year ended
December 31, 2003, that we expected to contribute approximately $372 to the Plan
to cover expected benefit payments during 2004. As of March 31, 2004, $35 has
been paid and we anticipate contributing an additional $337 to cover the
expected benefit payments for the Plan in 2004.
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 and other forms of 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. In the measurement of segment
performance, we do not allocate manufacturing variances, research and
development, sales and marketing, or general and administrative expenses. We do
not use that information to make key operating decisions and do not believe that
allocating these expenses is significant in evaluating performance.
Beginning January 1, 2004, we revised our internal reporting of certain
manufacturing costs, including but not limited to costs of re-working product,
warranty costs, obsolescence costs and costs to
21
scrap and no longer include these in our standard costing structure. As
reflected in the table below, there is an increase in our standard gross profit
and our manufacturing variances and other related costs for the three months
ended March 31, 2004 as compared to the comparable period in 2003.
Our internal structure is in the form of a matrix organization whereby
certain managers are held responsible for products and services worldwide while
other managers are responsible for specific geographic areas. The operating
results of both components are reviewed on a regular basis.
We operate in three main geographic regions: The Americas (which
includes North and South America), EMEA (which includes Europe, Middle East and
Africa) and Asia Pacific (which includes Japan, the Far East and Australia).
Sales are allocated to each region based upon the location of the use of the
products and services. Non-U.S. sales for the three months ended March 31, 2004
and 2003 were $166,485 and $170,970, respectively.
Identifiable assets are those tangible and intangible assets used in
operations in each geographic region. Corporate assets are principally temporary
investments and goodwill.
Summarized financial information concerning our reportable segments and
geographic regions is shown in the following table.
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL
-------- -------- ----- -------- -------- -----
REVENUES:
The Americas...................... $ 229,094 $ 45,277 $ 274,371 $ 185,080 $ 50,248 $ 235,328
EMEA.............................. 89,241 22,960 112,201 104,836 22,829 127,665
Asia Pacific...................... 29,904 3,175 33,079 20,787 2,567 23,354
----------- ----------- ----------- ----------- ----------- -----------
Total net sales................... $ 348,239 $ 71,412 $ 419,651 $ 310,703 $ 75,644 $ 386,347
=========== =========== =========== =========== =========== ===========
STANDARD GROSS PROFIT:
The Americas...................... $ 130,534 $ 8,532 $ 139,066 $ 94,881 $ 11,603 $ 106,484
EMEA.............................. 52,249 7,523 59,772 53,510 7,163 60,673
Asia Pacific...................... 17,909 1,373 19,282 10,439 830 11,269
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit at standard.... $ 200,692 $ 17,428 218,120 $ 158,830 $ 19,596 178,426
=========== =========== =========== ===========
Manufacturing variances & other
related costs.................. 23,192 6,554
----------- -----------
Total gross profit................ $ 194,928 $ 171,872
=========== ===========
AS OF AS OF
MARCH 31, DECEMBER 31,
2004 2003
---- ----
IDENTIFIABLE ASSETS:
The Americas...................... $ 818,037 $ 867,133
EMEA.............................. 305,090 316,406
Asia Pacific...................... 68,230 64,228
Corporate (principally goodwill,
intangible assets and investments) 398,603 398,751
----------- -----------
Total........................ $ 1,589,960 $ 1,646,518
=========== ===========
22
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 46-R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the end
of the first interim or annual reporting period ending after March 15, 2004,
except for those VIE's that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or annual
reporting period ending after December 15, 2003. The Company does not currently
hold any interests in VIE's that would require consolidation or additional
disclosures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FORWARD-LOOKING STATEMENTS; CERTAIN CAUTIONARY STATEMENTS
This report contains forward-looking statements made in reliance upon
the safe harbor provisions of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements may be identified by their use of words, such as "anticipate,"
"estimates," "should," "expect," "guidance," "project," "intend," "plan,"
"believe" and other words and terms of similar meaning, in connection with any
discussion of Symbol's future business, results of operations, liquidity and
operating or financial performance or results. Such forward looking statements
involve significant material known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. These and other
important risk factors are included in the "Risk Factors" section of this
report.
In light of the uncertainty inherent in such forward-looking
statements, you should not consider the inclusion to be a representation that
such forward-looking events or outcomes will occur.
Because the information herein is based solely on data currently
available, it is subject to change and should not be viewed as providing any
assurance regarding Symbol's future performance. Actual results and performance
may differ from Symbol's current projections, estimates and expectations, and
the differences may be material, individually or in the aggregate, to Symbol's
business, financial condition, results of operations, liquidity or prospects.
Additionally, Symbol is not obligated to make public indication of changes in
its forward looking statements unless required under applicable disclosure rules
and regulations.
The following discussion and analysis should be read in conjunction with
Symbol's Condensed Consolidated Financial Statements and the notes thereto that
appear elsewhere in this report.
OVERVIEW
We are a leader in secure mobile information systems that integrate
application-specific handheld computers with wireless networks for data, voice
and bar code and other forms of data capture. Our goal is to be one of the
world's preeminent suppliers of mission-critical mobile computing solutions to
both
23
business and industrial users. For the three months ended March 31, 2004, we
generated $419,651 of revenue.
Symbol manufactures products and provides services to capture, manage
and communicate data using four core technologies - bar code reading and image
recognition, mobile computing, networking systems and mobility software
applications. Our products and services are sold to a broad and diverse base of
customers on a worldwide basis and in diverse markets such as retail,
transportation, parcel and postal delivery services, warehousing and
distribution, manufacturing, healthcare, hospitality, security, education and
government. We do not depend upon a single customer, or a few customers, the
loss of which would have a material adverse effect on our business.
We are engaged in two reportable business segments: (1) the design,
manufacture and marketing of mobile computing, automatic data capture, and
wireless network systems (the "Product Segment"); and (2) the servicing of,
customer support for and professional services related to these systems (the
"Services Segment"). Each of our operating segments uses its core competencies
to provide building blocks for mobile computing solutions.
EXECUTIVE OVERVIEW OF PERFORMANCE
Our total revenue for the three months ended March 31, 2004 was
$419,651, an increase of 8.6 percent from total revenue of $386,347 for the
three months ended March 31, 2003. The increase in revenue is primarily
attributable to gradual strengthening in the global economy and increased
spending in the information technology sector which resulted in growth in our
product segment, particularly in mobile computing.
Our gross profit was 46.5 percent for the three months ended March 31,
2004, an increase from 44.5 percent for the three months ended March 31, 2003.
The increase is primarily due to our increased sales of higher margin product
and efficiencies we have achieved in our manufacturing and distribution
operations.
We are committed and continue to invest in our people, processes and
systems to improve our control environments, our effectiveness with our
customers and our operational efficiencies. Accordingly, our selling, general
and administrative expenses were $121,680 for the three months ended March 31,
2004, a 22.9 percent increase from the comparable period in 2003.
With continued focus on our balance sheet, we have increased our cash
to $179,033 at March 31, 2004, an increase of $29,016 from $150,017 at December
31, 2003, with no current borrowings under our secured credit line. We have also
invested $15,221 in our business during the three months ended March 31, 2004
through purchases of property and computer equipment and related software of
$11,171 and investments in other companies of $4,050. We expect to continue to
make investments in property plant and equipment over the next 12 to 18 months
in the range of $100,000 related primarily to our information technology
business transformation initiatives.
RESULTS OF OPERATIONS
The following table summarizes our revenue by geographic region and
then by reportable segment and geographic region for which we use to manage our
business:
24
FOR THE THREE MONTHS ENDED MARCH 31
-----------------------------------
VARIANCE IN VARIANCE IN
2004 2003 $'S PERCENT
---- ---- --- -------
Total Revenue
The Americas........... $ 274,371 $ 235,328 $ 39,043 16.6
EMEA................... 112,201 127,665 (15,464) (12.1)
Asia Pacific........... 33,079 23,354 9,725 41.6
------------ ------------ ------------ ----
Total Revenue......... 419,651 386,347 33,304 8.6
============ ============ ============ ====
Product Revenue
The Americas........... 229,094 185,080 44,014 23.8
EMEA................... 89,241 104,836 (15,595) (14.9)
Asia Pacific........... 29,904 20,787 9,117 43.9
------------ ------------ ------------ ----
Total Product Revenue. 348,239 310,703 37,536 12.1
============ ============ ============ ====
Service Revenue
The Americas........... 45,277 50,248 (4,971) (9.9)
EMEA................... 22,960 22,829 131 0.6
Asia Pacific........... 3,175 2,567 608 23.7
------------ ------------ ------------ ----
Total Service Revenue. $ 71,412 $ 75,644 $ (4,232) (5.6)
============ ============ ============ ====
FOR THE THREE MONTHS ENDED MARCH 31, 2004
Net product revenue for the three months ended March 31, 2004 was
$348,239, an increase of 12.1 percent from $310,703 reported for the three
months ended March 31, 2003. The increase in net product revenue of $37,536 is
primarily due to continued growth in our mobile computing product offerings,
which is our largest product line and represented approximately 42.5 percent of
the total product revenue growth. Contributing to this increase is the growth
from both our next generation mobile gun and portable data mobile computing
devices, which collectively represented an increase of approximately 9 percent
over the comparable prior year quarter. Also contributing to the product revenue
growth was growth in automatic data capture of approximately 29 percent over the
comparable prior year quarter which was primarily driven by a large rollout of
wireless point-of-sale scanners to a nationwide retailer. Offsetting these
increases were increases in our vendor and distributor rebates of approximately
$3,246 over the comparable prior year quarter, which is recorded as a reduction
to product revenue.
Net services revenue of $71,412 for the three months ended March 31,
2004 decreased 5.6 percent from $75,644 reported in the three months ended March
31, 2003 due to our continued drive to utilize third party service providers for
the lower margin service activities. Also contributing to the decrease was a
lower level of cash collections compared to the comparable prior year period, as
our U.S. service revenue is recognized on a billed and collected basis.
Geographically, the Americas revenue for the three months ended March
31, 2004 was $274,371, an increase of 16.6 percent from the $235,328 reported in
the three months ended March 31, 2003 mainly due to the reasons described above.
EMEA revenue of $112,201 decreased 12.1 percent for the three months ended March
31, 2004, from $127,665 reported in the comparable period in 2003. Approximately
$10,000 of the decrease is related to the timing of revenue recognition from our
thinly capitalized value added resellers and approximately $3,200 of the
decrease is related to a deferral of revenue from our EMEA distributors. Asia
Pacific revenue increased 41.6 percent to $33,079 for the three months ended
March 31, 2004 from $23,354 reported in the three months ended March 31, 2003
primarily the result of continued penetration of all of our product offerings
into this marketplace. The Americas, EMEA and Asia Pacific represent
approximately 65.4, 26.7 and 7.9 percent of revenue, respectively, for the three
months ended March 31, 2004.
Product cost of revenue as a percentage of net product revenue was 47.7
percent for the three months ended March 31, 2004 as compared to 50.3 percent in
the three months ended March 31, 2003. This decrease is primarily due to
increased efficiencies gained in our manufacturing and distribution
25
operations. Additionally, during the period ended March 31, 2004, the Company
recorded a $2,860 reduction in its accrued restructuring expenses related to
manufacturing transition activities. This amount represents the estimated
sub-lease income expected on our vacated facility space in Bohemia, New York.
The initial charge was recorded as a charge to product cost of revenue.
Services cost of revenue as a percentage of net services revenue was
82.0 percent for the three months ended March 31, 2004 as compared to 76.9
percent in the three months ended March 31, 2003, primarily due to the decreased
level of revenues recognized on a billed and collected basis while costs
remained relatively constant. Also included in service cost of revenue at March
31, 2004 and 2003 are global services transition restructuring costs of
approximately $1,629 and $979, respectively which relate to workforce reductions
and lease obligation costs.
OPERATING EXPENSES
Operating expenses consist of the following for the three months ended
March 31:
VARIANCE IN VARIANCE IN
2004 2003 $'S PERCENT
---- ---- --- -------
Engineering.............. $ 41,559 $ 37,055 $ 4,504 12.2
Selling, general and
administrative......... 121,680 99,031 22,649 22.9
Provision for legal
settlements............ -- 72,000 (72,000) (100.0)
Stock based
compensation expense... 2,234 776 1,458 187.9
Restructuring and
impairment charges..... -- 87 (87) (100.0)
------------ ------------ ------------ -----
$ 165,473 $ 208,949 $ (43,476) (20.8)
============ ============ ============ =====
Total operating expenses of $165,473 decreased 20.8 percent for the
three months ended March 31, 2004 from $208,949 in three months ended March 31,
2003. This decrease is largely driven by the fact that the prior year three
month period ended March 31, 2003 included a provision on legal settlements of
$72,000. There was no provision on legal settlements required during the current
three months ended March 31, 2004. Offsetting this decrease are increases in our
engineering expenses and selling, general and administrative expenses of $4,504
and $22,649 which represent a 12.2 percent and 22.9 percent increase
respectively, for the three months ended March 31, 2004 as compared to the
comparable prior period of 2003.
Also included in total operating expenses are amounts associated with
non-cash compensation expenses associated with our stock option plans. As of
March 31, 2003, due to the inability of Symbol to make timely filings with the
Commission, our stock option plans were held in abeyance, meaning that our
employees could not exercise their options until we became current with our
filings. As an accommodation to both current and former Symbol associates whose
options were impacted by this suspension, the Compensation Committee of the
Board approved an abeyance program that allowed associates whose options were
affected during the suspension period the right to exercise such options up to
90 days after the end of the suspension period. This resulted in a new
measurement date for those options, which led to a non-cash accounting
compensation charge for the intrinsic value of those vested options when the
employee either terminated employment during the suspension period or within the
90 day period after the end of the suspension period. Such expense amounted to
$2,234 and $776 for the three months ended March 31, 2004 and 2003,
respectively. On February 25, 2004, the date on which we became current with our
regulatory filings with the SEC, this suspension period ended.
Engineering and selling, general and administrative expenses are
summarized in the following table:
26
FOR THE YEARS THREE MONTHS ENDED MARCH 31
-----------------------------------------
VARIANCE IN VARIANCE IN
2004 2003 DOLLARS PERCENT
---- ---- ------- -------
Engineering.............. $ 41,559 $ 37,055 $ 4,504 12.2%
Percent of Net Sales... 9.9% 9.6%
Selling, general and
administrative......... $ 121,680 $ 99,031 $ 22,649 22.9%
Percent of Net Sales... 29.0% 25.6%
Engineering costs for the three months ended March 31, 2004 increased
12.2 percent to $41,559 from $37,055 for the three months ended March 31, 2003.
The increase was due to additional investments in mobile computing and RFID
(Radio Frequency Identification). The increase was consistent with our projected
expenditures and actual revenue growth as engineering spending as a percentage
of revenue remained relatively consistent.
Selling, general and administrative expenses for the three months ended
March 31, 2004 increased 22.9 percent to $121,680 from $99,031 for the three
months ended March 31, 2003. The increase is primarily due to our increased
revenues and our increased investment in worldwide sales, marketing and
financial personnel throughout 2003 and through the first quarter of 2004. Also
included in selling, general and administrative expenses at March 31, 2004 is a
pretax compensation and related benefits charge of $2,800 recorded in connection
with the resignation of our former Chief Executive Officer, representing 2.3
percent of selling, general and administrative expenses during the period.
OTHER (INCOME)/EXPENSE, NET
In accordance with the provisions of SFAS No. 133, the gain or loss on
the change in fair value of the portion of our investment in Cisco common stock
classified as trading, coupled with the gain or loss on the change in fair value
of the embedded derivative has been recorded as a component of other income or
loss in each reporting period. The net impact of these fair value adjustments
included in other (income) is $(1,713) for the three months ended March 31,
2004. Other (income) was partially offset by interest expense for the three
months ended March 31, 2004. Included in other expense for the three months
ended March 31, 2003 is a write-down of $3,025 for a cost method investment
which was considered to be other than temporary.
PROVISION FOR INCOME TAXES
Our effective rate for the three months ended March 31, 2004 and 2003
was 77.6% and 24.6%, respectively. As discussed in Note 9a in the notes to the
condensed consolidated financial statements, in April 2004 we changed our
estimate of the amount for certain pending class action lawsuits and government
fines, which may not be deductible for tax purposes. At December 31, 2003, our
estimate of the non-deductible amount was $5,000, currently we estimate such
non-deductible amount to approximate $40,000. Accordingly, we reversed a
previously recorded deferred tax asset of $13,475, as we believe this deferred
tax asset is unlikely to be realizable. Below are the components of our
provision for income taxes for the three months ended March 31, 2004.
Amount Percent
------ -------
Earnings before income taxes $ 30,461
Deferred tax asset impairment $13,475 44.3
Income tax expense 10,158 33.3
------- ----
Total provision for income taxes 23,633 77.6
------ ====
Net earnings $ 6,828
========
27
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The following table summarizes Symbol's cash and cash equivalent
balances as of March 31, 2004 and December 31, 2003 and the results of our
statement of cash flows for the three months ended March 31,
2004 2003 $ CHANGE
---- ---- --------
Cash and cash equivalents ...................................... $ 179,033 $ 150,017 $ 29,016
========= ========= =========
Net cash provided by /(used in):
Operating activities ....................................... 40,789 71,288 (30,499)
Investing activities ....................................... (15,221) (13,150) (2,071)
Financing activities ....................................... 4,082 (37,062) 41,144
Effect of exchange rate changes on cash and cash equivalents (634) 1,390 (2,024)
--------- --------- ---------
Net increase in cash and cash equivalents ...................... $ 29,016 $ 22,466 $ 6,550
========= ========= =========
Net cash provided by operating activities during the three months ended
March 31, 2004 was $40,789, as compared to $71,288 for the same period last
year. Net cash provided by operating activities decreased during the three
months ended March 31, 2004 as compared to the comparable prior year period
primarily due to our use of cash to reduce and pay down our outstanding accounts
payable and accrued expenses. Included in the use of cash was the $25,000
settlement related to the Telxon class action lawsuit, that was paid in February
2004.
Net cash used in investing activities for the three months ended March
31, 2004 was $15,221, as compared to $13,150 for the same period last year. Net
cash used in investing activities principally consists of net investments in
other companies and capital expenditures for property, plant and equipment. The
increase during the three months ended March 31, 2004, when compared to the same
period last year, was primarily due to increased investments in other companies
as we invested $4,050 and $1,777 of cash during the three months ended March 31,
2004 and 2003, respectively.
Net cash provided by financing activities during the three months ended
March 31, 2004 was $4,082, as compared to net cash used in financing activities
of $(37,062) during the same period last year. Net cash provided by financing
activities during the three months ended March 31, 2004 consists of proceeds
from stock option exercises and long-term debt of $10,293 and $13,745,
respectively offset by purchases of treasury stock of $(19,956) as compared to
cash used in financing activities for repayments on long-term debt of $(36,575)
in the same period last year.
The following table presents selected key performance measurements we
use to monitor our business for the three months ended March 31,
2004 2003
---- ----
Days sales outstanding (DSO)............................ 26.0 32.5
Inventory turnover - product only....................... 4.2 3.6
We continue to effectively manage our net accounts receivables, ending
the three months ended March 31, 2004 with receivables of $119,624, a decrease
of $32,753 from $152,377 at December 31, 2003. Through aggressive collection
strategies we have been able to reduce our average days sales outstanding to
26.0 days during the three months ended March 31, 2004 from an average of 32.5
days in the three months ended March 31, 2003.
28
We have also continued to improve our efficiencies in our manufacturing
and distribution operations and have decreased our inventory levels by $1,170 to
$211,692 at March 31, 2004 from $212,862 at December 31, 2003. As a result of
increased revenues and the efficiencies we have instituted in our manufacturing
and distribution operations we have been able to increase the average number of
times that our inventory turns to 4.2 from 3.6 for the three months ended March
31, 2004 as compared to the comparable period in 2003.
OTHER LIQUIDITY MEASURES
Other measures of our liquidity including the following:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Working capital.......................................... $188,254 $197,808
(current assets minus current liabilities)
Current ratio (current assets to current liabilities).... 1.4:1 1.4:1
Current assets as of March 31, 2004 decreased by $56,822 from December
31, 2003, due to short-term deferred tax assets being converted into net
operating losses which are deemed to be long-term deferred tax assets.
Additionally and as discussed in Note 10 of the notes to the condensed
consolidated financial statements, we reversed a previously recorded deferred
tax asset of $13,475 as we believe this asset may not be realized. Accounts
receivable also decreased due to improved cash collections, however a portion of
the cash generated was used to pay down and reduce our outstanding accounts
payable and accrued expenses. Current liabilities as of March 31, 2004 decreased
$47,268 from December 31, 2003 primarily due to a decrease in accounts payable
and accrued expenses which was largely driven by a $25,000 payment made in
February 2004 related to the settlement of the Telxon class action lawsuit which
was included in accounts payable and accrued expenses at December 31, 2003. As a
result, working capital decreased $9,554 between March 31, 2004 and December 31,
2003. Our current ratio was 1.4:1 at March 31, 2004 and December 31, 2003.
FINANCING ACTIVITIES
As of March 31, 2004 and December 31, 2003, there were no borrowings
outstanding under our $60,000 secured credit line.
In addition to our secured credit line, we have additional uncommitted
loan agreements with various overseas banks pursuant to which the banks have
agreed to provide lines of credit totaling $25,132 with a range of borrowing
rates and varying terms. As of March 31, 2004, we had no loans outstanding under
these lines. These agreements continue until such time as either party
terminates the agreements.
During 2000, we entered into a $50,000 lease receivable securitization
agreement. This agreement matured on December 31, 2003, but was renewed for an
additional three months without the payment of amounts outstanding at such time.
Subsequent to December 31, 2003, we have been unable to securitize additional
lease receivables until we provide certain financial information to the
financial institution. During the three months ended March 31, 2004 and 2003, we
did not securitize any additional lease receivables. Factors that are reasonably
likely to affect our ability to continue using these financing arrangements
include the ability to generate lease receivables that qualify for
securitization and the ability of the financial institution to obtain an
investment grade rating from either of the two major credit rating agencies. We
do not consider the securitization of lease receivables to be a significant
contributing factor to our continued liquidity.
29
EXISTING INDEBTEDNESS
At March 31, 2004 and December 31, 2003 long-term debt outstanding,
excluding current maturities, was as follows:
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Secured credit line ......................... $ -- $ --
Secured installment loan..................... 13,825 --
SAILS exchangeable debt ..................... 94,005 98,927
Other ....................................... 239 319
-------- --------
108,069 99,246
Less: current maturities..................... 3,633 234
-------- --------
Long-term debt .............................. $104,436 $ 99,012
======== ========
In March 2004, we entered into a secured installment loan agreement
with a bank for $13,825. The loan is payable in four semiannual installments of
$3,655 commencing October 1, 2004. The proceeds received under the loan were
used to finance certain Company software license arrangements.
In January 2001, we entered into a private Mandatorily Exchangeable
Securities Contract for Shared Appreciation Income Linked Securities ("SAILS")
with a highly rated financial institution. The securities that underlie the
SAILS contract represent our investment in Cisco common stock, which was
acquired in connection with the Telxon acquisition. The 4,160 shares of Cisco
common stock had a market value of $98,051 at March 31, 2004 and $100,797 at
December 31, 2003. Such shares are held as collateral to secure the debt
instrument associated with the SAILS and are included in Investment in
Marketable Securities in the Consolidated Balance Sheets. This debt has a
seven-year maturity and we pay interest at a cash coupon rate of 3.625 percent.
At maturity, the SAILS will be exchangeable for shares of Cisco common
stock or, at our option, cash in lieu of shares. Net proceeds from the issuance
of the SAILS and termination of an existing freestanding collar arrangement were
approximately $262,246 which were used for general corporate purposes, including
the repayment of debt outstanding under our revolving credit facility. The SAILS
contain an embedded equity collar, which effectively hedges a large portion of
exposure to fluctuations in the fair value of our holdings in Cisco common
stock. We account for the embedded equity collar as a derivative financial
instrument in accordance with the requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended. The gain or loss on
changes in the fair value of the derivative is recognized through earnings in
the period of change together with the offsetting gain or loss on the Cisco
shares classified as trading securities.
The derivative has been combined with the debt instrument in long-term
debt in the Condensed Consolidated Balance Sheets and presented on a net basis
as permitted under FIN No. 39, "Offsetting of Amounts Related to Certain
Contracts," as there exists a legal right of offset. The SAILS liability, net of
the derivative asset, represents $94,005 at March 31, 2004.
The remaining portion of long-term debt outstanding relates primarily
to capital lease obligations.
CONTRACTUAL CASH OBLIGATIONS
The following is a summary of the contractual commitments associated
with our debt and lease obligations as of March 31, 2004.
30
YEARS ENDED DECEMBER 31,
------------------------
NINE
MONTHS
TOTAL ENDED 2004 2005 2006 2007 2008 THEREAFTER
----- ---------- ---- ---- ---- ---- ----------
Long-term debt................. $107,848 $3,455 $6,920 $3,463 $ 5 $94,005 $ --
Capital lease commitments...... 221 177 44 -- -- -- --
Operating lease commitments.... 96,406 15,683 17,835 14,960 12,791 10,788 24,349
-------- ------- ------- ------- ------- -------- -------
Total.......................... $204,475 $19,315 $24,799 $18,423 $12,796 $104,793 $24,349
======== ======= ======= ======= ======= ======== =======
Currently, our primary source of liquidity is cash flow from operations
and the secured credit line. Our primary liquidity requirements continue to be
working capital, engineering costs, and financing and investing activities.
Our ability to fund planned capital expenditures and to make payments
on and to refinance our indebtedness will depend on our ability to generate cash
in the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Based on our current level of operations, we believe our
cash flow from operations, available cash and available borrowings under our
secured credit line will be adequate to meet our future liquidity needs for the
next twelve months.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be available
to us under our secured credit line in an amount sufficient to enable us to fund
our other liquidity needs or pay our indebtedness. If we consummate an
acquisition, our liquidity and/or debt service requirements could increase.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
reported amounts of assets, liabilities, revenue and expenses, as well as the
disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates and judgments,
including those related to product return reserves, allowance for doubtful
accounts, legal contingencies, inventory valuation, warranty reserves, useful
lives of long-lived assets, derivative instrument valuations and income taxes.
We base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. Note 1 of the Notes to the Consolidated Financial Statements
"Summary of Significant Accounting Policies" summarizes each of our significant
accounting policies in our Annual Report on Form 10-K. We believe 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
31
products are shipped or services are rendered, the title and risk of loss has
passed to the customer, the sales price is fixed or determinable and
collectibility is reasonably assured. The recognition of revenues related to
sales of our products or systems to our value-added resellers is contingent upon
the reseller's ability to pay for the product without reselling it to the end
user. Sales to resellers that are financially sound are generally recognized
when products are shipped, the title and risk of loss has passed, the sales
prices is fixed and determinable and collectibility is reasonably assured. Sales
to resellers that lack economic substance or cannot pay for our products without
reselling them to their customers are recognized when the revenue is billed and
collected. Revenue on sales to distributors is recognized when our products and
systems are sold by them to the end user.
Service and maintenance sales are recognized when there is persuasive
evidence of an arrangement, the services are rendered, the price is fixed and
determinable and collectibility is reasonably assured, which is primarily upon
receipt of payment.
When a sale involves multiple elements, the entire revenue from the
arrangement is allocated to each respective element based on its relative fair
value and is recognized when the revenue recognition criteria for each element
is met.
We accrue estimated product return reserves against our recorded
revenue. The estimated amount is based on historical experience of similar
products to our customers. If our product mix or customer base changes
significantly, this could result in a change to our future estimated product
return reserve.
We record accounts receivable, net of an allowance for doubtful
accounts. Throughout the year, we estimate our ability to collect outstanding
receivables and establish an allowance for doubtful accounts. In doing so, we
evaluate the age of our receivables, past collection history, current financial
conditions for key customers, and economic conditions. Based on this evaluation,
we establish a reserve for specific accounts receivable that we believe are
uncollectible. A deterioration in the financial condition of any key customer or
a significant slow down in the economy could have a material negative impact on
our ability to collect a portion or all of the accounts receivable. We believe
that analysis of historical trends and current knowledge of potential collection
problems provides us significant information to establish a reasonable estimate
for an allowance for doubtful accounts. However, since we cannot predict with
certainty future changes in the financial stability of our customers, our actual
future losses from uncollectible accounts may differ from our estimates, which
could have an adverse effect on our financial condition and results of
operations.
LEGAL CONTINGENCIES
We are currently involved in certain legal proceedings and accruals are
established when we are able to estimate the probable outcome of these matters.
Such estimates of outcome are derived from consultation with outside legal
counsel, as well as an assessment of litigation and settlement strategies. Legal
contingencies are often resolved over long time periods. The required accruals
may change in the future due to new developments in each matter or changes in
approach such as a change in settlement 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
32
variables we assess when determining our reserve for excess and obsolete
inventories. We have experienced significant changes in required reserves in
recent periods due to these variables. It is possible that significant changes
in required inventory reserves may continue to occur in the future if there is
further deterioration in market conditions or acceleration in technological
change.
WARRANTY RESERVES
We provide standard warranty coverage for most of our products for a
period of one year from the date of shipment. We record a liability for
estimated warranty claims based on historical claims, product failure rates and
other factors. This liability primarily includes the anticipated cost of
materials, labor and shipping necessary to repair and service the equipment. Our
warranty obligation is affected by product failure rates, material usage rates,
and the efficiency by which the product failure is corrected. Should our
warranty policy change or should actual failure rates, material usage and labor
efficiencies differ from our estimates, revisions to the estimated warranty
liability would be required.
USEFUL LIVES OF LONG-LIVED ASSETS
We estimate the useful lives of our long-lived assets, including
property, plant and equipment, identifiable finite life intangible assets and
software development costs for internal use in order to determine the amount of
depreciation and amortization expense to be recorded during any reporting
period. The estimated lives are based on historical experience with similar
assets as well as taking into consideration anticipated technological or other
changes. If technological changes were to occur more rapidly or slowly than
anticipated, or in a different form, useful lives may need to be changed
accordingly, resulting in either an increase or decrease in depreciation and
amortization expense. We review these assets annually or whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Factors we consider important and that could trigger an impairment review
include significant changes in the manner of our use of the acquired asset,
changes in historical or projected operating performance and cash flows and
significant negative economic trends.
GOODWILL IMPAIRMENTS
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques in the
high-technology mobile computing industry. Goodwill is measured as the excess of
the cost of acquisition over the sum of the amounts assigned to tangible and
identifiable intangible assets acquired less liabilities assumed. We perform our
goodwill impairment test on an annual basis. In response to changes in industry
and market conditions, we could be required to strategically realign our
resources and consider restructuring, disposing of, or otherwise exiting
businesses, which could result in an impairment of goodwill.
DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FOREIGN CURRENCY
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.
33
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 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 46-R also requires additional disclosures by primary beneficiaries and
other significant variable interest holders. For entities acquired or created
before February 1, 2003, this interpretation is effective no later than the end
of the first interim or annual reporting period ending after March 15, 2004,
except for those VIE's that are considered to be special purpose entities, for
which the effective date is no later than the end of the first interim or annual
reporting period ending after December 15, 2003. The Company currently does not
hold any interests in VIE's that would require consolidation or additional
disclosures.
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 INVESTIGATIONS
WE ARE BEING INVESTIGATED BY THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC" OR THE "COMMISSION") AND THE EASTERN DISTRICT OF NEW YORK (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
34
statements, which we filed with the SEC in our Annual Report on Form 10-K/A on
February 25, 2004. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Form 10-K/A. Symbol has
also been given notice that the Commission is considering recommending civil
actions against Symbol and certain of our former employees for violations of
federal securities laws.
We are fully cooperating with the Commission and Eastern District in
their respective investigations, and are engaging in discussions with each
entity to resolve the issues raised by such investigations. However, we cannot
predict when these investigations will be completed, the outcome of such
investigations, or when a negotiated resolution, if any, may be reached and the
likely terms of such a resolution. However, any criminal and/or civil action or
any negotiated resolution may involve, among other things, injunctive and
equitable relief, including material fines, which could have a material adverse
effect on our business, results of operations and financial condition.
In addition, as a result of the investigations, various governmental
entities at the federal, state and municipal levels may conduct a review of our
supply arrangements with them to determine whether we should be considered for
debarment. If we are debarred, we would be prohibited for a specified period of
time from entering into new supply arrangements with such government entities.
In addition, after a government entity has debarred Symbol, other government
entities are likely to act similarly, subject to applicable law. Governmental
entities constitute an important customer group for Symbol, and debarment from
governmental supply arrangements at a significant level could have an adverse
effect on our business, results of operations and financial condition.
PENDING LITIGATION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND CASH FLOW.
Symbol, certain members of our former senior management team and
certain former 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 currently have accrued $142.0 million related
to the pending class action lawsuits and estimated government fines filed
against Symbol. The plaintiffs have yet to specify the amount of damages being
sought in certain of the related civil actions and, therefore, we are unable to
estimate what our ultimate liability in such lawsuits may be.
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, pleaded guilty to two counts of
securities fraud in connection with the government investigations described
above. The Commission has 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 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
35
our directors and officers, although our insurance coverage may not be
sufficient in some or all of these matters. Furthermore, the underwriters of our
directors and officers insurance policy may seek to rescind or otherwise deny
coverage in some or all of these matters, in which case we may have to self-fund
the indemnification amounts owed to such directors and officers. Our ultimate
liability in these civil actions may have a material adverse effect on our
results of operations and financial condition.
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 December 19, 2003,
the settlement received preliminary approval from the Court. On February 12,
2004, the Court granted its final approval of the settlement. As a result of
contributions by Telxon's insurers, Telxon paid $25 million to the class on
February 27, 2004.
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 made certain
post-verdict motions seeking, among other things, a new trial or a reduction in
the amount of the jury verdict. On May 6, 2004 the Court entered judgment
against Telxon for approximately $218,000 in damages plus statutory interest
from the date of the verdict. The Court denied Telxon's motions for judgment in
its favor, for a new trial, and for a reduction in the verdict. The Court also
rejected Telxon's motion for a stay of the execution of the judgment. Symbol and
Telxon have appealed these rulings and have filed a motion to stay execution of
the judgment. In the alternative, Symbol and or Telxon will post a bond to
appeal the judgment.
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. As of March 31, 2004, we have not recorded any liability in our
consolidated financial statements with respect to this matter.
We are also subject to lawsuits in the normal course of business, which
can be expensive and 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 Note 9a, "Legal Matters" for
additional information regarding material litigation.
IF WE ARE UNABLE TO EFFECTIVELY AND EFFICIENTLY IMPLEMENT OUR PLAN TO REMEDIATE
DEFICIENCIES WHICH HAVE BEEN IDENTIFIED IN OUR INTERNAL CONTROLS AND PROCEDURES,
THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR FINANCIAL RESULTS.
Throughout 2003 and continuing in 2004, we have and are implementing
various initiatives to address the material weaknesses and other deficiencies in
our internal controls identified by our internal investigations, conducted with
the oversight by our Audit Committee, into our past practices.
These initiatives, along with the initiatives we have underway related
to our compliance with the Sarbanes Oxley Act of 2002, are intended to
materially improve our internal controls and procedures, address systems and
personnel issues and help ensure a corporate culture that emphasizes integrity,
honesty and accurate financial reporting. These initiatives address Symbol's
control environment, organization and staffing, policies, procedures,
documentation and information systems. See Item 4, "Controls and Procedures."
36
The implementation of these initiatives 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 deficiencies in our internal controls and procedures. In
addition, we may be required to hire additional employees, and may experience
higher than anticipated capital expenditures and operating expenses, during the
implementation of these changes and thereafter. If we are unable to implement
these changes effectively or efficiently, there could be a material adverse
effect on our operations or financial results.
ONGOING REVIEW OF OUR PUBLIC FILINGS BY THE COMMISSION MAY RESULT IN THE FURTHER
AMENDMENT OR RESTATEMENT OF OUR PERIODIC REPORTS. IF 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 resulted in a restatement of our previous
years financial statements that were filed delinquently with the SEC. The
Commission may provide us with comments on this filing or any of our previous
filings, which would require us to amend or restate previously filed periodic
reports. If we are required to amend or restate our periodic filings, 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 our previous 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 that which 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 WHO 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.
37
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 of the last few years
have contributed to slowdowns in the technology sector generally and the mobile
information systems industry specifically. While worldwide economic and market
conditions have begun recently to improve, if they do not continue to improve or
otherwise deteriorate, there may be:
o reduced demand for our products and services due to continued
restraints on technology-related capital spending by our customers;
o increased price competition;
o increased risk of excess and obsolete inventories;
o higher overhead costs as a percentage of revenues; and
o limited investment by Symbol in new products and services.
Our current business and operating plan assumes that economic activity
in general, and IT spending in particular, will at least remain at current
levels; however, we cannot be assured of the level of IT spending, the
deterioration of which could have a material adverse effect on our results of
operations and growth rates. Our business is especially affected by the economic
success of the retail sector, which accounts for a significant portion of our
business, and our results of operations may be adversely affected if the global
economic and market conditions in the retail sector do not improve. 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:
38
o integration and restructuring costs, both one-time and ongoing;
o maintaining sufficient controls, procedures and policies;
o diversion of management's attention from ongoing business
operations;
o establishing new informational, operational and financial systems
to meet the needs of our business;
o losing key employees;
o failing to achieve anticipated synergies, including with respect to
complementary products; and
o unanticipated and unknown liabilities.
WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS, SUCH AS ENTERPRISE MOBILITY
PRODUCTS, AND ENHANCEMENTS TO EXISTING PRODUCTS, AND IF WE FAIL TO PREDICT AND
RESPOND TO EMERGING TECHNOLOGICAL TRENDS AND OUR CUSTOMERS' CHANGING NEEDS,
THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS AND
MARKET SHARE.
We are active in the research and development of new products and
technologies and enhancing our current products. However, research and
development in the mobile information systems industry is complex and filled
with uncertainty. If we expend a significant amount of resources and our efforts
do not lead to the successful introduction of new or improved products, there
could be a material adverse 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 or 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.
39
THE MOBILE INFORMATION SYSTEMS INDUSTRY IS HIGHLY COMPETITIVE AND COMPETITIVE
PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIALLY ADVERSE EFFECT
ON OUR BUSINESS.
The mobile information systems industry is a highly competitive
industry that is influenced by the following:
o advances in technology;
o new product introduction;
o product improvements;
o rapidly changing customer needs;
o marketing and distribution capabilities; and
o price competition.
If we do not keep pace with product and technological advances, there
could be a material adverse effect on our competitive position and prospects for
growth. There is also likely to be continued pricing pressure as competitors
attempt to maintain or increase market share.
The products manufactured and marketed by us and our competitors in the
mobile information systems industry are becoming more complex. As the
technological and functional capabilities of future products increase, these
products may begin to compete with products being offered by traditional
computer, network and communications industry participants who have
substantially greater financial, technical, marketing and manufacturing
resources than we do. We may not be able to compete successfully against these
new competitors, and competitive pressures may result in a material adverse
effect on our business or operating results.
WE ARE SUBJECT TO RISKS RELATED TO OUR OPERATIONS OUTSIDE THE UNITED STATES.
A substantial portion of our net revenues have been from foreign sales.
For the quarter ended March 31, 2004, foreign sales accounted for approximately
39.7% 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 and the first three
months of 2004 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 increased security requirements;
o political uncertainties;
o currency fluctuations;
o protective tariffs and taxes;
o trade barriers and export/import controls;
40
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 lengthy receivables collection periods;
o adapting to different regulatory requirements;
o difficulties associated with repatriating cash generated or held
abroad in a tax-efficient manner; and
o different technology standards or customer expectations.
Many of these risks have affected our business in the past and may have
a material adverse effect on our business, results of operations and financial
condition in the future. We cannot predict whether the United States or any
other country will impose new quotas, tariffs, taxes or other trade barriers
upon the importation of our products or supplies or if new barriers would have a
material adverse effect on our results of operations and financial condition.
FLUCTUATIONS IN EXCHANGE RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS.
Most of our equipment sales in Western Europe and Asia are billed in
foreign currencies and are subject to currency exchange fluctuations. In 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 and the first three months
of 2004. If the value of the yen continues to strengthen relative to the dollar,
there could be a material adverse effect on our results of operations.
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.
For the quarter ended March 31, 2004, approximately 55% of our product
cost of revenue can be attributed to our facility in Reynosa, and we estimate
that such percentage will be similar or higher for the remainder of 2004.
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;
41
o ramping production;
o installing new equipment at our manufacturing facilities; and
o shortage of key components.
If manufacturing problems in our Reynosa facility arise, and we are
unable to develop alternative sources for our production needs, we may not be
able to meet consumer demand for our products, which could have a material
adverse effect on our business, results of operations and financial condition.
We have been sued in Mexico by a plaintiff who alleges she is the legal
owner of some of the property on which our facility in Reynosa is located. See
Note 9a, "Legal Matters--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 properly anticipate customer
demand and could have a material adverse effect on our business and results of
operations.
If shortages or delays exist, we may not be able to secure 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 2003 or
thus far in 2004, 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 economic downturn, or abide by our inventory and
42
credit requirements. If the third-party distribution sources we rely on do not
perform their services adequately or efficiently or exit the industry, and we
are not able to quickly find adequate replacements, there could be a material
adverse effect on our revenues. In addition, we do not have third-party
distribution sources in certain parts of the world. If we are unable to
effectively and efficiently service customers outside our current geographic
scope, there may be a material adverse effect on our growth rates and result of
operations.
In 2003, we launched a new distribution system called the Symbol
PartnerSelect Program that is designed to increase our business and the business
of our resellers, distributors and OEMs and improve the quality of services and
products offered to the end user community. If the new program does not continue
to be well received by our resellers, distributors and OEMs, or the end user
community, there could be a material adverse effect on our operating results.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF THIRD PARTIES
ASSERT WE ARE IN VIOLATION OF THEIR INTELLECTUAL PROPERTY RIGHTS, THERE COULD BE
A MATERIALLY ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND OUR ABILITY TO
COMPETE.
We protect our proprietary information and technology through licensing
agreements, third-party nondisclosure agreements and other contractual
provisions, as well as through patent, trademark, copyright and trade secret
laws in the United States and similar laws in other countries. There can be no
assurance that these protections will be adequate to prevent our competitors
from copying or reverse engineering our products, or that our competitors will
not independently develop products that are substantially equivalent or superior
to our technology, which in each case could affect our ability to compete and to
receive licensing revenues. In addition, third parties may seek to challenge,
invalidate or circumvent our applications for our actual patents, trademarks,
copyrights and trade secrets. Furthermore, 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 effect on our business and we have either prevailed in all litigation,
obtained a license on commercially acceptable terms or otherwise been able to
modify any affected products or technology. However, there can be no assurance
that we will continue to prevail in any such actions or that any license
required under any such patent or other intellectual property would be made
available on commercially acceptable terms, if at all. Since there are 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
43
standards. Member countries of the European community have enacted standards
concerning electrical and laser safety and electromagnetic compatibility and
emissions standards.
While some of our products do emit electromagnetic radiation, we
believe that due to the low power output of our products and the logistics of
their use, there is no health risk to end-users in the normal operation of our
products. However, if any of our products becomes specifically regulated by
governments, or their safety 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 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 RECRUIT AND RETAIN 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
44
bar code scanning devices and scanner integrated mobile computing devices to
customers. Increasingly, our sales efforts have focused on sales of complete
data transaction systems. System sales are more costly and require a longer
selling cycle and more complex integration and installation services. An
increase in system sales, therefore, may result in increased time between the
manufacture of product and the recognition of revenue, as well as the receipt of
payment for such transactions.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE.
Our stock price, like that of other technology companies, can be
volatile. Some of the factors that can affect our stock price include:
o the announcement of new products, services or technological
innovations by us or our competitors;
o quarterly increases or decreases in revenue, gross margin or
earnings, and changes in our business, operations or prospects for
any of our segments;
o changes in quarterly revenue or earnings estimates by the
investment community; and
o speculation in the media 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, 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.
45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7A of Symbol's Annual Report on Form 10-K for the year ended
December 31, 2003 for a discussion of various market risks that Symbol is
exposed to. The market risks we are exposed to have not materially changed from
such disclosure.
ITEM 4. CONTROLS AND PROCEDURES
Symbol is committed to maintaining disclosure controls and procedures
that are designed to ensure that information required to be disclosed in its
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms, and that such
information is accumulated and communicated to its management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives and are subject
to certain limitations, including the exercise of judgment by individuals, the
inability to identify unlikely future events, and the inability to eliminate
misconduct completely. As a result, there can be no assurance that our
disclosure controls and procedures will prevent all errors or fraud or ensure
that all material information will be made known to management in a timely
manner.
During 2003 and 2002, we learned of certain deficiencies in our
internal control that existed in 2002 and prior years. Additionally, as of
December 31, 2003, we identified a material weakness related to the manner in
which we process transactions to record our revenue as our current processes and
procedures to record revenue transactions requires substantive manual
intervention and are reliant on several departments in our sales and finance
organization. These deficiencies are summarized as follows:
o inadequate systems and systems interfaces;
o inadequate and untimely account reconciliations;
o numerous manual journal entries; and
o informal worldwide policies and procedures.
We have taken measures to improve the effectiveness of our internal controls and
we believe these efforts address the matters described above. Certain measures
we have taken since the discovery of such deficiencies include, but are not
limited to, the following:
o centralized the responsibility of revenue under a revenue
controller's department, reporting directly to the Chief Accounting
Officer;
o undertaken a project to establish formalized worldwide policies and
procedures to be approved by the Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer;
o undertaken a project to identify responsible associates for account
reconciliations, including approvals;
o implemented formal review processes of transactions where there
still exists manual intervention; and
46
o investing in software and hardware systems upgrades that will
improve the integration of our sales, finance and accounting
departments and improve the accuracy of our revenue reporting.
As required by Rule 13a-15(b) of the Exchange Act, Symbol has carried
out an evaluation, under the supervision and with the participation of its
management, including its Chief Executive Officer and its Chief Financial
Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures. The evaluation examined those disclosure controls and
procedures as of March 31, 2004, the end of the period covered by this report.
Based upon the evaluation, Symbol's management, including its Chief Executive
Officer and its Chief Financial Officer, concluded that, as of March 31, 2004,
Symbol's disclosure controls and procedures were effective, except as described
above, at the reasonable assurance level to ensure that information required to
be disclosed in Symbol's reports filed or submitted under the Exchange Act was
accumulated and communicated to Symbol's management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
It will take some time before we have in place the rigorous disclosure
controls and procedures, including internal controls and procedures, that our
Board of Directors and senior management are striving for. As a result of our
efforts, however, we believe that our Condensed Consolidated Financial
Statements fairly present, in all material respects, our financial condition,
results of operations and cash flows as of, and for, the periods presented and
that this Quarterly Report on Form 10-Q contains the information required to be
included in accordance with the Exchange Act.
During the first quarter 2004, we continued to make improvements in our
financial reporting by continuing to hire qualified personnel and refine our
formal review processes of manual transactions. We will continue to assess our
disclosure controls and procedures and will take any further actions that we
deem necessary.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 9 in the Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q is hereby
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Symbol held its Annual Meeting of Stockholders on April 26, 2004. At
that meeting, stockholders elected six individuals as directors of the Company
for terms that will expire at the Annual Meeting to be held in 2005. In
addition, stockholders approved three additional Company proposals as follows:
the amendment and restatement of the Symbol Technologies, Inc. Executive Bonus
Plan, the adoption of the Symbol Technologies, Inc. 2004 Equity Incentive Award
Plan and the ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors for fiscal year 2004. The individuals elected and
the results of the voting are as follows:
Proposal 1--Election of Directors
VOTES FOR VOTES WITHHELD
--------- --------------
Robert J. Chrenc 193,155,693 7,965,623
Salvatore Iannuzzi 192,934,767 8,186,549
47
Edward Kozel 195,948,847 5,172,469
William R. Nuti 195,971,068 5,150,248
George Samenuk 194,279,061 6,842,255
Melvin A. Yellin 194,594,291 6,527,025
Proposal 2--Amendment and Restatement of the Symbol Technologies, Inc. Executive
Bonus Plan
- --------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
143,638,947 7,297,115 5,597,495 44,587,759
- --------------------------------------------------------------------------------
Proposal 3--Adoption of the Symbol Technologies, Inc. 2004 Equity Incentive
Award Plan
- --------------------------------------------------------------------------------
VOTES FOR VOTES AGAINST VOTES WITHHELD BROKER NON-VOTE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
120,663,420 30,252,927 5,617,210 44,587,759
- --------------------------------------------------------------------------------
Proposal 4--Ratification of the appointment of Ernst & Young LLP as independent
auditors for fiscal year 2004
---------------------------------------------------------------
VOTES FOR VOTES AGAINST VOTES WITHHELD
---------------------------------------------------------------
---------------------------------------------------------------
195,735,622 2,174,324 3,211,370
---------------------------------------------------------------
The following individuals retired as directors of Symbol as of April
26, 2004: George Bugliarello, Leo A. Guthart, Harvey P. Mallement, Raymond R.
Martino Sr. and James A. Simons.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
10.1 2000 Directors' Stock Option Plan (as amended and restated).
10.2 Symbol Technologies, Inc. Executive Bonus Plan (as amended
and restated).
10.3 Symbol Technologies, Inc. 2004 Equity Incentive Award Plan.
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 quarter
ended March 31, 2004:
48
- --------------------------------------------------------------------------------
Date Filed Item No.(s) Description
- --------------------------------------------------------------------------------
February 23, 2004 5, 7 and 12 Issuing of press release
announcing preliminary 2003 fourth
quarter results.
- --------------------------------------------------------------------------------
February 26, 2004 5, 7 and 12 Filing of quarterly reports on
Form 10-Q for the first three
quarters of 2003.
- --------------------------------------------------------------------------------
March 10, 2004 5, 7 and 12 Issuing of press release
announcing unaudited results for
the fourth quarter and year ended
December 31, 2003.
- --------------------------------------------------------------------------------
49
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: May 10, 2004 By: /s/ William R. Nuti
--------------------------------
William R. Nuti
Chief Executive Officer, President, Chief
Operating Officer and Director
(principal executive officer)
Dated: May 10, 2004 By: /s/ Mark T. Greenquist
---------------------------------
Mark T. Greenquist
Senior Vice President and Chief
Financial Officer
(principal financial officer)
Dated: May 10, 2004 By: /s/ James M. Conboy
-------------------------------
James M. Conboy
Vice President - Controller and Chief
Accounting Officer
(principal accounting officer)
50