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 March 31, 1999
Commission file number 1-9802
SYMBOL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2308681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Symbol Plaza, Holtsville, NY 11742
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 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 March 31, 1999
Common Stock, 58,717,473 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
March 31, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Earnings
Three Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial
Statements 5 - 9
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
PART II. OTHER INFORMATION 15 - 17
SIGNATURES 18
<TABLE>
<CAPTION>
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except stock par value)
March 31, December 31,
ASSETS 1999 1998 (1)
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary investments $ 27,537 $ 16,284
Accounts receivable, less allowance for doubtful
accounts of $10,227 and $10,031, respectively 190,490 205,416
Inventories, net 184,594 196,986
Deferred income taxes 36,297 34,428
Other current assets 27,509 26,490
TOTAL CURRENT ASSETS 466,427 479,604
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $92,903 and
$84,432, respectively 184,073 174,867
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $94,158 and $87,828,
respectively 194,226 183,928
$844,726 $838,399
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $114,580 $149,938
Current portion of long-term debt 10,588 10,594
Income taxes payable 14,553 9,858
Deferred revenue 14,517 13,897
TOTAL CURRENT LIABILITIES 154,238 184,287
LONG-TERM DEBT, less current maturities 85,246 64,596
OTHER LIABILITIES AND DEFERRED REVENUES 61,898 58,588
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 66,674 shares and
66,439 shares, respectively 667 664
Retained earnings 389,114 365,950
Other stockholders' equity 153,563 164,314
543,344 530,928
$844,726 $838,399
See notes to condensed consolidated financial statements
<FN>
(1) The consolidated balance sheet as of December 31, 1998 has been taken
from the audited financial statements at that date and condensed.
</FN>
</TABLE>
-2-
<TABLE>
<CAPTION>
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(All amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
NET REVENUE $259,690 $213,310
COST OF REVENUE 144,753 116,837
AMORTIZATION OF SOFTWARE DEVELOPMENT COSTS 4,283 3,517
GROSS PROFIT 110,654 92,956
OPERATING EXPENSES:
Engineering 19,110 16,135
Selling, general and administrative 52,809 44,439
Amortization of excess of cost over
fair value of net assets acquired 1,199 1,261
73,118 61,835
EARNINGS FROM OPERATIONS 37,536 31,121
INTEREST EXPENSE, net (1,204) (449)
EARNINGS BEFORE PROVISION FOR
INCOME TAXES 36,332 30,672
PROVISION FOR INCOME TAXES 11,990 11,042
NET EARNINGS $ 24,342 $ 19,630
EARNINGS PER SHARE:
Basic $0.41 $0.33
Diluted $0.39 $0.32
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
Basic 58,871 58,820
Diluted 63,082 61,724
</TABLE>
See notes to condensed consolidated financial statements
-3-
<TABLE>
<CAPTION>
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings $24,342 $19,630
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization of property,
plant and equipment 8,471 7,901
Other amortization 6,330 5,267
Provision for losses on accounts receivable 1,058 491
Changes in assets and liabilities net of
effects of acquisitions:
Accounts receivable 12,728 (17,178)
Inventories 12,098 (12,466)
Other current assets (2,873) (1,698)
Intangible and other assets (10,660) (5,258)
Accounts payable and accrued expenses (35,747) (3,728)
Other liabilities and deferred revenue 8,625 8,945
Net cash provided by operating activities 24,372 1,906
Cash flows from investing activities:
Expenditures for property, plant and
equipment (17,641) (15,667)
Acquisition of subsidiaries, net of
cash acquired (6,224) (1,168)
Net cash used in investing activities (23,865) (16,835)
Cash flows from financing activities:
Net proceeds from issuance and repayment
of long-term debt 20,644 (6,355)
Exercise of stock options and warrants 6,384 9,170
Dividends paid (1,178) (813)
Purchase of treasury shares (13,338) (8,345)
Net cash provided by/(used in)
financing activities 12,512 (6,343)
Effects of exchange rate changes on cash (1,766) (791)
Net increase/(decrease) in cash and
temporary investments 11,253 (22,063)
Cash and temporary investments, beginning
of period 16,284 59,970
Cash and temporary investments, end of
period $27,537 $37,907
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,284 $ 848
Income taxes $ 1,512 $ 660
</TABLE>
See notes to condensed consolidated financial statements
-4-
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 March 31, 1999, and the results
of its operations and its cash flows for the three months ended
March 31, 1999 and 1998, in conformity with generally accepted
accounting principles for interim financial information applied on
a consistent basis. The results of operations for the three months
ended March 31, 1999, 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, 1998. 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.
3. Classification of inventories is:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited)
<S> <C> <C>
Raw materials $ 79,308 $ 77,435
Work-in-process 23,835 30,306
Finished goods 81,451 89,245
$184,594 $196,986
</TABLE>
4. The Company's total comprehensive earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(Unaudited)
1999 1998
<S> <C> <C>
Net earnings $ 24,342 $ 19,630
Other comprehensive earnings(losses),
net of tax:
Change in equity due to foreign
currency translation adjustments (3,794) (973)
Comprehensive earnings $ 20,548 $ 18,657
</TABLE>
-5-
5. The Company is currently involved in matters of litigation arising
from the normal course of business including matters described
below. 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 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 of the Company's 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 of the Company's
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 the Company 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 the Company's
patents covering the integration of the scan engine into integrated
scanning terminals. The Arbitrator's decision has been confirmed by
the Court.
-6-
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 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. Discovery by
the Company and PSC on the contract issues has essentially been
completed. If the Company succeeds in the contract action, it
believes it will be owed, on an ongoing basis, additional royalties
of approximately $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
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
-7-
represent less than 10 percent 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.
Discovery by the Company and PSC has essentially been completed.
On November 5, 1998, the Company made a Motion for Reconsideration
of the Court's misuse decision, based on what the Company believes
to be legal and factual matters that the Court overlooked in making
its decision. On the same day, the Company made a separate motion
to have the misuse decision entered as a final judgment, or in the
alternative, to have the decision certified to the United States
Court of Appeals for the Federal Circuit, which would have enabled
the Company to obtain immediate appellate review of the misuse
decision. On April 30, 1999, the judge denied both motions. The
Company anticipates that the judge will set a trial date on the
contract issues in the near future.
6. In February 1999, the Company acquired Airwire Mobile Technologies,
Inc., a developer 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 for the assets
acquired related to this acquisition amounted to approximately
$4,400,000. The excess of cost over net assets acquired of
approximately $4,000,000 is being amortized over twenty years.
Additional acquisition payments will be contingent upon the
attainment of certain financial targets, as defined in the purchase
agreement, during the next two years.
Results 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 1999 and 1998, would not differ
materially from the reported results.
7. The Company manages its business on a geographic basis. The
Company's reportable segments have been aggregated into three
geographic reportable business segments, The Americas (which
includes North and South America), EMEA (which includes Europe,
Middle East and Africa) and Asia Pacific (which includes Japan, the
Far East and Australia).
Summarized financial information concerning the Company's reportable
segments is shown in the following table. Sales are allocated to
each of the reportable segments based upon the location of the use
of the products and services. The "Corporate" column includes
corporate related expenses (primarily various indirect manufacturing
operations costs, engineering and general and administrative
expenses) not allocated to reportable segments. This has the effect
of increasing reportable operating profit for The Americas, EMEA and
Asia Pacific.
-8-
Identifiable assets are those tangible and intangible assets used in
operations in each geographic area. Corporate assets are
principally temporary investments and the excess of cost over fair
value of net assets acquired.
<TABLE>
<CAPTION>
The Asia/
Americas EMEA Pacific Corporate Consolidated
(in thousands)
Three Months ended
March 31, 1999:
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $161,196 $ 84,985 $13,509 $ - $259,690
Transfers between
geographic areas 57,366 - - (57,366) -
Total net revenue $218,562 $ 84,985 $13,509 ($57,366) $259,690
Earnings before
provision for income
taxes $ 57,025 $ 25,091 $ 4,845 $(50,629) $ 36,332
Identifiable assets $599,967 $129,536 $12,873 $102,350 $844,726
Three Months ended
March 31, 1998:
Sales to unaffiliated
customers $134,933 $ 68,041 $10,336 $ - $213,310
Transfers between
geographic areas 51,760 - - (51,760) -
Total net revenue $186,693 $ 68,041 $10,336 ($51,760) $213,310
Earnings before
provision for income
taxes $ 42,590 $ 18,608 $ 3,770 (34,296) $ 30,672
Identifiable assets $453,587 $132,500 $15,350 $ 95,319 $696,756
</TABLE>
-9-
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net revenue of $259,690,000 for the three months ended March 31,
1999 increased 21.7 percent over the comparable prior year period.
This increase is primarily due to increased worldwide sales of
scanner products and scanner integrated application specific mobile
computer systems, as well as the increase in revenue associated with
the Company's contract with the United States Postal Service which
was substantially completed during the quarter ended March 31, 1999.
Foreign exchange rate fluctuations did not have a material impact on
net revenue for the three months ended March 31, 1999. Foreign
exchange rate fluctuations unfavorably impacted net revenue 2.0
percent for the three months ended March 31, 1998.
Geographically, The Americas revenue increased 19.5 percent,
EMEA revenue increased 24.9 percent and Asia Pacific revenue
increased 30.5 percent, respectively, over the prior year. The
Americas, EMEA and Asia Pacific revenue represent approximately 62
percent, 33 percent and 5 percent of net revenue, respectively.
Cost of revenue (as a percentage of revenue) of 55.7 percent for
the three months ended March 31, 1999 increased from 54.8 percent for
the three months ended March 31, 1998. This increase is principally
due to new product start up costs, a shift in product mix to lower
margin products, as well as the Company's contract with the United
States Postal Service which represents a lower margin order relative
to historical orders.
Amortization of software development costs of $4,283,000 for the
three months ended March 31, 1999 increased from $3,517,000 for the
three months ended March 31, 1998 due to new product releases.
Engineering costs for the three months ended March 31, 1999
increased to $19,110,000 from $16,135,000 for the three months ended
March 31, 1998. As a percentage of net revenue engineering expenses
decreased to 7.4 percent from 7.6 percent in the prior year period.
In absolute dollars, engineering expenses increased 18.4 percent from
the prior year period 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 $52,809,000 for the
three months ended March 31, 1999 increased from $44,439,000 for the
three months ended March 31, 1998. While in absolute dollars,
selling, general and administrative expenses increased 18.8 percent
-10-
from the prior year period, as a percentage of revenue such expenses
were reduced to 20.3 percent for the three months ended March 31,
1999, from 20.8 percent in 1998 due to on going cost containment
programs. The increase in absolute dollars reflects expenses incurred
to support a higher revenue base and additional expenses incurred due
to two subsidiaries acquired subsequent to March 31, 1998.
Amortization of excess of cost over fair value of net assets
acquired of $1,199,000 for the three months ended March 31, 1999
remained relatively constant with $1,261,000 for the three months
ended March 31, 1998. The acquisitions referred to above as well as
contingent additional acquisition related payments increased the
value of excess of cost over net assets acquired which was offset by
the sale of stock and certain assets of Symbol LIS Limited in the
prior year.
Net interest expense increased to $1,204,000 for the three
months ended March 31, 1999 from $449,000 for the three months ended
March 31, 1998 due to increased borrowings under the Company's
revolving credit facility, partially offset by a reduction in
interest expense due to annual mandatory repayments of indebtedness.
The Company's effective tax rate of 33.0 percent for the three
months ended March 31, 1999 decreased from 36.0 percent in the prior
year primarily due to an increase in federal tax credits and the
exempt earnings of the foreign sales corporations.
<TABLE>
Liquidity and Capital Resources
<CAPTION>
The Company utilizes a number of measures of liquidity including
the following:
March 31, December 31,
1999 1998
<S> <C> <C>
Working Capital (in thousands) $312,189 $295,317
Current Ratio (Current Assets
to Current Liabilities) 3.0:1 2.6:1
Long-Term Debt to Capital 13.6% 10.8%
(Long-term debt to long-term
debt plus equity)
</TABLE>
Current assets decreased by $13,177,000 from December 31, 1998
principally due to a decrease in accounts receivable as a result of
improved collections and a decrease in inventories which were
partially offset by an increase in cash.
Current liabilities decreased $30,049,000 from December 31, 1998
primarily due to a decrease in accounts payable and accrued expenses.
-11-
The aforementioned activity resulted in a working capital increase
of $16,872,000 for the three months ended March 31, 1999. The Company's
current ratio at March 31, 1999 increased to 3.0:1 compared with 2.6:1
as of December 31, 1998.
Property, plant and equipment expenditures for the three months
ended March 31, 1999 totalled $17,641,000 compared to $15,667,000 for
the three months ended March 31, 1998. In the first quarter of 1999 the
Company substantially completed construction related to its expansion of
its existing Worldwide Headquarters facility, located in Holtsville, New
York. The Company continues to make capital investments in major
systems and networks conversions but does not have any other material
commitments for capital expenditures.
The Company's long-term debt to capital ratio increased to 13.6
percent at March 31, 1999 from 10.8 percent at December 31, 1998
primarily due to increased borrowings under the Company's revolving
credit facility, described below, which exceeded the payment of the
annual installment of the Company's Series A and B Senior Notes,
treasury stock repurchases in excess of the benefits realized by stock
option exercises and the change in equity due to foreign currency
translation adjustments partially offset by increased equity from
results of profitable operations.
The Company has a $200,000,000 unsecured revolving credit facility
with a syndicate of U.S. and international banks for which the proceeds
are committed until 2003. As of March 31, 1999 the Company had
outstanding borrowings of $62,000,000 under this facility.
The Company generated $24,372,000 positive cash flow from
operations for the three months ended March 31, 1999, and experienced an
overall increase in cash of $11,253,000 for the period. The positive
cash flow provided by operations and borrowings under the Company's
revolving credit facility was offset by cash used in investing
activities, the purchase of 274,000 shares of the Company's common stock
and the note repayments described above. The purchases of common stock
include both shares purchased from officers related to the exercise of
stock options and shares purchased in open market transactions. These
purchases were partially offset by cash flow generated from and tax
benefits associated with 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.
-12-
Computer systems may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in product and/or system failures
or other computer errors causing disruption of the Company's operations.
The Company has identified the following areas of risk: a) the
failure or disruption of systems used by the Company to run its business
operations and facilities, b) the failure or disruption of systems used
by the Company's suppliers and vendors, c) warranty or other claims by
customers due to failure or malfunctioning of the Company's products.
The Company has established a steering committee including senior
executives to address Year 2000 issues which will report periodically to
the Board of Directors. The Company's 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 recently implemented new computer systems that
substantially insure that the Company's operating systems are not
subject to Year 2000 transition problems. To the extent that portions
of its computer systems that have not been 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. To the extent such system implementation, replacement or
modification is delayed or if significant new non-compliance issues are
identified or go undetected, the Company's results of operations could
be adversely impacted.
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 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. However, several Year 2000 related issues,
mostly stemming from third party operating systems, have been
identified. The Company has undertaken measures to inform customers of
Year 2000 related issues via its Year 2000 web site. However, it is not
possible to anticipate all end user situations and/or Year 2000 related
issues, particularly those involving third party products. The Company
may experience an increase in warranty and other claims related to Year
2000 issues. Additionally, there may be substantial Year 2000
litigation caused by failure of systems which contain Company products
or third party products sold by the Company. The impact of such
warranty and/or other claims would have a material adverse impact on the
Company's financial condition.
-13-
In 1998, the Company expended less than $200,000 for external
resources in connection with its Year 2000 related activities.
Capitalized spending for upgrading and replacing non-compliant computer
systems was approximately $900,000 for the year. The Company
anticipates the total cost of its Year 2000 activities in 1999 to be
approximately $3,000,000 which includes approximately $2,000,000 of
capitalized fixed assets.
Based upon the Company's current estimates, total 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 is true for most 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 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 its 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
The Company is currently involved in matters of litigation
arising from the normal course of business including matters
described below. 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 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 of the Company's 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 of the Company's 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 the Company
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)
-15-
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 the Company's 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 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. Discovery by the Company and PSC on the contract issues has
essentially been completed. If the Company succeeds in the
contract action, it believes it will be owed, on an ongoing
basis, additional royalties of approximately $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.
-16-
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 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 percent
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. Discovery by the Company
and PSC has essentially been completed.
On November 5, 1998, the Company made a Motion for
Reconsideration of the Court's misuse decision, based on what the
Company believes to be legal and factual matters that the Court
overlooked in making its decision. On the same day, the Company
made a separate motion to have the misuse decision entered as a
final judgment, or in the alternative, to have the decision
certified to the United States Court of Appeals for the Federal
Circuit, which would have enabled the Company to obtain immediate
appellate review of the misuse decision. On April 30, 1999, the
judge denied both motions. The Company anticipates that the
judge will set a trial date on the contract issues in the near
future.
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SYMBOL TECHNOLOGIES, INC.
Dated: May 7, 1999 By: /s/ Jerome Swartz
Jerome Swartz, Chairman and
Chief Executive Officer
Dated: May 7, 1999 By: /s/ Kenneth V. Jaeggi
Kenneth V. Jaeggi
Senior Vice President -
Chief Financial Officer
-18-
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