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, 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, 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, 1999
Common Stock, 88,480,741 shares
par value $0.01
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Earnings
Three and Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 1999 and 1998 4 - 5
Notes to Condensed Consolidated Financial
Statements 6 - 10
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
ITEM 3.
Quantitative and Qualitative Disclosure About
Market Risk 15
PART II. OTHER INFORMATION 16 - 18
SIGNATURES 19
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except stock par value)
September 30, December 31,
ASSETS 1999 1998_____
(Unaudited)
CURRENT ASSETS:
Cash and temporary investments $ 25,517 $ 16,284
Accounts receivable, less allowance for doubtful
accounts of $11,347 and $10,031, respectively 232,698 205,416
Inventories 183,971 196,986
Deferred income taxes 30,292 34,428
Other current assets 39,126 26,490
TOTAL CURRENT ASSETS 511,604 479,604
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation and amortization of $106,990 and
$84,432, respectively 201,925 174,867
INTANGIBLE AND OTHER ASSETS, net of accumulated
amortization of $107,679 and $87,828,
respectively 222,072 183,928
$935,601 $838,399
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $154,767 $149,938
Current portion of long-term debt 10,631 10,594
Income taxes payable 15,583 9,858
Deferred revenue 18,264 13,897
TOTAL CURRENT LIABILITIES 199,245 184,287
LONG-TERM DEBT, less current maturities 69,276 64,596
OTHER LIABILITIES AND DEFERRED REVENUE 66,116 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
300,000 shares; issued 100,946 shares and
66,439 shares, respectively 1,009 664
Retained earnings 446,347 365,950
Other stockholders' equity 153,608 164,314
600,964 530,928
$935,601 $838,399
See notes to condensed consolidated financial statements
-2-
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,____
1999 1998 1999 1998___
NET REVENUE $293,030 $256,806 $826,823 $709,097
COST OF REVENUE 163,322 144,780 460,919 397,269
AMORTIZATION OF SOFTWARE
DEVELOPMENT COSTS 4,601 3,397 13,236 10,125
GROSS PROFIT 125,107 108,629 352,668 301,703
OPERATING EXPENSES:
Engineering 21,112 18,512 60,173 51,749
Selling, general and
administrative 55,485 49,792 161,048 141,180
Amortization of excess
of cost over fair value
of net assets acquired 1,254 1,184 3,724 3,607
77,851 69,488 224,945 196,536
EARNINGS FROM OPERATIONS 47,256 39,141 127,723 105,167
GAIN ON SALE OF BUSINESS - - - 494
INTEREST EXPENSE, net (1,316) (1,117) (3,984) (2,279)
EARNINGS BEFORE PROVISION
FOR INCOME TAXES 45,940 38,024 123,739 103,382
PROVISION FOR INCOME TAXES 15,160 12,928 40,834 35,150
NET EARNINGS $ 30,780 $ 25,096 $ 82,905 $ 68,232
EARNINGS PER SHARE:
Basic $0.35 $0.28 $0.94 $0.77
Diluted $0.33 $0.27 $0.88 $0.73
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING:
Basic 88,435 88,218 88,301 88,245
Diluted 94,252 93,933 94,121 93,355
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,
1999 1998_____
Cash flows from operating activities:
Net earnings $30,780 $25,096
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization of property,
plant and equipment 11,581 8,409
Other amortization 7,058 5,506
Provision for losses on accounts receivable 621 884
Changes in assets and liabilities net of
effect of acquisitions:
Accounts receivable (17,985) (1,285)
Inventories (3,201) (15,855)
Other current assets (2,398) 1,755
Accounts payable and accrued expenses 31,153 7,942
Other liabilities and deferred revenue (1,645) 2,004
Net cash provided by operating activities 55,964 34,456
Cash flows from investing activities:
Purchases of property, plant and
equipment (18,474) (22,707)
Investments in intangible and other assets (18,977) (14,489)
Acquisition of subsidiaries (1,844) (6,756)
Purchase of available for sale securities (1,000) -__
Net cash used in investing activities (40,295) (43,952)
Cash flows from financing activities:
Proceeds from issuance and repayment
of notes payable and long term debt (13,007) 31,772
Exercise of stock options and warrants 12,673 8,097
Dividends paid (1,330) (1,177)
Purchase of treasury shares (13,319) (9,739)
Net cash (used in)/ provided by
financing activities (14,983) 28,953
Effects of exchange rate changes on cash 591 2,158
Net increase in cash and
temporary investments 1,277 21,615
Cash and temporary investments, beginning
of period 24,240 15,384
Cash and temporary investments, end of
period $25,517 $36,999
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,233 $ 852
Income taxes $ 3,446 $13,012
See notes to condensed consolidated financial statements
-4-
SYMBOL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
Nine Months Ended September 30,
1999 1998___
Cash flows from operating activities:
Net earnings $82,905 $68,232
Adjustments to reconcile net earnings to
net cash from operating activities:
Depreciation and amortization of property,
plant and equipment 28,933 24,270
Other amortization 19,851 15,909
Provision for losses on accounts receivable 2,591 2,144
Gain from sale of business - (494)
Changes in assets and liabilities net of
effect of acquisitions and divestitures:
Accounts receivable (30,269) (40,288)
Inventories 12,938 (53,792)
Other current assets (8,485) (126)
Accounts payable and accrued expenses 4,689 22,710
Other liabilities and deferred revenue 17,620 14,060
Net cash provided by operating
activities 130,773 52,625
Cash flows from investing activities:
Purchases of property, plant and
equipment (55,834) (61,993)
Investments in intangible and other assets (49,082) (30,259)
Proceeds from sale of business, net - 11,911
Acquisition of subsidiaries (8,068) (12,924)
Purchase of available for sale securities (1,000) -__
Net cash used in investing activities (113,984) (93,265)
Cash flows from financing activities:
Proceeds from issuance and repayment of
notes payable and long term debt 4,717 24,546
Exercise of stock options and warrants 24,153 18,588
Dividends paid (2,508) (1,990)
Purchase of treasury shares (32,005) (25,755)
Net cash (used in)/ provided by
financing activities (5,643) 15,389
Effects of exchange rate changes on cash (1,913) 2,280
Net increase/(decrease) in cash and
temporary investments 9,233 (22,971)
Cash and temporary investments, beginning
of period 16,284 59,970
Cash and temporary investments, end of
period $25,517 $36,999
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 3,448 $ 2,571
Income taxes $ 6,099 $20,203
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, 1999, and the results
of its operations and its cash flows for the three and nine months
ended September 30, 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
and nine months ended September 30, 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.
On May 10, 1999 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 which was payable on June 14, 1999 to shareholders of
record on June 1, 1999. In these financial statements, 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 has been
adjusted to reflect the stock split and an amount equal to the par
value of the additional shares issued has been transferred from
additional paid in capital to common stock.
3. Classification of inventories is:
September 30, 1999 December 31, 1998
(Unaudited)
Raw materials $ 93,118 $ 77,435
Work-in-process 14,485 30,306
Finished goods 76,368 89,245
$183,971 $196,986
-6-
4. The Company's total comprehensive earnings were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,___
1999 1998 1999 1998__
Net earnings $ 30,780 $25,096 $ 82,905 $ 68,232
Other comprehensive
earnings(losses), net
of tax:
Change in equity due to
foreign currency
translation adjustments 2,511 3,949 (2,610) 2,624
Change in equity due to
unrealized gains
on marketable securities 101 - 101 -__
Comprehensive earnings $ 33,392 $ 29,045 $ 80,396 $ 70,856
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 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.
-7-
On April 3, 1998 the Court, with the consent of the parties, lifted
the stay previously in effect with respect to the contract issues in
the litigation. 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 believes 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
judgment 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. 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.
On October 22, 1998 the Court issued a decision and order granting
PSC's motion, which decision was subsequently reconfirmed by the
Court on April 30, 1999. 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 believes it has
prospectively cured 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.
The Company believes it has purged the alleged misuse on a going-
forward basis, by informing PSC that it does not intend to enforce
the offending contractual provision, subject to the Company's rights
on appeal. PSC disputes that the misuse has been purged, asserting
that the "effects" of the misuse have not been dissipated. However,
the Company believes its strong position on the issue is the correct
one.
-8-
The Court has directed both parties to file cross motions for
summary judgment on the main contract issues including whether PSC
owes the Company additional royalty payments under the 1991
Agreement and whether the alleged misuse has been purged. A hearing
on the motions is currently scheduled to be held on January 11,
2000.
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.
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.
-9-
<TABLE>
<CAPTION>
The Asia/
Americas EMEA Pacific Corporate Consolidated
(in thousands)
<S> <C> <C> <C> <C> <C>
Three Months ended
September 30, 1999:
Sales to unaffiliated
customers $186,078 $ 87,774 $19,178 $ - $293,030
Transfers between
geographic areas 66,820 - - (66,820) -___
Total net revenue $252,898 $ 87,774 $19,178 $(66,820) $293,030
Earnings before
provision for income
taxes $ 71,856 $ 23,143 $ 7,397 $(56,456) $ 45,940
Identifiable assets $664,317 $133,100 $20,508 $117,676 $935,601
Three Months ended
September 30, 1998:
Sales to unaffiliated
customers $175,934 $ 67,753 $13,119 $ - $256,806
Transfers between
geographic areas 48,206 - - (48,206) -___
Total net revenue $224,140 $ 67,753 $13,119 $(48,206) $256,806
Earnings before
provision for income
taxes $ 55,782 $ 13,069 $ 4,889 $(35,716) $ 38,024
Identifiable assets $544,237 $147,164 $19,636 $ 94,757 $805,794
Nine Months ended
September 30, 1999:
Sales to unaffiliated
customers $521,835 $257,376 $47,612 $ - $826,823
Transfers between
geographic areas 178,865 - - (178,865) -___
Total net revenue $700,700 $257,376 $47,612 $(178,865) $826,823
Earnings before
provision for income
taxes $194,682 $ 71,545 $17,746 $(160,234) $123,739
Nine Months ended
September 30, 1998:
Sales to unaffiliated
customers $471,638 $203,727 $33,732 $ - $709,097
Transfers between
geographic areas 153,568 - - (153,568) -____
Total net revenue $625,206 $203,727 $33,732 $(153,568) $709,097
Earnings before
provision for income
taxes $149,134 $ 50,495 $12,129 $(108,376) $103,382
</TABLE>
-10-
Safe harbor for forward looking statements under securities litigation act of
1995; certain cautionary statements
This report contains forward-looking statements based on current expectations,
forecasts and assumptions that involve risks and uncertainties that could
cause actual outcomes and results to differ materially. These risks and
uncertainties include price and product competition, dependence on new product
development, reliance on major customers, customer demand for the Company's
products and services, readiness for Year 2000, control of costs and expenses,
international growth, general industry and market conditions and growth rates
and general domestic and international economic conditions including interest
rate and currency exchange rate fluctuations. For a further list and
description of such risks and uncertainties, see the reports filed by the
Company with the Securities and Exchange Commission. The Company disclaims
any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Net revenue of $293,030,000 and $826,823,000 for the three and nine
months ended September 30, 1999 increased 14.1 percent and 16.6 percent,
respectively, over the comparable prior year periods. The increase for the
three and nine months ended September 30, 1999 is due to increased sales of
scanner products and scanner integrated application specific mobile
computer systems, partially offset by the decrease in the three months
ended September 30, 1999 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 unfavorably impacted net revenue by approximately 0.4 percent
for the three months ended September 30, 1999 but did not have a material
impact on net revenue for the nine months ended September 30, 1999.
Foreign exchange rate fluctuations unfavorably impacted net revenue by
approximately 1.5 percent and 1.7 percent for the three and nine months
ended September 30, 1998.
Geographically, The Americas revenue increased 5.8 percent and 10.6
percent, respectively, for the three and nine months ended September 30,
1999 over the comparable prior year periods. EMEA revenue increased 29.5
percent and 26.3 percent, respectively, and Asia Pacific revenue increased
46.2 and 41.1 percent, respectively, over the comparable prior year
periods.
The Americas, EMEA and Asia Pacific revenue represent approximately 64
percent, 30 percent and 6 percent of net revenue, respectively for the
three months ended September 30, 1999 and 63 percent, 31 percent and 6
percent of net revenue, respectively for the nine months ended September
30, 1999.
-11-
Cost of revenue (as a percentage of revenue) of 55.7 percent for the
three and nine months ended September 30, 1999 decreased from 56.4 percent
and 56.0 percent for the comparable prior year period due to the completion
of the Company's contract with the United States Postal Service which
represented a lower margin order relative to historical orders, partially
offset by new product start up costs.
Amortization of software development costs of $4,601,000 and
$13,236,000 for the three and nine months ended September 30, 1999
increased from $3,397,000 and $10,125,000 in the comparable prior year
periods due to new product releases.
Engineering expenses for the three and nine months ended September 30,
1999 increased to $21,112,000 and $60,173,000 from $18,512,000 and
$51,749,000, respectively, for the comparable prior year periods. In
absolute dollars engineering expenses increased 14.0 percent and 16.3
percent, respectively, from the prior year periods. As a percentage of net
revenue such expenses remained consistent with the comparable prior year
periods at 7.2 percent and 7.3 percent, respectively, for the three and
nine months ended September 30, 1999. 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 $55,485,000 and
$161,048,000 for the three and nine months ended September 30, 1999
increased from $49,792,000 and $141,180,000, respectively, for the
comparable prior year periods. While in absolute dollars, selling, general
and administrative expenses increased 11.4 percent and 14.1 percent,
respectively, from the prior year periods, as a percentage of revenue such
expenses decreased to 18.9 percent and 19.5 percent for the three and nine
months ended September 30, 1999 from 19.4 percent and 19.9 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 subsequent to
June 30, 1998.
Amortization of excess of cost over fair value of net assets acquired
of $1,254,000 and $3,724,000 for the three and nine months ended September
30, 1999, increased from $1,184,000 and $3,607,000, respectively for the
comparable prior year periods due to the acquisition of three subsidiaries
after June 30, 1998.
The gain from the sale of business in 1998 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.
-12-
Net interest expense of $1,316,000 and $3,984,000 for the three and
nine months ended September 30, 1999 increased from $1,117,000 and
$2,279,000 respectively, for the comparable prior year periods 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 and
nine months ended September 30, 1999, respectively, decreased from 34.0
percent in the comparable prior year periods primarily due to an increase
in the federal tax credits and 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,
1999 1998__
Working Capital (in thousands) $312,359 $295,317
Current Ratio (Current Assets
to Current Liabilities) 2.6:1 2.6:1
Long-Term Debt to Capital 10.3% 10.8%
(Long-term debt to long-term
debt plus equity)
Current assets increased by $32,000,000 from December 31, 1998
principally due to an increase in cash and accounts receivable resulting
from increased revenue and other current assets partially offset by a
decrease in inventories resulting from an improvement in inventory
management worldwide.
Current liabilities increased by $14,958,000 from December 31, 1998
primarily due to increases in accounts payable and accrued expenses, income
taxes payable and deferred revenue due to increased operating levels.
The aforementioned activity resulted in a working capital increase of
$17,042,000 for the nine months ended September 30, 1999. The Company's
current ratio of 2.6:1 at September 30, 1999 remained constant with that of
December 31, 1998.
Property, plant and equipment purchases for the nine months ended
September 30, 1999 totalled $55,834,000 compared to $61,993,000 for the nine
months ended September 30, 1998. In the first quarter of 1999 the Company
substantially completed construction related to 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.
-13-
The Company's long-term debt to capital ratio decreased to 10.3
percent at September 30, 1999 from 10.8 percent at December 31, 1998
primarily due to increased equity from results of profitable operations,
the benefits realized by stock option exercises and payment of the annual
installments of the Company's long-term indebtedness partially offset by
increased borrowings under the Company's revolving credit facility,
described below, treasury stock repurchases and the change in equity due
to foreign currency translation.
The Company has a $350,000,000 unsecured revolving credit facility with
a syndicate of U.S. and international banks for which the proceeds are
committed until 2003. The Company also has $60,000,000 in uncommitted U.S.
dollar and foreign currency lines of credit with several global banks that
continue until such time as either party wishes to terminate the
arrangement. As of September 30, 1999 the Company had outstanding
borrowings of $47,000,000 under these facilities.
The Company generated positive cash flow from operations of
$55,964,000 for the three months ended September 30, 1999, and experienced
an overall increase in cash of $1,277,000 for the period. The positive
cash flow provided by operations and cash flow generated from and tax
benefits associated with the exercise of stock options, were partially
offset by cash used for purchases of property plant and equipment,
investments in intangibles and other long term assets, acquisition related
payments, net repayments of notes payable and long term debt, dividends
paid and the purchase of 335,000 shares of the Company's stock for
approximately $13,319,000. The purchases of common stock represent shares
purchased in open market transactions and 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. 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 reports 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.
-14-
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 working with the suppliers of such systems has
obtained 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 and by direct mail. 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.
In 1998, the Company expended less than $200,000 and in the first three
quarters of 1999, the Company expended approximately $320,000 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 1998 and $2,100,000 for the first three quarters
of 1999. The Company anticipates the total cost of its Year 2000 activities
in 1999 to be approximately $3,000,000 which includes approximately
$2,500,000 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to ITEM 7, in the Company's annual report on Form 10-K for the
year ended December 31, 1998 for required disclosure.
-15-
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.
On April 3, 1998 the Court, with the consent of the parties, lifted
the stay previously in effect with respect to the contract issues in the
litigation. 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 believes 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 judgment
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. 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-
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 believes it has cured 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.
The Company believes it has purged the alleged misuse on a going-
forward basis, by informing PSC that it does not intend to enforce the
offending contractual provision, subject to the Company's rights on appeal.
PSC disputes that the misuse has been purged, asserting that the "effects"
of the misuse have not been dissipated. However, the Company believes its
position on the issue is the correct one.
The Court has directed both parties to file cross motions for summary
judgments on the main contract issues including whether PSC owes the
Company additional royalty payments under the 1991 Agreement and whether
the alleged misuse has been purged. A hearing on the motion is currently
scheduled to be held on January 11, 2000.
On July 21, 1999 the Company and six other leading members of the
Automatic Identification and Data Capture industry jointly initiated a
litigation against the Lemelson Medical, Educational, & Research
Foundation, Limited Partnership (the "Lemelson Partnership"). The suit,
which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical,
Educational & Research Foundation, Limited Partnerships, was commenced in
the U.S. District Court, District of Nevada in Reno, 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 other six Auto ID companies who are plaintiffs in the
lawsuit are Accu-Sort Systems, Inc., Intermec Technologies Corporation, a
wholly-owned subsidiary of UNOVA, Inc., Metrologic Instruments, Inc., PSC
Inc., Teklogix Corporation, a wholly-owned U.S. subsidiary of Teklogix
International, Inc. and Zebra Technologies Corporation. The Company has
agreed to bear approximately half of the legal and related expenses
associated with the litigation, with the remaining portion being borne by
the other Auto ID companies.
-17-
Although no claim is now or has ever been asserted by the Lemelson
Partnership directly against the Company or, to our knowledge any other
Auto ID company, the Lemelson Partnership has contacted many of the Auto ID
companies' customers demanding a one-time license fee for certain so-called
"bar code" patents transferred to the Lemelson Partnership by the late
Jerome H. Lemelson. The Company and the other Auto ID companies have
received many requests from their customers asking that they undertake the
defense of these claims using their knowledge of the technology at issue.
Certain of these customers have requested indemnification against the
Lemelson Partnership's claims from the Company and the other Auto ID
companies, individually and/or collectively with other equipment suppliers.
The Company, and we understand, the other Auto ID companies believe that
generally they have no obligation to indemnify their customers against
these claims and that the patents being asserted by the Lemelson
Partnership against their customers with respect to bar code equipment are
invalid, unenforceable and not infringed. However, the Company and the
other Auto ID companies believe that the Lemelson claims do concern the
Auto ID industry at large and that it is appropriate for them to act
jointly to protect their customers against what they believe to be baseless
claims being asserted by the Lemelson Partnership.
The Lemelson Partnership has not yet filed an Answer to the Complaint
in the lawsuit. Instead, the Lemelson Partnership has filed a motion to
dismiss the lawsuit, or in the alternative, to stay proceedings or to
transfer the case to the U.S. District Court in Arizona where there are
pending cases involving the Lemelson Partnership and other companies in the
semiconductor and electronics industries. The Lemelson Partnership's
motion is primarily based on grounds that there is no legally justiciable
case or controversy between the Auto ID companies and the Lemelson
Partnership because (1) the Lemelson Partnership's asserted method claims
apply against the bar code equipment "uses" by the end-users only and not
against the bar code equipment itself; and (2) the Lemelson Partnership has
never asserted its patent claims against the Auto ID companies. Contrary
to the Lemelson Partnership's arguments, the Company and the other Auto ID
companies believe the federal district court in Nevada has proper
jurisdiction to adjudicate the case on its merit.
-18-
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 25, 1999 By: /s/ Jerome Swartz
Jerome Swartz, Chairman and
Chief Executive Officer
Dated: October 25, 1999 By: /s/ Kenneth V. Jaeggi
Kenneth V. Jaeggi
Senior Vice President -
Chief Financial Officer
-19-
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