-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LBmFFzqixP53JS/CnhKgMzR1VvGKNhBBUTAiYvZNyCcztteyICny/xdDZ1wL47Mj 9m/Plf2PqlB4JlC+OneQ4g== 0000950136-04-000558.txt : 20040225 0000950136-04-000558.hdr.sgml : 20040225 20040225164511 ACCESSION NUMBER: 0000950136-04-000558 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20040225 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYMBOL TECHNOLOGIES INC CENTRAL INDEX KEY: 0000278352 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 112308681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09802 FILM NUMBER: 04628051 BUSINESS ADDRESS: STREET 1: ONE SYMBOL PLAZA CITY: HOLTSVILLE STATE: NY ZIP: 11742-1300 BUSINESS PHONE: 5165632400 MAIL ADDRESS: STREET 1: ONE SYMBOL PLAZA CITY: HOLTSVILLE STATE: NY ZIP: 11742-1300 10-Q 1 file001.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to __________________. COMMISSION FILE NUMBER 1-9802 SYMBOL TECHNOLOGIES, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 11-2308681 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) One Symbol Plaza Holtsville, New York 11742-1300 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 738-2400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ ] NO [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ] The number of shares outstanding of the registrant's classes of common stock, as of February 20, 2004, was as follows: Class Number of Shares ----- ---------------- Common Stock, par value $0.01 231,205,860 DOCUMENTS INCORPORATED BY REFERENCE: NONE. SYMBOL TECHNOLOGIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2003 TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements.....................................................1 Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002...................1 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 (Restated)...................................................................2 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Restated)...................................................................3 Notes to Condensed Consolidated Financial Statements............................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........30 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................52 Item 4. Controls and Procedures........................................................................52 PART II - OTHER INFORMATION Item 1. Legal Proceedings..............................................................................53 Item 6. Exhibits and Reports on Form 8-K...............................................................54 Signatures......................................................................................................55 Certifications..................................................................................................56
i PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------- SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) (Unaudited)
MARCH 31, DECEMBER 31, 2003 2002 -------------- -------------- ASSETS - ------ Cash and cash equivalents.................................................... $ 98,587 $ 76,121 Accounts receivable, less allowance for doubtful accounts of $38,343 and $34,272, respectively..................................................... 140,037 151,417 Inventories.................................................................. 240,463 261,096 Deferred income taxes........................................................ 155,190 167,489 Other current assets......................................................... 41,899 34,293 -------------- -------------- Total current assets...................................................... 676,176 690,416 Property, plant and equipment, net........................................... 205,171 208,209 Deferred income taxes........................................................ 244,585 222,475 Investment in marketable securities.......................................... 54,698 54,939 Goodwill..................................................................... 301,640 301,023 Intangible assets, net....................................................... 35,339 37,125 Other assets................................................................. 44,222 58,008 -------------- -------------- Total assets.............................................................. $ 1,561,831 $ 1,572,195 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Accounts payable and accrued expenses........................................ $ 482,524 $ 427,568 Current portion of long-term debt............................................ 50,298 6,681 Deferred revenue............................................................. 37,561 32,903 Accrued restructuring expenses............................................... 7,640 6,948 -------------- -------------- Total current liabilities................................................. 578,023 474,100 Long-term debt, less current maturities...................................... 54,519 135,614 Deferred revenue............................................................. 12,200 15,821 Other liabilities............................................................ 59,635 58,921 Contingencies (Note 11) STOCKHOLDERS' EQUITY: Preferred stock, par value $1.00; authorized 10,000 shares, none issued or outstanding............................................................... -- -- Series A Junior Participating preferred stock, par value $1.00; authorized 500 shares, none issued or outstanding.................................... -- -- Common stock, par value $0.01; authorized 600,000 shares; issued 256,896 shares and 256,589 shares, respectively................................... 2,569 2,566 Additional paid in-capital................................................... 1,325,924 1,323,085 Accumulated other comprehensive loss, net.................................... (10,345) (13,096) Accumulated deficit.......................................................... (221,665) (188,340) -------------- -------------- 1,096,483 1,124,215 LESS: Treasury stock, at cost, 26,130 shares and 25,962 shares, respectively....... (239,029) (236,476) -------------- -------------- Total stockholders' equity................................................ 857,454 887,739 -------------- -------------- Total liabilities and stockholders' equity......................... $ 1,561,831 $ 1,572,195 ============== ==============
See notes to Condensed Consolidated Financial Statements. SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, --------------------------------- 2002 (AS RESTATED - 2003 SEE NOTE 2) --------------- --------------- REVENUE: Product......................................................................... $ 310,703 $ 254,902 Services........................................................................ 75,644 62,742 --------------- --------------- 386,347 317,644 COST OF REVENUE: Product cost of revenue......................................................... 156,339 182,159 Services cost of revenue........................................................ 58,136 56,615 --------------- --------------- 214,475 238,774 --------------- --------------- Gross profit.................................................................... 171,872 78,870 --------------- --------------- OPERATING EXPENSES: Engineering..................................................................... 37,055 35,533 Selling, general and administrative............................................. 99,031 80,295 Loss provision for legal settlements............................................ 72,000 -- Stock based compensation expense/(recovery)..................................... 776 (51,302) Restructuring and impairment charges............................................ 87 2,634 --------------- --------------- 208,949 67,160 --------------- --------------- (Loss)/earnings from operations................................................. (37,077) 11,710 Other expense, net.............................................................. 4,034 4,052 (Loss)/earnings before income taxes............................................. (41,111) 7,658 (Benefit from)/provision for income taxes....................................... (10,098) 2,304 --------------- --------------- NET (LOSS)/EARNINGS............................................................. $ (31,013) $ 5,354 =============== =============== (LOSS)/EARNINGS PER SHARE: Basic and diluted............................................................... $ (0.13) $ 0.02 =============== =============== CASH DIVIDENDS DECLARED PER COMMON SHARE........................................ $ 0.01 $ 0.01 =============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic........................................................................... 230,527 228,881 Diluted......................................................................... 230,527 234,286
See notes to Condensed Consolidated Financial Statements. 2 SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------- 2002 (AS RESTATED - ----------------- 2003 SEE NOTE 2) --------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)/earnings................................................ $ (31,013) $ 5,354 ADJUSTMENTS TO RECONCILE NET (LOSS)/EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation and amortization of property, plant and equipment..... 13,232 14,042 Other amortization................................................. 3,413 3,012 Provision for losses on accounts receivable........................ 4,788 4,839 Provision for inventory writedown.................................. 11,700 9,731 Deferred income tax (benefit)/provision............................ (10,098) 2,874 Non-cash stock based compensation expense/(recovery)............... 776 (51,302) (Gain)/loss on sale of property, plant and equipment and other assets (12) 803 CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS OF ACQUISITIONS AND DIVESTITURES: Accounts receivable................................................ 18,866 6,977 Inventories........................................................ 9,327 36,567 Other assets....................................................... (4,515) 12,590 Accounts payable and accrued expenses.............................. 52,381 (21,041) Accrued restructuring expenses..................................... 692 58 Other liabilities and deferred revenue............................. 1,751 4,734 --------------- ----------------- Net cash provided by operating activities....................... 71,288 29,238 --------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in other companies, net of cash acquired............... (1,777) (1,500) Proceeds from sale of property, plant and equipment and other assets.......................................................... 467 2,185 Purchases of property, plant and equipment......................... (10,649) (10,537) Investments in intangible and other assets......................... (1,191) (1,143) --------------- ----------------- Net cash used in investing activities........................... (13,150) (10,995) --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable and long-term debt...................... (36,575) (24,480) Proceeds from issuance of notes payable and long-term debt......... -- 40,795 Repurchase of convertible notes and debentures..................... -- (39,963) Proceeds from exercise of stock options, warrants and employee stock purchase plan............................................. 4,623 6,951 Purchase of treasury shares........................................ (5,110) (5,409) --------------- ----------------- Net cash used in financing activities........................... (37,062) (22,106) --------------- ----------------- Effects of exchange rate changes on cash........................... 1,390 (996) --------------- ----------------- Net increase/(decrease) in cash and cash equivalents............... 22,466 (4,859) Cash and cash equivalents, beginning of period..................... 76,121 70,365 --------------- ----------------- Cash and cash equivalents, end of period..................... $ 98,587 $ 65,506 =============== ================= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID/(REFUNDED) DURING THE PERIOD FOR: Interest........................................................... $ 1,667 $ 5,289 Income taxes....................................................... $ 808 $ (15,239)
See notes to Condensed Consolidated Financial Statements. 3 SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2003 AND FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION ------------------------------------------------- Overview - -------- Symbol Technologies, Inc. and subsidiaries is a provider of secure mobile information systems that integrate application-specific hand-held computers with wireless networks for data, voice and bar code data capture. The Condensed Consolidated Financial Statements include the accounts of Symbol Technologies, Inc. and its majority-owned and controlled subsidiaries. References herein to "we" or "our" or "us" or "the Company" refer to Symbol Technologies, Inc. and subsidiaries unless the context specifically requires otherwise. The Condensed Consolidated Financial Statements have been prepared by us, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "Commission" or "SEC"). In our opinion, the Condensed Consolidated Financial Statements include all necessary adjustments (consisting of normal recurring accruals) and present fairly our financial position as of March 31, 2003, and the results of our operations and cash flows for the three months ended March 31, 2003 and 2002, in accordance with the instructions to Form 10-Q of the Commission and in accordance with accounting principles generally accepted in the United States of America applicable to interim financial information. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2002. Stock-Based Compensation - ------------------------ We account for our employee stock option plans under the intrinsic value method in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB Opinion No. 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of the grant. We have adopted the disclosure-only requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock grants made as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions. 4 The following table illustrates the effect on net (loss)/earnings and net (loss)/earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
THREE MONTHS ENDED MARCH 31, ---------------------------------- 2003 2002 -------------- --------------- Net (loss)/earnings - as reported....................................... $ (31,013) $ 5,354 Stock based employee compensation expense/(recovery) included in reported net (loss)/earnings, net of related tax effects............. 477 (31,551) Less total stock based employee compensation expense determined under the fair value based method for all awards, net of related tax effects........................................... (4,563) (4,871) -------------- --------------- Pro forma net loss...................................................... $ (35,099) $ (31,068) ============== =============== Basic and diluted net (loss)/earnings per share: As reported.......................................................... $ (0.13) $ 0.02 Pro forma............................................................ $ (0.15) $ (0.14)
The weighted average fair value of options granted during the three months ended March 31, 2003 and 2002 was $5.34 and $4.22 per option, respectively. In determining the fair value of options and stock purchase warrants granted for purposes of calculating the pro forma results disclosed above for the three months ended March 31, 2003 and 2002, we used the Black-Scholes option pricing model and assumed the following: a risk free interest rate of 4.0 percent; an expected option life of 4.7 years; an expected volatility of 59 percent; and a dividend yield of 0.14 percent per year. As required by SFAS No. 123, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculations. 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS ----------------------------------------------------- Subsequent to the issuance of our March 31, 2002 financial statements, our management identified certain accounting errors and irregularities, as discussed below, in its previously issued financial statements beginning in 1998 through the nine months ended September 30, 2002. The adjustments necessary to restate our financial statements relate primarily to the correction of errors related to the timing and amount of product and service revenue recognized, as well as certain reserves, restructurings, the administration of certain option programs and several categories of cost of revenue and operating expenses. As a result, the Condensed Consolidated Financial Statements included herein for the three-month period ended March 31, 2002 have been restated to give effect to the correction of these errors. 5 The principal adjustments are summarized below: Revenue Recognition - ------------------- Errors identified in the area of revenue recognition included numerous instances where the timing or amount of revenue recognized was not appropriate. SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), expresses the SEC Staff's views regarding the application of accounting principles generally accepted in the United States of America ("U.S. GAAP") to revenue recorded in financial statements. Provided below is a summary of the nature of the adjustments to revenue that were necessary: Persuasive evidence of an arrangement exists We identified situations when the customer arrangements were not available, were not documented or were superceded by separate written agreements or verbal arrangements. In many of these instances, the customer returned most or all of the merchandise shipped in a subsequent accounting period based on these separate agreements or arrangements. The existence of these separate agreements and arrangements indicates that the original agreement was not binding and, therefore, the recognition of revenue was inappropriate at that time and should have been deferred until such time as persuasive evidence of an arrangement existed. Delivery had not occurred or services had not been rendered We identified situations in which we had recognized revenue at the time we shipped our product to an intermediate staging area or location where we performed additional configuration services to meet customer requirements. The recognition of revenue was inappropriate at that time and should have been deferred until such time as our products had been shipped or services had been rendered to our customer. The seller's price to the buyer was not fixed or determinable We identified situations in which significant price concessions were made based on prior or ongoing negotiations or in which subsequent credits were issued to a customer based on sales volume or in which separate agreements existed that were not considered in the revenue recognition process. These arrangements indicate that the price of goods and services was not fixed or determinable at the time of the sale and, therefore, the recognition of revenue was inappropriate and should have been deferred until the price was fixed or determinable. Collectibility is reasonably assured We identified situations in which sales were made to customers who had no financial means for payment other than from the resale of our products to third parties. Effectively, these customers were acting as our distributors or agents and our sales to them were on a consignment basis because we accepted any products they returned to us. Accordingly, the recognition of such sales to distributors with unlimited or extremely broad return capability was inappropriate and should have been deferred until such time as the sale was made to the ultimate customer and collectibility was reasonably assured. Restructuring Reserves - ---------------------- In December 2000, we recorded restructuring, impairment and merger integration charges associated with the Telxon acquisition. We determined that both the amount and timing of certain 6 components of these charges, as well as the subsequent utilization of the established reserve, were inappropriate. In September 2001, we recorded a restructuring charge primarily related to the reorganization of our manufacturing facilities. Similarly, we determined that both the amount and timing of certain components of this charge, as well as the subsequent utilization of the established reserve, were inappropriate. Inventory - --------- We identified numerous errors and irregularities in the area of inventory. Our previous methodology for identifying excess and obsolete inventory, which relied heavily on historical usage, did not properly consider the rapid nature of technology changes and reduced product life cycles during the past several years. The nature, timing and amount of these charges were inappropriate. Computer Hardware and Software Costs - ------------------------------------ We determined that certain computer hardware costs had been incorrectly capitalized. In addition, we determined that the criteria provided in SFAS No. 86 to determine when technological feasibility has been established had been misapplied resulting in an error in the capitalization of development costs of software which should have been expensed. Patent Costs - ------------ Certain patent-related costs were being incorrectly amortized beyond the life of the related patent. Additionally, other instances were noted in which we could not associate various legal costs incurred with a specific patent. Accordingly, adjustments were made to correct the amortization of costs to coincide with the remaining life of the related patent and to write-off legal costs that could not be directly associated with a patent. In addition, because of rapidly changing technology, we determined that our prior policy of amortizing patents generally over a 17 year period was not appropriate and we made adjustments to reduce the patent amortization period to six years. Telxon Transaction - ------------------ On November 30, 2000, we completed the acquisition of the Telxon Corporation. The acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded as goodwill. Subsequent to the acquisition date, we adjusted goodwill for revisions to the fair values of the assets and liabilities acquired. We subsequently determined that certain of the adjustments to goodwill did not relate to contingencies existing at the time of the acquisition. Furthermore, we discovered that while certain adjustments to the net assets acquired from Telxon were appropriate, the impact of these adjustments was incorrectly recorded in accounts other than goodwill. Brazil Acquisition - ------------------ As discussed in Note 10 of the Condensed Consolidated Financial Statements, during the second quarter of 2002, we entered into an agreement with the owners of a Brazilian corporation that was a distributor of our products, whereby we created a majority-owned subsidiary of Symbol. In our previously reported financial statements, we recorded two payments ($3,250 and $2,050 in 2000 and 2002, respectively) to three individuals and one entity aggregating approximately $5,300 as part of the 7 purchase price. We subsequently determined that we should have treated these payments as operating expenses. Accruals, Reserves and Prepayments - ---------------------------------- We identified errors in the accounting for certain accruals and prepayments. Specifically, we identified instances in which we established reserves or released reserves in error. Statement of Operations Reclassifications - ----------------------------------------- We discovered numerous instances in which certain categories of expenses were inappropriately classified in the statements of operations. Stock Option Accounting - ----------------------- We identified certain irregularities and improper administration of option exercises related to our stock option plans. In particular, an informal practice began in or around the early 1990's, whereby certain officers and directors were afforded a look-back period (no more than 30 days) for purposes of determining the market price to be used in connection with specific option exercises. In addition, certain of these individuals were given an extended period of time in which to pay for their option exercises. These practices were contrary to the terms of the relevant option plans. As this practice allowed certain participants to choose exercise dates outside of the approved plan terms and also allowed these participants to extend the period of time in which to pay for their option exercise, the price of the option at the grant date was not fixed. Accordingly, in accordance with APB Opinion No. 25, we have reflected in our financial statements the change in market price of the common stock underlying these options granted to plan participants that could have participated in this practice as compensation expense. Effective July 30, 2002, this practice of options exercise ended resulting in ceasing the accounting for such options under variable plan accounting. Executive Life Insurance - ------------------------ As a benefit to some of our key executives, we paid the premiums to provide split dollar life insurance. As part of this program, the premiums on the policies accumulate as cash surrender value that must be repaid to us upon the termination of employment or death of the employee. We determined that the amount we recorded as a recoverable asset exceeded the amount we could realize as cash surrender value under the policies. Interest Expense - ---------------- Our primary source of liquidity during 1999 through most of 2003 was a Credit Agreement signed in December 1998 and voluntarily terminated in November 2003. Pricing terms of this Credit Agreement were covered under a "credit grid" that provided for interest charges on both drawn and undrawn committed lines of credit, and was based on a quarterly calculation of a leverage ratio of outstanding debt divided by earnings before income taxes, depreciation and amortization. Interest charges were either lowered the further the leverage ratio fell below 2.5 times or raised if the ratio moved toward 2.5 times. The agreement also provided for additional fees in the event of additional leverage or events of default. Through a series of waivers and amendments granted by the bank group during the life 8 of the Credit Agreement, no event of default occurred. However, these waivers and amendments did not provide protection from the obligations under the "credit grid" pricing. We determined that our previously recorded interest expense needed to be recalculated based on our restated results, which resulted in adjustments to our previously issued 2002 Condensed Consolidated Financial Statements to appropriately reflect interest expense due under the terms of the Credit Agreement. Other Restatement-Related Adjustments - ------------------------------------- We identified instances where marketable securities, property, plant and equipment and other long-lived assets were carried at amounts exceeding their net realizable values. Income Taxes - ------------ As a result of the adjustments described above, we have adjusted our tax provisions and related accounts for the periods involved. The following tables present the effects of the aforementioned adjustments on earnings before income taxes as previously reported: Increase to earnings before income taxes (in thousands): INCREASE/(DECREASE) FOR THE THREE MONTHS ENDED MARCH 31, 2002 ------------------ Earnings before income taxes, previously reported........... $ 2,576 ------------------ REVENUE ADJUSTMENTS: Product..................................................... 26,447 Services.................................................... (10,115) ------------------ 16,332 ------------------ COST OF REVENUE ADJUSTMENTS: Product revenue cost........................................ (12,571) Service revenue cost........................................ 1,194 Restructuring reserves...................................... (5,588) Excess and obsolete inventory............................... (27,383) Computer software........................................... 3,286 Telxon transaction.......................................... (2,587) Accruals, reserves and prepayments.......................... 353 Other, net.................................................. 490 ------------------ (42,806) ------------------ OPERATING AND OTHER EXPENSES: Restructuring reserves...................................... (5,292) Computer hardware and software costs........................ (10,009) Patent costs................................................ (851) Telxon transaction.......................................... (1,222) Brazil acquisition.......................................... (2,050) Accruals and prepayments.................................... 1,803 Stock option accounting..................................... 51,302 Executive life insurance.................................... (107) Interest expense............................................ (125) 9 Increase to earnings before income taxes INCREASE/(DECREASE) (in thousands): FOR THE THREE MONTHS ENDED MARCH 31, 2002 ------------------ Bad debt impact on revenue adjustments...................... (334) Other adjustments........................................... (1,559) ------------------ 31,556 ------------------ Increase in earnings before income taxes.................... 5,082 ------------------ Earnings before income taxes, as restated................... $ 7,658 ================== The following is a summary of the significant effects of the restatement on our previously reported results of operations.
THREE MONTHS ENDED MARCH 31, 2002 ---------------------------------- AS PREVIOUSLY REPORTED AS RESTATED --------------- --------------- (Amounts in thousands, except per share data) Revenue...................................................................... $ 301,312 $ 317,644 Cost of revenue.............................................................. 195,968 238,774 --------------- --------------- Gross profit................................................................. 105,344 78,870 Stock based compensation recovery under variable plan accounting............. - (51,302) Other operating expenses..................................................... 98,651 118,462 --------------- --------------- Earnings from operations..................................................... 6,693 11,710 Other expense, net........................................................... (4,117) (4,052) --------------- --------------- Earnings before income taxes................................................. 2,576 7,658 Provision for income taxes................................................... 824 2,304 --------------- --------------- Net earnings................................................................. $ 1,752 $ 5,354 =============== =============== Net earnings per common share: Basic and diluted............................................................ $ 0.01 $ 0.02 =============== ===============
The above as previously reported amounts have been adjusted to reflect the reclassification of gains on the extinguishment of debt per the Company's adoption of SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," in 2002. 3. INVENTORIES -----------
MARCH 31, 2003 DECEMBER 31, 2002 -------------- ----------------- Raw materials................................................................ $ 78,058 $ 82,115 Work-in-process.............................................................. 44,892 39,931 Finished goods............................................................... 117,513 139,050 -------------- ----------------- $ 240,463 $ 261,096 ============== =================
The amounts shown above are net of inventory reserves of $155,082 and $170,057 as of March 31, 2003 and December 31, 2002, respectively, and include inventory on consignment of $33,112 and $49,182 as of March 31, 2003 and December 31, 2002, respectively. 10 4. GOODWILL AND INTANGIBLE ASSETS ------------------------------ The changes in the carrying amount of goodwill for the three months ended March 31, 2003 are as follows:
PRODUCT SERVICES TOTAL ------------ ------------ ------------- Balance as of December 31, 2002............................... $ 244,014 $ 57,009 $ 301,023 Telxon goodwill adjustments................................... (438) (110) (548) Foreign currency impact....................................... 912 228 1,140 @POS transaction costs........................................ 20 5 25 ------------ ------------ ------------- Balance as of March 31, 2003........................... $ 244,508 $ 57,132 $ 301,640 ============ ============ =============
Other than goodwill, the Company's intangible assets, all of which are subject to amortization, consist of the following:
MARCH 31, 2003 DECEMBER 31, 2002 ----------------------------- ----------------------------- ACCUMULATED GROSS ACCUMULATED GROSS AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------------- -------------- ----------- ---------------- Patents, trademarks and tradenames............... $ 32,230 $ (20,955) $ 31,624 $ (19,956) Purchased technology............................. 24,600 (6,894) 24,817 (6,069) Other............................................ 6,862 (504) 6,865 (156) ------------- -------------- ----------- ---------------- $ 63,692 $ (28,353) $ 63,306 $ (26,181) ============= ============= =========== ===============
The amortization expense for the three months ended March 31, 2003 and 2002 amounted to $2,173 and $1,638, respectively. Estimated amortization expense for the above intangible assets, assuming no additions or writeoffs, for the nine months ended December 31, 2003 and for each of the subsequent years ending December 31 is as follows:
2003 (nine months).............................................................. $ 6,395 2004 (full year)................................................................ 8,020 2005 (full year)................................................................ 7,661 2006 (full year)................................................................ 5,110 2007 (full year)................................................................ 3,318 ---------- $ 30,504 ==========
5. (LOSS)/EARNINGS PER SHARE AND DIVIDENDS --------------------------------------- Basic (loss)/earnings per share are based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are based on the weighted average number of common and potentially dilutive common shares (options and warrants) outstanding during the period, computed in accordance with the treasury stock method. 11 The following table sets forth the computation of basic and diluted (loss)/earnings per share: THREE MONTHS ENDED -------------------------- MARCH 31, MARCH 31, 2003 2002 ------------- ---------- Numerator: (Loss)/earnings applicable to common shares for basic and diluted calculation........... $ (31,013) $ 5,354 ============ ========== Denominator: Weighted-average common shares........................ 230,527 228,881 Effect of dilutive securities: Stock options and warrants......................... -- 5,405 ------------ ---------- Denominator for diluted calculation................... 230,527 234,286 ============ ========== Stock options and warrants outstanding and the effect of convertible subordinated notes and debentures at March 31, 2003 and 2002 aggregating to 14,897 and 17,050, respectively, of potentially dilutive shares have not been included in the diluted per share calculations since their effect would be antidilutive. On March 10, 2003, Symbol's Board of Directors approved a $0.01 per share semi-annual cash dividend, which amounted to $2,312 and was paid on April 28, 2003 to shareholders of record on April 14, 2003. 6. COMPREHENSIVE (LOSS)/EARNINGS ----------------------------- Comprehensive (loss)/earnings is the change in equity of a business enterprise from transactions, other events, and circumstances from nonowner sources during a period. The Company generated total comprehensive (loss)/earnings of $(28,261) and $33,653 for the three months ended March 31, 2003 and 2002, respectively. The Company's comprehensive (loss)/earnings is comprised of net (loss)/earnings, foreign currency translation adjustments, unrealized gains/losses on available for sale marketable securities and unrealized derivative gains/losses on our cash flow hedging activities. 7. RESTRUCTURING AND IMPAIRMENT CHARGES ------------------------------------ a. Telxon Acquisition ------------------ We recorded certain restructuring, impairment and merger integration related charges related to our Telxon acquisition during 2001 and 2002. Approximately $1,354 relating to these charges was included in accrued restructuring expenses as of December 31, 2002. As of March 31, 2003, $1,174 remained in accrued restructuring expenses.
LEASE WORKFORCE OBLIGATION REDUCTIONS COSTS TOTAL -------------- -------------- ------------ Balance December 31, 2002.......................... $ 158 $ 1,196 $ 1,354 Utilization/payments............................... (138) (42) (180) -------------- -------------- ----------- Balance March 31, 2003............................. $ 20 $ 1,154 $ 1,174 ============== ============== ===========
12 b. Manufacturing Transition ------------------------ In 2001, we began to transition volume manufacturing away from our Bohemia, New York facility to lower cost locations, primarily our Reynosa, Mexico facility and Far East contract manufacturing. As a result of these activities, we incurred certain restructuring charges during 2002 and 2001. The manufacturing restructuring charges recorded during the three months ended March 31, 2002 were $3,179, of which $1,868 was recorded as a component of operating expenses and $1,311 was recorded as a component of cost of revenue, all of which consist of workforce reduction costs. The anticipated sub-lease income under these agreements was recorded as a reduction of the restructuring charge recorded in 2002. Workforce reduction charges related to the termination of approximately 350 employees, primarily manufacturing associates. As of December 31, 2002, all of these employees have been terminated. Included in accrued restructuring expenses as of March 31, 2003 is $5,285 of lease obligations relating to these manufacturing restructuring charges. LEASE OBLIGATION COSTS ----------------- Balance at December 31, 2002............................ $ 5,594 Utilization/payments.................................... (309) ----------------- Balance at March 31, 2003............................... $ 5,285 ================= c. 2003 Restructuring Charges -------------------------- During the first quarter of 2003, our global services organization initiated restructuring activities which included transferring a large percentage of our repair operations to Mexico and the Czech Republic, reorganizing our professional services group to utilize third party service providers for lower margin activities, and reorganizing our European management structure from a country based structure to a regional structure. The total costs incurred in connection with this restructuring in the first quarter were, which related almost entirely to workforce reductions, was approximately $1,066, of which $979 and $87 was recorded as a component of cost of revenue and operating expenses, respectively, in the first quarter of 2003. These restructuring activities are expected to be completed during the first quarter of 2004. During the first quarter of 2003, we initiated additional restructuring activities in connection with our decision to relocate additional product lines from New York to Mexico. The costs associated with this restructuring relate to workforce reductions and transportation costs. The total amount incurred in connection with this restructuring activity in the first quarter was $749 and was recorded as a component of cost of revenue in the first quarter of 2003. These restructuring activities were completed by June 30, 2003. Details of the 2003 restructuring charges and remaining balances are as follows:
ASSET WORKFORCE IMPAIRMENTS REDUCTIONS AND OTHER TOTAL ------------- ------------- ------------- Provision - cost of revenue....................... $ 1,574 $ 154 $ 1,728 Provision - operating expenses.................... 87 -- 87 Utilization/payments.............................. (519) (115) (634) ------------- ------------- ------------- Balance at March 31, 2003......................... $ 1,142 $ 39 $ 1,181 ============= ============= =============
13 8. CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES AND OTHER DEBT ------------------------------------------------------------ In January and February 2002, Telxon, a wholly owned subsidiary of the Company, purchased in the open market $34,790 of its 5.75 percent convertible subordinated notes for $34,127 in cash, and $5,173 of its 7.5 percent convertible subordinated debentures for $5,004 in cash. This represented a redemption price of 100.8214 percent of the outstanding principal amount for the 5.75 percent notes and 100 percent of the outstanding principal amount of the 7.5 percent debentures. We obtained such funds from borrowings under our line of credit. The gain on extinguishment of this debt of $566 has been included in other expense, net in the Condensed Consolidated Statements of Operations for the three-month period ended March 31, 2002. As of March 31, 2003, we had a $350,000 unsecured revolving credit facility with a syndicate of U.S. and international banks (the "Credit Agreement"). These borrowings bear interest at either LIBOR plus 100 basis points (which approximated 2.3 percent and 2.4 percent at March 31, 2003 and December 31, 2002, respectively) or the base rate of the syndication agent bank, contingent upon various stipulations by the lender (which approximated 4.25 percent at both March 31, 2003 and December 31, 2002). This Credit Agreement was due to expire in January 2004, as such, the revolving credit facility amount is recorded as a component of current portion of long-term debt as of March 31, 2003. During the quarter ended March 31, 2003, we paid down approximately $30,000 on the revolving credit facility. As a result of the length of time necessary to restate our financial statements (see Note 2 of the Condensed Consolidated Financial Statements) beginning on September 16, 2003, we would have been in violation of one of the covenants of our Credit Agreement that requires the timely filing of financial statements with the SEC. On September 15, 2003, we reached an agreement with the bank group and obtained a waiver to provide us additional time to become current with our periodic filings with the SEC. Under the revised Credit Agreement, the credit facility was reduced from $350,000 to $100,000 in September 2003 and was voluntarily terminated in November 2003. In November 2003, this credit facility was replaced with a $30,000 secured credit line which expires in May 2006. 9. AIRCLIC TRANSACTIONS AND OTHER ASSETS ------------------------------------- AirClic - ------- In November 2000, we invested $35,000 in and licensed certain intellectual property to AirClic Inc. ("AirClic"), a business which allows wireless devices to scan bar codes and transmit data to the Internet. In return, we received convertible preferred stock in AirClic. We do not currently have the right to convert the preferred stock into common stock of AirClic and our ability to do so in the future is subject to certain contractual restrictions. As we do not have the ability to exercise significant influence over AirClic, we account for this investment using the cost method. We periodically test the carrying value of our investments for impairment. In consideration of the outlook of AirClic's business, the general decline in the economy and the decline in information technology spending, we determined that the decline in the value of our investment in AirClic was other than temporary in June 2002. We obtained an independent appraisal of our investment in AirClic and wrote down the carrying amount of the investment to the estimated fair value at June 30, 2002 of $2,800 by recording an impairment of the investment of $32,200. In January 2003, we invested an additional $750 in AirClic in exchange for additional convertible preferred stock. This additional investment has also been accounted for under the cost method and increased our investment in AirClic to $3,550. In March 2003, AirClic received additional financing from other investors but the negative outlook for AirClic's business and the lack of a rebound in the information technology sector and the 14 economy in general prompted us to record an additional impairment charge of $3,025 related to this investment for the three months ended March 31, 2003, classified as other expense in the Condensed Consolidated Statements of Operations. We subsequently wrote off our remaining investment in AirClic of $525 during the third quarter of 2003. During the year ended December 31, 2001, we had accumulated certain component inventories in anticipation of orders from AirClic. As a result, during 2001, AirClic paid $7,000 with respect to this component inventory. This payment was accounted for as an advance payment for future inventory purchases. At December 31, 2002, an accrued liability of $6,147 remained outstanding under this obligation. In July 2003, we reached an agreement with AirClic as it related to this obligation. The remaining obligation of $4,992 as of July 2003 was settled by making a cash payment of $2,497 to AirClic. Accordingly, we recognized other income of $2,495 in the third quarter of 2003. Employee Loan Receivable - ------------------------ In January 2003, we loaned $500 to our Senior Vice President and Chief Information Officer. This loan is payable upon the earlier of: (1) 180 days after he ceases to be an employee of the Company if terminated without cause, (2) 30 days after he ceases to be an employee of the Company for any other reason, or (3) January 10, 2008. In addition, if the officer or his wife sell any shares of our common stock now owned by either of them or hereafter acquired (other than shares sold to pay the exercise price and taxes resulting from the exercise of any options originally granted to this officer by us), 100 percent of the net proceeds of such sales shall be applied immediately to reduce any outstanding indebtedness under this loan if the equity in any real property owned by this officer and his wife is insufficient to satisfy this loan. Although this loan is currently non-interest bearing, if this loan is not paid when due, interest will accrue at an annual rate of 12 percent or the highest rate allowed by law. Our Senior Vice President and Chief Information Officer is not considered to be an "officer" as such term is defined in Rule 16a-1(f) of the Exchange Act and for purposes of Section 16(a) of the Exchange Act. 10. ACQUISITIONS ------------ a. Brazil Acquisition ------------------ During the second quarter of 2002, we entered into an agreement with the owners of Seal Sistemas e Technologia Da Informacao Ltda. ("Seal"), a Brazilian corporation that had operated as a distributor and integrator of our products since 1987. The agreement resulted in the termination of distribution rights for Seal and the creation of a majority-owned subsidiary of the Company that would serve as the Brazilian distributor and customer service entity ("Symbol Brazil"). In accordance with the terms of the agreement, the owners of Seal acquired a 49 percent ownership interest in Symbol Brazil. Terms of the agreement included payments to the minority shareholders that range from a minimum of $9,550 to a maximum of $14,800 contingent upon the attainment of certain annual net revenue levels of Symbol Brazil. In the event that none of the specified revenue levels are attained, the minimum earnout payment is payable no later than March 31, 2009. With each earnout payment, we are entitled to obtain a portion of Symbol Brazil's shares owned by the minority shareholders such that we will ultimately own 100 percent of Symbol Brazil no later than March 31, 2009. We loaned an entity affiliated with the minority shareholders $5,000 at the time of the agreement, which was due on the date the first earnout payment is triggered. The present value of net future minimum earnout payments of $4,550 amounted to $1,992 and was recorded as part of the purchase price resulting in a total purchase 15 price of $6,992. Any additional earnout payments will be accounted for as additional purchase price and recorded as goodwill. Management allocated the purchase price and considered a number of factors, including independent appraisals, and as a result of such procedures, the total purchase price has been classified as goodwill. We have not shown the pro-forma effects of this acquisition as the results of operations of the acquired company prior to our acquisition was immaterial in relation to our consolidated financial statements. As we control Symbol Brazil and are obligated to purchase the remaining ownership interest, we have consolidated this subsidiary. The minority interest is accounted for as accrued purchase price and is recorded in other liabilities. On January 10, 2004, the parties amended this transaction, whereby Symbol Technologies Holdings do Brasil Ltda., a wholly owned subsidiary of the Company, purchased an additional 34% ownership interest of Symbol Technologies do Brazil Ltda. owned by two principals of Seal. The Company paid $4,050 and also forgave the pre-existing $5,000 loan that had been made to an entity affiliated with the principals of Seal. As a result of this transaction, the Company and Symbol Technologies Holdings do Brasil Ltda. now owns 85% of the capital of Symbol Technologies do Brasil Ltda. The principals of Seal can now earn up to a maximum of approximately $3,900 if Symbol Technologies do Brasil Ltda. meets certain sales targets over relevant time periods. Under the terms of the relevant agreements, Symbol Technologies do Brasil Ltda. had its corporate form changed into a corporation and it will eventually become a wholly owned subsidiary of the Company, directly or indirectly. b. @POS.Com Acquisition -------------------- On September 16, 2002, we completed the acquisition of @POS.com, Inc. ("@POS") through a merger of @POS with one of our wholly owned subsidiaries. @POS manufactures and markets a range of interactive customer transaction terminals with advanced signature capture technology and features. In the merger, we purchased all outstanding shares of @POS common stock and preferred stock for approximately $5,446. The assets acquired and liabilities assumed were recorded at their estimated fair values. After allocating the purchase price including acquisition costs to net tangible assets, purchased technology that has reached technological feasibility was valued by independent appraisal at $1,800. This purchased technology has been capitalized and is being amortized over four years. In addition, a portion of the purchase price was allocated to other intangible assets with an aggregate fair value as determined by independent appraisal of $3,000 with a useful life of 9.5 years. 11. CONTINGENCIES ------------- a. Legal Matters ------------- We are a party to lawsuits in the normal course of business. Litigation in the normal course of business, as well as the lawsuits and investigations described below, can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings and government investigations are difficult to predict. Unless otherwise specified, Symbol is currently unable to estimate, with reasonable certainty, the possible loss, or range of loss, if any, for the lawsuits and investigations described herein. An unfavorable resolution to any of the lawsuits or investigations 16 described below could have a material adverse effect on Symbol's business, results of operations or financial condition. GOVERNMENT INVESTIGATIONS The SEC has issued a Formal Order Directing Private Investigation and Designating Officers to Take Testimony with respect to certain accounting matters, principally concerning the timing and amount of revenue recognized by Symbol during the period of January 1, 2000 through December 31, 2001 as well as the accounting for certain reserves, restructurings, certain option programs and several categories of cost of revenue and operating expenses. We are cooperating with the SEC, and have produced hundreds of thousands of documents and numerous witnesses in response to the SEC's inquiries. Symbol and approximately ten or more former employees have received so-called "Wells Notices" stating that the SEC Staff in the Northeast Regional Office is considering recommending to the Commission that it authorize civil actions against Symbol and the individuals involved alleging violations of various sections of the federal securities laws and regulations. Pursuant to an action against Symbol, the Commission may seek permanent injunctive relief and appropriate monetary relief, including a fine, from us. The United States Attorney's Office for the Eastern District of New York (the "Eastern District") has commenced a related investigation. We are cooperating with that investigation, and have produced documents and witnesses in response to the Eastern District's inquiries. The Eastern District could file criminal charges against Symbol and seek to impose a fine upon us and other relief the Eastern District deems appropriate. Any criminal and/or civil action or any negotiated resolution may involve, among other things, injunctive and equitable relief, including material fines, which could have a material adverse effect on our business, results of operations and financial condition. In addition, as a result of the investigations, various governmental entities at the federal, state and municipal levels may conduct a review of our supply arrangements with them to determine whether we should be considered for debarment. If we are debarred, we would be prohibited for a specified period of time from entering into new supply arrangements with such government entities. In addition, after a government entity has debarred Symbol, other government entities are likely to act similarly, subject to applicable law. Governmental entities constitute an important customer group for Symbol, and debarment from governmental supply arrangements at a significant level could have an adverse effect on our business, results of operations and financial condition. In March 2003, Robert Asti, Symbol's former Vice President--North America Sales & Services--Finance, who left Symbol in March 2001, pleaded guilty to two counts of securities fraud in connection with matters that are the subject of the Commission and the Eastern District investigations. These counts included allegations that Mr. Asti acted together with other unnamed high-ranking corporate executives at Symbol to, among other things, manufacture revenue through sham "round-trip" transactions. The Commission has also filed a civil complaint asserting similar allegations against Mr. Asti. In June 2003, Robert Korkuc, Symbol's former Chief Accounting Officer, who left Symbol in March 2003, pleaded guilty to two counts of securities fraud in connection with matters that are the subject of the Commission and the Eastern District investigations. These counts included allegations that Mr. Korkuc acted with others at Symbol in a fraudulent scheme to inflate various measures of Symbol's financial performance. The Commission also has filed a civil complaint asserting similar allegations against Mr. Korkuc. 17 Symbol is attempting to negotiate a resolution with each of the Commission and the Eastern District to the mutual satisfaction of the parties involved. In either case, an agreement has not yet been reached and there is no guarantee that Symbol will be able to successfully negotiate a resolution. SECURITIES LITIGATION MATTERS Pinkowitz v. Symbol Technologies, Inc., et al. On March 5, 2002, a purported class action lawsuit was filed, entitled Pinkowitz v. Symbol Technologies, Inc., et al., in the United States District Court for the Eastern District of New York on behalf of purchasers of the common stock of Symbol between October 19, 2000 and February 13, 2002, inclusive, against Symbol, Tomo Razmilovic, Jerome Swartz and Kenneth Jaeggi. The complaint alleged that defendants violated the federal securities laws by issuing materially false and misleading statements throughout the class period that had the effect of artificially inflating the market price of Symbol's securities. Subsequently, a number of additional purported class actions containing substantially similar allegations were also filed against Symbol and certain Symbol officers in the Eastern District of New York. On September 27, 2002, a consolidated amended complaint was filed in the United States District Court for the Eastern District of New York, consolidating the previously filed purported class actions. The consolidated amended complaint added Harvey P. Mallement, George Bugliarello and Leo A. Guthart (the then current members of the Audit Committee of Symbol's Board of Directors) and Brian Burke and Frank Borghese (former employees of Symbol) as additional individual defendants and broadened the scope of the allegations concerning revenue recognition. In addition, the consolidated amended complaint extended the alleged class period to the time between April 26, 2000 and April 18, 2002. Discovery in the Pinkowitz action has recently commenced. In addition, on October 15, 2003, plaintiffs moved for class certification of the Pinkowitz action. Trial of the Pinkowitz action is scheduled to commence on June 8, 2004. Symbol continues to vigorously assert its defenses in this litigation. Hoyle v. Symbol Technologies, Inc., et al. Salerno v. Symbol Technologies, Inc., et al. On March 21, 2003, a separate purported class action lawsuit was filed, entitled Edward Hoyle v. Symbol Technologies, Inc., Tomo Razmilovic, Kenneth V. Jaeggi, Robert W. Korkuc, Jerome Swartz, Harvey P. Mallement, George Bugliarello, Charles B. Wang, Leo A. Guthart and James H. Simons, in the United States District Court for the Eastern District of New York. On May 7, 2003, a virtually identical purported class action lawsuit was filed against the same defendants by Joseph Salerno. The Hoyle and Salerno complaints are brought on behalf of a purported class of former shareholders of Telxon Corporation ("Telxon") who obtained Symbol stock in exchange for their Telxon stock pursuant to Symbol's acquisition of Telxon effective as of November 30, 2000. The complaint alleges that the defendants violated the federal securities laws by issuing a Registration Statement and Joint Proxy Statement/Prospectus in connection with the Telxon acquisition that contained materially false and misleading statements that had the effect of artificially inflating the market price of Symbol's securities. On October 3, 2003, Symbol and the individual defendants moved to dismiss the Hoyle action as barred by the applicable statute of limitations. The Court has not ruled on the motion. Symbol intends to defend the case vigorously on the merits. 18 In connection with the above pending class actions and government investigations, Symbol has recorded a loss provision on legal settlements of $72,000 in the three month period ended March 31, 2003, bringing the estimated liability to $142,000 as of March 31, 2003, which is reflected as a component of accounts payable and accrued expenses in the accompanying Condensed Consolidated Financial Statements. Bildstein v. Symbol Technologies, Inc., et. al. On April 29, 2003, a lawsuit was filed, entitled Bildstein v. Symbol Technologies, Inc., et. al., in the United States District Court for the Eastern District of New York against Symbol and Jerome Swartz, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Charles B. Wang, Tomo Razmilovic, Leo A. Guthart, James Simons, Saul F. Steinberg and Lowell Freiberg. The plaintiff alleges that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, and common and state law, by authorizing the distribution of proxy statements in 2000, 2001 and 2002. Plaintiff seeks the cancellation of all affirmative votes at the annual meetings for 2000, 2001 and 2002, canceling all awards under the option plans, enjoining implementation of the option plans and any awards thereunder and an accounting by the defendants for all damage to Symbol, plus all costs and expenses in connection with the action. Symbol has filed a motion to dismiss that is now fully briefed. On February 4, 2004, Symbol argued its motion to dismiss before the Court and is awaiting the Court's decision. Symbol intends to litigate the case vigorously on the merits. Gold v. Symbol Technologies, Inc., et al. On December 18, 2003, a purported derivative action lawsuit was filed, entitled Gold v. Symbol Technologies, Inc., et al., in the Court of Chancery of the State of the State of Delaware against Symbol and Tomo Razmilovic, Kenneth V. Jaeggi, Dr. Jerome Swartz, Frank Borghese, Brian Burke, Richard M. Feldt, Satya Sharma, Harvey P. Mallement, Raymond R. Martino, George Bugliarello, Dr. Leo A. Guthart, Richard Bravman, Dr. James H. Simons, Leonard H. Goldner, Saul P. Steinberg, Lowell C. Freiberg and Charles Wang. The complaint alleges that the defendants violated the federal securities laws by issuing materially false and misleading statements from January 1, 1998 through December 31, 2002 that had the effect of artificially inflating the market price of Symbol's securities and that they failed to properly oversee or implement policies, procedures and rules to ensure compliance with federal and state laws requiring the dissemination of accurate financial statements, which ultimately caused Symbol to be sued for, and exposed to liability for, violations of the anti-fraud provisions of the federal securities laws, engaged in insider trading in Symbol's common stock, wasted corporate assets and improperly awarded a severance of approximately $13,000 to Mr. Razmilovic. Plaintiff seeks to recover incentive-based compensation paid to senior members of Symbol's management in reliance on materially inflated financial statements and to impose a trust to recover cash and other valuable assets received by the management defendants and former Symbol board members in the form of proceeds garnered from the sale of Symbol common stock (including option related sales) from at least January 1, 1998 through December 31, 2002. Symbol intends to litigate the case vigorously. In re Telxon Corporation Securities Litigation From December 1998 through March 1999, a total of 27 class actions were filed in the United States District Court, Northern District of Ohio, by certain alleged stockholders of Telxon on behalf of themselves and purported classes consisting of Telxon stockholders, other than the defendants and their affiliates, who purchased stock during the period from May 21, 1996 through February 23, 1999, or various portions thereof, alleging claims for "fraud on the market" arising from alleged 19 misrepresentations and omissions with respect to Telxon's financial performance and prospects and an alleged violation of generally accepted accounting principles by improperly recognizing revenues. The named defendants are Telxon, its former president and chief executive officer, Frank E. Brick, and its former senior vice president and chief financial officer, Kenneth W. Haver. The actions were referred to a single judge, consolidated and an amended complaint was filed by lead counsel. The amended complaint alleges that the defendants engaged in a scheme to defraud investors through improper revenue recognition practices and concealment of material adverse conditions in Telxon's business and finances. The amended complaint seeks certification of the identified class, unspecified compensatory and punitive damages, pre- and post-judgment interest, and attorneys' fees and costs. On November 13, 2003, Telxon and the plaintiff class reached a tentative settlement of all pending shareholder class actions against Telxon. Under the settlement, Telxon anticipates that it will pay $37,000 to the class. As a result of anticipated contributions by Telxon's insurers, Telxon expects that its net payment will be no more than $25,000. Telxon has not settled its lawsuit against its former auditors, PricewaterhouseCoopers LLP ("PwC"), and, as part of the proposed settlement of the class action, Telxon has agreed to pay to the class, under certain circumstances, up to $3,000 of the proceeds of that lawsuit. On December 19, 2003, the settlement received preliminary approval from the Court. On February 12, 2004, the Court granted its final approval of the settlement. Accordingly, we recorded a $25,000 pre-tax charge in the Consolidated Statements of Operations for the quarter ended December 31, 2002 and have reflected as an accrued liability as of December 31, 2002 and March 31, 2003 the estimated settlement of $37,000 and have recorded a non-current asset for the insurance proceeds of $12,000 which we expect to receive in the first quarter of 2004. On February 20, 2001, Telxon filed a motion for leave to file and serve a summons and third-party complaint against third-party defendant PwC in the shareholders' class action complaints. Telxon's third-party complaint against PwC concerns PwC's role in the original issuance and restatements of Telxon's financial statements for its fiscal years 1996, 1997 and 1998 and its interim financial statements for its first and second quarters of fiscal year 1999, which are the subject of the class action litigation against Telxon. Telxon states causes of action against PwC for contribution under federal securities law, as well as state law claims for accountant malpractice, fraud, constructive fraud, fraudulent concealment, fraudulent misrepresentation, negligent misrepresentation, breach of contract and breach of fiduciary duty. With respect to its federal claim against PwC, Telxon seeks contribution from PwC for all sums that Telxon may be required to pay in excess of Telxon's proportionate liability, if any, and attorney fees and costs. With respect to its state law claims against PwC, Telxon seeks compensatory damages, punitive damages, attorney fees and costs, in amounts to be determined at trial. Fact discovery has been substantially completed. Trial is scheduled to commence sometime in 2004. Wyser-Pratte Management Co. v. Telxon Corporation, et. al. On June 11, 2002, Wyser-Pratte Management Co., Inc. ("WPMC") filed a complaint against Telxon and its former top executives alleging violations of Sections 10(b), 18, 14(a) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act"), and alleging additional common law claims. This action is related to the same set of facts as the In re Telxon class action described above. On November 15, 2003, the parties reached an agreement in principle to resolve the litigation under which Telxon would pay WPMC $3,300. Accordingly, we recorded a $3,300 pre-tax charge in the Consolidated Statements of Operations for the quarter ended December 31, 2002. The settlement was finalized in December 2003, and a stipulation of dismissal was filed in January 2004. 20 PENDING PATENT AND TRADEMARK LITIGATION Proxim v. Symbol Technologies, Inc., 3 Com Corporation, Wayport Incorporated and SMC Networks Incorporated In March 2001, Proxim Incorporated ("Proxim") sued Symbol, 3 Com Corporation, Wayport Incorporated and SMC Networks Incorporated in the United States District Court in the District of Delaware for allegedly infringing three patents owned by Proxim (the "Proxim v. 3Com et al. Action"). Proxim also filed a similar lawsuit in March 2001 in the United States District Court in the District of Massachusetts against Cisco Systems, Incorporated and Intersil Corporation. The complaint against Symbol sought, among other relief, unspecified damages for patent infringement, treble damages for willful infringement and a permanent injunction against Symbol from infringing these three patents. Symbol answered and filed counterclaims against Proxim, asserting that Proxim's RF product offerings infringe on four of our patents relating to wireless LAN technology. On December 4, 2001, we filed a complaint against Proxim in the United States District Court in the District of Delaware (the "Symbol v. Proxim Action") asserting infringement of the same four patents that were asserted in our counterclaim against Proxim in the Proxim v. 3Com et al. Action prior to the severance of this counterclaim by the Court. On December 18, 2001, Proxim filed an answer and counterclaims in the Symbol v. Proxim Action, seeking declaratory judgments for non-infringement, invalidity and unenforceability of the four patents asserted by Symbol, injunctive and monetary relief for our alleged infringement of one additional Proxim patent (the "`634 Patent") involving wireless LAN technology, monetary relief for our alleged false patent marking, and injunctive and monetary relief for our alleged unfair competition under the Lanham Act, common law unfair competition and tortious interference. On March 17, 2003, Intersil and Proxim announced that a settlement between the companies had been reached, whereby Proxim agreed, inter alia, to dismiss with prejudice all of Proxim's claims in the Proxim v. 3Com et al. Action (the "Proxim/Intersil Agreement"). Proxim also agreed in the Proxim/Intersil Agreement to release us from past and future liability for alleged infringement of the `634 Patent in the Symbol v. Proxim Action, with respect to any of our products that incorporate Intersil's wireless radio chipsets. On April 5, 2003, the Court signed that Stipulation and Order of Dismissal, dismissing all of Proxim's claims in that action with prejudice. On July 30, 2003, among other rulings, the Court dismissed Proxim's unfair competition claim. Trial on the Symbol patents began on September 8, 2003. On September 12, 2003, the jury returned a verdict finding that two of the three asserted patents (the `183 and `441 Patents) had been infringed by Proxim. Proxim dropped its claims of invalidity as to all three Symbol patents, and consented to judgment against Proxim on those invalidity claims. The jury awarded us 6% royalties on Proxim's past sales of infringing products, which include Proxim's OpenAir, 802.11 and 802.11b products. Based on Proxim's sales of infringing products from 1995 to the present, we estimate that damages for past infringement by Proxim amount to approximately $23,000 before interest. In addition, Proxim continues to sell the infringing products, and we expect that future sales would be subject to a 6% 21 royalty as well. A one day bench trial on Proxim's remaining equitable defenses took place on November 24, 2003. The Court has not ruled on these defenses. Trial on the Proxim patent began on September 15, 2003. On September 29, 2003, the jury returned a verdict, finding the patent valid but not infringed by Symbol. Symbol Technologies, Inc. v. Hand Held Products, Inc. and HHP-NC, Inc. On January 21, 2003, we filed a complaint against Hand Held Products, Inc. and HHP-NC, Inc. (collectively, "HHP") for patent infringement and declaratory judgment. We alleged that HHP infringes 12 of our patents, that 36 of HHP's patents are not infringed by us, that the HHP patents are otherwise invalid or unenforceable, and that the court has jurisdiction to hear the declaratory judgment action. We requested that the court enjoin HHP from further infringement, declare that our products do not infringe HHP's patents, and award us costs and damages. On March 12, 2003, HHP filed a Motion to Dismiss, which was denied on November 14, 2003. With respect to our claim for a declaratory judgment that 36 of HHP's patents are not infringed by us, or that they are otherwise invalid or unenforceable, the Court denied HHP's motion to dismiss with respect to 10 of the patents, granted HHP's motion to dismiss with respect to 25 of the patents based on lack of subject matter jurisdiction, and granted HHP's motion to dismiss as to one HHP patent based on HHP's representation to the Court that the patent had been dedicated to the public and that HHP would not assert it against us. Pursuant to a stipulation between the parties, we have dismissed without prejudice our claim that HHP infringes 5 of the 12 Symbol patents and our action seeking a declaratory judgment with respect to the 10 HHP patents that remained in the case. On December 12, 2003, HHP asserted counterclaims against Symbol and Telxon (which had previously owned some of the patents asserted by Symbol) seeking a declaratory judgment that the Symbol patents were not infringed, were invalid and/or unenforceable. On the same day, HHP filed a third party complaint against 12 of its suppliers which, HHP claims, are liable to defend and/or indemnify HHP with respect to Symbol's infringement claims. We expect discovery to commence in 2004. Hand Held Products, Inc. and HHP-NC, Inc. v. Symbol Technologies, Inc. and Telxon Corporation On January 7, 2004, Symbol was served with a summons and complaint alleging that certain of its products infringe 4 patents owned by HHP. Three of the patents concern the design of a finger groove on the surface of a hand held computer, and the fourth concerns a decoding algorithm for 2 dimensional bar codes. These patents had been the subject of Symbol's declaratory judgment complaint, described above, but had been dismissed by the Court based on HHP's representation to the Court that Symbol had no reasonable apprehension of being sued by HHP for infringement of these patents. Symbol intends to defend this case vigorously on the merits. Symbol Technologies, Inc. v. Metrologic Instruments, Inc. Symbol and Metrologic Instruments, Inc. ("Metrologic") entered into a cross-licensing agreement executed on December 16, 1996 and effective as of January 1, 1996 (the "Metrologic Agreement"). On April 12, 2002, we filed a complaint in the United States District Court in the Eastern District of New York against Metrologic, alleging a material breach of the Metrologic Agreement. We moved for summary judgment seeking a ruling on the issues, inter alia, that Metrologic had breached the Metrologic Agreement and that we had the right to terminate Metrologic's rights under the Metrologic Agreement. The Court denied the summary judgment motion on March 31, 2003, and held that the issues were subject to resolution by arbitration. We have appealed the Court's decision. 22 On December 23, 2003, the Court of Appeals dismissed the appeal for lack of appellate jurisdiction because the District Court judgment was not final. In the interim, we are proceeding with the arbitration. Metrologic had filed a Demand for Arbitration in 2002 that was stayed pending the decisions by the Court. On June 26, 2003, we filed an Amended Answer and Counterclaims to Metrologic's Demand for Arbitration, asserting that (a) Metrologic's accused products are royalty bearing products, as defined under the Metrologic Agreement, and (b) in the alternative, those products infringe upon one or more of our patents. Metrologic replied to our counterclaims on July 31, 2003, denying infringement and asserting that the arbitrator was without jurisdiction to hear our counterclaims. Pursuant to the decision made by the arbitration panel, an arbitrator is now in place to hear the arbitration. On December 22, 2003, Metrologic withdrew its Demand for Arbitration, however, our counterclaims are still being heard. In a separate matter relating to the Metrologic Agreement, we filed a demand for an arbitration against Metrologic seeking a determination that certain of our new bar code scanning products are not covered by Metrologic patents licensed to us under the Metrologic Agreement. We do not believe that the products infringe any Metrologic patents, but in the event there was a ruling to the contrary, our liability would be limited to the previously negotiated royalty rate. On June 6, 2003, the arbitrator ruled that whether we must pay royalties depends on whether our products are covered by one or more claims of Metrologic's patents, and that this issue must be litigated in court, not by arbitration. The arbitrator further ruled that we could not have materially breached the Metrologic Agreement, since the threshold infringement issue has not yet been determined. On June 19, 2003, after the arbitrator ruled that Metrologic's infringement allegations must be adjudicated in court, Metrologic filed a complaint against us in the District Court for the District of New Jersey, alleging patent infringement and breach of contract, and seeking monetary damages and termination of the Metrologic Agreement. On July 30, 2003, Symbol answered the complaint and asserted counterclaims for declaratory judgments of invalidity and noninfringement of Metrologic's patents and for non-breach of the Agreement. Discovery is proceeding. Symbol intends to defend the case vigorously on the merits. Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnership On July 21, 1999, we and six other members of the Automatic Identification and Data Capture industry ("Auto ID Companies") jointly initiated a lawsuit against the Lemelson Medical, Educational, & Research Foundation, Limited Partnership (the "Lemelson Partnership"). The suit, which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnership, was commenced in the U.S. District Court, District of Nevada in Reno, Nevada but was subsequently transferred to the Court in Las Vegas, Nevada. In the litigation, the Auto ID Companies seek, among other remedies, a declaration that certain patents, which have been asserted by the Lemelson Partnership against end users of bar code equipment, are invalid, unenforceable and not infringed. The Lemelson Partnership has contacted many of the Auto ID Companies' customers demanding a one-time license fee for certain so-called "bar code" patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson. Symbol and the other Auto ID Companies have received many requests from their customers asking that they undertake the defense of these claims using their knowledge of the technology at issue. Certain of these customers have requested indemnification against the Lemelson Partnership's claims from Symbol and the other Auto ID Companies, individually and/or collectively with other equipment suppliers. Symbol believes, and its understanding is that the other Auto ID Companies believe, that generally they have no obligation to indemnify their customers against these 23 claims and that the patents being asserted by the Lemelson Partnership against their customers with respect to bar code equipment are invalid, unenforceable and not infringed. A 27-day non-jury trial was held before the Court beginning on November 18, 2002, and concluding on January 17, 2003. Post-trial briefing was completed in late June 2003 and the parties are awaiting a decision to be rendered by the Court. On January 23, 2004, the Court concluded that Lemelson's patent claims are unenforceable under the equitable doctrine of prosecution laches; that the asserted patent claims as construed by the Court are not infringed by Symbol because use of the accused products does not satisfy one or more of the limitations of each and every asserted claim; and that the claims are invalid for lack of written description and enablement even if construed in the manner urged by Lemelson. In so concluding, the Court found that judgment should be entered in favor of plaintiffs Symbol and the other members of the Auto ID Companies and against defendant Lemelson Partnership on Symbol's and the Auto ID Companies' complaint for declaratory judgment. The Court entered its judgment on January 23, 2004. OTHER LITIGATION Telxon v. Smart Media of Delaware, Inc. ("SMI") On December 1, 1998, Telxon filed suit against SMI in the Court of Common Pleas for Summit County, Ohio in a case seeking declaratory judgment that, contrary to SMI's position, Telxon did not contract to develop SMI's products or to fund SMI, and that it did not fraudulently induce SMI to refrain from engaging in business with others or interfere with SMI's business relations. On March 12, 1999, SMI filed its Answer and Counterclaim denying Telxon's allegations and alleging claims against Telxon for negligent misrepresentation, estoppel, tortious interference with business relationship and intentional misrepresentation and seeking approximately $10,000 in compensatory damages, punitive damages, fees and costs. On September 17, 2003, a jury awarded approximately $218,000 in damages against Telxon. This sum included an award of approximately $6,000 to an individual. On September 24, 2003, the individual and SMI moved to add Symbol as a substitute or counterclaim defendant. That motion has subsequently been withdrawn by SMI although it is still being pursued by the individual. The motion has been fully briefed and Symbol is awaiting a decision. There can be no assurance that SMI will not renew this motion at a later date. On October 7, 2003, Telxon made a motion to impound and secure the trial record of certain exhibits, and on October 8, 2003, Telxon made motions for judgment in its favor notwithstanding the jury's verdicts, and for a new trial. In the event this relief is not granted, Telxon requested that the amount of the jury's verdicts be reduced. Also, Telxon requested that the execution of any judgment against Telxon entered by the Court be stayed without the posting of a bond, or in the alternative, that a bond be set at a maximum of $3,700. In support of its motions, Telxon argued that the jury's verdicts were based upon inadmissible evidence being improperly provided to the jury during its deliberations; that the absence of liability on the part of Telxon was conclusively established by the documents in evidence; and that the amounts awarded to SMI were based on legally irrelevant projections, and are wildly speculative, particularly given that SMI never had any revenue or profits. In addition, Telxon argued that the jury verdicts incorrectly awarded damages more than once for the same alleged injury by adding together two separate awards for lost profits, and by improperly combining different measures of damages. The court has not ruled on any post-trial motions. There can be no assurance that Symbol will not be found to be ultimately liable for the damage awards. 24 Barcode Systems, Inc. ("BSI") v. Symbol Technologies Canada, Inc., et al. On March 19, 2003, BSI filed an amended statement of claim in the Court of Queen's Bench in Winnipeg, Canada, naming Symbol Technologies Canada, Inc. and Symbol as defendants. BSI alleges that Symbol deliberately, maliciously and willfully breached its agreement with BSI under which BSI purported to have the right to sell Symbol product in western Canada and to supply Symbol's support operations for western Canada. BSI has claimed damages in an unspecified amount, punitive damages and special damages. Symbol denies BSI's allegations and claims that it properly terminated any agreements between BSI and Symbol. Additionally, Symbol filed a counterclaim against BSI alleging trademark infringement, depreciation of the value of the goodwill attached to Symbol's trademark and damages in the sum of Canadian $1,281, representing the unpaid balance of product sold by Symbol to BSI. On October 30, 2003, BSI filed an Application For Leave with the Canadian Competition Tribunal ("Tribunal"). BSI is seeking an Order from the Tribunal that would require Symbol to accept BSI as a customer on the "usual trade terms" as they existed prior to the termination of their agreement in April 2003. The Tribunal granted leave for BSI to proceed with its claim against Symbol on January 15, 2004. Symbol intends to appeal the Tribunal's decision. On November 17, 2003, BSI filed an additional lawsuit in British Columbia, Canada against Symbol and a number of its distributors alleging that Symbol refused to sell products to BSI, conspired with the other defendants to do the same and used confidential information to interfere with BSI's business. Symbol considers these claims to be meritless and intends to defend against these claims vigorously. Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol de Mexico, Sociedad de R.L. de C.V. Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata ("Plaintiff"), filed a lawsuit against Symbol de Mexico, Sociedad de R.L. de C.V. ("Symbol Mexico") on or about October 21, 2003 for purposes of exercising an action to reclaim property on which Symbol's Reynosa facility is located. Such lawsuit was filed before the First Civil Judge of First Instance, 5th Judicial District, in Reynosa, Tamaulipas, Mexico. Additionally, the First Civil Judge ordered the recording of a list pendens with respect to this litigation before the Public Register of Property in Cd. Victoria, Tamaulipas. As of November 13, 2003, such list pendens was still pending recordation. Plaintiff alleges that she is the legal owner of a tract of land of one hundred (100) hectares in area, located within the area comprising the Rancho La Alameda, Municipality of Reynosa, Tamaulipas, within the Bajo Rio San Juan, Tamaulipas, irrigation district. Allegedly, such land was caused to be part of the Parque Industrial Del Norte in Reynosa, Tamaulipas. Plaintiff further alleges that Symbol Mexico, without any claim of right and without Plaintiff's consent entered upon the tract of land, occupied such, and refused to return to Plaintiff the portion of land and all improvements and accessions thereto occupied by Symbol Mexico. Plaintiff is asking the court to order Symbol Mexico to physically and legally deliver to the Plaintiff the portion of land occupied by Symbol Mexico. Symbol Mexico acquired title to the lots in the Parque Industrial Reynosa from Edificadora Jarachina, S.A. de C.V. pursuant to a deed instrument. An Owner's Policy of Title Insurance was issued by Stewart Title Guaranty Company in connection with the above-mentioned transaction in the amount of $13,400. A Notice of Claim and Request for Defense of Litigation was duly delivered on behalf of Symbol 25 to Stewart Title Guaranty Company on November 4, 2003. Symbol intends to defend against this claim vigorously. Bruck Technologies Handels GmbH European Commission ("EC") Complaint In February 2004, Symbol became aware of a notice from the European Competition Commission (the "EC") of a complaint lodged with it by Bruck Technologies Handels GmbH ("Bruck") that certain provisions of the Symbol PartnerSelect program violate Article 81 of the EC Treaty. Symbol considers this claim to be without merit and intends to vigorously defend itself. PSC Litigation On June 26, 2002, Symbol filed an action against PSC Inc. and PSC Scanning, Inc. (collectively, "PSC") in New York State Supreme Court in Suffolk County, New York asserting claims for breach of contract and tortious interference with prospective business relations stemming from PSC's failure to deliver products to Symbol under a preexisting supply and distribution agreement. On August 22, 2002, PSC filed a separate action in the same Court against Symbol alleging that Symbol breached its obligations under a separate supply and distribution agreement with PSC for the supply of Symbol's bar code readers. On November 22, 2002, during the pendency of the two contract actions, PSC filed petitions in the United States Bankruptcy Court for the Southern District of New York seeking relief under Chapter 11 of the United States Bankruptcy Code. As part of a Bankruptcy Court's mandated mediation process, on April 7, 2003, the parties entered into a settlement agreement settling all existing disputes between them. The settlement agreement was approved by the Bankruptcy Court as part of PSC's Final Plan of Reorganization, as confirmed on June 19, 2003, and became effective on June 30, 2003. On June 30, 2003, in accordance with the terms of the settlement, PSC made a one-time payment of $6,000 to Symbol. In addition, the parties executed an amended patent license and supply agreements that permit PSC to purchase certain Symbol bar code scan engine products for use by PSC in the manufacture of certain bar code reading products. The parties also terminated the two pre-existing distribution agreements that were the subject of pending litigations between the parties, and dismissed, with prejudice, the two pending contract actions relating to those agreements. b. Guarantees and Product Warranties --------------------------------- Financial Accounting Standards Board ("FASB") Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtness of Others" ("FIN 45"), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure requirements of FIN 45 are applicable to the Company's product warranty liability. We provide standard warranty coverage for most of our products for a period of one year from the date of shipment. We record a liability for estimated warranty claims based on historical claims, product failure rates and other factors. This warranty liability, recorded as a component of accounts payable and accrued expenses, primarily includes the anticipated cost of materials, labor and shipping necessary to repair and service the equipment. The following table illustrates the changes in our warranty reserves: Amount ------ Balance at December 31, 2002................... $ 15,034 Charges to expense--cost of revenue............ 9,146 Utilization/payment............................ (9,322) ----------- Balance at March 31, 2003...................... $ 14,858 =========== 26 c. Derivative Instruments and Hedging Activities --------------------------------------------- We utilize derivative financial instruments to hedge the risk exposures associated with foreign currency fluctuations for payments denominated in foreign currencies from our international subsidiaries. These derivative instruments are designated as either fair value or cash flow hedges, depending on the exposure being hedged, and have maturities of less than one year. Changes in fair value of derivative instruments are recognized immediately in earnings unless the derivative qualifies as a cash flow hedge. For derivatives qualifying as cash flow hedges, the effective portion of changes in fair value of the derivative instrument is recorded as a component of other comprehensive income / (loss) and is reclassified to earnings in the same period during which the hedged transaction affects earnings. Any ineffective portion (representing the remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged transaction) is recognized in earnings as it occurs. For fair value hedges, changes in fair value of the derivative, as well as the offsetting changes in fair value of the hedged item, are recognized in earnings each period. We do not use these derivative financial instruments for trading purposes. As of March 31, 2003 and December 31, 2002, respectively, we had $8,566 and $25,267 in notional amounts of forward exchange contracts outstanding. The forward exchange contracts generally have maturities that do not exceed 12 months and require us to exchange foreign currencies for U.S. dollars at maturity at rates agreed to at inception of the contracts. These contracts are primarily denominated in British pounds, Euros, Australian dollars, Canadian dollars and Japanese yen and have been marked to market each period with the resulting gains and losses included in the Condensed Consolidated Statement of Operations. The fair value of these forward exchange contracts was $(386) and ($1,732) as of March 31, 2003 and December 31, 2002, respectively, which was recorded in current liabilities. 12. BUSINESS SEGMENTS AND OPERATIONS BY GEOGRAPHIC AREAS ---------------------------------------------------- Our business consists of the design, manufacture and marketing of scanner integrated mobile and wireless information management systems, and the servicing of, customer support for and professional services related to these systems. These service activities are coordinated under one global services organization. As a result, our activities are conducted in two reportable segments, Products and Services. The Products segment sells bar code data capture equipment, mobile computing devices, wireless communication equipment and other peripheral products and receives royalties. The Services segment provides wireless communication solutions that connect our bar code reading equipment and mobile computing devices to wireless networks. This segment also provides worldwide comprehensive repair and maintenance integration and support in the form of service contracts or repairs on an as-needed basis. We use many factors to measure performance and allocate resources to these two reportable segments. The primary measurements are sales and standard costs. The accounting policies of the two reportable segments are essentially the same as those used to prepare our consolidated financial statements. We rely on our internal management system to provide us with necessary sales and standard cost data by reportable segment and we make financial decisions and allocate resources based on the information we receive from this management system. We do not allocate manufacturing variances, research and development, sales and marketing, or general and administrative expenses to these segments, nor to our 27 geographic regions, as we do not use that information to make key operating decisions and do not believe that allocating these expenses is significant in evaluating performance. Our internal structure is in the form of a matrix organization whereby certain managers are held responsible for products and services worldwide while other managers are responsible for specific geographic areas. The operating results of both components are reviewed on a regular basis. We operate in three main geographic regions: The Americas (which includes North and South America), EMEA (which includes Europe, Middle East and Africa) and Asia Pacific (which includes Japan, the Far East and Australia). Sales are allocated to each region based upon the location of the use of the products and services. Non - U.S. sales for the three months ended March 31, 2003 and 2002 were $170,970 and $123,875, respectively. Identifiable assets are those tangible and intangible assets used in operations in each geographic region. Corporate assets are principally temporary investments and goodwill. Summarized financial information concerning our reportable segments and geographic regions is shown in the following table.
FOR THE THREE MONTHS ENDED ----------------------------------------------------------------------------- MARCH 31, 2003 MARCH 31, 2002 ------------------------------------- -------------------------------------- PRODUCTS SERVICES TOTAL PRODUCTS SERVICES TOTAL ----------- ----------- ----------- ----------- ----------- ----------- REVENUES: The Americas...................... $ 185,080 $ 50,248 $ 235,328 $ 170,948 $ 42,457 $ 213,405 EMEA.............................. 104,836 22,829 127,665 71,149 18,038 89,187 Asia Pacific...................... 20,787 2,567 23,354 12,805 2,247 15,052 ----------- ----------- ----------- ----------- ----------- ----------- Total net sales................... $ 310,703 $ 75,644 $ 386,347 $ 254,902 $ 62,742 $ 317,644 =========== =========== =========== =========== =========== =========== STANDARD GROSS PROFIT: The Americas...................... $ 94,881 $ 11,603 $ 106,484 $ 84,605 $ 16,449 $ 101,054 EMEA.............................. 53,510 7,163 60,673 35,305 3,634 38,939 Asia Pacific...................... 10,439 830 11,269 6,908 987 7,895 ----------- ----------- ----------- ----------- ----------- ----------- Total gross profit at standard.... $ 158,830 $ 19,596 178,426 $ 126,818 $ 21,070 147,888 =========== =========== =========== =========== Manufacturing variances & other related costs..................... 6,554 69,018 ----------- ----------- Total gross profit................ $ 171,872 $ 78,870 =========== ===========
AS OF AS OF MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------- IDENTIFIABLE ASSETS: The Americas...................... $ 886,079 $ 900,563 EMEA.............................. 281,284 280,538 Asia Pacific...................... 39,032 34,652 Corporate (principally goodwill, intangible assets and investments) 355,436 356,442 ----------- ----------- Total........................ $ 1,561,831 $ 1,572,195 =========== ===========
13. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In November 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with 28 Multiple Deliverables," related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The consensus requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized over the life of the arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item in a bundled sales arrangement. If the fair value is not available for the delivered items, the residual method must be used. This method requires that the amount allocated for the undelivered items in the arrangement be recorded at their full fair value. This results in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus is not expected to have a material effect on the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation issues. This interpretation requires that the assets, liabilities, and results of activities of a Variable Interest Entity ("VIE") be consolidated into the financial statements of the enterprise that has a controlling interest in the VIE. FIN 46R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or annual reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. We are currently evaluating the impact of adopting this interpretation on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. SFAS No. 149 also amends the definition of an underlying to conform it to language used in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. The adoption of SFAS No. 149 is not expected to have a material impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that falls within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, which for us is the quarter ended September 30, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on our consolidated financial statements. In August 2003, the EITF reached consensus on EITF Issue No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2, "Software Revenue Recognition," to Non-Software 29 Deliverables in an Arrangement Containing More-than-Incidental Software." EITF 03-5, which became effective for us on October 1, 2003, provides guidance on determining whether non-software deliverables are included within the scope of SOP 97-2 and, accordingly, whether multiple element arrangements are to be accounted for in accordance with EITF Issue No. 00-21 or SOP 97-2. We do not believe that adoption of the provisions of EITF 03-5 will have a material impact on our consolidated financial statements. In November 2003, the EITF reached partial consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-1 provides guidance on the new requirements for other-than-temporary impairment and its application to debt and marketable equity investments that are accounted for under SFAS No. 115. The new requirements on disclosures are effective for fiscal years ending after December 15, 2003. The implementation of EITF 03-1 is not anticipated to have a material impact on our consolidated financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FORWARD-LOOKING STATEMENTS; CERTAIN CAUTIONARY STATEMENTS - --------------------------------------------------------- This report contains forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by their use of words, such as "anticipate," "estimates," "should," "expect," "guidance," "project," "intend," "plan," "believe" and other words and terms of similar meaning, in connection with any discussion of Symbol's future business, results of operations, liquidity and operating or financial performance or results. Such forward looking statements involve significant material known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These and other important risk factors are included in the "Risk Factors" section of this report. In light of the uncertainty inherent in such forward-looking statements, you should not consider the inclusion to be a representation that such forward-looking events or outcomes will occur. Because the information herein is based solely on data currently available, it is subject to change and should not be viewed as providing any assurance regarding Symbol's future performance. Actual results and performance may differ from Symbol's current projections, estimates and expectations, and the differences may be material, individually or in the aggregate, to Symbol's business, financial condition, results of operations, liquidity or prospects. Additionally, Symbol is not obligated to make public indication of changes in its forward looking statements unless required under applicable disclosure rules and regulations. The following discussion and analysis should be read in conjunction with Symbol's Condensed Consolidated Financial Statements and the notes thereto that appear elsewhere in this report. OVERVIEW - -------- We are a leader in secure mobile information systems that integrate application-specific handheld computers with wireless networks for data, voice and bar code data capture. Our goal is to be one of the world's preeminent suppliers of mission-critical mobile computing solutions to both business and industrial users. For the year ended December 31, 2002, we generated $1,401,617 of net revenue. 30 Symbol manufactures products and provides services to capture, manage and communicate data using three core technologies - bar code reading and image recognition, mobile computing and networking systems. Our products and services are sold to a broad and diverse base of customers on a worldwide basis and in diverse markets such as retail, transportation, parcel and postal delivery services, warehousing and distribution, manufacturing, healthcare, hospitality, security, education and government. We do not depend upon a single customer, or a few customers, the loss of which would have a material adverse effect on our business. We are engaged in two reportable business segments: (1) the design, manufacture and marketing of mobile computing, automatic data capture, and wireless network systems (the "Product Segment"); and (2) the servicing of, customer support for and professional services related to these systems (the "Services Segment"). Each of our operating segments uses its core competencies to provide building blocks for mobile computing solutions. EXECUTIVE OVERVIEW OF PERFORMANCE - --------------------------------- Overall our revenue performance in the three month period ended March 31, 2003 improved 21.6% to $386,347 from $317,644 in the comparable prior year period, despite facing certain challenges beyond our control such as the still-slow information technology spending, a deteriorating global economy, a worsening geopolitical landscape, with the U.S. at war, and a rising global health threat in SARS. We are continuing to invest in our people, processes and systems to improve our margins. We are beginning to see benefits as our overall gross profit improved to 44.5% for the three month period ended March 31, 2003, from 24.8% in the comparable prior year period. Our operating expenses of $208,949 for the three month period ended March 31, 2003 included a provision for potential legal settlements related to our class action suits of $72,000 and approximately $5,300 additional expenses associated with our investigations and restatement. A key focus of management has been on improving balance sheet performance. For the three month period ended March 31, 2003, we saw continued strength in cash flow from operations of $71,288. As such, we improved our liquidity position, further paying down total debt by approximately $37,000 and increased cash by $22,466 in the three month period ended March 31, 2003. As of March 31, 2003, our cash was at $98,587 with only $50 million in short-term bank debt. Our net inventory at March 31, 2003 was reduced by $20,633 to $240,463 as compared to $261,096 at December 31, 2002. Our focus on improving our inventory control processes and on improving inventory turns has aided significantly in reducing our inventory levels. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS - ----------------------------------------------------- Subsequent to the issuance of the Company's March 31, 2002 financial statements, management of the Company identified certain accounting errors and irregularities in its previously issued financial statements beginning in 1998 through the nine months ended September 30, 2002. As a result, the condensed consolidated financial statements for the three months ended March 31, 2002 included in Item 1 have been restated. Refer to Note 2 of the Condensed Consolidated Financial Statements for further details on the restatement. Management's discussion and analysis of financial condition and results of operations give effect to the restatement of the March 31, 2002 financial statements. RESULTS OF OPERATIONS - --------------------- The following table summarizes our revenue by reportable segment and geographic region: 31
FOR THE THREE MONTHS -------------------- ENDED MARCH 31, ------------------ PERCENT 2003 2002 INCREASE INCREASE ---- ---- -------- -------- Product revenues: The Americas $185,080 $170,948 $14,132 8.3 EMEA 104,836 71,149 33,687 47.4 Asia Pacific 20,787 12,805 7,982 62.3 ----------------- --------------- -------------- --------------- Total-product revenues 310,703 254,902 55,801 21.9 ----------------- --------------- -------------- --------------- Services revenues: The Americas 50,248 42,457 7,791 18.4 EMEA 22,829 18,038 4,791 26.6 Asia Pacific 2,567 2,247 320 14.2 ----------------- --------------- -------------- --------------- Total-services revenues 75,644 62,742 12,902 20.6 ----------------- --------------- -------------- --------------- Total revenues $386,347 $317,644 $68,703 21.6 ================= ================ ============= ===============
Net product revenue of $310,703 for the three months ended March 31, 2003 increased $55,801 or 21.9 percent from $254,902 in the comparable prior year period. The increase is due to increased sales volume of the Company's mobile computing products, particularly in the Americas. In addition, our product revenue in EMEA grew $33,687 or 47.4% as compared to the comparable prior year period, due to similar increases in our mobile computing products as we further penetrated this market. Net services revenue of $75,644 for the three months ended March 31, 2003 increased $12,902 or 20.6 percent, from $62,742 in the comparable prior year period primarily due to an 18.4 percent increase in the Americas and a 26.6 percent increase in EMEA. The increase in service revenue in the Americas is largely due to significant cash collections, as service revenue is recognized on a billed and collected basis. The increase in service revenue in EMEA is the result of an increase in the contract base and favorable exchange rates. Geographically, the Americas product revenue increased $14,132 or 8.3 percent for the three months ended March 31, 2003, from the respective comparable prior year period, primarily due to the strong performance of our mobile computing product offering. Outside of the Americas, revenue between periods were favorably impacted by exchange rates. EMEA product revenue increased $33,687 or 47.4 percent for the three months ended March 31, 2003 from the comparable prior year period. Asia Pacific product revenue increased $7,982 or 62.3 percent for the three months ended March 31, 2003 from the comparable prior year period. The Americas, EMEA and Asia Pacific represent approximately 59 percent, 34 percent, and 7 percent of net product revenue for the three months ended March 31, 2003. Product cost of revenue as a percentage of net product revenue was 50.3 percent for the three months ended March 31, 2003 as compared to 71.5 percent in the comparable prior year period. Included in product cost of revenue for the three month period ended March 31, 2002 are the following charges: $4,896 provision for a loss contract; $1,311 related to the restructuring activities for the transition of our manufacturing facilities; approximately $1,100 related to the impairment of certain product software assets; severance charges of approximately $2,000 and additional warranty expenses of $1,930. These charges, aggregating $11,237 represent 6.2 percent of product cost of revenue in the quarter ended March 31, 2002 or 4.4 percent of product cost of revenue as a percentage of product revenue. In addition our manufacturing efficiencies and favorable absorption during the quarter ended March 31, 2003 reduced our costs by approximately 4.0 percent between the periods. The remaining decrease is due to an overall shift 32 in product mix to higher margin products particularly in our scanner and mobile computing products where the percent of cost of these products as a percentage of revenue decreased for the quarter ended March 31, 2003 by 5.2 percent and 7.4 percent, respectively from the comparable prior year quarter, and favorable impact of foreign exchange rates. Services cost of revenue increased $1,521 or 2.7 percent to $58,136 for the three months ended March 31, 2003 from $56,615 in the comparable prior year period, primarily due to higher repair volumes. Total operating expenses increased 211.1 percent to $208,949 for the three-month period ended March 31, 2003 from $67,160 in the comparable period in the prior year. This increase is largely driven by accounting consequences related to our stock-based compensation plans which resulted in a recovery or benefit of $51,302 in our prior year quarter, loss provision for legal settlements of $72,000 in our current year quarter and additional costs of $5,300 associated with our restatement and the ongoing government investigations as further described below. Engineering costs increased to $37,055 or 4.3 percent for the three months ended March 31, 2003 from $35,533 for the respective prior year period. This increase is due to the inclusion of @POS engineering resources and an increase in engineering development activities. As a percentage of total net revenue, engineering expenses decreased to 9.6 percent for the three months ended March 31, 2003 compared to 11.2 percent for the comparable prior year period primarily due to increased sales between the periods. Selling, general and administrative expenses of $99,031 for the three months ended March 31, 2003 increased 23.3 percent from $80,295 for the comparable prior year period. The increase is a result of variable expenses associated with our net sales growth over comparable periods of approximately 17.8 percent and additional costs of $5,300 or 5.3 percent of total selling, general and administrative expenses for the quarter ended March 31, 2003 associated with the restatement and ongoing government investigations. As a percentage of net revenue, such expenses increased to 25.6 percent for the three months ended March 31, 2003 from 25.3 percent in the comparable prior year period. In February 2002, our former President and Chief Executive Officer announced his retirement. In connection therewith, we recorded a pre-tax compensation and related benefits charge of $8,597 for the three months ended March 31, 2002 included as a component of selling, general and administrative expenses. As the Company continues to negotiate with regard to the investigations and its outstanding class action lawsuits, we have recorded an additional $72,000 loss provision for legal settlements in the three month period ended March 31, 2003 bringing the estimated liability to $142,000 as of March 31, 2003. Included in total operating expenses, and as more fully described in our Annual Report on Form 10-K/A as of and for the year ended December 31, 2002, are amounts associated with the variable portion of our stock option plans. Such amount was a recovery of $51,302 for the three-month period ended March 31, 2002. As of March 31, 2003, due to the inability of Symbol to make timely filings with the Commission, our stock option plans were held in abeyance, meaning that our employees could not exercise their options until we become current with our filings. As an accommodation to both current and former Symbol associates whose options have been impacted by this suspension, the Compensation Committee of the Board approved an abeyance program that allows associates whose options are affected during the suspension period the right to exercise such options up to 90 days after the end of the suspension period. This results in a new measurement date for those options, which leads to a non-cash 33 accounting compensation charge for the intrinsic value of those vested options when the employee either terminates employment during the suspension period or within the 90 day period after the end of the suspension period. Such expense amounted to $776 for the three month period ended March 31, 2003. In 2001, we began to transition volume manufacturing away from our Bohemia, New York facility to lower cost locations, primarily our Reynosa, Mexico facility and Far East manufacturing partners. Included in operating expenses as restructuring and impairment charges for the three-month period ended March 31, 2002 is $2,634 related to these transition activities, primarily related to workforce reduction. (See Note 7 to the Condensed Consolidated Financial Statements) Our effective tax rate for the three months ended March 31, 2003 and 2002 was 24.6% and 30.1%, respectively, reflecting the increasing benefits for research credits, income exemptions and lower foreign effective tax rates partially offset by non-deductible expenses. The tax rate for the first three months of 2003 reflects our current estimate of the full year effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- We utilize a number of measures of liquidity including the following:
MARCH 31, 2003 DECEMBER 31, 2002 --------------------- ------------------------ Working Capital................................................ $98,153 $216,316 Current Ratio (Current Assets to Current Liabilities).......... 1.2:1 1.5:1 Long-Term Debt to Capital (long-term debt to long-term debt plus equity)................................................ 6.0% 13.3%
Current assets decreased by $14,240 from December 31, 2002 principally due to a decrease in inventories due to increased sales and a decrease in accounts receivable due to increased cash collections, partially offset by an increase in cash on hand due to improved cash flow from operations. Additionally during the three months ended March 31, 2003 we paid down approximately $30,000 on the revolving credit facility. Current liabilities increased $103,923 from December 31, 2002 primarily due to an increase in accounts payable and accrued expenses, primarily due to additional accruals recorded in connection with pending class action litigation as well as increased short-term debt obligations due to maturities of amounts under our revolving credit facility. The aforementioned activity resulted in a working capital decrease of $118,163 for the three months ended March 31, 2003. Our current ratio at March 31, 2003 decreased to 1.2:1 compared with 1.5:1 as of December 31, 2002. During the three months ended March 31, 2003, we generated cash flow from operating activities of $71,288 and experienced an overall increase in cash of $22,466. The cash flows provided by operating activities as well as the proceeds from the exercise of stock options, warrants and the employee stock purchase plan were used primarily to repay long-term debt, purchase property, plant and equipment, repurchase our common stock and invest in new companies and other assets. Net cash provided by operating activities for the three months ended March 31, 2003 increased to $71,288 from $29,238 for the same period in 2002 primarily as a result of improved operating gross profit as well as improved collections on customer accounts receivable. Net cash used in investing activities for the three months ended March 31, 2003 increased to $13,150 from $10,995 in the same period in 2002 as 34 a result of lower proceeds in 2003 from the sale of property, plant and equipment. Net cash used in financing activities for the three months ended March 31, 2003 increased to $37,062 from $22,106 primarily as a result of increased net debt repayments. Based on recent financial performance and current expectations, we believe that our cash on hand, cash generated from operations and various credit facilities available to us will satisfy our needs for working capital, capital expenditures, investment requirements, stock repurchases, and other liquidity requirements associated with our existing operations through at least the next 12 months. During 2000, we entered into a $50,000 lease receivable securitization agreement. This agreement matured on December 31, 2003 but was renewed for an additional three months without the ability to draw upon additional funds available under the agreement. Since December 31, 2003, we have not been able to securitize additional lease receivables and will not be able to do so until we provide certain financial information to the financial institution. During the three months ended March 31, 2003 and 2002, we did not securitize any of our lease receivables. Factors that are reasonably likely to affect our ability to continue using these financing arrangements include the ability to generate lease receivables that qualify for securitization and the ability of the financial institution to obtain an investment grade rating from either of the two major credit rating agencies. We do not consider the securitization of lease receivables to be a significant contributing factor to our continued liquidity. We had long-term debt outstanding as follows: MARCH 31, 2003 DECEMBER 31, 2002 --------------- ----------------- Revolving Credit Facility.............. $ 50,000 $ 80,000 Senior Notes........................... -- 6,349 SAILS Exchangeable Debt................ 54,290 55,194 Other.................................. 527 752 --------------- ----------------- 104,817 142,295 Less Current Maturities................ 50,298 6,681 --------------- ----------------- Long Term Debt......................... $ 54,519 $ 135,614 =============== ================= As of March 31, 2003, we had a $350,000 unsecured revolving credit facility with a syndicate of U.S. and International banks (the "Credit Agreement"). These borrowings bear interest at either LIBOR plus 100 basis points (which approximated 2.3 percent and 2.4 percent at March 31, 2003 and December 31, 2002, respectively) or the base rate of the syndication agent bank, contingent upon various stipulations by the lender (which approximated 4.25 percent at both March 31, 2003 and December 31, 2002). This Credit Agreement was due to expire in January 2004, as such, the revolving credit facility amount is recorded as a component of current maturities in the above table as of March 31, 2003. As a result of the length of time necessary to restate our financial statements (see Note 2 of the Condensed Consolidated Financial Statements) beginning on September 16, 2003, we would have been in violation of one of the covenants of our Credit Agreement that requires the timely filing of financial statements with the SEC. On September 15, 2003, we reached an agreement with the bank group and obtained a waiver to provide us additional time to become current with our periodic filings with the SEC. Under the revised Credit Agreement, the credit facility was reduced from $350,000 to $100,000 in September, 2003 and was voluntarily terminated in November 2003. In November 2003, we refinanced the Credit Agreement with a $30,000 secured credit line which expires in May 2006. In addition to our secured credit line, we have loan agreements with various banks pursuant to which, the banks have agreed to provide lines of credit totaling $24,469 with a range of borrowing rates and varying terms. As of March 31, 2003 and December 31, 2002, the Company had no borrowings outstanding under these lines. These agreements continue until such time as either party terminates the agreements. 35 In March 1993, we issued $50,000 of our 7.76 percent Series Notes due February 15, 2003 (the "Senior Notes"). The remaining balance of the Senior Notes of $6,349 is classified as current at December 31, 2002 and was fully repaid in February 2003. In January 2001, we entered in to a private Mandatorily Exchangeable Securities Contract for Shared Appreciation Income Linked Securities ("SAILS") with a highly rated financial institution. The securities that underlie the SAILS contract represent our investment in Cisco common stock, which was acquired in connection with the Telxon acquisition. The 4,160 shares of Cisco common stock had a market value of $53,997 at March 31, 2003. Such shares are held as collateral to secure the debt instrument associated with the SAILS and are included in Investment in Marketable Securities in the Consolidated Balance Sheets. This debt has a seven-year maturity and pays interest at a cash coupon rate of 3.625 percent. At maturity, the SAILS will be exchangeable for shares of Cisco common stock or, at our option, cash in lieu of shares. Net proceeds from the issuance of the SAILS and termination of an existing freestanding collar arrangement were approximately $262,246 which were used for general corporate purposes, including the repayment of debt outstanding under our revolving credit facility. The SAILS contain an embedded equity collar, which effectively hedges a large portion of exposure to fluctuations in the fair value of our holdings in Cisco common stock. We account for the embedded equity collar as a derivative financial instrument in accordance with the requirements of SFAS No. 133. Accordingly, the derivative has been specifically designated as a hedge of the exposure to changes in the fair value of the securities. The gain or loss on changes in the fair value of the derivative is recognized through earnings in the period of change together with the offsetting gain or loss on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. The derivative has been combined with the debt instrument in long-term debt in the Condensed Consolidated Balance Sheets and presented on a net basis as permitted under FIN No. 39, "Offsetting of Amounts Related to Certain Contracts," as there exists a legal right of offset. The SAILS liability, net of the derivative asset, represents $54,290 at March 31, 2003. The remaining portion of long-term debt outstanding relates to capital lease obligations and various other loans maturing through 2007. The combined aggregate amount of long-term debt maturities for the nine months ended December 31, 2003 and each of the subsequent years ending December 31 are as follows: 2003 (9 months) 50,298 2004 (full year) 144 2005 (full year) 73 2006 (full year) 6 2007 (full year) 6 Thereafter 54,290 -------- $104,817 ======== Our long-term debt to capital ratio decreased to 6.0 percent at March 31, 2003 from 13.3 percent at December 31, 2002 primarily due to the repayment of debt under our revolving credit facility from cash flows from operating activities. We continue to enter into obligations and commitments to make future payments under lease agreements. Our capital lease obligations are included in long-term debt as presented on the balance 36 sheet. The aggregate amount of required future minimum rental payments under non-cancelable operating leases for the nine months ended December 31, 2003 and each of the subsequent years ending December 31, are as follows: OPERATING LEASES ---------------- 2003 (9 months).................................. $ 14,537 2004 (full year)................................. 16,470 2005 (full year)................................. 14,769 2006 (full year)................................. 13,386 2007 (full year)................................. 11,591 Thereafter....................................... 34,686 ---------------- Total minimum payments........................... $105,439 ================ In our opinion, inflation has not had a material effect on our operations. CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS - ----------------------------------------------------- The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to product return reserves, legal contingencies, inventory valuation, warranty reserves, useful lives of long-lived assets, derivative instrument valuations and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Note 1 to the Consolidated Financial Statements "Summary of Significant Accounting Policies" filed in our Annual Report on Form 10-K/A for the year ended December 31, 2002 summarizes each of our significant accounting policies. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. REVENUE RECOGNITION, PRODUCT RETURN RESERVES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS We sell our products and systems to end users for their own consumption, as well as to value-added resellers, distributors and original equipment manufacturers (OEMs or channel partners). Channel partners may provide a service or add componentry in order to resell our product to end users. Revenue from the direct sale of our products and systems to end users and OEMs is generally recognized when products are shipped or services are rendered, the title and risk of loss has passed to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. The recognition of revenues related to sales of our products or systems to our value-added resellers is contingent upon the reseller's ability to pay for the product without reselling it to the end user. Sales to resellers that are financially sound are generally recognized when products are shipped, the title and risk of loss has passed, the sales prices is fixed and determinable and collectibility is reasonably assured. Sales to resellers that lack economic substance or cannot pay for our products without reselling them to their customers are recognized when the revenue is billed and collected. Revenue on sales to distributors is recognized when our products and systems are sold by them to the end user. 37 When a sale involves multiple elements, the entire revenue from the arrangement is allocated to each respective element based on its relative fair value and is recognized when the revenue recognition criteria for each element is met. We accrue estimated product return reserves against our recorded revenue. The estimated amount is based on historical experience of similar products to our customers. If our product mix or customer base changes significantly, this could result in a change to our future estimated product return reserve. We record accounts receivable, net of an allowance for doubtful accounts. Throughout the year, we estimate our ability to collect outstanding receivables and establish an allowance for doubtful accounts. In doing so, we evaluate the age of our receivables, past collection history, current financial conditions of key customers, and economic conditions. Based on this evaluation, we establish a reserve for specific accounts receivable that we believe are uncollectible. A deterioration in the financial condition of any key customer or a significant slow down in the economy could have a material negative impact on our ability to collect a portion of all of the accounts receivable. We believe that analysis of historical trends and current knowledge of potential collection problems provides us sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. However, since we cannot predict with certainty future changes in the financial stability of our customers, our actual future losses from uncollectible accounts may differ from our estimates, which could have an adverse effect on our financial condition and results of operations. LEGAL CONTINGENCIES We are currently involved in certain legal proceedings and accruals are established when we are able to estimate the probable outcome of these matters. Such estimates of outcome are derived from consultation with outside legal counsel, as well as an assessment of litigation and settlement strategies. Legal contingencies are often resolved over long time periods. The required accruals may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters. Depending on how these matters are resolved, these costs could be material. INVENTORY VALUATION We record our inventories at the lower of historical cost or market value. In assessing the ultimate realization of recorded amounts, we are required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Projected demand levels, economic conditions, business restructurings, technological innovation and product life cycles are variables we assess when determining our reserve for excess and obsolete inventories. We have experienced significant changes in required reserves in recent periods due to these variables. It is possible that significant changes in required inventory reserves may continue to occur in the future if there is further deterioration in market conditions or acceleration in technological change. WARRANTY RESERVES We provide standard warranty coverage for most of our products for a period of one year from the date of shipment. We record a liability for estimated warranty claims based on historical claims, product failure rates and other factors. This liability primarily includes the anticipated cost of materials, labor and shipping necessary to repair and service the equipment. Our warranty obligation is affected by product failure rates, material usage rates, and the efficiency by which the product failure is corrected. Should our warranty policy change or should actual failure rates, material usage and labor efficiencies differ from our estimates, revisions to the estimated warranty liability would be required. 38 USEFUL LIVES OF LONG-LIVED ASSETS We estimate the useful lives of our long-lived assets, including property, plant and equipment, identifiable finite life intangible assets and software development costs for internal use in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The estimated lives are based on historical experience with similar assets as well as taking into consideration anticipated technological or other changes. If technological changes were to occur more rapidly or slowly than anticipated, or in a different form, useful lives may need to be changed accordingly, resulting in either an increase or decrease in depreciation and amortization expense. We review these assets annually or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Factors we consider important and that could trigger an impairment review include significant changes in the manner of our use of the acquired asset, changes in historical or projected operating performance and cash flows and significant negative economic trends. DERIVATIVE INSTRUMENTS, HEDGING ACTIVITIES AND FOREIGN CURRENCY We utilize derivative financial instruments to hedge foreign exchange rate risk exposures related to foreign currency denominated payments from our international subsidiaries. We also utilize a derivative financial instrument to hedge fluctuations in the fair value of our investment in Cisco common shares. Our foreign exchange derivatives qualify for hedge accounting in accordance with the provisions of SFAS No. 133. We do not participate in speculative derivatives trading. While we intend to continue to meet the conditions for hedge accounting, if hedges did not qualify as highly effective, or if we did not believe the forecasted transactions would occur, the changes in fair value of the derivatives used as hedges would be reflected in earnings and could be material. We do not believe we are exposed to more than a nominal amount of credit risk in our hedging activities as the counterparties are established, well capitalized financial institutions. INCOME TAXES Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. We measure deferred tax assets and liabilities using enacted tax rates, that if changed, would result in either an increase or decrease in the reported income taxes in the period of change. A valuation allowance is recorded when it is more likely than not that a deferred tax asset will not be realized. In assessing the likelihood of realization, management considers estimates of future taxable income, the character of income needed to realize future tax benefits, and other available evidence. Our critical accounting policies have been reviewed with the Audit Committee of the Board of Directors. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- In November 2002, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," related to the timing of revenue recognition for arrangements in which goods or services or both are delivered separately in a bundled sales arrangement. The consensus requires that when the deliverables included in this type of arrangement meet certain criteria they should be accounted for separately. This may result in a difference in the timing of revenue recognition but will not result in a change in the total amount of revenue recognized over the life of the arrangement. The allocation of revenue to the separate deliverables is based on the relative fair value of each item in a bundled sales 39 arrangement. If the fair value is not available for the delivered items, the residual method must be used. This method requires that the amount allocated for the undelivered items in the arrangement be recorded at their full fair value. This results in the discount, if any, being allocated to the delivered items. This consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus is not expected to have a material effect on the Company's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." In December 2003, the FASB issued FIN No. 46 (Revised) ("FIN 46-R") to address certain FIN 46 implementation issues. This interpretation requires that the assets, liabilities, and results of activities of a Variable Interest Entity ("VIE") be consolidated into the financial statements of the enterprise that has a controlling interest in the VIE. FIN 46R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or annual reporting period ending after March 15, 2004, except for those VIE's that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. We are currently evaluating the impact of adopting this interpretation on our consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component. SFAS No. 149 also amends the definition of an underlying to conform it to language used in FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. The adoption of SFAS No. 149 is not expected to have a material impact on our consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that falls within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, which for us is the quarter ended September 30, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on our consolidated financial statements. In August 2003, the EITF reached consensus on EITF Issue No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2, "Software Revenue Recognition," to Non-Software Deliverables in an Arrangement Containing More-than-Incidental Software." EITF 03-5, which became effective for us on October 1, 2003, provides guidance on determining whether non-software deliverables are included within the scope of SOP 97-2 and, accordingly, whether multiple element arrangements are to be accounted for in accordance with EITF Issue No. 00-21 or SOP 97-2. We do not believe that adoption of the provisions of EITF 03-5 will have a material impact on our consolidated financial statements. 40 In November 2003, the EITF reached partial consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF 03-1 provides guidance on the new requirements for other-than-temporary impairment and its application to debt and marketable equity investments that are accounted for under SFAS No. 115. The new requirements on disclosures are effective for fiscal years ending after December 15, 2003. The implementation of EITF 03-1 is not anticipated to have a material impact on our consolidated financial statements. RISK FACTORS - ------------ Set forth below are important risks and uncertainties that could have a material adverse effect on Symbol's business, results of operations and financial condition and cause actual results to differ materially from those expressed in forward-looking statements made by Symbol or our management. RISKS RELATING TO THE RESTATEMENT --------------------------------- WE ARE BEING INVESTIGATED BY THE COMMISSION AND THE EASTERN DISTRICT FOR CERTAIN OF OUR PRIOR ACCOUNTING PRACTICES AND WE CANNOT PREDICT THE OUTCOME OF THESE INVESTIGATIONS. THE INVESTIGATIONS COULD RESULT IN CIVIL AND/OR CRIMINAL ACTIONS SEEKING, AMONG OTHER THINGS, INJUNCTIVE AND MONETARY RELIEF FROM SYMBOL. IN ADDITION, THE FILING OF ANY CHARGES COULD RESULT IN THE SUSPENSION OR DEBARMENT FROM FUTURE GOVERNMENT CONTRACTS. ANY SUCH DEVELOPMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The Commission and the Eastern District have commenced separate investigations relating to certain of our prior accounting practices. In response to an inquiry from the Commission, we conducted an initial internal investigation, with the assistance of a law firm, in May 2001 relating to such accounting practices, which we subsequently discovered was hindered by certain of our former employees. The Commission expressed dissatisfaction with the initial investigation. In March 2002, we undertook an approximately eighteen-month internal investigation, with the assistance of a second law firm and independent forensic accounting team, the results of which gave rise to the restatement of our financial statements for the years ended December 31, 2000 and 2001, and unaudited selected quarterly information for each of the four quarters of 2001 and the first three quarters of 2002. See Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2002. Symbol has also been given notice that the Commission is considering recommending civil actions against Symbol and certain of our former employees for violations of federal securities laws. We are fully cooperating with the Commission and Eastern District in their respective investigations, and are engaging in discussions with each entity to resolve the issues raised by such investigations. However, we cannot predict when these investigations will be completed, the outcome of such investigations, or when a negotiated resolution, if any, may be reached and the likely terms of such a resolution. However, any criminal and/or civil action or any negotiated resolution may involve, among other things, injunctive and equitable relief, including material fines, which could have a material adverse effect on our business, results of operations and financial condition. In addition, as a result of the investigations, various governmental entities at the federal, state and municipal levels may conduct a review of our supply arrangements with them to determine whether we should be considered for debarment. If we are debarred, we would be prohibited for a specified period of time from entering into new supply arrangements with such government entities. In addition, after a government entity has debarred Symbol, other government entities are likely to act similarly, subject to applicable law. Governmental entities constitute an important customer group for Symbol, and debarment from governmental supply arrangements at a significant level could have an adverse effect on our business, results of operations and financial condition. 41 PENDING LITIGATION MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. Symbol, certain members of our former senior management team and certain former and current members of our Board of Directors are named defendants in a number of purported class actions alleging violations of federal securities laws, including issuing materially false and misleading statements that had the effect of artificially inflating the market price of our common stock, as well as related derivative actions. As of March 31, 2003, we have accrued $142 million related to the pending class actions and the government investigations. The plaintiffs have yet to specify the amount of damages being sought in the related civil actions and, therefore, we are unable to estimate what our ultimate liability in such lawsuits may be. Telxon, our wholly-owned subsidiary, along with various former executive officers of Telxon, are named defendants in a number of separate purported class actions alleging violations of federal securities laws. On November 13, 2003, Telxon and the plaintiff class reached a tentative settlement of all pending shareholder class actions against Telxon. On February 12, 2004, the Court granted its final approval of the settlement. Under the settlement, Telxon anticipates that it will pay $37 million to the class. As a result of anticipated contributions by Telxon's insurers, Telxon expects that its net payment will be no more than $25 million. Our insurance coverage is not sufficient to cover our total liabilities in any of these purported class actions, and our ultimate liability in these actions may have a material adverse effect on our results of operations and financial condition. In addition, in March and June 2003, Robert Asti, former Vice President--North America Sales and Service--Finance, and Robert Korkuc, former Chief Accounting Officer, respectively, pled guilty to two counts of securities fraud in connection with the government investigations described above. The Commission has also filed civil complaints against the two individuals based upon similar facts. The resolution of these civil complaints, any additional civil complaints against members of our current and/or former management team or Board of Directors or the indictment of any members of our current management team or Board of Directors could result in additional negative publicity for Symbol and may impact the securities litigations in which we are a party. In addition, we may be obligated to indemnify (and advance legal expenses to) such former or current directors, officers or employees in accordance with the terms of our certificate of incorporation, bylaws, other applicable agreements, and Delaware law. We currently hold insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the underwriters of our directors and officers insurance policy may seek to rescind or otherwise deny coverage in some or all of these matters, in which case we may have to self-fund the indemnification amounts owed to such directors and officers. Our ultimate liability in these civil actions may have a material adverse effect on our results of operations and financial condition. On September 17, 2003, a jury awarded approximately $218 million in damages against Telxon, which we acquired in November 2000, for claims relating to an alleged contract with Smart Media of Delaware, Inc. Telxon has made certain post-verdict motions seeking, among other things, a new trial or a reduction in the amount of the jury verdict. While we are still vigorously defending against this lawsuit, we may ultimately be liable for the full amount of the jury verdict, which could have a material adverse effect on our results of operations, financial condition and business. We are also subject to lawsuits in the normal course of business, which can be expensive, lengthy, disrupt normal business operations and divert management's attention from ongoing business operations. An unfavorable resolution to any lawsuit could have a material adverse effect on our business, results of operations and financial condition. See Part II, Item I, "Legal Proceedings" for additional information regarding material litigation. 42 IF WE ARE UNABLE TO EFFECTIVELY AND EFFICIENTLY IMPLEMENT OUR PLAN TO REMEDIATE THE MATERIAL WEAKNESSES WHICH HAVE BEEN IDENTIFIED IN OUR INTERNAL CONTROLS AND PROCEDURES, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS OR FINANCIAL RESULTS. Symbol's internal investigations, conducted with oversight by our Audit Committee, identified material weaknesses in our internal controls and procedures, as well as instances in which certain members of former management engaged in, directed and/or created an environment that encouraged a variety of inappropriate activities that necessitated the restatement. Through our investigations, we discovered that a significant portion of the accounting errors and irregularities related to the timing and amount of product and service revenue recognized. Additionally, there were errors and irregularities associated with the establishment and utilization of certain reserves and restructurings, including certain end-of-quarter adjustments that were apparently made in order to achieve previously forecasted financial results. There were also errors and/or irregularities associated with the administration of certain options programs, as well as several categories of revenue and operating expenses, including efforts to artificially reduce reported inventory. In the investigations, we also concluded that certain members of former management who were primarily responsible for maintaining proper internal controls and procedures failed to establish an appropriate control environment, which, among other things, resulted from inadequate hiring of qualified and experienced personnel, inadequate staffing, insufficient training and supervision of personnel, a decentralized accounting structure for operations in the United States and inadequate systems and systems interfaces. We are implementing various initiatives intended to materially improve our internal controls and procedures, address the systems and personnel issues raised in the course of the restatement and help ensure a corporate culture that emphasizes integrity, honesty and accurate financial reporting. These initiatives address Symbol's control environment, organization and staffing, policies, procedures and documentation, and information systems. See Part I, Item 4, "Controls and Procedures" for a discussion of these initiatives. The implementation of the initiatives set forth in Part I, Item 4 is one of Symbol's highest priorities. Our Board of Directors, in coordination with our Audit Committee, will continually assess the progress and sufficiency of these initiatives and make adjustments as necessary. However, no assurance can be given that we will be able to successfully implement our revised internal controls and procedures or that our revised controls and procedures will be effective in remedying all of the identified material weaknesses in our prior controls and procedures. In addition, we may be required to hire additional employees, and may experience higher than anticipated capital expenditures and operating expenses, during the implementation of these changes and thereafter. If we are unable to implement these changes effectively or efficiently, there could be a material adverse effect on our operations or financial results. ONGOING REVIEW OF OUR PUBLIC FILINGS BY THE COMMISSION MAY RESULT IN THE FURTHER AMENDMENT OR RESTATEMENT OF OUR PERIODIC REPORTS, AND THE NEW YORK STOCK EXCHANGE MAY DELIST OUR COMMON STOCK OR TAKE OTHER ACTION IF WE ARE UNABLE TO COMPLY WITH ITS LISTING REQUIREMENTS. IF ANY OF THE FOREGOING OCCURRED, THERE COULD BE A MATERIAL ADVERSE EFFECT ON THE TRADING PRICE OF OUR COMMON STOCK AND OUR ABILITY TO ACCESS THE CAPITAL MARKETS. The investigations by Symbol and the resulting restatement of our financial statements have led to a delay in the filing of this quarterly report. We have been, and will continue to be, engaged in a dialogue with the Commission with respect to the Consolidated Financial Statements and our delayed periodic reports. However, the Commission may provide us with comments on this filing or any of the delayed quarterly reports after such reports have been filed, which could require us to amend or restate previously filed periodic reports. In addition, as a result of the delay in filing our periodic reports with the Commission, we are currently not in compliance with the listing requirements of the New York Stock 43 Exchange, or NYSE, the exchange on which our common stock is listed. The NYSE has not taken any delisting or other action against Symbol, but there can be no assurance that the NYSE will not take any such action in the future. If we are required to amend or restate our periodic filings, or if the NYSE delists, or attempts to delist, our common stock, investor confidence may be reduced, our stock price may substantially decrease and our ability to access the capital markets may be limited. TAXING AUTHORITIES MAY DETERMINE WE OWE ADDITIONAL TAXES FROM PREVIOUS YEARS DUE TO THE RESTATEMENT. As a result of the restatement, previously filed tax returns and reports may be required to be amended to reflect tax related impacts of the restatement. Where legal, regulatory or administrative rules would require or allow us to amend our previous tax filings, we intend to comply with our obligations under applicable law. To the extent that tax authorities do not accept our conclusions regarding the tax effects of the restatement, liabilities for taxes could differ from what has been recorded in our Consolidated Financial Statements. If it is determined that we have additional tax liabilities, there could be an adverse effect on our financial condition. MANY OF THE INDIVIDUALS THAT COMPRISE OUR SENIOR MANAGEMENT TEAM ARE NEW TO SYMBOL, AND THEY HAVE BEEN REQUIRED TO DEVOTE A SIGNIFICANT AMOUNT OF TIME ON MATTERS RELATING TO THE RESTATEMENT. In the past year, we have replaced a significant portion of our senior management team. During this period, our senior management team has devoted a significant amount of time conducting internal investigations, restating our financial statements, reviewing and improving our internal controls and procedures, developing effective corporate governance procedures and responding to government inquiries. If senior management is unable to devote a significant amount of time in the future towards developing and attaining our strategic business initiatives and running ongoing business operations, there may be a material adverse effect on our results of operations, financial condition and business. RISKS RELATING TO THE BUSINESS OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC AND MARKET CONDITIONS, AS WELL AS THE VOLATILE GEOPOLITICAL ENVIRONMENT. Adverse worldwide economic and market conditions over the last few years have contributed to slowdowns in the technology sector generally and the mobile information systems industry specifically. While worldwide economic and market conditions have begun recently to improve, if they do not continue to improve or otherwise deteriorate, there may be: o reduced demand for our products and services due to continued restraints on technology-related capital spending by our customers; o increased price competition; o increased risk of excess and obsolete inventories; o higher overhead costs as a percentage of revenues; and o limited investment by Symbol in new products and services. Our current business and operating plan assumes that economic activity in general, and IT spending in particular, will at least remain at current levels; however, we cannot assure you that IT spending will not deteriorate, which could have a material adverse effect on our results of operations and growth rates. Our business is especially affected by the economic success of the retail sector, which 44 accounts for a significant portion of our business, and our results of operations may be adversely affected if the global economic and market conditions in the retail sector do not improve. If historically low interest rates rise, consumer demand and IT spending could be further dampened. In addition, continuing turmoil in the geopolitical environment in many parts of the world, including terrorist activities and military actions, particularly in the aftermath of the September 11th attacks and the war in Iraq, may continue to put pressure on global economic and market conditions and may continue to have a material adverse effect on consumer and business confidence, at least in the short term. As an international company with significant operations located outside of the United States, we are vulnerable to geopolitical instability. If worldwide economic and market conditions and geopolitical stability do not improve or otherwise deteriorate, there could be a materially adverse effect on our business, operating results, financial condition and growth rates. WE HAVE MADE STRATEGIC ACQUISITIONS AND ENTERED INTO ALLIANCES AND JOINT VENTURES IN THE PAST AND INTEND TO DO SO IN THE FUTURE. IF WE ARE UNABLE TO FIND SUITABLE ACQUISITIONS OR PARTNERS OR ACHIEVE EXPECTED BENEFITS FROM SUCH ACQUISITIONS OR PARTNERSHIPS, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, GROWTH RATES AND RESULTS OF OPERATIONS. As part of our ongoing business strategy to expand product offerings and acquire new technology, we frequently engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic alliances and joint ventures. If we are unable to identify future acquisition opportunities or reach agreement with such third parties, there could be a material adverse effect on our business, growth rates and results of operations. Even if we are able to complete acquisitions or enter into alliances and joint ventures that we believe will be successful, such transactions, especially those involving technology companies, are inherently risky. Significant risks include: o integration and restructuring costs, both one-time and ongoing; o maintaining sufficient controls, procedures and policies; o diversion of management's attention from ongoing business operations; o establishing new informational, operational and financial systems to meet the needs of our business; o losing key employees; o failing to achieve anticipated synergies, including with respect to complementary products; and o unanticipated and unknown liabilities. WE DEPEND UPON THE DEVELOPMENT OF NEW PRODUCTS, SUCH AS ENTERPRISE MOBILITY PRODUCTS, AND ENHANCEMENTS TO EXISTING PRODUCTS, AND IF WE FAIL TO PREDICT AND RESPOND TO EMERGING TECHNOLOGICAL TRENDS AND OUR CUSTOMERS' CHANGING NEEDS, THERE COULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS AND MARKET SHARE. We are active in the research and development of new products and technologies and enhancing our current products. However, research and development in the mobile information systems industry is complex and filled with uncertainty. If we expend a significant amount of resources and our efforts do not lead to the successful introduction of new or improved products, there could be a material adverse 45 effect on our business, operating results and market share. In addition, it is common for research and development projects to encounter delays due to unforeseen problems, resulting in low initial volume production, fewer features than originally considered desirable and higher production costs than initially budgeted, which may result in lost market opportunities. In addition, new products may not be commercially well received. There could be a material adverse effect on our business, operating results and market share due to such delays or deficiencies in development, manufacturing and delivery of new products. We have made significant investments to develop enterprise mobility products because we believe enterprise mobility is a new and developing market. If this market does not grow, retailers and consumers react unenthusiastically to enterprise mobility or we are unable to sell our enterprise mobility products and services at projected rates, there could be a material adverse effect on our business and operating results. Our efforts in enterprise mobility are also dependent, in part, on applications developed and infrastructure deployed by third parties. If third parties do not develop robust, new or innovative applications, or create the appropriate infrastructure, for enterprise mobility products, there could be a material adverse effect on our business and operating results. Once a product is in the marketplace, its selling price usually decreases over the life of the product, especially after a new competitive product is publicly announced because customers often delay purchases of existing products until the new or improved versions of those products are available. To lessen the effect of price decreases, our research and development teams attempt to reduce manufacturing costs of existing products in order to improve our margins on such products. However, if cost reductions do not occur in a timely manner, there could be a material adverse effect on our operating results and market share. THE MOBILE INFORMATION SYSTEMS INDUSTRY IS HIGHLY COMPETITIVE AND COMPETITIVE PRESSURES FROM EXISTING AND NEW COMPANIES MAY HAVE A MATERIALLY ADVERSE EFFECT ON OUR BUSINESS. The mobile information systems industry is a highly competitive industry that is influenced by the following: o advances in technology; o new product introduction; o product improvements; o rapidly changing customer needs; o marketing and distribution capabilities; and o price competition. If we do not keep pace with product and technological advances, there could be a material adverse effect on our competitive position and prospects for growth. There is also likely to be continued pricing pressure as competitors attempt to maintain or increase market share. The products manufactured and marketed by us and our competitors in the mobile information systems industry are becoming more complex. As the technological and functional capabilities of future products increase, these products may begin to compete with products being offered by traditional computer, network and communications industry participants who have substantially greater financial, technical, marketing and manufacturing resources than us. We may not be able to compete successfully 46 against these new competitors, and competitive pressures may result in a material adverse effect on our business or operating results. WE ARE SUBJECT TO RISKS RELATED TO OUR OPERATIONS OUTSIDE THE UNITED STATES. A substantial portion of our net revenues have been from foreign sales. For the quarter ended March 31, 2003, foreign sales accounted for approximately 44% of our net revenue. We also manufacture most of our products outside the United States and we anticipate that an increasing percentage of new products and subassemblies will be manufactured outside the United States. Overall margins for our products have increased throughout 2003 partially as a result of increased efficiencies due to the transfer of internal manufacturing to our Reynosa facility and external manufacturing to lower cost producers in China, Taiwan and Singapore. These sales and manufacturing activities are subject to the normal risks of foreign operations, including: o political uncertainties; o currency fluctuations; o protective tariffs and taxes; o trade barriers and export/import controls; o transportation delays and interruptions; o reduced protection for intellectual property rights in some countries; o the impact of recessionary or inflationary foreign economies; o long receivables collection periods; o adapting to different regulatory requirements; o difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner; and o different technology standards or customer expectations. Many of these risks have affected our business in the past and may have a material adverse effect on our business, results of operations and financial condition in the future. We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation of our products or supplies or if new barriers would have a material adverse effect on our results of operations and financial condition. FLUCTUATIONS IN EXCHANGE RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. Most of our equipment sales in Western Europe and Asia are billed in foreign currencies and are subject to currency exchange fluctuations. In addition, much of Europe converted to mandatory use of the "Euro" currency in 2002, which has continued to appreciate throughout 2003. In prior years, changes in the value of the U.S. dollar compared to foreign currencies have had an impact on our sales and margins. We cannot predict the direction or magnitude of currency fluctuations. A weakening of the currencies in 47 which we generate sales relative to the currencies in which our costs are denominated may lower our results of operations and financial condition. For example, we purchase a large number of parts, components and third-party products from Japan. The value of the yen in relation to the U.S. dollar strengthened during 2002 and has continued to appreciate throughout 2003. If the value of the yen continues to strengthen relative to the dollar, there could be a material adverse effect on our results of operations. In all jurisdictions in which we operate, we are also subject to the laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit our ability to repatriate cash as dividends or otherwise to the United States and may limit our ability to convert foreign currency cash flows in to U.S. dollars. WE RELY ON OUR MANUFACTURING FACILITY IN REYNOSA, MEXICO TO MANUFACTURE A SIGNIFICANT PORTION OF OUR PRODUCTS. ANY PROBLEMS AT THE REYNOSA FACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. In 2002, approximately 50% of our product cost of revenue can be attributed to our facility in Reynosa, and we estimate that such percentage will be similar or higher throughout the remainder of 2003. In the past, we have experienced manufacturing problems that have caused delivery delays. We may experience production difficulties and product delivery delays in the future as a result of the following: o changing process technologies; o ramping production; o installing new equipment at our manufacturing facilities; and o shortage of key components. If manufacturing problems in our Reynosa facility arise, and we are unable to develop alternative sources for our production needs, we may not be able to meet consumer demand for our products, which could have a material adverse effect on our business, results of operations and financial condition. We have been sued in Mexico by a plaintiff who alleges she is the legal owner of some of the property that our facility in Reynosa is located. See Part II, Item 1, "Legal Proceedings--Other Litigation--Lic. Olegario Cavazos Cantu, on behalf of Maria Leonor Cepeda Zapata vs. Symbol de Mexico, Sociedad de R.L. de C.V." If use of our manufacturing facility in Reynosa, Mexico were interrupted by natural disaster, the aforementioned lawsuit or otherwise, there could be a material adverse effect on our operations until we could establish alternative production and service operations. SOME COMPONENTS, SUBASSEMBLIES AND PRODUCTS ARE PURCHASED FROM A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS. THE LOSS OF ANY OF THESE SUPPLIERS MAY CAUSE US TO INCUR ADDITIONAL SET-UP COSTS AND RESULT IN DELAYS IN MANUFACTURING AND THE DELIVERY OF OUR PRODUCTS. While components and supplies are generally available from a variety of sources, we currently depend on a limited number of suppliers for several components for our equipment, and certain subassemblies and products. Some components, subassemblies and products are purchased from a single supplier or a limited number of suppliers. In addition, for certain components, subassemblies and products for which we may have multiple sources, we are still subject to significant price increases and limited availability due to market demand for such components, subassemblies and products. In the past, 48 unexpected demand for communication products caused worldwide shortages of certain electronic parts, which had an adverse impact on our business. While we have entered into contracts with suppliers of parts that we anticipate may be in short supply, there can be no assurance that additional parts will not become the subject of such shortages or that such suppliers will be able to deliver the parts in fulfillment of their contracts. In addition, on occasion, we build up our component inventory in anticipation of supply shortages, which may result in us carrying excess or obsolete components if we do not anticipate customer demand properly and could have a material adverse effect on our business and results of operations. If shortages or delays exist, we may not be able to secure enough components at reasonable prices and acceptable quality and therefore, may not be able to meet consumer demand for our products, which could have a material adverse effect on our business and results of operations. Although the availability of components did not materially impact our business in 2002 or 2003, we cannot predict when and if component shortages will occur. If we are unable to develop alternative sources for our raw materials if and as required, we could incur additional set-up costs, which could result in delays in manufacturing and the delivery of our products and thereby have a material adverse effect on our business, results of operations and financial condition. WE SELL A MAJORITY OF OUR PRODUCTS THROUGH RESELLERS, DISTRIBUTORS AND ORIGINAL EQUIPMENT MANUFACTURERS (OEMS). IF WE FAIL TO MANAGE OUR SALES SYSTEM PROPERLY, OR IF THIRD-PARTY DISTRIBUTION SOURCES DO NOT PERFORM EFFECTIVELY, OUR BUSINESS MAY SUFFER. We sell a majority of our products through resellers, distributors and OEMs. Some of our third-party distribution sources may have insufficient financial resources and may not be able to withstand changes in worldwide business conditions, including the current economic downturn, or abide by our inventory and credit requirements. If the third-party distribution sources we rely on do not perform their services adequately or efficiently or exit the industry, and we are not able to quickly find adequate replacements, there could be a material adverse effect on our revenues. In addition, we do not have third-party distribution sources in certain parts of the world. If we are unable to effectively and efficiently service customers outside our current geographic scope, there may be a material adverse effect on our growth rates and result of operations. In 2003, we launched a new distribution system called the Symbol PartnerSelect Program that is designed to increase our business and the business of our resellers, distributors and OEMs and improve the quality of services and products offered to the end user community. If the new program does not continue to be well received by our resellers, distributors and OEMs, or the end user community, there could be a material adverse effect on our operating results. IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR IF THIRD PARTIES ASSERT WE ARE IN VIOLATION OF THEIR INTELLECTUAL PROPERTY RIGHTS, THERE COULD BE A MATERIALLY ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND OUR ABILITY TO COMPETE. We protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. There can be no assurance that these protections will be adequate to prevent our competitors from copying or reverse engineering our products, or that our competitors will not independently develop products that are substantially equivalent or superior to our technology, which in each case could affect our ability to compete and to receive licensing revenues. In addition, third parties may seek to challenge, invalidate or circumvent our applications for our actual patents, trademarks, copyrights and trade secrets. Furthermore, 49 the laws of certain countries in which our products are or may be licensed do not protect our proprietary rights to the same extent as the laws of the United States. Third parties have, and may in the future, assert claims of infringement of intellectual property rights against us. Due to the rapid pace of technological change in the mobile information systems industry, much of our business and many of our products rely on proprietary technologies of third parties, and we may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms. We have received, and have currently pending, third-party claims and may receive additional notices of such claims of infringement in the future. To date, such activities have not had a material adverse affect on our business and we have either prevailed in all litigation, obtained a license on commercially acceptable terms or otherwise been able to modify any affected products or technology. However, there can be no assurance that we will continue to prevail in any such actions or that any license required under any such patent or other intellectual property would be made available on commercially acceptable terms, if at all. Since there is a significant number of U.S. and foreign patents and patent applications applicable to our business, we believe that there is likely to continue to be significant litigation regarding patent and other intellectual property rights, which could have a material adverse effect on our business and our ability to compete. CHANGES IN SAFETY REGULATIONS RELATED TO OUR PRODUCTS, INCLUDING WITH RESPECT TO THE TRANSMISSION OF ELECTROMAGNETIC RADIATION, COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR PROSPECTS AND FUTURE SALES. The use of lasers and radio emissions are subject to regulation in the United States and in other countries in which we do business. In the United States, various Federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations which concern the use of lasers and/or radio/electromagnetic emissions standards. Member countries of the European community have enacted standards concerning electrical and laser safety and electromagnetic compatibility and emissions standards. While some of our products do emit electromagnetic radiation, we believe that due to the low power output of our products and the logistics of their use, there is no health risk to end-users in the normal operation of our products. However, if any of our products becomes specifically regulated by governments, or the safety of which is questioned by our customers, such as electronic cash register manufacturers, or the public at large, there could be a material adverse effect on our business and our results of operations. In addition, our Spectrum 24 spread spectrum wireless communication products operate through the transmission of radio signals. These products are subject to regulation by the FCC in the United States and corresponding authorities in other countries. Currently, operation of these products in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could have a material adverse effect on our business and our results of operations. OUR SUCCESS LARGELY DEPENDS ON OUR ABILITY TO RETAIN AND RECRUIT KEY EMPLOYEES. In order to be successful, we must retain and motivate our executives and other key employees, including those in managerial, technical, marketing and information technology support positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Attracting and retaining skilled solutions providers in the IT support business and qualified sales representatives are also critical to our future. 50 Experienced management and technical, marketing and support personnel in the information technology industry are in high demand, in spite of the general economic slowdown, and competition for their talents is intense. The loss of, or the inability to recruit, key employees could have a material adverse effect on our business. OUR OPERATING RESULTS FLUCTUATE EACH QUARTER. THIS FLUCTUATION HINDERS OUR ABILITY TO FORECAST REVENUES AND TO VARY OUR OPERATING EXPENSES ACCORDINGLY. Our operating results have been, and may continue to be, subject to quarterly fluctuations as a result of a number of factors discussed in this report, including: worldwide economic conditions; levels of IT spending; changes in technology; new competition; customer demand; a shift in the mix of our products; a shift in sales channels; the market acceptance of new or enhanced versions of our products; the timing of introduction of other products and technologies; component shortages; and acquisitions made by Symbol. An additional reason for such quarterly fluctuations is that it is difficult for us to forecast the volume and timing of sales orders we will receive during a fiscal quarter, as most customers require delivery of our products within 45 days of ordering and customers frequently cancel or reschedule shipments. However, our operating expense levels are partly based on our projections of future revenues at any given time. For example, in order to meet the delivery requirements of our customers, we maintain significant levels of raw materials. Therefore, in the event that actual revenues are significantly less than projected revenues for any quarter, operating expenses are likely to be unusually high and our operating profit may be adversely affected. Our revenues may vary in the future to an even greater degree due to our increasing focus on sales of mobile information systems instead of individual products. Historically, we have sold individual bar code scanning devices and scanner integrated mobile computing devices to customers. Increasingly, our sales efforts have focused on sales of complete data transaction systems. System sales are more costly, and require a longer selling cycle and more complex integration and installation services. An increase in system sales, therefore, may result in increased time between the manufacture of product and the recognition of revenue, as well as the receipt of payment for such transactions. OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE. Our stock price, like that of other technology companies, can be volatile. Some of the factors that can affect our stock price include: o the announcement of new products, services or technological innovations by us or our competitors; o quarterly increases or decreases in revenue, gross margin or earnings, and changes in our business, operations or prospects for any of our segments; o changes in quarterly revenue or earnings estimates by the investment community; and o speculation in the press or investment community about our strategic position, financial condition, results of operations, business, significant transactions, the restatement or the previously discussed government investigations. General market conditions or domestic or international macroeconomic and geopolitical factors unrelated to our performance may also affect the price of our stock. For these reasons, investors should not rely on recent trends to predict future stock prices, financial condition, results of operations or cash 51 flows. In addition, following periods of volatility in a company's securities or a restatement of previously reported financial statements, securities class actions may be filed against a company. We are currently litigating a number of securities class action lawsuits. See "--Pending litigation may have a material adverse effect on our results of operations and financial condition." ACCESS TO INFORMATION - --------------------- Symbol's Internet address is www.symbol.com. Through the Investor Relations section of our Internet website, we make available, free of charge, our Annual Report on Form 10-K/A, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (the "Exchange Act"), as well as any filings made pursuant to Section 16 of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. Copies are also available, without charge, from Symbol Investor Relations, One Symbol Plaza, Holtsville, New York 11742. Our Internet website and the information contained therein or incorporated therein are not incorporated into this Quarterly Report on Form 10-Q. You may also read and copy materials that we have filed with the Commission at the Commission's public reference room located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference room. In addition, our filings with the Commission are available to the public on the Commission's web site at www.sec.gov. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- See Item 7A of Symbol's Annual Report on Form 10-K/A for the year ended December 31, 2002 for a discussion of various market risks that Symbol is exposed to. The market risks we are exposed to have not materially changed from such disclosure. ITEM 4. CONTROLS AND PROCEDURES ----------------------- Symbol is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and is subject to certain limitations, including the exercise of judgment by individuals, the inability to identify unlikely future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or fraud or ensure that all material information will be made known to management in a timely manner. As reported more fully in Symbol's Annual Report on Form 10-K/A for the year ended December 31, 2002, through two internal investigations, we learned that certain members of former management engaged in, directed and/or created an environment that encouraged a variety of inappropriate activities that resulted in accounting errors and irregularities affecting our previously issued financial statements that we have now restated. The investigations also found that, in addition to the specific items of misconduct giving rise to the need for the restatement, there was a failure by Symbol's former management to establish an appropriate control environment, and there were significant failures in 52 Symbol's internal controls and procedures resulting from numerous causes, including inadequate hiring of qualified and experienced personnel, insufficient training and supervision of personnel, a decentralized accounting structure for operations in the United States and inadequate systems and systems interfaces. The investigations also found instances in which some members of former management and sales and finance-related employees devoted insufficient attention and resources to ensuring accurate accounting and financial reporting. Indeed, as the guilty pleas of two former senior members of our finance group illustrate, there were also instances in which such activity rose to the level of criminal misconduct. In 2002 and 2003, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. We concluded that many of the internal control deficiencies described more fully in our Annual Report on Form 10-K/A for the year ended December 31, 2002 constituted "material weaknesses," as defined under standards established by the American Institute of Certified Public Accountants, during the restatement period. As described more fully in our 2002 Annual Report on Form 10-K/A, Symbol has implemented a number of initiatives to improve Symbol's disclosure controls and procedures, including internal controls and procedures, and to address the areas of weakness identified during the investigations and the restatement. We believe the efforts we have and are taking address the material weaknesses that previously affected our internal controls. However, it will take some time before we have in place the rigorous disclosure controls and procedures, including internal controls and procedures, that our Board of Directors and senior management are striving for. As a result of our efforts as of the date hereof, we believe that our Condensed Consolidated Financial Statements fairly present, in all material respects, our financial condition, results of operations and cash flows as of, and for, the periods presented and that this Quarterly Report on Form 10-Q contains the information required to be included in accordance with the Exchange Act. As required by Rule 13a-15(b) of the Exchange Act, Symbol has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of March 31, 2003, the end of the period covered by this report. Based upon the evaluation and the results of the investigations discussed above, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that, except for the internal control deficiencies as described in Symbol's 2002 10-K/A and herein, as of the evaluation date and the filing date of this report, our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that information we must disclose in reports filed with the Commission is properly recorded, processed, summarized and reported in conformance with the rules and regulations of the Commission. Other than as described in our 2002 Annual Report on Form 10-K/A and herein, since the evaluation date, there have been no significant changes in our internal control structure, policies and procedures over financial reporting or in other areas that could significantly affect our internal controls. We will continue to assess our disclosure controls and procedures as we prepare our filings and will take any further actions that we deem necessary. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- The information set forth in Note 11 in the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is hereby incorporated by reference. 53 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) The following exhibits are included herein: 31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) None. 54 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SYMBOL TECHNOLOGIES, INC. Dated: February 25, 2004 By: /s/ William R. Nuti -------------------------------- William R. Nuti Chief Executive Officer, President, Chief Operating Officer and Director (principal executive officer) Dated: February 25, 2004 By: /s/ Mark T. Greenquist --------------------------------- Mark T. Greenquist Senior Vice President and Chief Financial Officer (principal financial officer) Dated: February 25, 2004 By: /s/ James M. Conboy ------------------------------- James M. Conboy Vice President - Controller and Chief Accounting Officer (principal accounting officer) 55 EX-31.1 3 file002.txt CERTIFICATIONS EXHIBIT 31.1 CERTIFICATIONS I, William R. Nuti, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Symbol Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 56 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2004 /s/ William R. Nuti ----------------------------------- William R. Nuti Chief Executive Officer, President, Chief Operating Officer and Director 57 EX-31.2 4 file003.txt CERTIFICATIONS EXHIBIT 31.2 CERTIFICATIONS I, Mark T. Greenquist, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Symbol Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 58 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 25, 2004 /s/ Mark T. Greenquist --------------------------------- Mark T. Greenquist Senior Vice President and Chief Financial Officer 59 EX-32.1 5 file004.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Symbol Technologies, Inc., (the "Company") on Form 10-Q for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William R. Nuti, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: February 25, 2004 /s/ William R. Nuti ----------------------------------- William R. Nuti Chief Executive Officer, President, Chief Operating Officer and Director 60 EX-32.2 6 file005.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Symbol Technologies, Inc., (the "Company") on Form 10-Q for the period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mark Greenquist, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Date: February 25, 2004 /s/ Mark T. Greenquist --------------------------------- Mark T. Greenquist Senior Vice President and Chief Financial Officer 61 -----END PRIVACY-ENHANCED MESSAGE-----