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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
COMMISSION FILE NUMBER 1-9802
SYMBOL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 11-2308681
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Symbol Plaza
Holtsville, New York 11742-1300
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES [X] NO [ ]
The number of shares outstanding of the registrant's classes of common
stock, as of February 20, 2004, was as follows:
Class Number of Shares
----- ----------------
Common Stock, par value $0.01 231,205,860
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
SYMBOL TECHNOLOGIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.....................................................1
Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002...................1
Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2003 and 2002 (restated)............................................................2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003
and 2002 (restated) .........................................................................3
Notes to Condensed Consolidated Financial Statements as of June 30, 2003 and for the
Three and Six Months Ended June 30, 2003 and 2002............................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................55
Item 4. Controls and Procedures........................................................................55
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................56
Item 6. Exhibits and Reports on Form 8-K...............................................................56
Signatures.......................................................................................................57
Certifications...................................................................................................58
i
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
JUNE 30, DECEMBER 31,
2003 2002
----------- -------------
ASSETS
- ------
Cash and cash equivalents...................................................... $ 97,976 $76,121
Accounts receivable, less allowance for doubtful
accounts of $38,070 and $34,272 respectively................................. 126,629 151,417
Inventories.................................................................... 211,539 261,096
Deferred income taxes.......................................................... 146,672 167,489
Other current assets........................................................... 39,685 34,293
----------- -------------
Total current assets...................................................... 622,501 690,416
Property, plant and equipment, net............................................. 206,069 208,209
Deferred income taxes.......................................................... 248,707 222,475
Investment in marketable securities............................................ 70,128 54,939
Goodwill....................................................................... 302,616 301,023
Intangible assets, net......................................................... 33,750 37,125
Other assets................................................................... 42,840 58,008
----------- -------------
Total assets $1,526,611 $1,572,195
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses.......................................... $453,139 $427,568
Current portion of long-term debt.............................................. 15,278 6,681
Deferred revenue............................................................... 38,118 32,903
Accrued restructuring expenses................................................. 6,042 6,948
----------- -------------
Total current liabilities................................................. 512,577 474,100
Long-term debt, less current maturities........................................ 65,351 135,614
Deferred revenue............................................................... 15,180 15,821
Other liabilities.............................................................. 60,807 58,921
Contingencies (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized 10,000 shares, none issued or
outstanding.................................................................. -- --
Series A Junior Participating preferred stock, par value $1.00; authorized 500
shares, none issued or outstanding........................................... -- --
Common stock, par value $0.01; authorized 600,000 shares; issued 256,897 shares
and 256,589 shares, respectively............................................. 2,569 2,566
Additional paid in-capital..................................................... 1,327,380 1,323,085
Accumulated other comprehensive loss, net...................................... (3,174) (13,096)
Accumulated deficit............................................................ (215,050) (188,340)
----------- -------------
1,111,725 1,124,215
LESS:
Treasury stock, at cost, 26,130 shares and 25,962 shares, respectively......... (239,029) (236,476)
----------- -------------
Total stockholders' equity................................................ 872,696 887,739
----------- -------------
Total liabilities and stockholders' equity......................... $1,526,611 $1,572,195
========== =============
See notes to Condensed Consolidated Financial Statements.
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
2002 2002
(AS (AS
RESTATED-SEE RESTATED-SEE
2003 NOTE 2) 2003 NOTE 2)
-------- ------------ -------- ------------
REVENUE:
Product............................................ $290,296 $252,494 $600,999 $507,396
Services........................................... 83,523 76,593 159,167 139,335
-------- ------------ -------- ------------
373,819 329,087 760,166 646,731
COST OF REVENUE:
Product cost of revenue............................ 165,047 179,564 321,386 361,723
Services cost of revenue........................... 56,383 51,171 114,519 107,786
-------- ------------ -------- ------------
221,430 230,735 435,905 469,509
-------- ------------ -------- ------------
Gross profit....................................... 152,389 98,352 324,261 177,222
-------- ------------ -------- ------------
OPERATING EXPENSES:
Engineering........................................ 38,130 34,240 75,185 69,773
Selling, general and administrative................ 108,419 76,998 207,450 157,293
Loss provision for legal settlements............... -- -- 72,000 --
Stock based compensation
expense/ (recovery).............................. 1,456 (27,648) 2,232 (78,950)
Restructuring and impairment charges............... 136 92 223 2,726
-------- ------------ -------- ------------
148,141 83,682 357,090 150,842
-------- ------------ -------- ------------
Earnings/(loss) from operations.................... 4,248 14,670 (32,829) 26,380
Other income/(expense)............................. 4,522 (30,974) 488 (35,026)
-------- ------------ -------- ------------
Earnings/(loss) before income taxes................ 8,770 (16,304) (32,341) (8,646)
Provision for/(benefit from) income taxes.......... 2,155 (3,147) (7,943) (843)
-------- ------------ -------- ------------
NET EARNINGS/(LOSS) ............................... $6,615 $(13,157) $(24,398) $(7,803)
======== ============ ========== ============
EARNINGS/(LOSS) PER SHARE:
Basic and diluted.................................. $ 0.03 $ (0.06) $ (0.11) $ (0.03)
======== ============ ========== ============
CASH DIVIDENDS DECLARED AND PAID PER COMMON SHARE.. $ -- $ -- $ 0.01 $ 0.01
======== ============ ========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic.............................................. 230,770 228,970 230,649 229,287
Diluted............................................ 236,820 228,970 230,649 229,287
See notes to Condensed Consolidated Financial Statements.
2
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
FOR THE
SIX MONTHS ENDED JUNE 30,
------------------------------
2002
(AS RESTATED-
2003 SEE NOTE 2)
----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (24,398) $ (7,803)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization of property, plant and equipment................ 26,202 27,469
Other amortization............................................................ 7,164 5,989
Provision for losses on accounts receivable................................... 8,420 7,253
Provision for inventory writedown............................................. 21,787 24,242
Deferred income tax benefit................................................... (7,943) (3,042)
Non-cash restructuring, asset impairment and other charges.................... 3,292 44,140
Non-cash stock-based compensation expense / (recovery)........................ 2,232 (78,950)
(Gain)/loss on sale of property, plant and equipment and other assets......... (89) 1,788
Change in fair value of derivative............................................ 7,759 (21,517)
Unrealized holding (gain) loss on marketable securities....................... (14,934) 14,192
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITIONS
AND DIVESTITURES:
Accounts receivable........................................................... 30,721 (2,171)
Inventories................................................................... 31,966 63,869
Other assets.................................................................. (2,252) 9,532
Accounts payable and accrued expenses......................................... 24,828 (13,765)
Accrued restructuring expenses................................................ (906) (805)
Other liabilities and deferred revenue........................................ 6,460 853
----------- --------------
Net cash provided by operating activities................................... 120,309 71,274
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in other companies, net of cash acquired.......................... (1,777) (5,610)
Proceeds from sale of property, plant and equipment and other assets.......... 521 6,243
Purchases of property, plant and equipment.................................... (24,494) (19,309)
Investments in intangible and other assets.................................... (1,963) (689)
----------- --------------
Net cash used in investing activities....................................... (27,713) (19,365)
----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and long-term debt................................. (71,636) (45,227)
Proceeds from issuance of notes payable and long-term debt.................... -- 70,651
Repurchase of convertible notes and debentures................................ -- (84,432)
Proceeds from exercise of stock options, warrants and employee stock purchase
plan.......................................................................... 4,623 7,725
Purchase of treasury shares................................................... (5,110) (7,055)
Dividends paid................................................................ (2,312) (2,291
----------- --------------
Net cash used in financing activities....................................... (74,435) (60,629)
----------- --------------
Effects of exchange rate changes on cash...................................... 3,694 3,950
----------- --------------
Net increase/(decrease) in cash and cash equivalents.......................... 21,855 (4,770)
Cash and cash equivalents, beginning of period................................ 76,121 70,365
----------- --------------
Cash and cash equivalents, end of period.................................... $ 97,976 $ 65,595
=========== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID/(REFUNDED) DURING THE PERIOD FOR:
Interest.................................................................... $ 3,463 $ 9,588
Income taxes................................................................ $ 886 $ (13,300)
See notes to Condensed Consolidated Financial Statements
3
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF JUNE 30, 2003 AND FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Overview
Symbol Technologies, Inc. and subsidiaries is a provider of secure
mobile information systems that integrate application-specific hand-held
computers with wireless networks for data, voice and bar code data capture.
The Condensed Consolidated Financial Statements include the accounts of
Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries.
References herein to "we" or "our" or "us" or "the Company" refer to Symbol
Technologies, Inc. and subsidiaries unless the context specifically requires
otherwise. The Condensed Consolidated Financial Statements have been prepared by
us, without audit, pursuant to the rules and regulations of the United States
Securities and Exchange Commission (the "Commission" or "SEC").
In our opinion, the Condensed Consolidated Financial Statements include
all necessary adjustments (consisting of normal recurring accruals) and present
fairly our financial position as of June 30, 2003, and the results of our
operations and cash flows for the three and six months ended June 30, 2003 and
2002, in accordance with the instructions to Form 10-Q of the Commission and in
accordance with accounting principles generally accepted in the United States of
America applicable to interim financial information. The results of operations
for the three and six months ended June 30, 2003 are not necessarily indicative
of the results to be expected for the full year. For further information, refer
to the consolidated financial statements and footnotes thereto included in our
Annual Report on Form 10-K/A for the year ended December 31, 2002.
Stock-Based Compensation
We account for our employee stock option plans under the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Under APB Opinion No. 25, generally no compensation expense is
recorded when the terms of the award are fixed and the exercise price of the
employee stock option equals or exceeds the fair value of the underlying stock
on the date of the grant. We have adopted the disclosure-only requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees and provide pro
forma net earnings and pro forma earnings per share disclosures for employee
stock grants made as if the fair value based method of accounting in SFAS No.
123 had been applied to these transactions.
4
The following table illustrates the effect on net earnings/(loss) and
net earnings/(loss) per share if we had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
2003 2002 2003 2002
------------ -------------- ------------- -------------
Net earnings/(loss)-as reported.................. $ 6,615 $ (13,157) $ (24,398) $ (7,803)
Stock based employee compensation
expense/(recovery) included in reported net
earnings/(loss), net of related tax effects... 895 (17,004) 1,373 (48,554)
Less total stock based employee compensation
expense determined under the fair value based
method for all awards, net of related tax
effects....................................... (4,812) (5,012) (9,374) (9,884)
------------ -------------- ------------- -------------
Pro forma net earnings/(loss).................... $ 2,698 $ (35,173) $ (32,399) $ (66,241)
============ ============== ============= =============
Basic and diluted net earnings/(loss) per share:
As reported................................... $ 0.03 $ (0.06) $ (0.11) $ (0.03)
Pro forma..................................... $ 0.01 $ (0.15) $ (0.14) $ (0.29)
The weighted average fair value of options granted during the three and
six month periods ended June 30, 2003 and 2002 was $7.31 and $7.01, and $4.36
and $4.22 per option, respectively. In determining the fair value of options and
stock purchase warrants granted for purposes of calculating the pro forma
results disclosed above for the three and six month periods ended June 30, 2003
and 2002, we used the Black-Scholes option pricing model and assumed the
following: a risk free interest rate of 4.0 percent; an expected option life of
4.7 years; an expected volatility of 59 percent; and a dividend yield of 0.14
percent per year. As required by SFAS No. 123, the impact of outstanding
non-vested stock options granted prior to 1995 has been excluded from the pro
forma calculations.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Subsequent to the issuance of our June 30, 2002 financial statements,
our management identified certain accounting errors and irregularities, as
discussed below, in its previously issued financial statements beginning in 1998
through the nine months ended September 30, 2002.
The adjustments necessary to restate our financial statements relate
primarily to the correction of errors related to the timing and amount of
product and service revenue recognized, as well as certain reserves,
restructurings, the administration of certain option programs and several
categories of cost of revenue and operating expenses. As a result, the Condensed
Consolidated Financial Statements included herein for the three- and six-month
periods ended June 30, 2002 have been restated to give effect to the correction
of these errors.
5
The principal adjustments are summarized below:
Revenue Recognition
- -------------------
Errors identified in the area of revenue recognition included numerous
instances where the timing or amount of revenue recognized was not appropriate.
SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), expresses the SEC Staff's views regarding the
application of accounting principles generally accepted in the United States of
America ("U.S. GAAP") to revenue recorded in financial statements. Provided
below is a summary of the nature of the adjustments to revenue that were
necessary:
Persuasive evidence of an arrangement exists
We identified situations when the customer arrangements were not
available, were not documented or were superceded by separate written agreements
or verbal arrangements. In many of these instances, the customer returned most
or all of the merchandise shipped in a subsequent accounting period based on
these separate agreements or arrangements. The existence of these separate
agreements and arrangements indicates that the original agreement was not
binding and, therefore, the recognition of revenue was inappropriate at that
time and should have been deferred until such time as persuasive evidence of an
arrangement existed.
Delivery had not occurred or services had not been rendered
We identified situations in which we had recognized revenue at the time
we shipped our product to an intermediate staging area or location where we
performed additional configuration services to meet customer requirements. The
recognition of revenue was inappropriate at that time and should have been
deferred until such time as our products had been shipped or services had been
rendered to our customer.
The seller's price to the buyer was not fixed or determinable
We identified situations in which significant price concessions were
made based on prior or ongoing negotiations or in which subsequent credits were
issued to a customer based on sales volume or in which separate agreements
existed that were not considered in the revenue recognition process. These
arrangements indicate that the price of goods and services was not fixed or
determinable at the time of the sale and, therefore, the recognition of revenue
was inappropriate and should have been deferred until the price was fixed or
determinable.
Collectibility is reasonably assured
We identified situations in which sales were made to customers who had
no financial means for payment other than from the resale of our products to
third parties. Effectively these customers were acting as our distributors or
agents and our sales to them were on a consignment basis because we accepted any
products they returned to us. Accordingly, the recognition of such sales to
distributors with unlimited or extremely broad return capability was
inappropriate and should have been deferred until such time as the sale was made
to the ultimate customer and collectibility was reasonably assured.
Restructuring Reserves
- ----------------------
In December 2000, we recorded restructuring, impairment and merger
integration charges associated with the Telxon acquisition. We determined that
both the amount and timing of certain
6
components of these charges, as well as the subsequent utilization of the
established reserve, were inappropriate.
In September 2001, we recorded a restructuring charge primarily
related to the reorganization of our manufacturing facilities. Similarly, we
determined that both the amount and timing of certain components of this charge,
as well as the subsequent utilization of the established reserve, were
inappropriate.
Inventory
- ---------
We identified numerous errors and irregularities in the area of
inventory. Our previous methodology for identifying excess and obsolete
inventory, which relied heavily on historical usage, did not properly consider
the rapid nature of technology changes and reduced product life cycles during
the past several years. The nature, timing and amount of these charges were
inappropriate.
Computer Hardware and Software Costs
- ------------------------------------
We determined that certain computer hardware costs had been
incorrectly capitalized. In addition, we determined that the criteria provided
in SFAS No. 86 to determine when technological feasibility has been established
had been misapplied resulting in an error in the capitalization of development
costs of software which should have been expensed.
Patent Costs
- ------------
Certain patent-related costs were being incorrectly amortized beyond
the life of the related patent. Additionally, other instances were noted in
which we could not associate various legal costs incurred with a specific
patent. Accordingly, adjustments were made to correct the amortization of costs
to coincide with the remaining life of the related patent and to write-off legal
costs that could not be directly associated with a patent. In addition, because
of rapidly changing technology, we determined that our prior policy of
amortizing patents generally over a 17-year period was not appropriate and we
made adjustments to reduce the patent amortization period to six years.
AirClic Transaction
- -------------------
In the third quarter of 2000, we received a non-cancelable purchase
order from AirClic for the development of certain technologies, molding designs
and other rights and recorded $15,000 of revenue and gross profit. In the fourth
quarter of 2000, the terms of the purchase order were materially changed and
were tied to a $50,000 cash investment we made in AirClic, a cost method
investee. In the second quarter of 2002, we determined that a decline in the
value of our investment in AirClic was other than temporary and wrote off
$47,200 of the $50,000 investment as an impairment charge as a component of
operating expenses. We have determined that our previous accounting for the
transactions with AirClic was inappropriate and the accompanying Condensed
Consolidated Financial Statements reflect the elimination of the $15,000 revenue
and gross profit originally recognized in the third quarter of 2000 and the
previously recorded $50,000 investment has been recorded as $35,000, which
reflects the net effect of the 2000 transactions. Lastly, the $47,200 impairment
charge recorded in the quarter ended June 30, 2002 has been reduced to $32,200
and is shown as an impairment in investment as a component of other
income/(expense) in the Condensed Consolidated Statements of Operations.
7
Telxon Transaction
- ------------------
On November 30, 2000, we completed the acquisition of the Telxon
Corporation. The acquisition was accounted for as a purchase and the excess of
the purchase price over the fair value of the assets acquired and liabilities
assumed was recorded as goodwill. Subsequent to the acquisition date, we
adjusted goodwill for revisions to the fair values of the assets and liabilities
acquired. We subsequently determined that certain of the adjustments to goodwill
did not relate to contingencies existing at the time of the acquisition.
Furthermore, we discovered that while certain adjustments to the net assets
acquired from Telxon were appropriate, the impact of these adjustments was
incorrectly recorded in accounts other than goodwill.
Brazil Acquisition
- ------------------
As discussed in Note 10 of the Condensed Consolidated Financial
Statements, during the second quarter of 2002, we entered into an agreement with
the owners of a Brazilian corporation that was a distributor of our products,
whereby we created a majority-owned subsidiary of Symbol. In our previously
reported financial statements, we recorded two payments ($3,250 and $2,050 in
2000 and 2002, respectively) to three individuals and one entity aggregating
approximately $5,300 as part of the purchase price. We subsequently determined
that we should have treated these payments as operating expenses.
Accruals, Reserves and Prepayments
- ----------------------------------
We identified errors in the accounting for certain accruals and
prepayments. Specifically, we identified instances in which we established
reserves or released reserves in error.
Statement of Operations Reclassifications
- -----------------------------------------
We discovered numerous instances in which certain categories of
expenses were inappropriately classified in the statements of operations.
Stock Option Accounting
- -----------------------
We identified certain irregularities and improper administration of
option exercises related to our stock option plans. In particular, an informal
practice began in or around the early 1990's, whereby certain officers and
directors were afforded a look-back period (no more than 30 days) for purposes
of determining the market price to be used in connection with specific option
exercises. In addition, certain of these individuals were given an extended
period of time in which to pay for their option exercises. These practices were
contrary to the terms of the relevant option plans.
As this practice allowed certain participants to choose exercise dates
outside of the approved plan terms and also allowed these participants to extend
the period of time in which to pay for their option exercise, the price of the
option at the grant date was not fixed. Accordingly, in accordance with APB
Opinion No. 25, we have reflected in our financial statements the change in
market price of the common stock underlying these options granted to plan
participants that could have participated in this practice as compensation
expense.
Effective July 30, 2002, this practice of options exercise ended
resulting in ceasing the accounting for such options under variable plan
accounting.
8
Executive Life Insurance
- ------------------------
As a benefit to some of our key executives, we paid the premiums to
provide split dollar life insurance. As part of this program, the premiums on
the policies accumulate as cash surrender value that must be repaid to us upon
the termination of employment or death of the employee. We determined that the
amount we recorded as a recoverable asset exceeded the amount we could realize
as cash surrender value under the policies.
Interest Expense
- ----------------
Our primary source of liquidity during 1999 through most of 2003 was a
Credit Agreement signed in December 1998 and voluntarily terminated in November
2003. Pricing terms of this Credit Agreement were covered under a "credit grid"
that provided for interest charges on both drawn and undrawn committed lines of
credit, and was based on a quarterly calculation of a leverage ratio of
outstanding debt divided by earnings before income taxes, depreciation and
amortization. Interest charges were either lowered the further the leverage
ratio fell below 2.5 times or raised if the ratio moved toward 2.5 times. The
agreement also provided for additional fees in the event of additional leverage
or events of default. Through a series of waivers and amendments granted by the
bank group during the life of the Credit Agreement, no event of default
occurred. However, these waivers and amendments did not provide protection from
the obligations under the "credit grid" pricing.
We determined that our previously recorded interest expense needed to
be recalculated based on our restated results, which resulted in adjustments to
our previously issued 2002 Condensed Consolidated Financial Statements to
appropriately reflect interest expense due under the terms of the Credit
Agreement.
Other Restatement-Related Adjustments
- -------------------------------------
We identified instances where marketable securities, property, plant
and equipment and other long-lived assets were carried at amounts exceeding
their net realizable values.
Income Taxes
- ------------
As a result of the adjustments described above, we have adjusted our
tax provisions and related accounts for the periods involved.
9
The following tables present the effects of the aforementioned
adjustments on pre-tax income as previously reported:
Increase/(decrease) in loss before income taxes (in thousands):
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Loss before income taxes, previously reported $(33,449) $(30,873)
------------- -------------
REVENUE ADJUSTMENTS:
Product................................................................ 5,797 32,243
Services............................................................... 7,441 (2,673)
------------- -------------
13,238 29,570
------------- -------------
COST OF REVENUE ADJUSTMENTS:
Product revenue cost................................................... (2,649) (15,220)
Service revenue cost................................................... 1,357 2,552
Restructuring reserves................................................. (17,140) (22,727)
Excess and obsolete inventory.......................................... (26,860) (54,242)
Computer software...................................................... 4,107 7,393
Telxon transaction..................................................... 20 (2,567)
Accruals, reserves and prepayments..................................... 5,475 5,828
Other, net............................................................. 3,836 4,323
------------- -------------
(31,854) (74,660)
------------- -------------
OPERATING AND OTHER EXPENSES:
Restructuring reserves................................................. 18,769 13,477
Computer hardware and software costs................................... (6,120) (16,129)
Patent costs........................................................... (3,852) (4,703)
AirClic................................................................ 47,200 47,200
Telxon transaction..................................................... (2,221) (3,443)
Brazil acquisition..................................................... -- (2,050)
Accruals and prepayments............................................... 807 2,610
Stock option accounting................................................ 27,648 78,950
Executive life insurance............................................... (158) (266)
Interest expense....................................................... (158) (283)
Bad debt impact on revenue adjustments................................. 922 587
Impairment of investments.............................................. (32,200) (32,200)
Other adjustments...................................................... (14,876) (16,433)
------------- -------------
35,761 67,317
------------- -------------
Decrease in loss before income taxes................................... 17,145 22,227
------------- -------------
Loss before income taxes, as restated.................................. $(16,304) $ (8,646)
============= =============
10
The following is a summary of the significant effects of the restatement on our
previously reported results of operations and financial position:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2002
----------------------------- -----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ------------- --------------- ------------
(Amounts in thousands, except per share data)
Revenue................................................... $ 315,849 $329,087 $ 617,161 $ 646,731
Cost of revenue........................................... 198,881 230,735 394,849 469,509
------------- ------------- --------------- ------------
Gross profit.............................................. 116,968 98,352 222,312 177,222
Stock based compensation recovery under
variable plan accounting................................
-- (27,648) -- (78,950)
Other operating expenses.................................. 146,868 111,330 245,519 229,792
------------- ------------- --------------- ------------
(Loss)/earnings from operations........................... (29,900) 14,670 (23,207) 26,380
Other expense, net........................................ (3,549) (30,974) (7,666) (35,026)
------------- ------------- --------------- ------------
Loss before income taxes.................................. (33,449) (16,304) (30,873) (8,646)
Benefit from income taxes................................. (10,704) (3,147) (9,880) (843)
------------- ------------- --------------- ------------
Net loss.................................................. $ (22,745) $(13,157) $ (20,993) $ (7,803)
============= ============= =============== ============
Net loss per common share:
Basic and diluted......................................... $ (0.10) $ (0.06) $ (0.09) $ (0.03)
============= ============= =============== ============
The above as previously reported amounts have been adjusted to reflect
the reclassification of gains on the extinguishment of debt per the Company's
adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," in 2002.
3. INVENTORIES
JUNE 30, DECEMBER 31,
2003 2002
----------- --------------
Raw materials................................................................ $ 67,083 $ 82,115
Work-in-process.............................................................. 26,855 39,931
Finished goods............................................................... 117,601 139,050
----------- -----------
$ 211,539 $ 261,096
=========== ===========
The amounts shown above are net of inventory reserves of $144,084 and
$170,057 as of June 30, 2003 and December 31, 2002, respectively, and include
inventory on consignment of $29,976 and $49,182 as of June 30, 2003 and December
31, 2002, respectively.
4. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six months ended
June 30, 2003 are as follows:
PRODUCT SERVICES TOTAL
----------- ---------- ----------
Balance as of December 31, 2002.......................................... $ 244,014 $ 57,009 $301,023
Telxon goodwill adjustments.............................................. (1,559) (414) ( 1,973)
Foreign currency impact.................................................. 2,797 744 3,541
@POS..................................................................... 20 5 25
---------- ---------- --------
Balance as of June 30, 2003.............................................. $ 245,272 $ 57,344 $302,616
========== ========== ========
11
Other than goodwill, the Company's intangible assets, all of which are
subject to amortization, consist of the following:
JUNE 30, 2003 DECEMBER 31, 2002
------------------------------ -----------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------ ------------ ----------- ------------
Patents, trademarks and tradenames.......... $ 32,920 $ (22,065) $ 31,624 $ (19,956)
Purchased technology........................ 24,600 (7,721) 24,817 (6,069)
Other....................................... 6,862 (846) 6,865 (156)
------------ ------------ ----------- ------------
$ 64,382 $ (30,632) $ 63,306 $ (26,181)
============ ========= ========== ============
The amortization expense for the three months ended June 30, 2003 and
2002 amounted to $2,285 and $1,621, respectively. The amortization expense for
the six months ended June 30, 2003 and 2002 amounted to $4,458 and $3,259,
respectively.
Estimated amortization expense for the above intangible assets,
assuming no additions or writeoffs, for the six months ended December 31, 2003
and for each of the subsequent years ending December 31 is as follows:
2003 (six months)............. $ 4,321
2004 (full year).............. 8,135
2005 (full year).............. 7,776
2006 (full year).............. 5,225
2007 (full year).............. 3,433
---------
$ 28,890
=========
5. EARNINGS/(LOSS) PER SHARE AND DIVIDENDS
Basic earnings/(loss) per share are based on the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are based on the weighted average number of common and potentially
dilutive common shares (options and warrants) outstanding during the period,
computed in accordance with the treasury stock method.
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- --------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2003 2002 2003 2002
------------- ------------- ------------- ------------
Numerator:
Earnings (loss) applicable to common
shares for basic and diluted calculation..... $ 6,615 $ (13,157) $ (24,398) $ (7,803)
Denominator:
Weighted-average common shares.................. 230,770 228,970 230,649 229,287
Effect of dilutive securities:
Stock options and warrants................... 6,050 -- -- --
------------- ------------- ------------- ------------
Denominator for diluted calculation............. 236,820 228,970 230,649 229,287
============= ============= ============= ============
12
Stock options and warrants outstanding and the effect of convertible
subordinated notes and debentures for the three-month period ended June 30, 2003
and 2002 aggregating to 19,383 and 16,254, potentially dilutive shares,
respectively, have not been included in the diluted per share calculations since
their effect would be antidilutive.
Stock options and warrants outstanding and the effect of convertible
subordinated notes and debentures for the six-month period ended June 30, 2003
and 2002 aggregating to 20,069 and 16,387, respectively, of potentially dilutive
shares have not been included in the diluted per share calculations since their
effect would be antidilutive.
On March 10, 2003, Symbol's Board of Directors approved a $0.01 per
share semi-annual cash dividend, which amounted to $2,312 and was paid on April
28, 2003 to shareholders of record on April 14, 2003.
6. COMPREHENSIVE EARNINGS/(LOSS)
Comprehensive earnings/(loss) is the change in equity of a business
enterprise from transactions, other events, and circumstances from nonowner
sources during a period. The Company generated total comprehensive earnings of
$44,799 and $16,538 for the three and six months ended June 30, 2003,
respectively, and a total comprehensive (loss)/earnings of $(11,691) and $21,962
for the three and six months ended June 30, 2002, respectively. The Company's
comprehensive earnings/(loss) is comprised of net earnings/(loss), foreign
currency translation adjustments, unrealized gains/(losses) on available for
sale marketable securities and unrealized derivative gains/(losses) on our cash
flow hedging activities.
7. RESTRUCTURING AND IMPAIRMENT CHARGES
a. Telxon Acquisition
We recorded certain restructuring, impairment and merger integration
related charges related to our Telxon acquisition during 2001 and 2002.
Approximately $1,354 relating to these charges was included in accrued
restructuring expenses as of December 31, 2002. As of June 30, 2003, $112
remained in accrued restructuring expenses.
LEASE
WORKFORCE OBLIGATION
REDUCTIONS COSTS TOTAL
--------------- ------------------ ----------------
Balance at December 31, 2002....................... $ 158 $ 1,196 $ 1,354
Utilization/payments............................... (158) (1,084) (1,242)
--------------- ------------------ ----------------
Balance at June 30, 2003........................... $ -- $ 112 $ 112
=============== ================== ================
b. Manufacturing Transition
In 2001, we began to transition volume manufacturing away from our
Bohemia, New York facility to lower cost locations, primarily our Reynosa,
Mexico facility and Far East contract manufacturing. As a result of these
activities, we incurred certain restructuring charges during 2002 and 2001. The
manufacturing restructuring charges recorded during the three months ended June
30, 2002 were $1,387, of which $91 was recorded as a component of operating
expenses and $1,296 was recorded as a component of cost of revenue, all of which
consisted of workforce reduction costs. The anticipated sub-lease income under
these agreements was recorded as a reduction of the restructuring charge
recorded in 2002. Workforce reduction charges related to the termination of
approximately 350 employees,
13
primarily manufacturing associates. As of December 31, 2002, all of these
employees have been terminated. Included in accrued restructuring expenses as of
June 30, 2003 is $4,995 of lease obligations relating to these manufacturing
restructuring charges.
LEASE
OBLIGATION
COSTS
--------------
Balance at December 31, 2002................ $ 5,594
Utilization/payments........................ (599)
--------------
Balance at June 30, 2003.................... $ 4,995
==============
c. 2003 Restructuring Charges
During the first quarter of 2003, our global services organization
initiated restructuring activities which included transferring a large
percentage of our repair operations to Mexico and the Czech Republic,
reorganizing our professional services group to utilize third party service
providers for lower margin activities, and reorganizing our European management
structure from a country based structure to a regional structure. The total
costs incurred in connection with this restructuring in the first and second
quarter, which related almost entirely to workforce reductions, was
approximately $2,636, of which $979 and $87 was recorded as a component of cost
of revenue and operating expenses, respectively, in the first quarter of 2003
and $1,434 and $136 was recorded as a component of cost of revenue and operating
expenses respectively in the second quarter of 2003. These restructuring
activities are expected to be completed during the first quarter of 2004.
During the first quarter of 2003, we initiated additional restructuring
activities in connection with our decision to relocate additional product lines
from New York to Mexico. The costs associated with this restructuring relate to
workforce reductions and transportation costs. The total amount incurred in
connection with this restructuring activity is approximately $961, of which $749
was recorded as a component of cost of revenue in the first quarter of 2003 and
$212 was recorded as a component of cost of revenue in the second quarter of
2003. These restructuring activities were completed by June 30, 2003.
Details of the 2003 restructuring charges and remaining balances are as
follows:
ASSET
WORKFORCE IMPAIRMENTS
REDUCTIONS AND OTHER TOTAL
-------------- --------------- -------------
Provision-cost of revenue......................... $ 1,574 $ 154 $ 1,728
Provision-operating expenses...................... 87 -- 87
Utilization/payments.............................. (519) (115) (634)
-------------- --------------- -------------
Balance at March 31, 2003......................... 1,142 39 1,181
Provision-cost of revenue......................... 1,521 138 1,659
Provision-operating expenses...................... 136 -- 136
Utilization/payments.............................. (2,006) (35) (2,041)
-------------- --------------- -------------
Balance at June 30, 2003.......................... $ 793 $ 142 $ 935
============== =============== =============
8. CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES AND OTHER DEBT
In January and February 2002, Telxon, a wholly owned subsidiary of the
Company, purchased in the open market $34,790 of its 5.75 percent convertible
subordinated notes for $34,127 in cash, and $5,173 of its 7.5 percent
convertible subordinated debentures for $5,004 in cash. This represented a
14
redemption price of 100.8214 percent of the outstanding principal amount for the
5.75 percent notes and 100 percent of the outstanding principal amount of the
7.5 percent debentures. We obtained such funds from borrowings under our line of
credit. The gain on extinguishment of this debt of $0 and $566 has been included
in other income in the Condensed Consolidated Statements of Operations for the
three- and six-month periods ended June 30, 2002.
As of June 30, 2003, we had a $350,000 unsecured revolving credit
facility with a syndicate of U.S. and international banks (the "Credit
Agreement"). These borrowings bear interest at either LIBOR plus 75 basis points
(which approximated 2.06 percent at June 30, 2003) or the base rate of the
syndication agent bank, contingent upon various stipulations by the lender
(which approximated 4.0 percent at June 30, 2003). As of June 30, 2003, the
Company had $15,000 of borrowings outstanding under the Credit Agreement. This
Credit Agreement was due to expire in January 2004, as such, the revolving
credit facility amount is recorded as a component of current portion of
long-term debt as of as of June 30, 2003. During the six months ended June 30,
2003, we paid down approximately $65,000 on the revolving credit facility. As a
result of the length of time necessary to restate our financial statements (see
Note 2 of the Condensed Consolidated Financial Statements) beginning on
September 16, 2003, we would have been in violation of one of the covenants of
our Credit Agreement that requires the timely filing of financial statements
with the SEC. On September 15, 2003, we reached an agreement with the bank group
and obtained a waiver to provide us additional time to become current with our
periodic filings with the SEC. Under the revised Credit Agreement, the credit
facility was reduced from $350,000 to $100,000 in September, 2003 and was
voluntarily terminated in November 2003. In November 2003, this credit facility
was replaced with a $30,000 secured credit line which expires in May 2006.
9. AIRCLIC TRANSACTIONS AND OTHER ASSETS
AirClic
In November 2000, we invested $35,000 in and licensed certain
intellectual property to AirClic Inc. ("AirClic"), a business which allows
wireless devices to scan bar codes and transmit data to the Internet. In return,
we received convertible preferred stock in AirClic. We do not currently have the
right to convert the preferred stock into common stock of AirClic and our
ability to do so in the future is subject to certain contractual restrictions.
As we do not have the ability to exercise significant influence over AirClic, we
account for this investment using the cost method. We periodically test the
carrying value of our investments for impairment. In consideration of the
outlook of AirClic's business, the general decline in the economy and the
decline in information technology spending, we determined that the decline in
the value of our investment in AirClic was other than temporary in June 2002. We
obtained an independent appraisal of our investment in AirClic and wrote down
the carrying amount of the investment to the estimated fair value at June 30,
2002 of $2,800 by recording an impairment of the investment of $32,200,
classified as other expense in the condensed consolidated statement of
operations.
In January 2003, we invested an additional $750 in AirClic in exchange
for additional convertible preferred stock. This additional investment has also
been accounted for under the cost method and increased our investment in AirClic
to $3,550.
In March 2003, AirClic received additional financing from other
investors but the negative outlook for AirClic's business and the lack of a
rebound in the information technology sector and the economy in general prompted
us to record an additional impairment charge of $3,025 related to this
investment for the three months ended March 31, 2003. We subsequently wrote off
our remaining investment in AirClic of $525 during the third quarter of 2003.
15
During the year ended December 31, 2001, we had accumulated certain
component inventories in anticipation of orders from AirClic. As a result,
during 2001, AirClic paid $7,000 with respect to this component inventory. This
payment was accounted for as an advance payment for future inventory purchases.
At December 31, 2002, an accrued liability of $6,147 remained outstanding under
this obligation.
In July 2003, we reached an agreement with AirClic as it related to
this obligation. The remaining obligation of $4,992 as of July 2003 was settled
by making a cash payment of $2,497 to AirClic. Accordingly, we recognized other
income of $2,495 in the third quarter of 2003 which is classified as a component
of other income / (expense) in the condensed consolidated statements of
operations.
Employee Loan Receivable
In January 2003, we loaned $500 to our Senior Vice President and Chief
Information Officer. This loan is payable upon the earlier of: (1) 180 days
after he ceases to be an employee of the Company if terminated without cause,
(2) 30 days after he ceases to be an employee of the Company for any other
reason, or (3) January 10, 2008. In addition, if the officer or his wife sell
any shares of our common stock now owned by either of them or hereafter acquired
(other than shares sold to pay the exercise price and taxes resulting from the
exercise of any options originally granted to this officer by us), 100 percent
of the net proceeds of such sales shall be applied immediately to reduce any
outstanding indebtedness under this loan if the equity in any real property
owned by this officer and his wife is insufficient to satisfy this loan.
Although this loan is currently non-interest bearing, if this loan is not paid
when due, interest will accrue at an annual rate of 12 percent or the highest
rate allowed by law. Our Senior Vice President and Chief Information Officer is
not considered to be an "officer" as such term is defined in Rule 16a-1(f) of
the Exchange Act and for purposes of Section 16(a) of the Exchange Act.
10. ACQUISITIONS
a. Brazil Acquisition
During the second quarter of 2002, we entered into an agreement with
the owners of Seal Sistemas e Technologia Da Informacao Ltda. ("Seal"), a
Brazilian corporation that had operated as a distributor and integrator of our
products since 1987. The agreement resulted in the termination of distribution
rights for Seal and the creation of a majority-owned subsidiary of the Company
that would serve as the Brazilian distributor and customer service entity
("Symbol Brazil"). In accordance with the terms of the agreement, the owners of
Seal acquired a 49 percent ownership interest in Symbol Brazil.
Terms of the agreement included payments to the minority shareholders
that range from a minimum of $9,550 to a maximum of $14,800 contingent upon the
attainment of certain annual net revenue levels of Symbol Brazil. In the event
that none of the specified revenue levels are attained, the minimum earnout
payment is payable no later than March 31, 2009. With each earnout payment, we
are entitled to obtain a portion of Symbol Brazil's shares owned by the minority
shareholders such that we will ultimately own 100 percent of Symbol Brazil no
later than March 31, 2009. We loaned an entity affiliated with the minority
shareholders $5,000 at the time of the agreement, which was due on the date the
first earnout payment is triggered. The present value of net future minimum
earnout payments of $4,550 amounted to $1,992 and was recorded as part of the
purchase price resulting in a total purchase price of $6,992. Any additional
earnout payments will be accounted for as additional purchase price and recorded
as goodwill.
16
Management allocated the purchase price and considered a number of
factors, including independent appraisals, and as a result of such procedures,
the total purchase price has been classified as goodwill. We have not shown the
pro-forma effects of this acquisition as the results of operations of the
acquired company prior to our acquisition was immaterial in relation to our
consolidated financial statements.
As we control Symbol Brazil and are obligated to purchase the remaining
ownership interest, we have consolidated this subsidiary. The minority interest
is accounted for as accrued purchase price and is recorded in other liabilities.
On January 10, 2004, the parties amended this transaction, whereby
Symbol Technologies Holdings do Brasil Ltda., a wholly owned subsidiary of the
Company, purchased an additional 34% ownership interest of Symbol Technologies
do Brazil Ltda. owned by two principals of Seal. The Company paid $4,050 and
also forgave the pre-existing $5,000 loan that had been made to an entity
affiliated with the principals of Seal. As a result of this transaction, the
Company and Symbol Technologies Holdings do Brasil Ltda. now owns 85% of the
capital of Symbol Technologies do Brasil Ltda. The principals of Seal can now
earn up to a maximum of approximately $3,900 if Symbol Technologies do Brasil
Ltda. meets certain sales targets over relevant time periods. Under the terms of
the relevant agreements, Symbol Technologies do Brasil Ltda. had its corporate
form changed into a corporation and it will eventually become a wholly owned
subsidiary of the Company, directly or indirectly.
b. @POS.Com Acquisition
On September 16, 2002, we completed the acquisition of @POS.com, Inc.
("@POS") through a merger of @POS with one of our wholly owned subsidiaries.
@POS manufactures and markets a range of interactive customer transaction
terminals with advanced signature capture technology and features. In the
merger, we purchased all outstanding shares of @POS common stock and preferred
stock for approximately $5,446.
The assets acquired and liabilities assumed were recorded at their
estimated fair values. After allocating the purchase price including acquisition
costs to net tangible assets, purchased technology that has reached
technological feasibility was valued by independent appraisal at $1,800. This
purchased technology has been capitalized and is being amortized over four
years. In addition, a portion of the purchase price was allocated to other
intangible assets with an aggregate fair value as determined by independent
appraisal of $3,000 with a useful life of 9.5 years.
11. CONTINGENCIES
a. Legal Matters
We are a party to lawsuits in the normal course of business. Litigation
in the normal course of business, as well as the lawsuits and investigations
described below, can be expensive, lengthy and disruptive to normal business
operations. Moreover, the results of complex legal proceedings and government
investigations are difficult to predict. Unless otherwise specified, Symbol is
currently unable to estimate, with reasonable certainty, the possible loss, or
range of loss, if any, for the lawsuits and investigations described herein. An
unfavorable resolution to any of the lawsuits or investigations described below
could have a material adverse effect on Symbol's business, results of operations
or financial condition.
17
GOVERNMENT INVESTIGATIONS
The SEC has issued a Formal Order Directing Private Investigation and
Designating Officers to Take Testimony with respect to certain accounting
matters, principally concerning the timing and amount of revenue recognized by
Symbol during the period of January 1, 2000 through December 31, 2001, as well
as the accounting for certain reserves, restructurings, certain option programs
and several categories of cost of revenue and operating expenses. We are
cooperating with the SEC, and have produced hundreds of thousands of documents
and numerous witnesses in response to the SEC's inquiries. Symbol and
approximately ten or more former employees have received so-called "Wells
Notices" stating that the SEC Staff in the Northeast Regional Office is
considering recommending to the Commission that it authorize civil actions
against Symbol and the individuals involved alleging violations of various
sections of the federal securities laws and regulations. Pursuant to an action
against Symbol, the Commission may seek permanent injunctive relief and
appropriate monetary relief, including a fine, from us.
The United States Attorney's Office for the Eastern District of New
York (the "Eastern District") has commenced a related investigation. We are
cooperating with that investigation, and have produced documents and witnesses
in response to the Eastern District's inquiries. The Eastern District could file
criminal charges against Symbol and seek to impose a fine upon us and other
relief the Eastern District deems appropriate.
Any criminal and/or civil action or any negotiated resolution may
involve, among other things, injunctive and equitable relief, including material
fines, which could have a material adverse effect on our business, results of
operations and financial condition.
In addition, as a result of the investigations, various governmental
entities at the federal, state and municipal levels may conduct a review of our
supply arrangements with them to determine whether we should be considered for
debarment. If we are debarred, we would be prohibited for a specified period of
time from entering into new supply arrangements with such government entities.
In addition, after a government entity has debarred Symbol, other government
entities are likely to act similarly, subject to applicable law. Governmental
entities constitute an important customer group for Symbol, and debarment from
governmental supply arrangements at a significant level could have an adverse
effect on our business, results of operations and financial condition.
In March 2003, Robert Asti, Symbol's former Vice President--North
America Sales & Services--Finance, who left Symbol in March 2001, pleaded guilty
to two counts of securities fraud in connection with matters that are the
subject of the Commission and the Eastern District investigations. These counts
included allegations that Mr. Asti acted together with other unnamed
high-ranking corporate executives at Symbol to, among other things, manufacture
revenue through sham "round-trip" transactions. The Commission has also filed a
civil complaint asserting similar allegations against Mr. Asti.
In June 2003, Robert Korkuc, Symbol's former Chief Accounting Officer,
who left Symbol in March 2003, pleaded guilty to two counts of securities fraud
in connection with matters that are the subject of the Commission and the
Eastern District investigations. These counts included allegations that Mr.
Korkuc acted with others at Symbol in a fraudulent scheme to inflate various
measures of Symbol's financial performance. The Commission also has filed a
civil complaint asserting similar allegations against Mr. Korkuc.
Symbol is attempting to negotiate a resolution with each of the
Commission and the Eastern District to the mutual satisfaction of the parties
involved. In either case, an agreement has not yet been reached and there is no
guarantee that Symbol will be able to successfully negotiate a resolution.
18
SECURITIES LITIGATION MATTERS
Pinkowitz v. Symbol Technologies, Inc., et al.
On March 5, 2002, a purported class action lawsuit was filed, entitled
Pinkowitz v. Symbol Technologies, Inc., et al., in the United States District
Court for the Eastern District of New York on behalf of purchasers of the common
stock of Symbol between October 19, 2000 and February 13, 2002, inclusive,
against Symbol, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi. The complaint
alleged that defendants violated the federal securities laws by issuing
materially false and misleading statements throughout the class period that had
the effect of artificially inflating the market price of Symbol's securities.
Subsequently, a number of additional purported class actions containing
substantially similar allegations were also filed against Symbol and certain
Symbol officers in the Eastern District of New York.
On September 27, 2002, a consolidated amended complaint was filed in
the United States District Court for the Eastern District of New York,
consolidating the previously filed purported class actions. The consolidated
amended complaint added Harvey P. Mallement, George Bugliarello and Leo A.
Guthart (the then current members of the Audit Committee of Symbol's Board of
Directors) and Brian Burke and Frank Borghese (former employees of Symbol) as
additional individual defendants and broadened the scope of the allegations
concerning revenue recognition. In addition, the consolidated amended complaint
extended the alleged class period to the time between April 26, 2000 and April
18, 2002.
Discovery in the Pinkowitz action has recently commenced. In addition,
on October 15, 2003, plaintiffs moved for class certification of the Pinkowitz
action. Trial of the Pinkowitz action is scheduled to commence on June 8, 2004.
Symbol continues to vigorously assert its defenses in this litigation.
Hoyle v. Symbol Technologies, Inc., et al.
Salerno v. Symbol Technologies, Inc., et al.
On March 21, 2003, a separate purported class action lawsuit was filed,
entitled Edward Hoyle v. Symbol Technologies, Inc., Tomo Razmilovic, Kenneth V.
Jaeggi, Robert W. Korkuc, Jerome Swartz, Harvey P. Mallement, George
Bugliarello, Charles B. Wang, Leo A. Guthart and James H. Simons, in the United
States District Court for the Eastern District of New York. On May 7, 2003, a
virtually identical purported class action lawsuit was filed against the same
defendants by Joseph Salerno.
The Hoyle and Salerno complaints are brought on behalf of a purported
class of former shareholders of Telxon Corporation ("Telxon") who obtained
Symbol stock in exchange for their Telxon stock pursuant to Symbol's acquisition
of Telxon effective as of November 30, 2000. The complaint alleges that the
defendants violated the federal securities laws by issuing a Registration
Statement and Joint Proxy Statement/Prospectus in connection with the Telxon
acquisition that contained materially false and misleading statements that had
the effect of artificially inflating the market price of Symbol's securities.
On October 3, 2003, Symbol and the individual defendants moved to
dismiss the Hoyle action as barred by the applicable statute of limitations. The
Court has not ruled on the motion. Symbol intends to litigate the case
vigorously on the merits.
In connection with the above pending class actions and government
investigations, Symbol has recorded a loss provision on legal settlements of
$72,000 in the three months ended March 31, 2003 bringing the estimated
liability to $142,000 as of June 30, 2003, which is reflected as a component of
19
accounts payable and accrued expenses in the accompanying Condensed Consolidated
Financial Statements.
Bildstein v. Symbol Technologies, Inc., et. al.
On April 29, 2003, a lawsuit was filed, entitled Bildstein v. Symbol
Technologies, Inc., et. al., in the United States District Court for the Eastern
District of New York against Symbol and Jerome Swartz, Harvey P. Mallement,
Raymond R. Martino, George Bugliarello, Charles B. Wang, Tomo Razmilovic, Leo A.
Guthart, James Simons, Saul F. Steinberg and Lowell Freiberg. The plaintiff
alleges that the defendants violated Section 14(a) of the Securities Exchange
Act of 1934 and Rule 14a-9 promulgated thereunder, and common and state law, by
authorizing the distribution of proxy statements in 2000, 2001 and 2002.
Plaintiff seeks the cancellation of all affirmative votes at the annual meetings
for 2000, 2001 and 2002, canceling all awards under the option plans, enjoining
implementation of the option plans and any awards thereunder and an accounting
by the defendants for all damage to Symbol, plus all costs and expenses in
connection with the action. Symbol has filed a motion to dismiss that is now
fully briefed. On February 4, 2004, Symbol argued its motion to dismiss before
the Court and is awaiting the Court's decision. Symbol intends to litigate the
case vigorously on the merits.
Gold v. Symbol Technologies, Inc., et al.
On December 18, 2003, a purported derivative action lawsuit was filed,
entitled Gold v. Symbol Technologies, Inc., et al., in the Court of Chancery of
the State of the State of Delaware against Symbol and Tomo Razmilovic, Kenneth
V. Jaeggi, Dr. Jerome Swartz, Frank Borghese, Brian Burke, Richard M. Feldt,
Satya Sharma, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Dr.
Leo A. Guthart, Richard Bravman, Dr. James H. Simons, Leonard H. Goldner, Saul
P. Steinberg, Lowell C. Freiberg and Charles Wang. The complaint alleges that
the defendants violated the federal securities laws by issuing materially false
and misleading statements from January 1, 1998 through December 31, 2002 that
had the effect of artificially inflating the market price of Symbol's securities
and that they failed to properly oversee or implement policies, procedures and
rules to ensure compliance with federal and state laws requiring the
dissemination of accurate financial statements, which ultimately caused Symbol
to be sued for, and exposed to liability for, violations of the anti-fraud
provisions of the federal securities laws, engaged in insider trading in
Symbol's common stock, wasted corporate assets and improperly awarded a
severance of approximately $13,000 to Mr. Razmilovic.
Plaintiff seeks to recover incentive-based compensation paid to senior
members of Symbol's management in reliance on materially inflated financial
statements and to impose a trust to recover cash and other valuable assets
received by the management defendants and former Symbol board members in the
form of proceeds garnered from the sale of Symbol common stock (including option
related sales) from at least January 1, 1998 through December 31, 2002. Symbol
intends to litigate the case vigorously.
In re Telxon Corporation Securities Litigation
From December 1998 through March 1999, a total of 27 class actions were
filed in the United States District Court, Northern District of Ohio, by certain
alleged stockholders of Telxon on behalf of themselves and purported classes
consisting of Telxon stockholders, other than the defendants and their
affiliates, who purchased stock during the period from May 21, 1996 through
February 23, 1999, or various portions thereof, alleging claims for "fraud on
the market" arising from alleged 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
20
former senior vice president and chief financial officer, Kenneth W. Haver. The
actions were referred to a single judge, consolidated and an amended complaint
was filed by lead counsel. The amended complaint alleges that the defendants
engaged in a scheme to defraud investors through improper revenue recognition
practices and concealment of material adverse conditions in Telxon's business
and finances. The amended complaint seeks certification of the identified class,
unspecified compensatory and punitive damages, pre- and post-judgment interest,
and attorneys' fees and costs.
On November 13, 2003, Telxon and the plaintiff class reached a
tentative settlement of all pending shareholder class actions against Telxon.
Under the settlement, Telxon anticipates that it will pay $37,000 to the class.
As a result of anticipated contributions by Telxon's insurers, Telxon expects
that its net payment will be no more than $25,000. Telxon has not settled its
lawsuit against its former auditors, PricewaterhouseCoopers LLP ("PwC"), and, as
part of the proposed settlement of the class action, Telxon has agreed to pay to
the class, under certain circumstances, up to $3,000 of the proceeds of that
lawsuit. On December 19, 2003, the settlement received preliminary approval from
the Court. On February 12, 2004, the Court granted its final approval of the
settlement.
Accordingly, we recorded a $25,000 pre-tax charge in the Consolidated
Statements of Operations for the quarter ended December 31, 2002 and have
reflected as an accrued liability as of December 31, 2002 and June 30, 2003 the
estimated settlement of $37,000 and have recorded a non-current asset for the
insurance proceeds of $12,000 which we expect to receive in the first quarter of
2004.
On February 20, 2001, Telxon filed a motion for leave to file and serve
a summons and third-party complaint against third-party defendant PwC in the
shareholders' class action complaints. Telxon's third-party complaint against
PwC concerns PwC's role in the original issuance and restatements of Telxon's
financial statements for its fiscal years 1996, 1997 and 1998 and its interim
financial statements for its first and second quarters of fiscal year 1999,
which are the subject of the class action litigation against Telxon. Telxon
states causes of action against PwC for contribution under federal securities
law, as well as state law claims for accountant malpractice, fraud, constructive
fraud, fraudulent concealment, fraudulent misrepresentation, negligent
misrepresentation, breach of contract and breach of fiduciary duty. With respect
to its federal claim against PwC, Telxon seeks contribution from PwC for all
sums that Telxon may be required to pay in excess of Telxon's proportionate
liability, if any, and attorney fees and costs. With respect to its state law
claims against PwC, Telxon seeks compensatory damages, punitive damages,
attorney fees and costs, in amounts to be determined at trial.
Fact discovery has been substantially completed. Trial is scheduled to
commence sometime in 2004.
Wyser-Pratte Management Co. v. Telxon Corporation, et. al.
On June 11, 2002, Wyser-Pratte Management Co., Inc. ("WPMC") filed a
complaint against Telxon and its former top executives alleging violations of
Sections 10(b), 18, 14(a) and 20(a) of the Securities and Exchange Act of 1934
(the "Exchange Act"), and alleging additional common law claims. This action is
related to the same set of facts as the In re Telxon class action described
above. On November 15, 2003, the parties reached an agreement in principle to
resolve the litigation under which Telxon would pay WPMC $3,300. Accordingly, we
recorded a $3,300 pre-tax charge in the Consolidated Statements of Operations
for the quarter ended December 31, 2002. The settlement was finalized in
December 2003, and a stipulation of dismissal was filed in January 2004.
21
PENDING PATENT AND TRADEMARK LITIGATION
Proxim v. Symbol Technologies, Inc., 3 Com Corporation, Wayport Incorporated and
SMC Networks Incorporated
In March 2001, Proxim Incorporated ("Proxim") sued Symbol, 3 Com
Corporation, Wayport Incorporated and SMC Networks Incorporated in the United
States District Court in the District of Delaware for allegedly infringing three
patents owned by Proxim (the "Proxim v. 3Com et al. Action"). Proxim also filed
a similar lawsuit in March 2001 in the United States District Court in the
District of Massachusetts against Cisco Systems, Incorporated and Intersil
Corporation. The complaint against Symbol sought, among other relief,
unspecified damages for patent infringement, treble damages for willful
infringement and a permanent injunction against Symbol from infringing these
three patents.
Symbol answered and filed counterclaims against Proxim, asserting that
Proxim's RF product offerings infringe on four of our patents relating to
wireless LAN technology.
On December 4, 2001, we filed a complaint against Proxim in the United
States District Court in the District of Delaware (the "Symbol v. Proxim
Action") asserting infringement of the same four patents that were asserted in
our counterclaim against Proxim in the Proxim v. 3Com et al. Action prior to the
severance of this counterclaim by the Court. On December 18, 2001, Proxim filed
an answer and counterclaims in the Symbol v. Proxim Action, seeking declaratory
judgments for non-infringement, invalidity and unenforceability of the four
patents asserted by Symbol, injunctive and monetary relief for our alleged
infringement of one additional Proxim patent (the "`634 Patent") involving
wireless LAN technology, monetary relief for our alleged false patent marking,
and injunctive and monetary relief for our alleged unfair competition under the
Lanham Act, common law unfair competition and tortious interference.
On March 17, 2003, Intersil and Proxim announced that a settlement
between the companies had been reached, whereby Proxim agreed, inter alia, to
dismiss with prejudice all of Proxim's claims in the Proxim v. 3Com et al.
Action (the "Proxim/Intersil Agreement"). Proxim also agreed in the
Proxim/Intersil Agreement to release us from past and future liability for
alleged infringement of the `634 Patent in the Symbol v. Proxim Action, with
respect to any of our products that incorporate Intersil's wireless radio
chipsets. On April 5, 2003, the Court signed that Stipulation and Order of
Dismissal, dismissing all of Proxim's claims in that action with prejudice. On
July 30, 2003, among other rulings, the Court dismissed Proxim's unfair
competition claim.
Trial on the Symbol patents began on September 8, 2003. On September
12, 2003, the jury returned a verdict finding that two of the three asserted
patents (the `183 and `441 Patents) had been infringed by Proxim. Proxim dropped
its claims of invalidity as to all three Symbol patents, and consented to
judgment against Proxim on those invalidity claims. The jury awarded us 6%
royalties on Proxim's past sales of infringing products, which include Proxim's
OpenAir, 802.11 and 802.11b products. Based on Proxim's sales of infringing
products from 1995 to the present, we estimate that damages for past
infringement by Proxim amount to approximately $23,000 before interest. In
addition, Proxim continues to sell the infringing products, and we expect that
future sales would be subject to a 6% royalty as well. A one day bench trial on
Proxim's remaining equitable defenses took place on November 24, 2003. The Court
has not ruled on these defenses.
Trial on the Proxim patent began on September 15, 2003. On September
29, 2003, the jury returned a verdict, finding the patent valid but not
infringed by Symbol.
22
Symbol Technologies, Inc. v. Hand Held Products, Inc. and HHP-NC, Inc.
On January 21, 2003, we filed a complaint against Hand Held Products,
Inc. and HHP-NC, Inc. (collectively, "HHP") for patent infringement and
declaratory judgment. We alleged that HHP infringes 12 of our patents, that 36
of HHP's patents are not infringed by us, that the HHP patents are otherwise
invalid or unenforceable, and that the court has jurisdiction to hear the
declaratory judgment action. We requested that the court enjoin HHP from further
infringement, declare that our products do not infringe HHP's patents, and award
us costs and damages.
On March 12, 2003, HHP filed a Motion to Dismiss, which was denied on
November 14, 2003. With respect to our claim for a declaratory judgment that 36
of HHP's patents are not infringed by us, or that they are otherwise invalid or
unenforceable, the Court denied HHP's motion to dismiss with respect to 10 of
the patents, granted HHP's motion to dismiss with respect to 25 of the patents
based on lack of subject matter jurisdiction, and granted HHP's motion to
dismiss as to one HHP patent based on HHP's representation to the Court that the
patent had been dedicated to the public and that HHP would not assert it against
us. Pursuant to a stipulation between the parties, we have dismissed without
prejudice our claim that HHP infringes 5 of the 12 Symbol patents and our action
seeking a declaratory judgment with respect to the 10 HHP patents that remained
in the case. On December 12, 2003, HHP asserted counterclaims against Symbol and
Telxon (which had previously owned some of the patents asserted by Symbol)
seeking a declaratory judgment that the Symbol patents were not infringed, were
invalid and/or unenforceable. On the same day, HHP filed a third party complaint
against 12 of its suppliers which, HHP claims, are liable to defend and/or
indemnify HHP with respect to Symbol's infringement claims. We expect discovery
to commence in 2004.
Hand Held Products, Inc. and HHP-NC, Inc. v. Symbol Technologies, Inc. and
Telxon Corporation
On January 7, 2004, Symbol was served with a summons and complaint
alleging that certain of its products infringe 4 patents owned by HHP. Three of
the patents concern the design of a finger groove on the surface of a hand held
computer, and the fourth concerns a decoding algorithm for 2 dimensional bar
codes. These patents had been the subject of Symbol's declaratory judgment
complaint, described above, but had been dismissed by the Court based on HHP's
representation to the Court that Symbol had no reasonable apprehension of being
sued by HHP for infringement of these patents. Symbol intends to defend this
case vigorously on the merits.
Symbol Technologies, Inc. v. Metrologic Instruments, Inc.
Symbol and Metrologic Instruments, Inc. ("Metrologic") entered into a
cross-licensing agreement executed on December 16, 1996 and effective as of
January 1, 1996 (the "Metrologic Agreement").
On April 12, 2002, we filed a complaint in the United States District
Court in the Eastern District of New York against Metrologic, alleging a
material breach of the Metrologic Agreement. We moved for summary judgment
seeking a ruling on the issues, inter alia, that Metrologic had breached the
Metrologic Agreement and that we had the right to terminate Metrologic's rights
under the Metrologic Agreement. The Court denied the summary judgment motion on
March 31, 2003, and held that the issues were subject to resolution by
arbitration. We have appealed the Court's decision.
On December 23, 2003, the Court of Appeals dismissed the appeal for
lack of appellate jurisdiction because the District Court judgment was not
final.
In the interim, we are proceeding with the arbitration. Metrologic had
filed a Demand for Arbitration in 2002 that was stayed pending the decisions by
the Court. On June 26, 2003, we filed an
23
Amended Answer and Counterclaims to Metrologic's Demand for Arbitration,
asserting that (a) Metrologic's accused products are royalty bearing products,
as defined under the Metrologic Agreement, and (b) in the alternative, those
products infringe upon one or more of our patents. Metrologic replied to our
counterclaims on July 31, 2003, denying infringement and asserting that the
arbitrator was without jurisdiction to hear our counterclaims. Pursuant to the
decision made by the arbitration panel, an arbitrator is now in place to hear
the arbitration.
On December 22, 2003, Metrologic withdrew its Demand for Arbitration,
however, our counterclaims are still being heard.
In a separate matter relating to the Metrologic Agreement, we filed a
demand for an arbitration against Metrologic seeking a determination that
certain of our new bar code scanning products are not covered by Metrologic
patents licensed to us under the Metrologic Agreement. We do not believe that
the products infringe any Metrologic patents, but in the event there was a
ruling to the contrary, our liability would be limited to the previously
negotiated royalty rate. On June 6, 2003, the arbitrator ruled that whether we
must pay royalties depends on whether our products are covered by one or more
claims of Metrologic's patents, and that this issue must be litigated in court,
not by arbitration. The arbitrator further ruled that we could not have
materially breached the Metrologic Agreement, since the threshold infringement
issue has not yet been determined. On June 19, 2003, after the arbitrator ruled
that Metrologic's infringement allegations must be adjudicated in court,
Metrologic filed a complaint against us in the District Court for the District
of New Jersey, alleging patent infringement and breach of contract, and seeking
monetary damages and termination of the Metrologic Agreement. On July 30, 2003,
Symbol answered the complaint and asserted counterclaims for declaratory
judgments of invalidity and noninfringement of Metrologic's patents and for
non-breach of the Agreement. Discovery is proceeding. Symbol intends to defend
the case vigorously on the merits.
Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership
On July 21, 1999, we and six other members of the Automatic
Identification and Data Capture industry ("Auto ID Companies") jointly initiated
a lawsuit against the Lemelson Medical, Educational, & Research Foundation,
Limited Partnership (the "Lemelson Partnership"). The suit, which is entitled
Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research
Foundation, Limited Partnership, was commenced in the U.S. District Court,
District of Nevada in Reno, Nevada but was subsequently transferred to the Court
in Las Vegas, Nevada. In the litigation, the Auto ID Companies seek, among other
remedies, a declaration that certain patents, which have been asserted by the
Lemelson Partnership against end users of bar code equipment, are invalid,
unenforceable and not infringed.
The Lemelson Partnership has contacted many of the Auto ID Companies'
customers demanding a one-time license fee for certain so-called "bar code"
patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson.
Symbol and the other Auto ID Companies have received many requests from their
customers asking that they undertake the defense of these claims using their
knowledge of the technology at issue. Certain of these customers have requested
indemnification against the Lemelson Partnership's claims from Symbol and the
other Auto ID Companies, individually and/or collectively with other equipment
suppliers. Symbol believes, and its understanding is that the other Auto ID
Companies believe, that generally they have no obligation to indemnify their
customers against these claims and that the patents being asserted by the
Lemelson Partnership against their customers with respect to bar code equipment
are invalid, unenforceable and not infringed.
24
A 27-day non-jury trial was held before the Court beginning on November
18, 2002, and concluding on January 17, 2003. Post-trial briefing was completed
in late June 2003 and the parties are awaiting a decision to be rendered by the
Court.
On January 23, 2004, the Court concluded that Lemelson's patent claims
are unenforceable under the equitable doctrine of prosecution laches; that the
asserted patent claims as construed by the Court are not infringed by Symbol
because use of the accused products does not satisfy one or more of the
limitations of each and every asserted claim; and that the claims are invalid
for lack of written description and enablement even if construed in the manner
urged by Lemelson. In so concluding, the Court found that judgment should be
entered in favor of plaintiffs Symbol and the other members of the Auto ID
Companies and against defendant Lemelson Partnership on Symbol's and the Auto ID
Companies' complaint for declaratory judgment. The Court entered its judgment on
January 23, 2004.
OTHER LITIGATION
Telxon v. Smart Media of Delaware, Inc. ("SMI")
On December 1, 1998, Telxon filed suit against SMI in the Court of
Common Pleas for Summit County, Ohio in a case seeking declaratory judgment
that, contrary to SMI's position, Telxon did not contract to develop SMI's
products or to fund SMI, and that it did not fraudulently induce SMI to refrain
from engaging in business with others or interfere with SMI's business
relations. On March 12, 1999, SMI filed its Answer and Counterclaim denying
Telxon's allegations and alleging claims against Telxon for negligent
misrepresentation, estoppel, tortious interference with business relationship
and intentional misrepresentation and seeking approximately $10,000 in
compensatory damages, punitive damages, fees and costs.
On September 17, 2003, a jury awarded approximately $218,000 in damages
against Telxon. This sum included an award of approximately $6,000 to an
individual. On September 24, 2003, the individual and SMI moved to add Symbol as
a substitute or counterclaim defendant. That motion has subsequently been
withdrawn by SMI although it is still being pursued by the individual. The
motion has been fully briefed and Symbol is awaiting a decision. There can be no
assurance that SMI will not renew this motion at a later date. On October 7,
2003, Telxon made a motion to impound and secure the trial record of certain
exhibits, and on October 8, 2003, Telxon made motions for judgment in its favor
notwithstanding the jury's verdicts, and for a new trial. In the event this
relief is not granted, Telxon requested that the amount of the jury's verdicts
be reduced. Also, Telxon requested that the execution of any judgment against
Telxon entered by the Court be stayed without the posting of a bond, or in the
alternative, that a bond be set at a maximum of $3,700. In support of its
motions, Telxon argued that the jury's verdicts were based upon inadmissible
evidence being improperly provided to the jury during its deliberations; that
the absence of liability on the part of Telxon was conclusively established by
the documents in evidence; and that the amounts awarded to SMI were based on
legally irrelevant projections, and are wildly speculative, particularly given
that SMI never had any revenue or profits. In addition, Telxon argued that the
jury verdicts incorrectly awarded damages more than once for the same alleged
injury by adding together two separate awards for lost profits, and by
improperly combining different measures of damages. The court has not ruled on
any post-trial motions.
There can be no assurance that Symbol will not be found to be
ultimately liable for the damage awards.
25
Barcode Systems, Inc. ("BSI") v. Symbol Technologies Canada, Inc., et al.
On March 19, 2003, BSI filed an amended statement of claim in the Court
of Queen's Bench in Winnipeg, Canada, naming Symbol Technologies Canada, Inc.
and Symbol as defendants. BSI alleges that Symbol deliberately, maliciously and
willfully breached its agreement with BSI under which BSI purported to have the
right to sell Symbol product in western Canada and to supply Symbol's support
operations for western Canada. BSI has claimed damages in an unspecified amount,
punitive damages and special damages.
Symbol denies BSI's allegations and claims that it properly terminated
any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim
against BSI alleging trademark infringement, depreciation of the value of the
goodwill attached to Symbol's trademark and damages in the sum of Canadian
$1,281, representing the unpaid balance of product sold by Symbol to BSI.
On October 30, 2003, BSI filed an Application For Leave with the
Canadian Competition Tribunal ("Tribunal"). BSI is seeking an Order from the
Tribunal that would require Symbol to accept BSI as a customer on the "usual
trade terms" as they existed prior to the termination of their agreement in
April 2003. The Tribunal granted leave for BSI to proceed with its claim against
Symbol on January 15, 2004. Symbol intends to appeal the Tribunal's decision.
On November 17, 2003, BSI filed an additional lawsuit in British
Columbia, Canada against Symbol and a number of its distributors alleging that
Symbol refused to sell products to BSI, conspired with the other defendants to
do the same and used confidential information to interfere with BSI's business.
Symbol considers these claims to be meritless and intends to defend against
these claims vigorously.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol
de Mexico, Sociedad de R.L. de C.V.
Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata
("Plaintiff"), filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de
C.V. ("Symbol Mexico") on or about October 21, 2003 for purposes of exercising
an action to reclaim property on which Symbol's Reynosa facility is located.
Such lawsuit was filed before the First Civil Judge of First Instance, 5th
Judicial District, in Reynosa, Tamaulipas, Mexico. Additionally, the First Civil
Judge ordered the recording of a list pendens with respect to this litigation
before the Public Register of Property in Cd. Victoria, Tamaulipas. As of
November 13, 2003, such list pendens was still pending recordation.
Plaintiff alleges that she is the legal owner of a tract of land of one
hundred (100) hectares in area, located within the area comprising the Rancho La
Alameda, Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan,
Tamaulipas, irrigation district. Allegedly, such land was caused to be part of
the Parque Industrial Del Norte in Reynosa, Tamaulipas. Plaintiff further
alleges that Symbol Mexico, without any claim of right and without Plaintiff's
consent entered upon the tract of land, occupied such, and refused to return to
Plaintiff the portion of land and all improvements and accessions thereto
occupied by Symbol Mexico. Plaintiff is asking the court to order Symbol Mexico
to physically and legally deliver to the Plaintiff the portion of land occupied
by Symbol Mexico.
Symbol Mexico acquired title to the lots in the Parque Industrial
Reynosa from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument.
An Owner's Policy of Title Insurance was issued by Stewart Title Guaranty
Company in connection with the above-mentioned transaction in the amount of
$13,400. A Notice of Claim and Request for Defense of Litigation was duly
delivered on behalf of Symbol
26
to Stewart Title Guaranty Company on November 4, 2003. Symbol intends to defend
against this claim vigorously.
Bruck Technologies Handels GmbH European Commission ("EC") Complaint
In February 2004, Symbol became aware of a notice from the European
Competition Commission (the "EC") of a complaint lodged with it by Bruck
Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol
PartnerSelect program violate Article 81 of the EC Treaty. Symbol considers this
claim to be without merit and intends to vigorously defend itself.
PSC Litigation
On June 26, 2002, Symbol filed an action against PSC Inc. and PSC
Scanning, Inc. (collectively, "PSC") in New York State Supreme Court in Suffolk
County, New York asserting claims for breach of contract and tortious
interference with prospective business relations stemming from PSC's failure to
deliver products to Symbol under a preexisting supply and distribution
agreement. On August 22, 2002, PSC filed a separate action in the same Court
against Symbol alleging that Symbol breached its obligations under a separate
supply and distribution agreement with PSC for the supply of Symbol's bar code
readers. On November 22, 2002, during the pendency of the two contract actions,
PSC filed petitions in the United States Bankruptcy Court for the Southern
District of New York seeking relief under Chapter 11 of the United States
Bankruptcy Code. As part of a Bankruptcy Court's mandated mediation process, on
April 7, 2003, the parties entered into a settlement agreement settling all
existing disputes between them. The settlement agreement was approved by the
Bankruptcy Court as part of PSC's Final Plan of Reorganization, as confirmed on
June 19, 2003, and became effective on June 30, 2003. On June 30, 2003, in
accordance with the terms of the settlement, PSC made a one-time payment of
$6,000 to Symbol. Approximately $1,500 of such amount has been included within
other income in the Condensed Consolidated Statements of Operations for the
quarter ended June 30, 2003. The remaining balance of approximately $4,500 is
recorded as deferred revenue as of June 30, 2003 and is being deferred over the
fifty-four month term of the OEM Agreement which was signed in conjunction with
the settlement agreement. In addition, the parties executed an amended patent
license and supply agreements that permit PSC to purchase certain Symbol bar
code scan engine products for use by PSC in the manufacture of certain bar code
reading products. The parties also terminated the two pre-existing distribution
agreements that were the subject of pending litigations between the parties, and
dismissed, with prejudice, the two pending contract actions relating to those
agreements.
b. Guarantees and Product Warranties
Financial Accounting Standards Board ("FASB") Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"), requires that upon
issuance of a guarantee, the guarantor must disclose and recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
disclosure requirements of FIN 45 are applicable to the Company's product
warranty liability.
We provide standard warranty coverage for most of our products for a
period of one year from the date of shipment. We record a liability for
estimated warranty claims based on historical claims, product failure rates and
other factors. This warranty liability, recorded as a component of accounts
payable and accrued expenses, primarily includes the anticipated cost of
materials, labor and shipping necessary to repair and service the equipment.
27
The following table illustrates the changes in our warranty reserves:
Amount
-----------
Balance at December 31, 2002..................... $ 15,034
Charges to expense-cost of revenue............... 18,250
Utilization/payment.............................. (18,089)
-----------
Balance at June 30, 2003......................... $ 15,195
===========
c. Derivative Instruments and Hedging Activities
We utilize derivative financial instruments to hedge the risk exposures
associated with foreign currency fluctuations for payments denominated in
foreign currencies from our international subsidiaries. These derivative
instruments are designated as either fair value or cash flow hedges, depending
on the exposure being hedged, and have maturities of less than one year. Changes
in fair value of derivative instruments are recognized immediately in earnings
unless the derivative qualifies as a cash flow hedge. For derivatives qualifying
as cash flow hedges, the effective portion of changes in fair value of the
derivative instrument is recorded as a component of other comprehensive income /
(loss) and is reclassified to earnings in the same period during which the
hedged transaction affects earnings. Any ineffective portion (representing the
remaining gain or loss on the derivative instrument in excess of the cumulative
change in the present value of future cash flows of the hedged transaction) is
recognized in earnings as it occurs. For fair value hedges, changes in fair
value of the derivative, as well as the offsetting changes in fair value of the
hedged item, are recognized in earnings each period. We do not use these
derivative financial instruments for trading