SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
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, NY 11742_________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 631-738-2400
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the close of the period
covered by this report.
Class Outstanding at June 30, 2002
Common Stock, 229,457,259 shares
par value $0.01
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial
Statements 6
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
ITEM 3.
Quantitative and Qualitative Disclosures about
Market Risk 35
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings 36
ITEM 4.
Submission of Matters to a Vote of Security Holders 45
ITEM 6.
Exhibits and Reports on Form 8-K 46
SIGNATURES 47
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except stock par value)
June 30, December 31,
ASSETS 2002 2001____
(Unaudited)
CURRENT ASSETS:
Cash and temporary investments $ 69,283 $80,967
Accounts receivable, less allowance for doubtful
accounts of $33,113 and $31,348, respectively 282,702 307,576
Inventories 302,642 310,924
Deferred income taxes 180,894 182,964
Prepaid and refundable income taxes 31,436 22,498
Other current assets 81,157 95,279
TOTAL CURRENT ASSETS 948,114 1,000,208
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $138,531 and
$146,881, respectively 232,355 241,226
DEFERRED INCOME TAXES 18,527 24,153
INVESTMENT IN MARKETABLE SECURITIES 58,521 76,004
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $175,957 and $202,011,
respectively 511,048 551,083
$1,768,565 $1,892,674
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $261,922 $279,615
Current portion of long-term debt 6,433 6,548
Deferred revenue 29,699 34,641
Accrued restructuring expenses 11,252 18,929
TOTAL CURRENT LIABILITIES 309,306 339,733
CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES - 85,052
LONG-TERM DEBT, less current maturities 237,484 225,168
OTHER LIABILITIES AND DEFERRED REVENUE 62,536 61,932
COMMITMENTS AND CONTINGENCIES
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 255,598 shares and
253,313 shares, respectively 2,556 2,533
Retained earnings 327,109 350,393
Treasury stock, at cost, 26,141 shares
and 24,532 shares, respectively (238,908) (217,959)
Other stockholders' equity 1,068,482 1,045,822
1,159,239 1,180,789
$1,768,565 $1,892,674
See notes to condensed consolidated financial statements
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SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30,____ June 30,____
2002 2001__ 2002 2001__
REVENUE $246,698 $264,199 $475,153 $638,082
Product, net 69,151 76,011 142,008 152,293
Services, net 315,849 340,210 617,161 790,375
COST OF REVENUE:
Product costs 143,792 262,885 282,952 479,756
Amortization of software
development costs 4,879 4,477 9,067 8,719
Product cost of revenue 148,671 267,362 292,019 488,475
Services cost of revenue 50,210 54,731 102,830 113,407
198,881 322,093 394,849 601,882
GROSS PROFIT 116,968 18,117 222,312 188,493
OPERATING EXPENSES:
Engineering 29,467 28,341 56,240 59,358
Selling, general and administrative 70,201 80,684 134,314 170,946
Non-recurring compensation charge - - 8,597 -
Non-recurring impairment charge 47,200 - 47,200 -
Goodwill amortization - 4,042 - 7,999
146,868 113,067 246,351 238,303
LOSS FROM OPERATIONS (29,900) (94,950) (24,039) (49,810)
INTEREST EXPENSE, net (3,549) (3,952) (7,666) (7,996)
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (33,449) (98,902) (31,705) (57,806)
BENEFIT FROM INCOME TAXES (10,704) (39,349) (10,146) (26,198)
LOSS BEFORE EXTRAORDINARY ITEM (22,745) (59,553) (21,559) (31,608)
EXTRAORDINARY GAIN ON REPURCHASE OF
CONVERTIBLE NOTES AND DEBENTURES,
NET OF $266 IN INCOME TAXES - - 566 -
NET LOSS ($22,745) ($59,553)($20,993)($31,608)
BASIC LOSS PER SHARE:
Loss before extraordinary item ($0.10) ($0.27) ($0.09) ($0.14)
Extraordinary gain on repurchase of
convertible notes and debentures - - - -
Net loss ($0.10) ($0.27) ($0.09) ($0.14)
DILUTED LOSS PER SHARE:
Loss before extraordinary item ($0.10) ($0.27) ($0.09) ($0.14)
Extraordinary gain on repurchase of
convertible notes and debentures - - - -
Net loss ($0.10) ($0.27) ($0.09) ($0.14)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 229,395 224,597 229,287 225,025
Diluted 229,395 224,597 229,287 225,025
See notes to condensed consolidated financial statements
-3-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended June 30,
2002 2001____
Cash flows from operating activities:
Net loss ($22,745) ($59,553)
Adjustments to reconcile net loss
to net cash provided by/(used in) operating
activities:
Depreciation and amortization of property,
plant and equipment 11,856 13,676
Other amortization 8,736 10,712
Provision for losses on accounts receivable 1,072 806
Writedown due to probable losses from customers - 16,000
Provision for inventory writedown - 110,000
Non cash impairment charge 47,200 -
Tax benefit on exercise of stock
options and warrants 195 12,580
Changes in assets and liabilities
net of effects of acquisitions & divestitures:
Accounts receivable (1,553) 126
Inventories 5,317 (126,517)
Other assets 10,285 7,943
Accounts payable and accrued expenses 3,183 35,439
Income taxes payable (14,324) (55,774)
Accrued restructuring expenses (3,836) (18,147)
Other liabilities and deferred revenue 1,398 3,774
Net cash provided by/(used in)
operating activities 46,784 (48,935)
Cash flows from investing activities:
Proceeds from sale of property, plant
and equipment 4,196 -
Purchases of property, plant and equipment (8,841) (32,931)
Investments in intangible and other assets (14,072) (13,895)
Net cash used in investing activities (18,717) (46,826)
Cash flows from financing activities:
Net proceeds from issuance and repayment
of notes payable and long-term debt 10,564 101,115
Repurchase of convertible notes and debentures (45,089) -
Exercise of stock options and warrants 345 10,419
Purchase of treasury shares - (13,147)
Net cash (used in)/provided by financing
activities (34,180) 98,387
Effects of exchange rate changes on cash 3,322 (1,944)
Net (decrease)/ increase in cash and temporary
investments (2,791) 682
Cash and temporary investments, beginning
of period 72,074 70,651
Cash and temporary investments, end of
period $69,283 $71,333
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 4,299 $ 3,624
Income taxes $ 2,343 $ 2,508
See notes to condensed consolidated financial statements
-4-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001__
Cash flows from operating activities:
Net loss ($20,993) ($31,608)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation and amortization of property,
plant and equipment 22,076 26,846
Other amortization 15,955 19,628
Provision for losses on accounts receivable 2,696 1,622
Writedown due to probable losses from customers - 16,000
Provision for inventory writedown - 110,000
Non cash impairment charge 47,200 -
Tax benefit on exercise of stock options
and warrants 6,976 38,100
Gain on repurchase of convertible notes
and debentures, net of tax (566) -
Changes in assets and liabilities
net of effects of acquisitions & divestitures:
Accounts receivable 24,469 (11,364)
Inventories 9,308 (159,947)
Other assets 19,271 (7,622)
Accounts payable and accrued expenses (15,950) 21,995
Income taxes payable (8,938) (73,596)
Accrued restructuring expenses (7,677) (47,183)
Other liabilities and deferred revenue (4,338) 7,361
Net cash provided by/(used in) operating
activities 89,489 (89,768)
Cash flows from investing activities:
Proceeds from termination of
collar arrangement - 88,046
Proceeds from sale of property, plant
and equipment 4,196 -
Purchases of property, plant and
equipment (18,192) (54,215)
Investments in intangible and other assets (23,120) (19,828)
Net cash (used in)/provided by investing
activities (37,116) 14,003
Cash flows from financing activities:
Net proceeds from issuance and repayment
of notes payable and long-term debt 26,391 85,726
Repurchase of convertible notes and debentures (84,220) -
Exercise of stock options and warrants 14,130 30,549
Dividends paid (2,291) (1,510)
Purchase of treasury shares (20,949) (27,197)
Net cash (used in)/provided by financing
activities (66,939) 87,568
Effects of exchange rate changes on cash 2,882 (3,881)
Net (decrease)/increase in cash and
temporary investments (11,684) 7,922
Cash and temporary investments, beginning
of period 80,967 63,411
Cash and temporary investments, end of
period $69,283 $71,333
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 9,588 $ 7,771
Income taxes $ 5,711 $ 6,722
See notes to condensed consolidated financial statements
-5-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(All dollar amounts in thousands, except per share data)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments
(consisting of normal recurring accruals) and present fairly the
Company's financial position as of June 30, 2002, and the results of
its operations and its cash flows for the three and six months ended
June 30, 2002 and 2001, in conformity with generally accepted
accounting principles for interim financial information applied on a
consistent basis. The results of operations for the three and six
months ended June 30, 2002 and 2001 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 the Company's annual report on Form 10-K
for the year ended December 31, 2001. Certain reclassifications have
been made to prior consolidated financial statements to conform with
current presentations.
2. INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible
assets acquired in a business combination will no longer be amortized
into results of operations, but rather subject to a periodic
assessment for impairment. The Company adopted the provisions of this
Statement effective January 1, 2002. Under the new standard, goodwill
is subject to an annual assessment for impairment using a prescribed
fair-value-based test. The Company completed the initial step of the
transitional goodwill impairment test as of January 1, 2002 utilizing
an independent appraisal during the quarter ended June 30, 2002. This
step of the goodwill impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. Based on
results of these comparisons, the Company concluded there was no
impairment of goodwill related to either of its reporting units.
The changes in the carrying amount of goodwill for the six months
ended June 30, 2002 are as follows:
Product Services
Segment Segment Total_
Balance as of January 1, 2002 $267,862 $ 71,204 $339,066
Net goodwill acquired during
the year 9,132 1,487 10,619
Translation adjustment (465) (123) (588)
Balance as of June 30, 2002 $276,529 $ 72,568 $349,097
-6-
Adjusted financial information assuming SFAS No. 142 had been adopted
as of January 1, 2001 is as follows:
Three Months Ended Six Months Ended
June 30,_______ June 30,____
2002 2001__ 2002 2001__
(Unaudited) (Unaudited)
Reported loss before
extraordinary item ($22,745) ($59,553) ($21,559) ($31,608)
Goodwill amortization, net of tax - 2,434 - 5,125
Adjusted loss before
extraordinary item ($22,745) ($57,119) ($21,559) ($26,483)
Reported net loss ($22,745) ($59,553) ($20,993) ($31,608)
Goodwill amortization, net of tax - 2,434 - 5,125
Adjusted net loss ($22,745) ($57,119) ($20,993) ($26,483)
Basic Loss Per Share:
Loss as reported ($0.10) ($0.27) ($0.09) ($0.14)
Goodwill amortization, net of tax - 0.01 - 0.02
Adjusted loss ($0.10) ($0.25)(1) ($0.09) ($0.12)
Diluted Loss Per Share:
Loss as reported ($0.10) ($0.27) ($0.09) ($0.14)
Goodwill amortization, net of tax - 0.01 - 0.02
Adjusted loss ($0.10) ($0.25)(1) ($0.09) ($0.12)
(1) Basic and diluted loss per share are reported separately. In addition,
loss per share as reported, goodwill amortization, and adjusted loss per
share are calculated independently. Therefore, the sum of loss per share
as reported and the per share amount of goodwill amortization may differ
from adjusted loss per share as presented above.
Basic and diluted loss per share amounts before extraordinary items are not
materially different than the basic and diluted loss per share amounts
shown above. Therefore, the per share effect of the goodwill amortization
on loss per share before extraordinary items has not been presented.
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
June 30, 2002 December 31, 2001
Gross Accumulated Gross Accumulated
Amount Amortization Amount Amortization
(Unaudited)
Patents and trademarks $44,096 ($7,891) $40,633 ($6,789)
Purchased technology 63,976 (26,003) 61,154 (21,340)
Software development costs 110,756 (69,585) 138,419 (102,027)
Other 547 (66) 638 (54)
$219,375 ($103,545) $240,844 ($130,210)
Estimated amortization expense for the above intangible assets, assuming
no additions or writeoffs, for the six months ended December 31, 2002
and for each of the subsequent years ended December 31 is as follows:
2002 $ 15,958
2003 26,717
2004 18,354
2005 6,710
2006 5,189
$72,928
-7-
3. LOSS PER SHARE
Basic loss per share is based on the weighted average number of
shares of common stock outstanding during the period. For the
three and six months ended June 30, 2002 and 2001, stock options
and warrants outstanding and the effect of convertible
subordinated notes and debentures have not been included in the
net loss per share calculations since their effect would be
antidilutive.
4. INVENTORIES
June 30, 2002 December 31, 2001
(Unaudited)
Raw materials $159,852 $178,431
Work-in-process 12,686 16,108
Finished goods 130,104 116,385
$302,642 $310,924
5. COMPREHENSIVE LOSS
Three Months Ended Six Months Ended
June 30,____ June 30,____
2002 2001_ 2002 2001__
(Unaudited) (Unaudited)
Net loss ($22,745) ($59,553) ($20,993)($31,608)
Other comprehensive income
(losses), net of related
taxes:
Foreign currency translation
adjustments 8,406 (1,600) 7,151 (7,835)
Net unrealized (losses) gains
on marketable securities (1,547) 5,665 (1,992) (7,978)
Net unrealized derivative
(losses) gains (2,955) (2,390) (3,582) 1,259
Comprehensive loss ($18,841) ($57,878)($19,416) ($46,162)
6. CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES
In January and February 2002, Telxon, a wholly owned subsidiary of the
Company, purchased in the open market $34,790 of its 5.75 percent
convertible subordinated notes for $34,127 in cash, and $5,173 of its
7.5 percent convertible subordinated debentures for $5,004 in cash.
This resulted in an extraordinary gain of $566, net of income taxes of
$266. In April 2002, Telxon redeemed the remaining $25,849 of its 5.75
percent notes and the remaining $19,240 of its 7.5 percent notes for
$26,061 and $19,240 respectively. This represented a redemption price
of 100.8214 percent of the outstanding principal amount for the 5.75
percent notes and 100 percent of the outstanding principal amount for
the 7.5 percent debentures.
-8-
7. RESTRUCTURING AND IMPAIRMENT CHARGES
a.) In September 2001, the Company's management approved and adopted a
formal plan of restructuring related to the reorganization of its
manufacturing facilities. The plan includes a transition of volume
manufacturing away from its Bohemia, New York facility to lower cost
locations, primarily its Reynosa, Mexico facility and Far East
contract manufacturing partners. In connection with this
reorganization, the Company accrued for restructuring and impairment
charges at September 30, 2001 for workforce reduction and asset
impairment costs. Under this plan, the Company recorded a workforce
reduction charge related to the termination of approximately 375
employees, primarily manufacturing associates. As of June 30, 2002,
approximately 250 employees had been terminated. The Company's
restructuring plan has been substantially completed as of June 30,
2002 with the remaining workforce reductions to take place by
September 30, 2002.
Details of the restructuring charges as of June 30, 2002 are as
follows:
December 31,
2001 June 30, 2002
Accrual Utilized Accrual___
Workforce reductions $8,976 $2,621 $6,355
Impaired fixed asset
and other writeoffs 4,423 3,428 995
$13,399 $6,049 $7,350
b.) In December 2000, the Company's management approved and adopted a
formal plan of restructuring as a result of the Telxon acquisition. In
connection with this acquisition, the Company accrued for restructuring,
impairment and integration related charges at December 1, 2000. The
accrual represented costs anticipated for workforce reductions, asset
impairments and lease terminations. The Company's exit plan, which
focused on the consolidation of manufacturing operations, including
plant closings and elimination of redundant activities, was
substantially completed by June 30, 2001. The amount accrued for
workforce reductions related to the termination of 1,251 employees,
primarily in manufacturing, management, sales and administrative
support, all of whom have been terminated. During the six months ended
June 30, 2002, the Company utilized $156 in fixed asset and other
impairment charges, and $1,472 in lease cancellation costs. As a
result, the remaining unutilized restructuring expense balance is
$3,902, which relates to ongoing lease commitments on abandoned
facilities.
The accrued restructuring expenses of $3,902 combined with accrued
restructuring expenses of $7,350 related to the reorganization of the
Company's manufacturing facilities (as discussed in (a), above) result
in a total accrued restructuring expense of $11,252 remaining as of
June 30, 2002.
-9-
c.) In the quarter ended June 30, 2002, the Company recorded a pre-
tax impairment charge of $47,200 related to its investment in AirClic
Inc. ("AirClic"). The Company regularly tests the carrying value of
its investments for impairment. In consideration of the outlook of
AirClic's business, the general decline in the economy and the
decline in information technology spending, it was determined that
the decline in the value of its investment in AirClic was other than
temporary during the quarter ended June 30, 2002. The Company
obtained an independent appraisal of its investment in AirClic and
wrote down the carrying amount of the investment to its estimated
fair value of $2,800 at June 30, 2002. This investment was
previously fully allocated to the product segment.
8. COMMITMENTS AND CONTINGENCIES
In February 2002, the Company's former President and Chief Executive
Officer announced his retirement. In connection therewith, the
Company recorded a pre-tax non-recurring compensation and related
benefits charge of $8,597 during the quarter ended March 31, 2002.
9. OTHER ASSETS
In February 2002, the Company loaned $1,000 to its current Chief
Executive Officer. This loan bears interest at an annual rate of LIBOR
plus 100 basis points, which approximated 2.8 percent at June 30, 2002.
This loan is payable upon the earlier of: (1) the date he ceases to be
an employee of the Company, (2) the date of sale of his California
residence, or (3) February 19, 2007. In addition, if the officer or
his wife sell any shares of common stock of the Company now owned by
either of them or hereafter acquired (other than shares sold to pay the
exercise price and taxes resulting from the exercise of any options
originally granted to this officer by the Company) 100 percent of the
net proceeds of such sales shall be applied immediately to reduce any
outstanding indebtedness under this loan. In addition, the Company
loaned $500 to the officer in October 1999. This loan bears interest at
an annual rate of 7 percent through October 2004, and 2.75 percent
above the One Year Treasury Rate through maturity. It is payable upon
the earlier of: (1) the date he ceases to be an employee of the
Company, (2) the date of sale of his California residence, or (3)
October 5, 2006. This loan is secured by a second mortgage on the
officer's California residence. In addition, if the officer or his
wife sell any shares of common stock of the Company now owned by either
of them or hereafter acquired (other than shares sold to pay the
exercise price and taxes resulting from the exercise of any options
originally granted to this officer by the Company) 100 percent of the
net proceeds of such sales shall be applied immediately to reduce any
outstanding indebtedness under this loan.
These loans, including accrued interest, are classified as Intangible
and Other Assets at June 30, 2002.
-10-
10. ACQUISITIONS
During the second quarter of 2002, the Company entered into an
agreement with the owners of Seal Sistemas e Technologia Da
Informacao Ltda. ("Seal"), a Brazilian corporation which had
operated as a distributor and integrator of the Company's products
since 1987. The agreement resulted in the termination of
distribution rights for Seal and the creation of a majority owned
subsidiary of the Company that would serve as the Brazilian
distributor and customer service entity ("Symbol Brazil"). In
accordance with the terms of the agreement, the owners of Seal
acquired a 49 percent ownership interest in Symbol Brazil.
Terms of the agreement included payments to the minority
shareholders that range from $9,550 to a total of $14,800 contingent
upon the attainment of certain annual net revenue levels of Symbol
Brazil (as defined), and are payable no later than March 31, 2009.
With each of these earnout payments, the Company will repurchase
back a portion of Symbol Brazil's shares owned by the minority
shareholders such that the Company will ultimately own 100 percent
of Symbol Brazil no later than March 31, 2009. Additionally, the
Company loaned these minority shareholders $5,000 at the time of the
agreement, which was recorded by the Company as part of the purchase
price, but which will be repaid on the date the first earnout
payment is triggered.
In order to consummate this business combination, the Company was
also required to make payments aggregating $5,300 to two
shareholders of Seal. These amounts were also included in the
purchase price of Symbol Brazil, resulting in a total purchase price
(including the present value of the minimum future earnout payments)
of $12,292. The only assets acquired in this transaction were
certain intangible assets which were independently appraised and
determined to be immaterial. Therefore the total purchase price has
been classified as goodwill.
The subsidiary commenced operations in the second quarter of 2002
and the results of its operations have been included in the
Company's Statement of Operations since such time. Pro forma
financial information as if the acquisition had taken place at the
beginning of each interim period presented would not be materially
different from the actual results reported. Therefore, no pro forma
information has been disclosed.
11.LEGAL MATTERS
The Company is currently involved in matters of litigation arising
from the normal course of business. Management is of the opinion that
such litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
In March 2001, Proxim Incorporated ("Proxim") sued the Company, 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. Proxim did not
identify any specific products of the Company that allegedly infringe
these three
-11-
patents. 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 the Company seeks, among other relief, unspecified damages for
patent infringement, treble damages for willful infringement, and a
permanent injunction against the Company from infringing these three
patents. In a press conference held after the filing of the
complaints, Proxim indicated that it was interested in licensing the
patents that are the subject of the lawsuit against the Company.
On May 1, 2001, the Company filed an answer and counterclaim in
response to Proxim's suit. The Company has responded by asserting its
belief that Proxim's asserted patents are invalid and not infringed by
any of the Company's products. In addition, the Company has asserted
its belief that Proxim's claims are barred under principles of equity,
estoppel and laches. The Company has also filed counterclaims against
Proxim, asserting that Proxim's RF product offerings infringe four of
the Company's patents relating to wireless LAN technology. The
Company has requested the Court grant an unspecified amount of damages
as well as a permanent injunction against Proxim's sale of its
wireless LAN product offerings. The Court has severed the Company's
counterclaim against Proxim involving the four of the Company's
patents relating to wireless LAN technology from Proxim's initial
case.
On May 14, 2001, the Company announced that an agreement had been
reached with Intersil Corporation, a supplier of key wireless LAN
chips to the Company. Under this agreement, Intersil will
generally indemnify and defend the Company against Proxim's
infringement suit. On May 30, 2002, the Court granted Intersil's
motion to intervene as a defendant in the Proxim infringement
suit. Having granted Intersil's motion to intervene, the Court
imposed a mandatory stay in the case until the conclusion of a
related proceeding involving Proxim, Intersil, and other parties
in the U.S. International Trade Commission ("ITC"). The Court
further barred Proxim from collecting damages against the Company
attributable to the Company's alleged infringing conduct during
the stay. On June 14, 2002, Proxim filed a motion requesting the
Court reconsider the damages bar portion of the Court's May 30th
order. The motion is currently pending.
On December 4, 2001, the Company filed a complaint against Proxim
in the United States District Court in the District of Delaware
asserting that Proxim's RF product offerings infringe four of the
Company's patents relating to wireless LAN technology. This
complaint asserts the same four patents that were asserted in the
Company's counterclaim against Proxim in the initial Proxim case
prior to the severance of this counterclaim by the Court. On
December 18, 2001, Proxim filed an answer and counterclaims
seeking declaratory judgments for non-infringement, invalidity
and unenforceability of the four patents asserted by the Company,
injunctive and monetary relief for the Company's alleged
infringement of one additional Proxim patent involving wireless
LAN technology, monetary relief for the Company's alleged false
patent marking, and injunctive and monetary relief for the
Company's alleged unfair competition under the Lanham Act, common
law unfair competition and tortious interference. The Company
believes these claims to be without merit.
-12-
On January 31, 2002, the Company filed an answer in response to
Proxim's counterclaim. The Company has responded by asserting
its belief that Proxim's asserted patent is invalid and not
infringed by any of the Company's products. In addition, the
Company has asserted its belief that Proxim's patent claims are
barred under principles of equity, estoppel and laches. Also on
January 31, 2002, the Company filed a motion to dismiss Proxim's
claims regarding false patent markings, the Lanham Act, common
law unfair competition and tortious interference. On June 25,
2002, the Court granted the Company's motion with respect to
false patent marking, and denied the motion in all other
respects.
On July 21, 1999, the Company and six other leading members of the
Automatic Identification and Data Capture industry jointly initiated a
litigation 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 Company has agreed to
bear approximately half of the legal and related expenses associated
with the litigation, with the remaining portion being borne by the
other Auto ID companies.
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. The Company 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 the Company and the
other Auto ID companies, individually and/or collectively with other
equipment suppliers. The Company, and we understand, 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. However, the Company and the other Auto ID companies
believe that the Lemelson claims do concern the Auto ID industry at
large and that it is appropriate for them to act jointly to protect
their customers against what they believe to be baseless claims being
asserted by the Lemelson Partnership.
-13-
The Lemelson Partnership filed a motion to dismiss the lawsuit, or in
the alternative, to stay proceedings or to transfer the case to the
U.S. District Court in Arizona where there are pending cases involving
the Lemelson Partnership and other companies in the semiconductor and
electronics industries. On March 21, 2000, the U.S. District Court in
Nevada denied the Lemelson Partnership's motion to dismiss, transfer,
or stay the action. It also struck one of the four counts.
On April 12, 2000, the Lemelson Partnership filed its answer to the
complaint in the Symbol et al. v. Lemelson Partnership case. In the
answer, the Lemelson Partnership included a counterclaim against the
Company and the other plaintiffs seeking a dismissal of the case.
Alternatively, the Lemelson Partnership's counterclaim seeks a
declaration that the Company and the other plaintiffs have contributed
to, or induced infringement of particular method claims of the
patents-in-suit by the plaintiffs' customers. The Company believes
there is no merit to the Lemelson Partnership's counterclaim.
On May 15, 2000, the Auto ID companies filed a motion seeking
permission to file an interlocutory appeal of the Court's decision to
strike the fourth count of the complaint (which alleged that the
Lemelson Partnership's delays in obtaining its patents rendered them
unenforceable for laches). The motion was granted by the Court on
July 14, 2000. The Court entered a clarifying superseding order on
July 25, 2000. On September 1, 2000, the U.S. Court of Appeals for
the Federal Circuit granted the petition of the Auto ID companies for
permission to pursue this interlocutory appeal. The Federal Circuit
Court heard oral arguments on this appeal on October 4, 2001. On
January 24, 2002, the Federal Circuit found for the Auto ID companies,
holding that the defense of prosecution laches exists as a matter of
law. On March 20, 2002 the Federal Circuit denied Lemelson's petition
for rehearing in banc. Accordingly, the issue has been remanded to
the Court in Nevada to consider whether the laches defense is
applicable to the Lemelson case. On June 18, 2002, Lemelson filed a
petition for a writ of certiorari with the Supreme Court of the United
States seeking review of the Federal Circuit's prosecution laches
decision. The Auto ID companies expect to file an opposition to the
petition in due course.
On July 24, 2000, the Auto ID companies filed a motion for partial
summary judgment arguing that almost all of the claims of the Lemelson
Partnership's patents are invalid for lack of written description. On
August 8, 2000, the Lemelson Partnership filed a motion seeking an
extension of approximately ten weeks in which to file an answer to
this motion. On August 31, 2000, the Court granted the Lemelson
Partnership's motion for such an extension. On October 25, 2000, the
Lemelson Partnership filed a combined opposition to the motion of the
Auto ID companies for partial summary judgment and its own cross-
motion for partial summary judgment that many of the claims of the
Lemelson Partnership's patents satisfy the written description
requirement. On July 12, 2001, the District Court denied both the
Auto ID companies' motion and Lemelson's cross-motion. In doing so,
the Court did not rule on the merits of the matters raised in the
motions, but instead held that there remain triable issues of material
fact that preclude granting summary judgment in favor of either party.
-14-
On May 14, 2001, the Auto ID companies filed another motion for
summary judgment arguing that Lemelson's patents at issue are
unenforceable because of Lemelson's inequitable conduct before the
U.S. Patent and Trademark Office. On June 19, 2001, the Lemelson
Partnership filed a combined opposition to the motion of the Auto ID
companies for summary judgment and its own cross-motion for partial
summary judgment that no such inequitable conduct occurred. On July
10, 2001, the Auto ID companies filed a combined reply in support of
their summary judgment motion and opposition to the Lemelson
Partnership's partial summary judgment cross-motion. On November 13,
2001, the District Court denied both the Auto ID companies' motion and
Lemelson's cross-motion. In doing so, the Court did not rule on the
merits of the matters raised in the motions, but instead held that
there remain triable issues of material fact that preclude granting
summary judgment in favor of either party.
On August 1, 2001, the Auto ID companies filed another motion for
partial summary judgment arguing that the Lemelson Partnership is not
entitled, as a matter of law, to rely on a now-abandoned Lemelson
patent application filed in 1954 to provide a filing date or
disclosure for the claims of the patents-in-suit. On November 13,
2001, the District Court denied the Auto ID companies' motion. In
doing so, the Court did not rule on the merits of the matters raised
in the motion, but instead held that there remain triable issues of
material fact that preclude granting summary judgment.
On July 25, 2001, the Court entered an order setting a schedule that
culminates with a trial scheduled for August 2002. On April 12, 2002,
the Court entered a superseding scheduling order setting a schedule
that culminates with a trial scheduled for November 2002. Under this
timetable, the Auto ID companies' arguments relating to laches,
invalidity, unenforceability and/or non-infringement of the so-called
"bar code" patents will be briefed by motion at the appropriate time,
or at trial.
On July 12, 2002, the Auto ID plaintiffs filed three new summary
judgment motions with the Court in Nevada on the following grounds:
(1) that the so-called bar code patents are unenforceable based on the
prosecution laches doctrine found to exist by the Federal Circuit; (2)
that users of bar code equipment do not infringe Lemelson's patents
based on Lemelson's statements in the prosecution history equating his
alleged invention with video-based technology; and (3) that the so-
called bar code patents are invalid based on Lemelson's admissions
regarding the prior art that were made to advance the prosecution of
his patent applications. These motions are currently pending.
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
-15-
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. On February 9, 1999, the plaintiffs
filed a motion to consolidate all of the actions and the Court heard
motions on naming class representatives and lead class counsel on
April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their
counsel, ordered the filing of an amended complaint, and dismissed 26
of the 27 class action suits without prejudice and consolidated those
26 cases into the first filed action. The lead plaintiffs appointed
by the Court filed an amended class action complaint on September 30,
1999. 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.
Various appeals and writs challenging the District Court's August 25,
1999 rulings were filed by two of the unsuccessful plaintiffs but have
all been denied by the Court of Appeals.
On November 8, 1999, the defendants jointly moved to dismiss the
amended complaint, which was denied on September 29, 2000. Following
the denial, the parties filed a proposed joint case schedule,
discovery commenced, and the parties each filed their initial
disclosures. On October 30, 2000, defendants filed their answer to
the plaintiffs' amended complaint as well as a motion for
reconsideration or to certify the order denying the motion to dismiss
for interlocutory appeal and request for oral argument, and a
memorandum of points and authorities in support of that motion. On
November 14, 2000, plaintiffs filed a memorandum in opposition of
defendants' motion. This motion was denied on January 19, 2001. On
November 1, 2000, defendants filed a motion for application of the
Amended Federal Rules of Civil Procedure to the case, and on November
16, 2000, the Court granted this motion in part and held that the
Court will apply the new rules of evidence and new rules of civil
procedure except to the extent those rules effectuate changes to Rule
26 of the Federal Rules for Civil Procedure. Discovery is in its
preliminary stages.
On February 20, 2001, Telxon filed a motion for leave to file and
serve instanter a summons and third-party complaint against third-
party defendant PricewaterhouseCoopers LLP ("PWC") in 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, 1998
and its interim financial statements for its first and second quarters
of fiscal year 1999, 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
-16-
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. Thereafter Plaintiffs
sued PWC directly and that action was consolidated. PWC filed a
motion to dismiss both Telxon's third party complaint and the PWC
action.
On March 25, 2002, the Court ruled on the pending motions. As to
Telxon's third-party complaint against PWC, the Court ruled that it
was timely filed, and that Telxon's allegations of scienter by PWC
under the Federal securities laws were sufficiently pled, that
Telxon's state law fraud claims were sufficiently pled, and that
Telxon's breach of fiduciary duty, constructive fraud and fraudulent
concealment claims against PWC should not be dismissed at the pleading
stage. The Court denied PWC's motion to dismiss Telxon's claims for
contribution under the Federal securities laws with respect to
Telxon's restatements of its 1996, 1997 and 1998 audited financial
statements, and granted PWC's motion to dismiss Telxon's contribution
claims with respect to the restatements of its unaudited first and
second quarter 1999 financial statements. The Court also granted
Telxon's motion for leave to file and serve the third party complaint
instanter on February 20, 2001. The Court also denied PWC's motion to
dismiss the separate action filed against it by the plaintiffs. PWC
has subsequently filed an answer denying liability, asserting numerous
defenses and a third party complaint against Telxon for contribution
and indemnity.
On June 11, 2002 a complaint was filed against Telxon by Wyser-
Pratte Management Co., Inc. whose President and sole shareholder
is Mr. Guy Wyser-Pratte, a well-known securities arbitrageur. In
late August 1998, Mr. Wyser-Pratte and Telxon settled a proxy
litigation which arose out of discussions between Telxon and the
Company during the April-June 1998 time period about a then
possible acquisition by the Company. The complaint also names
several former Telxon executives as well as Telxon's former
outside auditors, PWC, as defendants. The complaint alleges
violations of Sections 10b-5, 14, 18 and 20 of the Securities and
Exchange Act of 1934, as well as common law claims for fraud and
negligent misrepresentation. This litigation is related to the
above described Telxon class action litigation. The Wyser-Pratte
complaint seeks unspecified compensatory and punitive damages, as
well as attorney's fees and costs. By Court Order dated June 20,
2002, this litigation was consolidated for discovery purposes with
the Telxon class action litigation. Telxon filed a motion to
dismiss the complaint. The Company believes that it has
meritorious defenses to the litigation, and intends to defend
against the lawsuit vigorously.
The Securities and Exchange Commission ("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 the Company during the period from January 1, 2000
to December 31, 2001. The Company is cooperating with the
Commission, and has produced documents in response to the
Commission's inquiries.
-17-
In addition, the Company has commenced its own investigation of
these matters with the assistance of an outside law firm and an
independent accounting firm. The Company's investigation is still
in progress and has not yet reached a final conclusion. It is
anticipated that the Company's investigation will be concluded in
the Fall of 2002. Since both the Commission's investigation and
the Company's investigation are continuing, there can be no
assurance that the outcome will not require the Company to restate
reported revenue for some or all of the periods in question.
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 the
Company, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi. The
complaint alleges 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 the Company's securities.
Specifically, the complaint alleges that defendants engaged in the
following conduct which had the effect of increasing the Company's
reported revenue and profits: (1) the Company booked as profit in
the third quarter of 2000 a one-time royalty payment in excess of
$10 million, enabling the Company to make its third quarter
projections; (2) the Company used expenses associated with its
acquisition of Telxon to mask the fact that its sales were
declining; and (3) the Company booked as having shipped in the first
quarter of 2001 more than $40 million in inventory in transactions
that included side provisions allowing customers to delay payments
or return merchandise, or included products that "never left the
warehouse". Subsequently, a number of additional purported class
actions containing substantially similar allegations have also been
filed against the Company and certain of its officers in the Eastern
District of New York. All of these actions have been consolidated
into one lawsuit. The Company anticipates that a consolidated
amended complaint will be filed in the near future. The Company
believes that it has meritorious defenses to this litigation, and
intends to defend against the lawsuit vigorously.
12. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS
The Company's 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. During the fourth
quarter of 2001, the Company reorganized its services activities and
formed a new global services organization. This change allows the
Company to focus on the delivery of all services to its customers.
These activities have been coordinated under one global services
organization. As a result, the Company now presents two reportable
operating segments as Products and Services.
-18-
a.)The Products segment sells bar code capture equipment, mobile
computing devices and other peripheral products and receives
royalties. The Services segment provides wireless communication
solutions that connect the Company's 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. Management uses many factors to measure performance
and allocate resources to these two reportable segments. The
primary measurement is gross profit. The accounting policies of the
two reportable segments are essentially the same as those applied to
the consolidated financial statements, but management is continuing
to monitor its cost of revenue allocations between the products and
services segments. Changes in cost allocations between segments may
be required which could materially change the reported gross profit
of the segments. Summarized financial information concerning the
Company's reportable operating segments is shown in the following
table. Prior period data has been reclassified to reflect the
current segment structure. Identifiable assets are those tangible
and intangible assets used by each operating segment. Corporate
assets are principally certain limited fixed assets, deferred taxes
and prepaid and refundable income taxes which can not appropriately
be allocated to either reportable segment. Intersegment
transactions are minimal and any intersegment profit is eliminated
in consolidation.
-19-
REPORTABLE SEGMENTS
Products Services Corporate Consolidated
Three Months ended June 30, 2002
External revenue $246,698 $69,151 - $315,849
Cost of revenue 148,671 50,210 - 198,881
Gross profit $98,027 $18,941 $ - $116,968
Identifiable assets $1,486,147 $273,035 $ 9,383 $1,768,565
Three Months ended June 30, 2001
External revenue $264,199 $76,011 - $340,210
Cost of revenue 267,362(1) 54,731 - 322,093
Gross profit ($3,163) $21,280 - $ 18,117
Identifiable assets $1,807,608 $304,718 $ 9,536 $2,121,862
Six Months ended June 30, 2002
External revenue $475,153 $142,008 - $617,161
Cost of revenue 292,019 102,830 - 394,849
Gross profit $183,134 $39,178 $ - $222,312
Six Months ended June 30, 2001
External revenue $638,082 $152,293 - $790,375
Cost of revenue 488,475(1) 113,407 - 601,882
Gross profit $149,607 $38,886 - $188,493
(1) Product cost of revenue for the three and six months ended June 30,
2001 includes a pre-tax charge of $110,000 related to an inventory
writedown. Excluding this charge, gross profit for the product
segment would have been $106,837 and $259,607, respectively, for
the three and six months ended June 30, 2001.
b). The Company's 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.
Supplemental information about geographic areas is as follows:
The Company operates its business 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).
Summarized financial information concerning the Company's
geographic regions is shown in the following table. Sales are
allocated to each region based upon the location of the use of
the products and services. The "Corporate" column includes
corporate related expenses (primarily various indirect
manufacturing operations costs, engineering and general and
administrative expenses) not allocated to geographic regions.
-20-
This has the effect of increasing operating profit for The
Americas, EMEA and Asia Pacific. Identifiable assets are those
tangible and intangible assets used in operations in each
geographic region. Corporate assets are principally temporary
investments and goodwill. Certain assets which have been
allocated to each reportable operating segment could not be
allocated to any of the Company's geographic regions.
Therefore, corporate assets as shown in the following table are
different from corporate assets as previously shown in the
segment disclosure.
-21-
1300:
The Asia/
Americas EMEA Pacific Corporate Consolidated
Three Months ended
June 30, 2002:
Sales to unaffiliated
customers $216,512 $80,379 $18,958 $ - $315,849
Transfers between
geographic areas 71,891 - - (71,891) -
Total net revenue $288,403 $80,379 $18,958 ($71,891) $315,849
Loss before
income taxes $68,889 $15,906 $6,140 ($124,384) ($33,449)
Identifiable assets $1,084,723 $295,052 $35,418 $353,372 $1,768,565
Three Months ended
June 30, 2001:
Sales to unaffiliated
customers $230,868 $89,790 $19,552 $ - $340,210
Transfers between
geographic areas 73,994 - - (73,994) -
Total net revenue $304,862 $89,790 $19,552 ($73,994) $340,210
Loss before
income taxes $ 79,330 $21,913 $ 7,655 ($207,800) ($98,902)
Identifiable assets $1,569,562 $194,334 $36,519 $ 321,447 $2,121,862
Six Months ended
June 30, 2002:
Sales to unaffiliated
customers $426,151 $156,727 $34,283 $ - $617,161
Transfers between
geographic areas 136,967 - - (136,967) -
Total net revenue $563,118 $156,727 $34,283 ($136,967) $617,161
Loss before income
taxes and extraordinary
item $137,527 $ 31,821 $11,550 ($212,603) ($ 31,705)
Six Months ended
June 30, 2001:
Sales to unaffiliated
customers $555,994 $194,468 $39,913 $ - $790,375
Transfers between
geographic areas 166,289 - - (166,289) -
Total net revenue $722,283 $194,468 $39,913 ($166,289) $790,375
Loss before
income taxes $193,651 $ 47,768 $15,383 ($314,608) ($57,806)
-22-
13. SUBSEQUENT EVENT
In July 2002, the Company announced the hiring of its new President
and Chief Operating Officer, effective August 2002. As part of his
compensation, the Company granted 400,000 fully vested treasury
shares of the Company's common stock to this officer. Such shares
had a value of $2,992 at the date of grant, which will be included
in compensation expense during the third quarter of 2002. If he is
an employee of the Company, this officer is restricted from selling
or transferring these shares for a period of two years from the date
of issuance. In addition to the aforementioned compensation charge,
the Company will record a charge of approximately $1,000 in the
third quarter of 2002 for recruiting fees and other expenses
associated with this officer's hiring.
-23-
Safe harbor for forward-looking statements under securities litigation
act of 1995; certain cautionary statements
This report contains forward-looking statements based on current
expectations, forecasts and assumptions that involve risks and
uncertainties that could cause actual outcomes and results to differ
materially. These risks and uncertainties include price and product
competition, dependence on new product development, reliance on major
customers, customer demand for the Company's products and services,
control of costs and expenses, international growth, general industry and
market conditions and growth rates and general domestic and international
economic conditions including interest rate and currency exchange rate
fluctuations as well as the effect of the current international political
situation, which is impossible to predict. For a further list and
description of such risks and uncertainties, see the reports filed by the
Company with the Securities and Exchange Commission. The Company
disclaims any intention or obligation to update or revise any forward-
looking statements, whether as a result of new information, future events
or otherwise.
-24-
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
(All dollar amounts in thousands, except per share data)
Results of Operations
Net product revenue of $246,698 and $475,153 for the three and
six months ended June 30, 2002 decreased 6.6 percent and 25.5 percent,
respectively, from the comparable prior year periods. The decrease in
net product revenue is due to a global slowdown in information
technology spending which resulted in a reduction in the quantity of
units sold. Net services revenue of $69,151 and $142,008 for the
three and six months ended June 30, 2002 decreased 9.0 percent and 6.8
percent, respectively, from the comparable prior year periods
primarily due to a decrease in professional service revenue resulting
from fewer project management and software development projects,
partially offset by additional customer service revenue from contract
revenue. Foreign exchange fluctuations favorably impacted the growth
in total net revenue by approximately 0.1 percentage points for the
three months ended June 30, 2002 but unfavorably impacted the growth
in total net revenue by 0.8 percentage points for the six months ended
June 30, 2002. Foreign exchange fluctuations unfavorably impacted the
growth in total net revenue by approximately 2.4 percent and 2.5
percent for the three and six months ended June 30, 2001,
respectively.
Geographically, the Americas revenue decreased 6.2 percent and 23.4
percent, respectively, for the three and six months ended June 30, 2002
from the comparable prior year periods. EMEA revenue decreased 10.5
percent and 19.4 percent for the three and six months ended June 30,
2002 from the comparable prior year periods. Asia Pacific revenue
decreased 3.0 percent and 14.1 percent for the three and six months
ended June 30, 2002 from the comparable prior year periods. The
Americas, EMEA and Asia Pacific revenue represent approximately 69
percent, 25 percent, and 6 percent of net revenue for the three and six
months ended June 30, 2002.
The Company has forecasted revenue to be approximately $1,300,000
for the full year 2002. Attainment of this forecast is dependent on
many factors, some of which are beyond the Company's control,
including those previously enumerated as well as the assumption that
there is a general improvement in the level of economic activity as
well as increased information technology spending.
Based on the aforementioned forecast level of revenue, the
Company expects diluted earnings per share before non-recurring
charges in the range of $0.20 to $0.25 for the full year 2002. The
forecast is contingent upon, among other factors, attainment of the
revenue level previously discussed. As such, the Company has limited
visibility to these numbers and there can be no assurance they will be
achieved.
-25-
Management of the Company has prepared the aforementioned
prospective financial information with respect to financial
performance in 2002. This prospective financial information was not
prepared with a view toward complying with the guidelines established
by the American Institute of Certified Public Accountants with respect
to prospective financial information, but, in the view of the
Company's management, was prepared on a reasonable basis. However,
this information is not fact and should not be relied upon as being
necessarily indicative of future results, and one should not place
undue reliance on the accuracy of the prospective financial
information.
Neither the Company's independent auditors, nor any other
independent accountants, have compiled, examined, or performed any
procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any other
form of assurance on such information or its achievability, and assume
no responsibility for, and disclaim any association with, the
prospective financial information.
Product cost of revenue (as a percentage of net product revenue) was
60.3 percent and 61.5 percent for the three and six months ended June 30,
2002 as compared to 59.6 percent and 59.3 percent before non-recurring
charges in the comparable prior year periods. This increase is due to an
overall shift in product mix to lower margin products, reduced
manufacturing absorption due to lower sales volumes and, for the six
months ended June 30, 2002, the unfavorable impact of foreign exchange
rate fluctuations on net revenue. Amortization of software development
costs for the three and six months ended June 30, 2002 of $4,879 and
$9,067 increased from $4,477 and $8,719 in the comparable prior year
periods due to new product releases.
Included in product cost of revenue for the three and six months
ended June 30, 2001 is a $110,000 non-recurring charge recorded in the
second quarter of 2001 for a writedown of the Company's radio frequency
(RF) infrastructure and systems inventories. The writedown was recorded
as a result of lower demand for the Company's then current RF products,
coupled with technological obsolescence due to planned introductions of
new RF infrastructure products and mobile computing appliances.
Services cost of revenue (as a percentage of net services revenue)
was 72.6 percent and 72.4 percent for the three and six months ended June
30, 2002 as compared to 72.0 percent and 74.5 percent in the comparable
prior year periods. The decrease in services cost of revenue as a
percentage of services revenue for the six month period resulted
primarily from customer service realizing the benefits of additional cost
containment activities in the first quarter of 2002, coupled with higher
selling prices on certain customer service orders.
Engineering costs increased to $29,467 from $28,341 for the three
months ended June 30, 2002, but decreased to $56,240 from $59,358 for
the six months ended June 30, 2002, as compared to the respective prior
year periods. This represents an increase of 4.0 percent and a
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decrease of 5.3 percent, respectively, from the prior year periods.
The increase for the three month period is due to a decrease in the
amount of capitalized costs incurred for internally developed product
software where economic and technological feasibility has been
established. The decrease for the six month period is due to overall
lower expenditures incurred in connection with the continuing research
and development of new products and the improvement of existing
products, reflecting the positive effect of the Company's expense
control programs. As a percentage of total net revenue, engineering
expenses increased to 9.3 percent and 9.1 percent for the three and
six months ended June 30, 2002 compared to 8.3 percent and 7.5 percent
for the comparable prior year periods primarily due to lower revenue
levels.
Selling, general and administrative expenses of $70,201 and
$134,314 for the three and six months ended June 30, 2002 decreased
from $80,684 and $170,946 for the comparable prior year periods. In
absolute dollars, selling, general and administrative expenses
decreased 13.0 percent and 21.4 percent from the comparable prior year
periods. The decrease is a result of cost containment efforts
implemented during the last half of 2001. As a percentage of net
revenue, such expenses decreased to 22.2 percent for the three months
ended June 30, 2002 from 23.7 percent, but remained consistent with
the comparable prior year period at 21.8 percent for the six months
ended June 30, 2002. The decrease for the three month period is due
to the aforementioned cost containment efforts, partially offset by
lower revenue.
In February 2002, the Company's former President and Chief Executive
Officer announced his retirement. In connection therewith, the Company
recorded a pre-tax non-recurring compensation and related benefits charge
of $8,597 for the three months ended March 31, 2002.
In the quarter ended June 30, 2002, the Company recorded a pre-tax
non-recurring impairment charge of $47,200 related to its investment in
AirClic Inc. ("AirClic"). The Company regularly tests the carrying value
of its investments for impairment. In consideration of the outlook of
AirClic's business, the general decline in the economy and the decline in
information technology spending, it was determined that the decline in
the value of the investment in AirClic was other than temporary during
the quarter ended June 30, 2002. The Company obtained an independent
appraisal of its investment in AirClic and wrote down the carrying amount
of the investment to its estimated fair value of $2,800 at June 30, 2002.
This investment was previously fully allocated to the product segment.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill and intangible assets
acquired in a business combination will no longer be amortized into
results of operations, but rather subject to a periodic assessment for
impairment. The Company adopted the provisions of this Statement
effective January 1, 2002. Under the new standard, goodwill is subject
to an annual assessment for impairment using a prescribed fair-value-
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based test. The Company completed the initial step of the transitional
goodwill impairment test as of January 1, 2002 utilizing an independent
appraisal during the quarter ended June 30, 2002. This step of the
goodwill impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. Based on results of these
comparisons, the Company concluded there was no impairment of goodwill
related to either of its reporting units.
Adjusted financial information assuming SFAS No. 142 had been
adopted as of January 1, 2001 is as follows:
Three Months Ended Six Months Ended
June 30,_______ June 30,____
2002 2001__ 2002 2001__
Reported loss before
extraordinary item ($22,745) ($59,553) ($21,559)($31,608)
Goodwill amortization, net of tax - 2,434 - 5,125
Adjusted loss before
extraordinary item ($22,745) ($57,119) ($21,559)($26,483)
Reported net loss ($22,745) ($59,553) ($20,993)($31,608)
Goodwill amortization, net of tax - 2,434 - 5,125
Adjusted net loss ($22,745) ($57,119) ($20,993)($26,483)
Basic Loss Per Share:
Loss as reported ($0.10) ($0.27) ($0.09) ($0.14)
Goodwill amortization, net of tax - 0.01 - 0.02
Adjusted loss ($0.10) ($0.25)(1) ($0.09) ($0.12)
Diluted Loss Per Share:
Loss as reported ($0.10) ($0.27) ($0.09) ($0.14)
Goodwill amortization, net of tax - 0.01 - 0.02
Adjusted loss ($0.10) ($0.25)(1) ($0.09) ($0.12)
(1) Basic and diluted loss per share are reported separately. In addition,
loss per share as reported, goodwill amortization, and adjusted loss
per share are calculated independently. Therefore, the sum of loss per
share as reported and the per share amount of goodwill amortization may
differ from adjusted loss per share as presented above.
Basic and diluted loss per share amounts before extraordinary items are not
materially different than the basic and diluted loss per share amounts shown
above. Therefore, the per share effect of goodwill amortization on loss per
share before extraordinary items has not been presented.
Net interest expense decreased to $3,549 and $7,666 for the three
and six months ended June 30, 2002 from $3,952 and $7,996 for the
comparable prior year periods. This net decrease is primarily due to
the lower interest expense resulting from Telxon's repurchase of its
convertible debt.
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The Company's effective tax benefit was 32 percent for the three
and six months ended June 30, 2002. This differed from the statutory
rate primarily as a result of research and development tax credits and
state taxes. The Company's effective tax benefit for the three and
six months ended June 30, 2001 was 39.8 percent and 45.3 percent,
respectively. This differed from the statutory rate primarily as a
result of the non-recurring charge associated with an inventory
writedown recorded in June 2001.
In January and February 2002, Telxon, a wholly owned subsidiary
of the Company, purchased in the open market $34,790 of its 5.75
percent convertible subordinated notes for $34,127 in cash and $5,173
of its 7.5 percent convertible subordinated debentures for $5,004 in
cash. This resulted in an extraordinary gain of $566 net of income
taxes of $266. In April 2002, Telxon redeemed the remaining $25,849
of its 5.75 percent notes and the remaining $19,240 of its 7.5
percent notes for $26,061 and $19,240 respectively. This represented
a redemption price of 100.8214 percent of the outstanding principal
amount for the 5.75 percent notes and 100 percent of the outstanding
principal amount for the 7.5 percent debentures.
Liquidity and Capital Resources
The Company utilizes a number of measures of liquidity including
the following:
June 30, December 31,
2002 _____ 2001_____
Working Capital $638,808 $660,475
Current Ratio (Current Assets
to Current Liabilities) 3.1:1 2.9:1
Long-Term Debt to Capital 17.0% 20.8%
(Convertible subordinated notes
and debentures plus long-term
debt to convertible subordinated
notes and debentures plus
long-term debt plus equity)
Current assets decreased by $52,094 from December 31, 2001
principally due to a decrease in accounts receivable due to lower
revenue levels and increased cash collections, a decrease in other
current assets, cash, and inventories partially offset by an increase in
prepaid and refundable income taxes.
Current liabilities decreased $30,427 from December 31, 2001
primarily due to a decrease in accounts payable and accrued expenses,
the utilization of accrued restructuring expenses and lower deferred
revenue.
The aforementioned activity resulted in a working capital
decrease of $21,667 for the six months ended June 30, 2002. The
Company's current ratio at June 30, 2002 increased to 3.1:1 compared
with 2.9:1 as of December 31, 2001.
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The Company generated $46,784 positive cash flow from operating
activities for the three months ended June 30, 2002, but experienced an
overall decrease in cash of $2,791 for the period. Cash used to
repurchase the Telxon convertible debt, purchases of property, plant
and equipment, and investments in intangible and other assets were
partially offset by the positive cash flow provided by operations, net
proceeds from issuance and repayment of long-term debt and proceeds
from the sale of property, plant and equipment.
Property, plant and equipment expenditures for the six months ended
June 30, 2002 totaled $18,192 compared to $54,215 for the six months
ended June 30, 2001. In February 2001, the Company began a 150,000
square foot expansion of its 140,000 square foot manufacturing and
distribution facility in Reynosa, Mexico. The total cost for this
project is estimated to be $8,500 and is scheduled to be completed
during 2002. Additionally, in February 2001, the Company began
construction of a new 334,000 square foot distribution center and data
center in McAllen, Texas. The total cost for this project is
approximately $33,000, which was substantially completed as of June 30,
2002. The Company continues to make capital investments in major systems
and network conversions but does not have any other material commitments
for capital expenditures.
During the year ended December 31, 2000, the Company established a
special purpose entity ("SPE") for the purpose of entering into a
$50,000 lease receivable securitization agreement with a highly rated
financial institution. The SPE is a consolidated entity and,
accordingly, its results are included in the consolidated financial
statements of the Company. During the six months ended June 30, 2002,
the Company securitized $7,373 of its lease receivables, which resulted
in proceeds of $4,200. During the year ended December 31, 2001, the
Company securitized $32,227 of its lease receivables, which resulted in
proceeds of $18,700. The Company does not consider its securitization
of lease receivables a significant dependency on its continued
liquidity.
The Company had long-term debt outstanding, excluding current
maturities, as follows:
June 30, December 31,
2002 2001____
Revolving Credit Facililty $158,320 $125,439
Senior Notes 6,349 12,698
SAILS Exchangeable Debt 79,015 93,206
Other 233 373
243,917 231,716
Less Current Maturities 6,433 6,548
$237,484 $225,168
The Company has a $350 million revolving credit facility with a
syndicate of U.S. and International banks (the "Credit Agreement"). The
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terms of the Credit Agreement extend to 2004. Use of the borrowings is
unrestricted and the borrowings are unsecured. These borrowings bear
interest at either LIBOR plus 100 basis points or the base rate of the
syndication agent bank which approximated 2.8 percent and 4.8 percent at
June 30, 2002 and December 31, 2001, respectively. At June 30, 2002,
the Company had $158,320 of borrowings outstanding under the Credit
Agreement, as compared to $125,439 outstanding at December 31, 2001.
These borrowings have been classified as long-term obligations in each
respective period.
In March 1993, the Company issued $25,000 of its 7.76 percent
Series A Senior Notes due February 15, 2003, and $25,000 of its 7.76
percent Series B Senior Notes due February 15, 2003 to two insurance
companies for working capital and general corporate purposes. The
Series A Senior Notes are being repaid in equal annual installments of
$2,778, which began in February 1995. The Series B Senior Notes are
being repaid in equal annual installments of $3,571, which began
February 1997. The remaining balance of the Senior Notes is classified
as current at June 30, 2002.
In January 2001, the Company entered into a private SAILS
arrangement with a highly rated financial institution. The securities
which underlie the SAILS contract represent the Company's investment in
Cisco common stock, which was acquired in connection with the Telxon
acquisition. The 4,160,000 shares of Cisco common stock had a market
value of $58,032 at June 30, 2002 and are held as collateral to secure
the debt instrument associated with the SAILS and are included in the
balance of Investment in Marketable Securities. This debt has a seven-
year maturity and pays a cash coupon of 3.625 percent. The SAILS
contain an embedded equity collar, which effectively manages a large
portion of the Company's exposure to fluctuations in the fair value of
its holdings in Cisco common stock. At maturity, the SAILS will be
exchangeable for shares of Cisco common stock, or at the Company's
option, cash in lieu of shares. Net proceeds from the issuance of the
SAILS and termination of an existing freestanding collar agreement were
approximately $262,246 which were used for general corporate purposes,
including the repayment of debt outstanding under its revolving credit
facility. The Company accounts for the embedded equity collar as a
derivative financial instrument in accordance with the requirements of
Statement of Financial Accounting Standards No. 133, "Accounting for
Certain Derivative Instruments and Hedging Activities." The change in
fair value of this derivative between reporting dates is recognized
through earnings but has been mitigated by the changes in market value
of Cisco shares classified as trading securities which resulted in a net
effect on earnings which is not material. The derivative has been
combined with the debt instrument in long-term debt in an appropriate
presentation of the Company's overall future cash outflows for that debt
instrument under Financial Accounting Standards Board Interpretation No.
39, "Offsetting of Amounts Related to Certain Contracts" for the legal
right of offset for accounting purposes. The SAILS liability, net of
the derivative asset, represents $79,015 of the total long-term debt
balance outstanding at June 30, 2002. The Company has the option to
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terminate the SAILS arrangement prior to its scheduled maturity. Such
early termination would require the Company to pay an amount based on
the fair value of the embedded equity collar and the underlying stock,
which would be recorded in the Company's Statement of Operations in the
period of termination. Such amount, however, will never exceed the
present value of the Company's future coupon payments at the time of
termination. At the present time, the Company does not anticipate
terminating the SAILS arrangement prior to its scheduled maturity date.
The remaining portion of long-term debt outstanding relates to
various other loans maturing through 2008.
The combined aggregate amount of long-term debt maturities for the
six months ended December 31, 2002 and each of the subsequent years
ended December 31 are as follows:
2002 $ 77
2003 6,379
2004 158,350
2005 31
2006 32
Thereafter 79,048
$243,917
The Company's long-term debt to capital ratio decreased to 17.0
percent at June 30, 2002 from 20.8 percent at December 31, 2001
primarily due to Telxon's repurchase of its remaining convertible
subordinated notes and debentures and the increase in equity due to
stock option exercises, partially offset by net borrowings under the
Company's credit facility (increase resulting from financing of
convertible notes and debentures repurchase partially offset by
repayments), the decrease in equity due to the net loss for the period,
and the repurchase of treasury shares.
The Company has loan agreements with various banks pursuant to
which, the banks have agreed to provide lines of credit totaling
$57,000. As of June 30, 2002 the Company had no borrowings outstanding
under these lines as compared to $19 outstanding at December 31, 2001.
These agreements continue until such time as either party terminates the
agreements.
At the date of the Telxon acquisition, Telxon had outstanding
$82,500 of 5.75 percent convertible subordinated notes, and $24,413 of
7.5 percent convertible subordinated debentures. During the year ended
December 31, 2001, Telxon purchased in the open market $21,861 of its
5.75 percent notes for $20,665. In January and February 2002, Telxon
repurchased $34,790 of its 5.75 percent notes for $34,127 in cash and
$5,173 of its 7.5 percent debentures for $5,004 in cash. This resulted
in an extraordinary gain of $566, net of income taxes of $266. In April
2002, Telxon redeemed the remaining balance of its 5.75 percent notes
and 7.5 percent debentures at a redemption price of 100.8214 percent of
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the outstanding principal amount plus accrued and unpaid interest for
the 5.75 percent notes and 100 percent of the outstanding principal
amount plus accrued and unpaid interest for the 7.5 percent debentures.
The aggregate principal amount redeemed was $45,089.
The Company continues to enter into obligations and commitments to
make future payments under lease agreements. The future obligations
related to capital lease obligations is not material.
The combined aggregate amount of required future minimum rental
payments under non-cancelable operating leases for the six months ended
December 31, 2002 and each of the subsequent years ended December 31,
are as follows:
2002 $ 8,551
2003 14,947
2004 12,312
2005 10,618
2006 9,523
Thereafter 34,428
$90,379
The Company has a balance of accrued purchase commitments of
$11,251 at June 30, 2002, compared to $13,822 at December 31, 2001.
Payments are due within one year and such balances are included in the
balance of accounts payable and accrued expenses in each respective
period.
The Company believes that it has adequate liquidity to meet its
current and anticipated needs from working capital, results of its
operations, and existing credit facilities.
In the opinion of management, inflation has not had a material
effect on the operations of the Company.
The Securities and Exchange Commission ("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
the Company during the period from January 1, 2000 to December 31,
2001. The Company is cooperating with the Commission, and has
produced documents in response to the Commission's inquiries.
In addition, the Company has commenced its own investigation of
these matters with the assistance of an outside law firm and an
independent accounting firm. The Company's investigation is still in
progress and has not yet reached a final conclusion. It is
anticipated that the Company's investigation will be concluded in the
Fall of 2002. Since both the Commission's investigation and the
Company's investigation are continuing, there can be no assurance that
the outcome will not require the Company to restate reported revenue
for some or all of the periods in question.
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Critical Accounting Policies
The preparation of these financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, asset
impairment, intangible assets and derivative instrument valuation.
Management bases its estimates and judgments on historical experience
and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Note 1 to the
Company's consolidated financial statements for the year ended December
31, 2001 (as contained in the Company's Form 10-K) "Summary of
Significant Accounting Policies" summarizes each of its significant
accounting policies. Management believes the following critical
accounting policies, among others, affect its more significant judgments
and estimates used in the preparation of its consolidated financial
statements.
Revenue Recognition
Revenue related to sales of the Company's products and systems is
generally recognized when products are shipped or services are rendered,
the title and risk of loss has passed to the customer, the sales price
is fixed or determinable, and collectibility is reasonably assured. The
Company accrues related product return reserves and warranty expenses at
the time of sale. Service and maintenance sales are recognized over the
contract term. In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements". Accordingly, if products, services or
maintenance are bundled in a single contract, revenue will be recognized
once all elements of the contract are completed unless the following
criteria are met: (1) the product has been delivered; (2) the
undelivered services or maintenance are not essential to the delivered
products; (3) the fee for the product is not subject to forfeiture,
refund or concession based on performance of the services or
maintenance; (4) the fair value of services and maintenance are
determined based on the price charged by the Company, or the price
charged by competitors when similar services or maintenance are sold
separately; and (5) the revenue related to any element of the contract
is not subject to customer acceptance; in which case the revenue for
each element will be recognized independently.
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Long-Lived Assets
The Company assesses the impairment of its long-lived assets,
including property, plant and equipment, identifiable intangible assets
and software development costs whenever events or changes in
circumstances indicate the carrying value may not be recoverable.
Factors the Company considers important which could trigger an impairment
review include significant changes in the manner of the Company's use of
the acquired asset, changes in historical or projected operating
performance and significant negative economic trends.
Research and Development/Software Development Costs
The Company expenses all research and development costs as incurred.
Research and development expenses may fluctuate due to the timing of
expenditures for the varying stages of research and product development
and the availability of capital resources. The Company capitalizes costs
incurred for internally developed product software where economic and
technological feasibility has been established and for qualifying
purchased product software. The Company assesses the recoverability of
its software development costs against estimated future revenue over the
remaining economic life of the software.
Derivative Instruments, Hedging Activities and Foreign Currency
The Company utilizes derivative financial instruments to hedge
foreign exchange rate risk exposures related to foreign currency
denominated payments from its international subsidiaries. The Company
also utilizes a derivative financial instrument to hedge fluctuations in
the fair value of its investment in Cisco common shares. These
derivatives qualify for hedge accounting. The Company does not
participate in speculative derivatives trading. While the Company
intends to continue to meet the conditions for hedge accounting, if
hedges did not qualify as highly effective, or if the Company did not
believe the forecasted transactions would occur, the changes in fair
value of the derivatives used as hedges would be reflected in earnings.
The Company does not believe it is exposed to more than a nominal amount
of credit risk in its hedging activities as the counterparties are
established, well capitalized financial institutions.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to ITEM 7, in the Company's annual report on Form 10-K for the
year ended December 31, 2001 for required disclosure.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently involved in matters of litigation arising
from the normal course of business. Management is of the opinion
that such litigation will not have a material adverse effect on
the Company's consolidated financial position or results of
operations.
In March 2001, Proxim Incorporated ("Proxim") sued the Company, 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. Proxim did not identify any specific products of the
Company that allegedly infringe these three patents. 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 the Company seeks, among other relief, unspecified damages
for patent infringement, treble damages for willful infringement,
and a permanent injunction against the Company from infringing
these three patents. In a press conference held after the filing
of the complaints, Proxim indicated that it was interested in
licensing the patents that are the subject of the lawsuit against
the Company.
On May 1, 2001, the Company filed an answer and counterclaim in
response to Proxim's suit. The Company has responded by asserting
its belief that Proxim's asserted patents are invalid and not
infringed by any of the Company's products. In addition, the
Company has asserted its belief that Proxim's claims are barred
under principles of equity, estoppel and laches. The Company
believes Proxim's claims are without merit. The Company has also
filed counterclaims against Proxim, asserting that Proxim's RF
product offerings infringe four of the Company's patents relating
to wireless LAN technology. The Company has requested the Court
grant an unspecified amount of damages as well as a permanent
injunction against Proxim's sale of its wireless LAN product
offerings. The Court has severed the Company's counterclaim
against Proxim involving the four of the Company's patents
relating to wireless LAN technology from Proxim's initial case.
On May 14, 2001, the Company announced that an agreement had been
reached with Intersil Corporation, a supplier of key wireless LAN
chips to the Company. Under this agreement, Intersil will
generally indemnify and defend the Company against Proxim's
initial infringement suit. On May 30, 2002, the Court granted
Intersil's motion to intervene as a defendant in the Proxim
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infringement suit. Having granted Intersil's motion to intervene,
the Court imposed a mandatory stay in the case until the
conclusion of a related proceeding involving Proxim, Intersil, and
other parties in the U.S. International Trade Commission ("ITC").
The Court further barred Proxim from collecting damages against
the Company attributable to the Company's alleged infringing
conduct during the stay. On June 14, 2002, Proxim filed a motion
requesting the Court reconsider the damages bar portion of the
Court's May 30th order. The motion is currently pending.
On December 4, 2001, the Company filed a complaint against Proxim
in the United States District Court in the District of Delaware
asserting that Proxim's RF product offerings infringe four of the
Company's patents relating to wireless LAN technology. This
complaint asserts the same four patents that were asserted in the
Company's counterclaim against Proxim in the initial Proxim case
prior to the severance of this counterclaim by the Court. On
December 18, 2001, Proxim filed an answer and counterclaims
seeking declaratory judgments for non-infringement, invalidity and
unenforceability of the four patents asserted by the Company,
injunctive and monetary relief for the Company's alleged
infringement of one additional Proxim patent involving wireless
LAN technology, monetary relief for the Company's alleged false
patent marking, and injunctive and monetary relief for the
Company's alleged unfair competition under the Lanham Act, common
law unfair competition and tortious interference. The Company
believes these claims to be without merit.
On January 31, 2002, the Company filed an answer in response to
Proxim's counterclaim. The Company has responded by asserting its
belief that Proxim's asserted patent is invalid and not infringed
by any of the Company's products. In addition, the Company has
asserted its belief that Proxim's patent claims are barred under
principles of equity, estoppel and laches. Also on January 31,
2002, the Company filed a motion to dismiss Proxim's claims
regarding false patent markings, the Lanham Act, common law unfair
competition and tortious interference. On June 25, 2002, the
Court granted the Company's motion with respect to false patent
marking, and denied the motion in all other respects.
On July 21, 1999, the Company and six other leading members of the
Automatic Identification and Data Capture industry jointly
initiated a litigation against the Lemelson Medical, Educational,
& Research Foundation, Limited Partnership (the "Lemelson
Partnership"). The suit, which is entitled Symbol Technologies,
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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
Company has agreed to bear approximately half of the legal and
related expenses associated with the litigation, with the
remaining portion being borne by the other Auto ID companies.
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. The Company 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 the Company and the other Auto
ID companies, individually and/or collectively with other
equipment suppliers. The Company, and we understand, 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. However, the Company and the
other Auto ID companies believe that the Lemelson claims do
concern the Auto ID industry at large and that it is appropriate
for them to act jointly to protect their customers against what
they believe to be baseless claims being asserted by the Lemelson
Partnership.
The Lemelson Partnership filed a motion to dismiss the lawsuit, or
in the alternative, to stay proceedings or to transfer the case to
the U.S. District Court in Arizona where there are pending cases
involving the Lemelson Partnership and other companies in the
semiconductor and electronics industries. On March 21, 2000, the
U.S. District Court in Nevada denied the Lemelson Partnership's
motion to dismiss, transfer, or stay the action. It also struck
one of the four counts.
On April 12, 2000, the Lemelson Partnership filed its answer to
the complaint in the Symbol et al. v. Lemelson Partnership case.
In the answer, the Lemelson Partnership included a counterclaim
against the Company and the other plaintiffs seeking a dismissal
of the case. Alternatively, the Lemelson Partnership's
counterclaim seeks a declaration that the Company and the other
plaintiffs have contributed to, or induced infringement of
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particular method claims of the patents-in-suit by the plaintiffs'
customers. The Company believes these claims to be without merit.
On May 15, 2000, the Auto ID companies filed a motion seeking
permission to file an interlocutory appeal of the Court's decision
to strike the fourth count of the complaint (which alleged that
the Lemelson Partnership's delays in obtaining its patents
rendered them unenforceable for laches). The motion was granted
by the Court on July 14, 2000. The Court entered a clarifying,
superseding order on July 25, 2000. On September 1, 2000, the U.S.
Court of Appeals for the Federal Circuit granted the petition of
the Auto ID companies for permission to pursue this interlocutory
appeal. The Federal Circuit heard oral argument on this appeal on
October 4, 2001. On January 24, 2002, the Federal Circuit found
for the Auto ID companies, holding that the defense of prosecution
laches exists as a matter of law. On March 20, 2002 the Federal
Circuit denied Lemelson's petition for rehearing in banc.
Accordingly, the issue has been remanded to the Court in Nevada to
consider whether the laches defense is applicable to the Lemelson
case. On June 18, 2002, Lemelson filed a petition for a writ of
certiorari with the Supreme Court of the United States seeking
review of the Federal Circuit's prosecution laches decision. The
Auto ID companies expect to file an opposition to the petition in
due course.
On July 24, 2000, the Auto ID companies filed a motion for partial
summary judgment arguing that almost all of the claims of the
Lemelson Partnership's patents are invalid for lack of written
description. On August 8, 2000, the Lemelson Partnership filed a
motion seeking an extension of approximately ten weeks in which to
file an answer to this motion. On August 31, 2000, the Court
granted the Lemelson Partnership's motion for such an extension.
On October 25, 2000, the Lemelson Partnership filed a combined
opposition to the motion of the Auto ID companies for partial
summary judgment and its own cross-motion for partial summary
judgment that many of the claims of the Lemelson Partnership's
patents satisfy the written description requirement. On January 8,
2001, the Auto ID companies filed a combined reply in support of
their partial summary judgment motion and opposition to the
Lemelson Partnership's partial summary judgment cross-motion. On
June 15, 2001, the District Court heard oral arguments on this
motion. On July 12, 2001, the District Court denied both the Auto
ID companies' motion and Lemelson's cross-motion. In doing so,
the Court did not rule on the merits of the matters raised in the
motions, but instead held that there remain triable issues of
material fact that preclude granting summary judgment in favor of
either party.
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On May 14, 2001, the Auto ID companies filed another motion for
summary judgment arguing that Lemelson's patents at issue are
unenforceable because of Lemelson's inequitable conduct before the
U.S. Patent and Trademark Office. On June 19, 2001, the Lemelson
Partnership filed a combined opposition to the motion of the Auto
ID companies for summary judgment and its own cross-motion for
partial summary judgment that no such inequitable conduct
occurred. On July 10, 2001, the Auto ID companies filed a
combined reply in support of their summary judgment motion and
opposition to the Lemelson Partnership's partial summary judgment
cross-motion. On November 13, 2001, the District Court denied
both the Auto ID companies' motion and Lemelson's cross-motion.
In doing so, the Court did not rule on the merits of the matters
raised in the motions, but instead held that there remain triable
issues of material fact that preclude granting summary judgment in
favor of either party.
On August 1, 2001, the Auto ID companies filed another motion for
partial summary judgment arguing that the Lemelson Partnership is
not entitled, as a matter of law, to rely on a now-abandoned
Lemelson patent application filed in 1954 to provide a filing date
or disclosure for the claims of the patents-in-suit. On November
13, 2001, the District Court denied the Auto ID companies' motion.
In doing so, the Court did not rule on the merits of the matters
raised in the motion, but instead held that there remain triable
issues of material fact that preclude granting summary judgment.
On July 25, 2001, the Court entered an order setting a schedule
that culminates with a trial scheduled for August 2002. On April
12, 2002, the Court entered a superseding scheduling order setting
a schedule that culminates with a trial scheduled for November
2002. Under this timetable, the Auto ID companies' arguments
relating to laches, invalidity, unenforceability and/or non-
infringement of the so-called "bar code" patents will be briefed
by motion at the appropriate time, or at trial.
On July 12, 2002, the Auto ID plaintiffs filed three new summary
judgment motions with the Court in Nevada on the following
grounds: (1) that the so-called bar code patents are unenforceable
based on the prosecution laches doctrine found to exist by the
Federal Circuit; (2) that users of bar code equipment do not
infringe Lemelson's patents based on Lemelson's statements in the
prosecution history equating his alleged invention with video-
based technology; and (3) that the so-called bar code patents are
invalid based on Lemelson's admissions regarding the prior art
that were made to advance the prosecution of his patent
applications. These motions are currently pending.
From December through March 1999, a total of 27 class actions were
filed in the United States District Court, Northern District of
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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. On
February 9, 1999, the plaintiffs filed a Motion to consolidate all
of the actions and the Court heard motions on naming class
representatives and lead class counsel on April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their
counsel, ordered the filing of an Amended Complaint, and dismissed
26 of the 27 class action suits without prejudice and consolidated
those 26 cases into the first filed action. The lead plaintiffs
appointed by the Court filed an Amended Class Action Complaint on
September 30, 1999. 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. Various appeals and writs
challenging the District Court's August 25, 1999 rulings were filed
by two of the unsuccessful plaintiffs but have all been denied by
the Court of Appeals.
On November 8, 1999, the defendants jointly moved to dismiss the
Amended Complaint, which was denied on September 29, 2000.
Following the denial, the parties filed a proposed joint case
schedule, discovery commenced, and the parties each filed their
initial disclosures. On October 30, 2000, defendants filed their
answer to the plaintiffs' amended complaint as well as a Motion for
Reconsideration or to Certify the Order Denying the Motion to
Dismiss for Interlocutory Appeal and request for oral argument, and
a memorandum of points and authorities in support of that motion.
On November 14, 2000, Plaintiffs filed a Memorandum in Opposition
of Defendants Motion. This Motion was denied on January 19, 2001.
On November 1, 2000, defendants filed a Motion for Application of
the Amended Federal Rules of Civil Procedure to the case, and on
November 16, 2000, the Court granted this Motion in part and held
that the Court will apply the new rules of evidence and new rules
of civil procedure except to the extent those rules effectuate
changes to Rule 26 of the Federal Rules for Civil Procedure.
Discovery is in its preliminary stages.
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On February 20, 2001, Telxon filed a motion for leave to file and
serve instanter a summons and third-party complaint against third-
party defendant PricewaterhouseCoopers LLP ( "PWC")in 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,
1998 and its interim financial statements for its first and second
quarters of fiscal year 1999, 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.
Thereafter plaintiffs sued PWC directly and that action was
consolidated. PWC filed a motion to dismiss both Telxon's third
party complaint an