SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
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, N.Y. 11742
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 516-738-2400
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the close of the period
covered by this report.
Class Outstanding at September 30, 1998
Common Stock, 58,916,258 shares
par value $0.01
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 2
Condensed Consolidated Statements of Earnings
Three and Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1998 and 1997 4 - 5
Notes to Condensed Consolidated Financial
Statements 6 - 8
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
PART II. OTHER INFORMATION 15 - 16
SIGNATURES 17
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except stock par value)
September 30, December 31,
ASSETS 1998 1997 (1)
(Unaudited)
CURRENT ASSETS:
Cash and temporary investments $ 36,999 $ 59,970
Accounts receivable, less allowance for doubtful
accounts of $11,061 and $10,995, respectively 203,513 162,789
Inventories, net 184,620 128,155
Deferred income taxes 23,558 24,908
Other current assets 25,442 24,130
TOTAL CURRENT ASSETS 474,132 399,952
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $91,788 and
$72,723, respectively 156,032 118,745
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $87,952 and $72,043,
respectively 175,630 160,493
$805,794 $679,190
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $149,426 $121,714
Notes payable and current
portion of long-term debt 42,310 10,384
Income taxes payable 9,977 13,580
Deferred revenue 12,964 12,428
TOTAL CURRENT LIABILITIES 214,677 158,106
LONG-TERM DEBT, less current maturities 32,921 40,301
OTHER LIABILITIES AND DEFERRED REVENUE 38,156 22,367
COMMON EQUITY PUT OPTIONS - 4,674
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00; authorized
10,000 shares, none issued or outstanding - -
Common stock, par value $0.01; authorized
100,000 shares; issued 66,202 shares and
43,519 shares, respectively 662 435
Retained earnings 341,218 274,976
Other stockholders' equity 178,160 178,331
520,040 453,742
$805,794 $679,190
See notes to condensed consolidated financial statements
(1) The consolidated balance sheet as of December 31, 1997 has been taken
from the audited financial statements at that date and condensed.
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SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
NET REVENUE $256,806 $201,876 $709,097 $567,810
COST OF REVENUE 144,780 110,466 397,269 309,101
AMORTIZATION OF SOFTWARE
DEVELOPMENT COSTS 3,397 2,938 10,125 8,700
GROSS PROFIT 108,629 88,472 301,703 250,009
OPERATING EXPENSES:
Engineering 18,512 14,846 51,749 41,903
Selling, general and
administrative 49,792 42,148 141,180 122,393
Amortization of excess
of cost over fair value
of net assets acquired 1,184 1,251 3,607 3,598
69,488 58,245 196,536 167,894
EARNINGS FROM OPERATIONS 39,141 30,227 105,167 82,115
GAIN ON SALE OF BUSINESS - - 494 -
INTEREST EXPENSE, net (1,117) (869) (2,279) (2,568)
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 38,024 29,358 103,382 79,547
PROVISION FOR INCOME TAXES 12,928 10,862 35,150 29,432
NET EARNINGS $ 25,096 $ 18,496 $ 68,232 $ 50,115
EARNINGS PER SHARE:
Basic $0.43 $0.31 $1.16 $0.85
Diluted $0.40 $0.30 $1.10 $0.82
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING:
Basic 58,812 59,094 58,830 59,015
Diluted 62,622 61,288 62,237 61,249
See notes to condensed consolidated financial statements
-3-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended September 30,
1998 1997
Cash flows from operating activities:
Net earnings $25,096 $18,496
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization of property,
plant and equipment 8,409 6,548
Other amortization 5,506 4,765
Provision for losses on accounts receivable 884 771
Changes in assets and liabilities
net of effect of acquisitions:
Accounts receivable (1,285) (15,921)
Inventories (15,855) 2,468
Other current assets 1,755 (3,397)
Intangible and other assets (14,489) (3,779)
Accounts payable and accrued expenses 7,942 10,051
Other liabilities and deferred revenue 2,004 2,237
Net cash provided by operating activities 19,967 22,239
Cash flows from investing activities:
Expenditures for property, plant and
equipment (22,707) (7,844)
Acquisition of subsidiaries, net
of cash acquired (6,756) (4,266)
Net cash used in investing activities (29,463) (12,110)
Cash flows from financing activities:
Proceeds from issuance of notes payable 31,772 -
Principal repayment of long term debt - (100)
Exercise of stock options and warrants 8,097 7,231
Dividends paid (1,177) (789)
Purchase of treasury shares (9,739) (5,866)
Net cash provided by
financing activities 28,953 476
Effects of exchange rate changes on cash 2,158 (728)
Net increase in cash and
temporary investments 21,615 9,877
Cash and temporary investments, beginning
of period 15,384 34,724
Cash and temporary investments, end of
period $36,999 $44,601
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 852 $ 898
Income taxes 13,012 908
See notes to condensed consolidated financial statements
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SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Nine Months Ended September 30,
1998 1997
Cash flows from operating activities:
Net earnings $68,232 $50,115
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization of property,
plant and equipment 24,270 19,329
Other amortization 15,909 14,468
Provision for losses on accounts receivable 2,144 2,034
Gain from sale of business (494) -
Changes in assets and liabilities net of
effect of acquisitions and divestitures:
Accounts receivable (40,288) (24,285)
Inventories (53,792) 1,894
Other current assets (126) (9,653)
Intangible and other assets (30,259) (7,321)
Accounts payable and accrued expenses 22,710 (699)
Other liabilities and deferred revenue 14,060 9,172
Net cash provided by operating
activities 22,366 55,054
Cash flows from investing activities:
Note receivable - 2,500
Expenditures for property, plant and
equipment (61,993) (21,279)
Proceeds from sale of business, net 11,911 -
Acquisition of subsidiaries, net
of cash acquired (12,924) (8,026)
Net cash used in investing activities (63,006) (26,805)
Cash flows from financing activities:
Proceeds from issuance of notes payable 31,772 -
Principal repayments of notes payable
and long term debt (7,226) (7,268)
Exercise of stock options and warrants 18,588 23,676
Proceeds from common equity put options - 285
Dividends paid (1,990) (1,587)
Purchase of treasury shares (25,755) (29,934)
Net cash provided by/(used in)
financing activities 15,389 (14,828)
Effects of exchange rate changes on cash 2,280 (3,110)
Net (decrease)/increase in cash and
temporary investments (22,971) 10,311
Cash and temporary investments, beginning
of period 59,970 34,290
Cash and temporary investments, end of
period $36,999 $44,601
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 2,571 $ 3,478
Income taxes 20,203 6,161
See notes to condensed consolidated financial statements
-5-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(All amounts in thousands, except per share data)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments
(consisting of normal recurring accruals) and present fairly the
Company's financial position as of September 30, 1998, and the results
of its operations and its cash flows for the three and nine months
ended September 30, 1998 and 1997, in conformity with generally
accepted accounting principles for interim financial information
applied on a consistent basis. The results of operations for the three
and nine months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the full year. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. Certain reclassifications have
been made to prior consolidated financial statements to conform with
current presentations.
2. Basic 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 shares
of common stock and common stock equivalents (options and warrants)
outstanding during the period, computed in accordance with the
treasury stock method.
On February 9, 1998 the Board of Directors approved a three for two
split of the Company's common stock to be effected as a 50 percent
stock dividend and a $0.02 per share semi-annual cash dividend both
of which were payable on April 3, 1998 to shareholders of record on
March 17, 1998. In this report, all earnings per share amounts and
the weighted average number of common shares outstanding have been
retroactively restated to reflect the stock split. In addition, the
number of common shares issued have been adjusted to reflect the
stock split, an amount equal to the par value of the additional
shares issued has been transferred from additional paid in capital
to common stock and the cash dividend has been recorded as an
adjustment to retained earnings as of March 31, 1998.
3. Classification of inventories is:
September 30, 1998 December 31, 1997
(Unaudited)
Raw materials $ 70,008 $ 57,872
Work-in-process 34,584 14,039
Finished goods 80,028 56,244
$184,620 $128,155
4. Effective January 1, 1998 the Company has adopted Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" which
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be
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reported in the financial statements. The Company's total
comprehensive earnings were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Net earnings $ 25,096 $ 18,496 $ 68,232 $ 50,115
Other comprehensive
earnings(losses), net
of tax:
Change in equity due to
foreign currency
translation adjustments 3,949 (1,993) 2,624 (4,648)
Comprehensive earnings $ 29,045 $ 16,503 $ 70,856 $ 45,467
5. The Company is currently involved in matters of litigation arising
from the normal course of business. Management is of the opinion
that such litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
On April 1, 1996, PSC Inc. ("PSC") commenced suit against the
Company in Federal District Court for the Western District of New
York, purporting to assert claims against the Company for alleged
violations of the federal antitrust laws, unfair competition and
also seeking a declaratory judgment of non-infringement and
invalidity as to certain of the Company's patents. PSC has served a
Third Amended Complaint, which purports to assert essentially the
same antitrust and unfair competition claims against the Company,
and also seeks a declaratory judgment of alleged non-infringement
and validity of nine of the Company's patents, and a declaratory
judgment that PSC has not breached its two agreements with the
Company and that those agreements have been terminated. The Company
has amended its suit against PSC to assert infringement of four
Symbol patents, breach of contract and fraud.
The Company had also sued Data General Corporation ("Data General"),
a manufacturer of portable integrated scanning terminals which
incorporate scan engines from PSC, for infringement of the same four
patents and five additional patents. The nine patents asserted
against Data General are the same nine Symbol patents as to which
PSC is seeking declaratory relief.
On October 9, 1996, the Court granted the Company's motion to sever
and stay PSC's antitrust, unfair competition and related claims. On
the same day, the Court denied Data General's motion to stay the
Company's claims against it.
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6. During April 1997, the Company issued common equity put options on
225,000 shares of its common stock which were exercisable for a
period of one year from the date of issuance and give independent
parties the right to sell such shares to the Company at a strike
price of $20.775 per share.
The balance of the common equity put option account as of December
31, 1997, represents the amount the Company would be obligated to
pay if all unexpired put options were exercised relating to
unexpired transactions outstanding. On April 9, 1998 the obligation
associated with the common equity put options expired. As a result
the balance in the common equity put option account of $4,674,000
was reclassified to additional paid in capital in April,1998.
7. Effective May 31, 1998, the Company sold all of the stock and certain
assets of Symbol LIS Limited, a wholly owned subsidiary, engaged in
the business of providing systems and technology with respect to
logistics and warehouse management systems operations to a third
party. Proceeds from the sale of $15,000,000 were offset by the
value of net assets sold and the write-off of the proportional share
of excess of cost over net assets acquired, relating to the original
acquisition of LIS Holdings Ltd., in 1996. This resulted in a gain
from the sale of business of $494,000 which is classified as non-
operating income in the consolidated statement of earnings.
Additional acquisition payments to be made to the Company are
contingent upon the attainment of certain annual net revenue levels
during the next six years, subject to a minimum earnout amount as
defined in the stock purchase agreement.
8. In July 1998, the Company established a wholly owned subsidiary in
Sweden through the acquisition of substantially all of the assets of
ISE Data AB, a distributor of the Company's products. This
acquisition has been accounted for as a purchase and, accordingly,
the related acquisition cost has been allocated to net assets
acquired based upon fair values. The initial purchase price related
to this acquisition amounted to approximately $5,300,000. The excess
of cost over net assets acquired of approximately $3,100,000 is being
amortized over twenty years.
Additional acquisition payments will be contingent upon the
attainment of certain annual net revenue levels, as defined in the
purchase agreement, during the next five years.
Result of operations of this subsidiary has been included in
consolidated operations as of its effective acquisition date. Pro
forma results of operations, assuming this acquisition had been
completed at the beginning of 1998 and 1997, would not differ
materially from the reported results.
-8-
Safe harbor for forward looking statements under Securities Litigation Act
of 1995; certain cautionary statements
Pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995, certain comments included herein are forward
looking statements. The actual results may differ materially from those
projected in the forward looking statements. Furthermore, such forward
looking statements are subject to a number of risks and uncertainties
including, but not limited to the state of the US and European economies,
the level of competition within the industry and its effect on product
prices, the Company's ability to timely launch new products, and various
other factors. Additional information concerning these factors is set
forth herein and in the Company's Annual Report on Form 10-K which was
filed with the Securities and Exchange Commission in March, 1998.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net revenue of $256,806,000 and $709,097,000 for the three and nine
months ended September 30, 1998 increased 27.2 percent and 24.9 percent,
respectively, over the comparable prior year periods. The increase for the
three months ended September 30, 1998 is primarily due to increased sales
of hand held computer systems. The increase for nine months ended September
30, 1998 is primarily due to increased sales of worldwide scanner products
and North America hand held computer systems. Foreign exchange rate
fluctuations unfavorably impacted net revenue by approximately 1.5 percent
and 1.7 percent, respectively for the three and nine months ended September
30, 1998 and unfavorably impacted net revenue by approximately 2.4 percent
and 1.5 percent for the three and nine months ended September 30, 1997.
Geographically, North America revenue increased 38.2 percent and 36.2
percent, respectively, for the three and nine months ended September 30,
1998 over the comparable prior year periods. International revenue
increased 10.9 percent and 9.6 percent, respectively, for the three and
nine months ended September 30, 1998 over the comparable prior year periods
notwithstanding the unfavorable impact of foreign exchange rate
fluctuations on net revenue previously described. North America and
International revenue continue to represent approximately three-fifths and
two-fifths of net revenue, respectively.
Cost of revenue (as a percentage of revenue) of 56.4 percent and 56.0
percent for the three and nine months ended September 30, 1998 increased
from 54.7 percent and 54.4 percent, respectively, for the comparable prior
year periods. This increase is principally due to the unfavorable impact of
foreign exchange rate fluctuations on net revenue previously described and
-9-
due to the Company's roll out of its contract related to the United States
Postal Service which represents a lower margin order relative to historical
orders. This is the largest contract in the Company's history and
represents over $100,000,000 of net revenue. The Company anticipates a
continued increase in the cost of revenue (as a percentage of net revenue),
in the last quarter of 1998 due to its continued roll out of its contract
related to the United States Postal Service. For most of 1998, the U.S.
dollar continued to appreciate from year end 1997 levels. Even if there is
no further change in foreign exchange rates, the Company anticipates that
this combination of factors will have an adverse impact on the 1998 to 1997
comparison of cost of revenue (as a percentage of net revenue).
Amortization of software development costs of $3,397,000 and
$10,125,000 for the three and nine months ended September 30, 1998
increased from $2,938,000 and $8,700,000 in the comparable prior year
periods due to new product releases.
Engineering expenses for the three and nine months ended September 30,
1998 increased to $18,512,000 and $51,749,000 from $14,846,000 and
$41,903,000, respectively, for the comparable prior year periods. In
absolute dollars engineering expenses increased 24.7 percent and 23.5
percent, respectively, from the prior year periods. As a percentage of
revenue such expenses decreased to 7.2 percent and 7.3 percent,
respectively, for the three and nine months ended September 30, 1998 from
7.4 percent for the comparable prior year periods. The increase in
absolute dollars is due to additional expenses incurred in connection with
the continuing research and development of new products and the improvement
of existing products partially offset by increased capitalized costs
incurred for internally developed product software where economic and
technological feasibility has been established.
Selling, general and administrative expenses of $49,792,000 and
$141,180,000 for the three and nine months ended September 30, 1998
increased from $42,148,000 and $122,393,000, respectively, for the
comparable prior year periods. While in absolute dollars, selling, general
and administrative expenses increased 18.1 percent and 15.3 percent,
respectively, from the prior year periods, as a percentage of revenue such
expenses decreased to 19.4 percent and 19.9 percent for the three and nine
months ended September 30, 1998 from 20.9 percent and 21.6 percent,
respectively, in the comparable prior year periods. The increase in
absolute dollars reflects expenses incurred to support a higher revenue
base and expenses incurred by three subsidiaries acquired in 1997 and 1998.
Amortization of excess of cost over fair value of net assets acquired
of $1,184,000 and $3,607,000 for the three and nine months ended September
30, 1998, decreased from $1,251,000 and increased from $3,598,000,
respectively for the comparable prior year periods. The decrease for the
three months ended September 30, 1998 is due to foreign exchange
fluctuations coupled with the sale of stock and certain assets of Symbol
LIS Limited described below partially offset by the increase resulting from
the acquisition of the Swedish subsidiary. The increase for the nine
-10-
months ended September 30, 1998 is primarily due to the acquisition of
three subsidiaries in 1998 and 1997 which resulted in an increase in the
gross value of excess of cost over fair value of net assets acquired
partially offset by the sale of stock and certain assets of Symbol LIS
Limited.
The gain from the sale of business resulted from the sale of the stock
and certain assets of Symbol LIS Limited, a wholly owned subsidiary,
engaged in the business of providing systems and technology with respect to
logistics and warehouse management systems operations to a third party.
Net interest expense of $1,117,000 and $2,279,000 for the three and
nine months ended September 30, 1998 increased from $869,000 and decreased
from $2,568,000 respectively, for the comparable prior year periods. The
increase for the three months ended September 30, 1998 is primarily due to
increased borrowings under lines of credit. The decrease for the nine
months ended September 30, 1998 is due to annual mandatory repayments of
indebtedness and increased interest income resulting from an increase in
temporary investments versus the prior year period.
The Company's effective tax rate of 34.0 percent for the three and
nine months ended September 30, 1998, respectively, decreased from 37.0
percent for the three and nine months ended September 30, 1997 primarily
due to an increase in federal tax credits and the exempt earnings of the
foreign sales corporation.
Liquidity and Capital Resources
The Company utilizes a number of measures of liquidity including the
following:
September 30, December 31,
1998 1997
Working Capital (in thousands) $259,455 $241,846
Current Ratio (Current Assets
to Current Liabilities) 2.2:1 2.5:1
Long-Term Debt to Capital 6.0% 8.1%
(Long-term debt to long-term
debt plus equity)
Current assets increased by $74,180,000 from December 31, 1997
principally due to an increase in accounts receivable as a result of the
increase in net revenue and inventories due to increased operating levels
partially offset by the decrease in cash and temporary investments.
Current liabilities increased $56,571,000 from December 31, 1997
primarily due to increases in accounts payable and accrued expenses and
borrowings under lines of credit.
The aforementioned activities resulted in a working capital increase of
$17,609,000 for the nine months ended September 30, 1998. The Company's
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current ratio as of September 30, 1998 decreased to 2.2:1 from 2.5:1 at
December 31, 1997.
Property, plant and equipment expenditures for the nine months ended
September 30, 1998 totalled $61,993,000 compared to $21,279,000 for the
nine months ended September 30, 1997. In the fourth quarter of 1997 the
Company entered into a construction commitment to expand its existing
Worldwide Headquarters facility, located in Holtsville, New York, by
approximately 125,000 square feet. The project cost, including
furniture, fixtures and equipment, is estimated at approximately
$20,000,000 and is anticipated to be completed in March 1999. In
addition, the Company continues to make capital investments in major
systems and networks conversions. The Company does not have any other
material commitments for capital expenditures.
The Company's long-term debt to capital ratio decreased to 6.0 percent
at September 30, 1998 from 8.1 percent at December 31, 1997 primarily due
to increased equity from the results of operations as well as payment of
the annual installments of the Company's 7.76 percent Series A and B Senior
Notes.
The Company has loan agreements which expire June 30, 1999 with six
banks pursuant to which the banks have agreed to provide lines of credit
totalling $135,000,000.
The Company generated positive cash flow from operations for the
three months ended September 30, 1998, but experienced an overall
decrease in cash of $22,971,000 for the period. The positive cash flow
provided by operations, borrowings under lines of credit, and cash flow
generated from and tax benefits associated with the exercise of stock
options were offset by cash used for expenditures for property, plant and
equipment, acquisition related payments, dividends paid and the purchase
of 239,000 shares of the Company's common stock held in treasury. The
purchases of common stock represent 158,000 shares purchased in open
market transactions and 81,000 shares purchased from officers related to
the exercise of stock options.
The Company believes that it has adequate liquidity to meet its
current and anticipated needs from working capital, results of its
operations, and existing credit facilities.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar
normal business activities.
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The Company has established a steering committee including senior
executives to address Year 2000 issues which will report regularly to the
Board of Directors. The comprehensive plan to address Year 2000 issues
has resulted in the formation of three main teams: (a) internal systems
team, (b) product readiness team, and (c) external vendors/suppliers
team.
The Company is currently implementing new computer systems that will
substantially insure that the Company's operating systems are not subject
to year 2000 transition problems. To the extent that current systems
that will not be replaced have been determined to be non-compliant, the
Company is working with the suppliers of such systems to obtain upgrades
and/or enhancements to insure Year 2000 compliance.
Based on a recent assessment, the Company believes that it will not
be required to modify or replace significant portions of its product
offerings so that such products will function properly with respect to
dates in the year 2000.
The Company has initiated formal communications with all of its
significant hardware and software suppliers to determine the extent to
which the Company's interface systems and sources of supply are
vulnerable to those third parties' failure to remediate their own Year
2000 issues.
Based upon the Company's current estimates, incremental out-of-
pocket costs of its Year 2000 program are expected to be immaterial.
These costs are expected to be incurred primarily in fiscal 1999 and
include third party consultants, remediation of existing computer
software and hardware, and upgrading product offerings. Such costs do
not include internal management time and the deferral of other projects,
the effects of which are not expected to be material to the Company's
results of operations or financial condition. The Company's total Year
2000 project costs include the estimated costs and time associated with
the impact of third party Year 2000 issues based on presently available
information. However, there can be no guarantee that other companies
upon which the Company relies will be able to timely address their Year
2000 compliance issues, the effects of which may have an adverse impact
on the Company's results of operations.
At this stage of the process, the Company believes that it is
difficult to specifically identify the cause of the most reasonable worst
case Year 2000 scenario. As with all manufacturers and distributors of
products such as those sold by the Company, a reasonable worst case
scenario would be the failure of the Company's products to operate
properly through the millennium rollover causing customers' systems
and/or operations that are dependent upon such products to fail or be
disrupted. In the event of such failures customers may commence legal
action against the Company or otherwise seek compensation for their
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losses associated with such failures. An additional worst case year 2000
scenario would be the failure of key vendors and/or suppliers to have
corrected their own Year 2000 issues which could cause disruption of the
Company's operations and have a material adverse effect on the Company's
financial condition. The impact of such disruption cannot be estimated
at this time. The Company's contingency plans to address worst case Year
2000 scenarios include developing or obtaining upgrades for products that
have been tested and found to be non-compliant and in the event the
Company believes that any of its key suppliers are unlikely to be able to
resolve their Year 2000 issues, it will seek a second source of supply.
-14-
Part II - Other Information
Item 1. Legal Proceedings:
On April 1, 1996, PSC Inc. ("PSC") commenced suit against the Company in
Federal District court for the Western District of New York, purporting to
assert claims against the Company for alleged violations of the federal
antitrust laws, unfair competition and also seeking a declaratory judgment
of non-infringement and invalidity as to certain of the Company's patents.
PSC has served a Third Amended Complaint, which purports to assert
essentially the same antitrust and unfair competition claims against the
Company, and also seek a declaratory judgment of alleged non-infringement
and invalidity of nine of the Company's patents, and a declaratory judgment
that PSC has not breached its two agreements with the Company and that
those agreements have been terminated. The Company has amended its suit
against PSC to assert infringement of four Symbol patents, breach of
contract and fraud. The Company had also sued Data General Corporation
("Data General"), a manufacturer of portable integrated scanning terminals
which incorporate scan engines from PSC, for infringement of the same four
patents and five additional patents. The nine patents asserted against
Data General are the same nine Symbol patents as to which PSC is seeking
declaratory relief.
On October 9, 1996, the Court granted the Company's motion, to sever
and stay PSC's antitrust, unfair competition and related claims. On the
same day, the Court denied Data General's motion to stay the Company's
claims against it. The Court also set a one week trial (a "Markman"
hearing) for July 14, 1997, to construe the claims in all nine patents
asserted by Symbol against Data General and PSC. On May 8, 1997, the Court
postponed the "Markman" hearing and in the interest of judicial economy,
the Court also stayed discovery on the patent claims until a non-judicial
arbitration which PSC had initiated on March 10, 1997 was completed. The
arbitration involved an interpretation of certain provisions of 1985 and
1995 license agreements between the Company and Spectra Physics Scanning
Systems, Inc. ("Spectra-Physics")(which had been acquired by PSC)
concerning whether purchasers of PSC's scan engines were free to
incorporate such scan engines into their integrated scanning terminals
without any royalty payment to the Company beyond that paid by PSC on the
scan engine itself. The arbitration was heard on July 22-24, 1997. On
December 29, 1997, the Arbitrator rendered his decision in favor of the
Company and against PSC. The Arbitrator ruled that the sale of PSC's scan
engines passed no immunity to PSC's customers under Symbol patents covering
the integration of the scan engine into integrated scanning terminals. The
Arbitrator's decision has been confirmed by the Court.
By letter dated January 22, 1998, the Company requested that the Court lift
the stay it entered in the litigation, to permit the Company to seek a
ruling that the Company's agreements with PSC, which PSC argues have been
terminated and under which it has ceased paying royalties for more than two
-15-
years, remain in full force and effect and require royalty payments to be
made to the Company pursuant to those agreements. PSC initially objected
to the Company's request and asked the Court that it continue to hold the
contract issues in abeyance and instead lift the stay with respect to the
pending patent issues and that discovery in these claims be reopened. On
April 3, 1998 the Court, with the consent of the parties, lifted the stay
previously in effect with respect to the contractual issues in the
litigation and ordered that a trial on these issues be held commencing on
October 13, 1998. The Company and PSC are currently conducting discovery
which should be completed by the end of the fourth quarter. If the Company
succeeds in the contract action, it believes it will be owed, on an ongoing
basis, additional royalties in excess of $5,000,000 per annum. If the
Company does not prevail in the action, it will continue to receive royalty
payments from PSC at the same rate and on the same products as it currently
is receiving them.
On September 12, 1998, PSC filed a motion for partial summary judgement
alleging that the Company was guilty of patent "misuse" since PSC is
obligated under its 1991 Agreement with the Company to pay royalties to the
Company on sales of scan engines to certain PSC customers who also pay
royalties to the Company when they incorporate these scan engines into
their integrated scanning terminals. On September 17, 1998, Judge Telesca,
in response to the filing by PSC of the motion, cancelled the hearing which
was scheduled to begin on October 13, 1998, and will be rescheduled by the
Court at a later time. In this motion, PSC claimed that this practice
should bar the Company from collecting past royalties which the Company
alleges are owed by PSC under the 1991 Agreement. However, since July
1996, PSC has not paid the Company any royalties under the 1991 Agreement
and has instead been paying royalties under agreements it obtained in
connection with the acquisition of Spectra-Physics.
The motion was argued on October 7, 1998 and on October 22, 1998 the Court
issued a decision and order granting PSC's motion. The Company disagrees
with the ruling and intends to appeal. Further, the ruling only prevents
the Company from collecting past royalties due and owing under the 1991
Agreement, none of which have been paid to the Company or taken into income
by the Company. Moreover, the ruling does not affect PSC's future royalty
obligations to the Company except with respect to royalties owed to the
Company under the 1991 Agreement on scan engines sold to other licensees of
the Company since the Company intends to prospectively cure the "misuse"
without prejudice, subject to the outcome of its appeal. The Company
estimates that royalties owed on PSC scan engines represent less than 10%
of the additional royalties PSC would owe the Company if it were paying
royalties under the 1991 Agreement. Furthermore, the decision has no other
impact on any royalties paid or to be paid to the Company by any other
licensee.
-16-
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: October 23, 1998 By: /s/ Jerome Swartz
Jerome Swartz, Chairman and
Chief Executive Officer
Dated: October 23, 1998 By: /s/ Kenneth V. Jaeggi
Kenneth V. Jaeggi
Senior Vice President -
Chief Financial Officer
-17-
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