<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 1)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________to __________
Commission file number 0-11402
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TELXON CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 74-1666060
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3330 West Market Street, Akron, Ohio 44333
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 664-1000
-----------------
Securities registered pursuant Name of each exchange
to Section 12(b) of the Act: on which registered:
--------------- --------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
----------------------------
(Title of class)
7-1/2% Convertible Subordinated Debentures Due 2012
---------------------------------------------------
(Title of Class)
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ].
The aggregate market value of registrant's Common Stock held by non-affiliates
as of May 30, 1997, based on the last reported sales price of the Common Stock
as reported on the Nasdaq National Market for such date, was $281,710,515.
At May 31, 1997, there were 15,429,636 outstanding shares of the registrant's
Common Stock.
Documents Incorporated by Reference
-----------------------------------
The registrant's definitive proxy statement for its 1997 Annual Meeting of
Stockholders to be held on September 10, 1997, as filed by the registrant with
the Securities and Exchange Commission on July 29, 1997, is incorporated by
reference in Part III of this Annual Report on Form 10-K from the date of filing
such document.
<PAGE> 2
This Amendment No. 1 on Form 10-K/A (this "Amendment") amends and restates in
full the disclosures made by the registrant, Telxon Corporation ("Telxon", and
together with its subsidiaries, the "Company"), in response to "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION", "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" and "ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" in its Form
10-K as originally filed with the Securities and Exchange Commission (the
"Commission") via EDGAR transmission on June 30, 1997 (the "Original Filing").
To facilitate the reading of the amended and restated responses set forth in
this Amendment in place of the corresponding disclosures in the Original Filing,
the pagination of each of the amended and restated Items included herein
corresponds to that of the disclosures in the Original Filing being hereby
superseded. The disclosures responsive to all of the other Items in the Original
Filing shall not be affected by this Amendment but continue as set forth in the
Original Filing without change. Notwithstanding the foregoing, the disclosures
in the Original Filing, as amended by this Amendment, are subject to updating
and supplementation by the disclosures contained in the filings made by the
Company with the Commission for any period or as of any date subsequent to the
fiscal year ended March 31, 1997, covered by the Original Filing.
The purpose of this Amendment No. 1 is to make the following corrections and
clarifications:
- -- In "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION":
i) To correct the fiscal 1997 consolidated effective tax rate stated on
page 29 of the Original Filing under "RESULTS OF OPERATIONS -- Income
Taxes" to be consistent with the rate stated in Note 7 of the Notes to
Consolidated Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA" on page 54 of the Original Filing,
ii) To correct the computational errors in the first and third numerical
columns of the "Working capital (current assets less current liabilities)"
row of the table on page 33 of the Original Filing under "FINANCIAL
CONDITION -- Liquidity -- 1996 vs. 1995", and
iii) To correct the computational error in the third numerical column of
the "Short-term investments" row of the table on page 37 of the Original
Filing under "FINANCIAL CONDITION--Investing Activities--1996 vs. 1995",
and
iv) To correct the 2002 redemption rate for the Company's 5-3/4%
convertible subordinated notes (the "5-3/4% Notes") stated on page 39 of
the Original Filing under "FINANCIAL CONDITION -- Financing Activities" to
be consistent with the rate stated in Note 10 of the Notes to Consolidated
Financial Statements included in "ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA" on page 59 of the Original Filing; and
- -- To revise the description of the redemption rate for the Company's 7-1/2%
Debentures stated in Note 10 of the Notes to Consolidated Financial Statements
included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" on page 59 of
the Original Filing to more clearly identify the rate applicable at March 31,
1997.
Except for certain stylistic and grammatical corrections made at various places
throughout the aforementioned Items 7 and 8 as restated herein, the disclosures
set forth herein do not differ from those in Items 7 and 8 of the Original
Filing. The response to Item 14 has been amended only to reflect the replacement
of the Consent of the Company's independent accountants included as Exhibit 23
to the Original Filing with the consent included as Exhibit 23 to this Amendment
which is necessitated by the above-described amendments to the audited financial
statements included in amended and restated Item 8.
<PAGE> 3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- -------------------------------------------------------------------------
FINANCIAL CONDITION
-------------------
SUMMARY
The following table sets forth for the periods indicated (1) certain expense and
income items expressed as a percentage of total revenues, and (2) the
percentage increase or decrease of such items as compared to the corresponding
prior period. This table and the textual discussion and analysis which follows
should be read in conjunction with the financial statements, including the notes
thereto, for the three years ended March 31, 1997, 1996 and 1995 as included in
Item 8 herein.
<TABLE>
<CAPTION>
Period to Period
Percentage of Total Revenues Increase (Decrease)
---------------------------- ----------------------
1997 1996
Year ended March 31, Compared Compared
1997 1996 1995 to 1996 to 1995
------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Product revenues, net 84.0% 85.9% 85.3% (6.3)% 29.0%
Customer service revenues, net 16.0 14.1 14.7 8.5 23.6
----- ----- -----
Total net revenues 100.0 100.0 100.0 (4.2) 28.2
Cost of product revenues 57.2 51.2 49.9 7.0 31.4
Cost of customer service
revenues 10.1 8.0 8.6 21.1 20.2
Selling expenses 19.0 17.0 18.0 7.4 20.4
Product development and
engineering expenses 9.5 9.3 8.9 (2.1) 34.6
General and administrative
expenses 11.5 8.1 9.1 35.1 14.0
----- ----- -----
107.3 93.6 94.5 9.8 26.9
----- ----- -----
(Loss) income from
operations (7.3) 6.4 5.5 (208.1) 49.9
Interest income .3 .2 .1 95.9 15.5
Interest expense (1.7) (1.4) (1.1) 19.0 55.5
Gain on sale of subsidiary stock -- .2 -- N.M. N.M.
Other non-operating income 7.5 .1 -- N.M. N.M.
----- ----- -----
(Loss) income before
income taxes (1.2) 5.5 4.5 (121.2) 55.9
Provision for income taxes .3 2.1 2.1 (86.7) 25.9
----- ----- -----
Net (loss) income (1.5)% 3.4% 2.4% (142.7) 83.2
===== ===== =====
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- -------------------------------------------------------------------------
FINANCIAL CONDITION (Continued)
-------------------------------
IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL
FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS
CONCERNING CERTAIN TRENDS AND OTHER FORWARD-LOOKING INFORMATION AFFECTING OR
RELATING TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE PROTECTIONS
AFFORDED "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS MADE
HEREIN AND ELSEWHERE IN THIS FORM 10-K ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. SEE "FACTORS THAT MAY AFFECT
FUTURE RESULTS" BELOW AND CAUTIONARY STATEMENTS APPEARING UNDER "ITEM 1.
BUSINESS" AND ELSEWHERE IN THIS FORM 10-K FOR A DISCUSSION OF THE IMPORTANT
FACTORS AFFECTING THE REALIZATION OF THOSE RESULTS.
OVERVIEW
For fiscal 1997, the Company recorded a net loss (including a non-operating
gain from the disposition of a subsidiary and certain non-recurring charges
recorded during the fiscal year) of $7.1 million or $.44 per share. This
compares to a net income of $16.5 million or $1.00 per share for fiscal 1996.
Inflation has not had a significant impact on the Company's consolidated
results of operations.
During fiscal 1997, the Company continued to work towards its goal of
delivering profitable growth and increased stockholder value by developing a
new, three-phase business model. The three phases of the model, which focus on
cost reduction, increased operating efficiencies and infrastructure
improvements, have been substantially implemented as of March 31, 1997. The
Company will continue to review its implementation of these initiatives for
further opportunities for improvement. The Company expects that the fiscal 1998
results will benefit from such initiatives.
The Company operates in a rapidly changing and dynamic market, and the Company's
strategies and plans are designed to adapt to changing market conditions where
and when possible. However, there can be no assurance that the Company's
management will identify the risks (especially those newly emerging from time
to time) affecting, and their impact on, the Company and its business, that the
Company's strategies and plans will take into account all market conditions and
changes thereto or that such strategies and plans will be successfully
implemented. Accordingly, neither the historical results presented in the
Company's consolidated financial statements and discussed herein, nor any
forward-looking statements in this Form 10-K, are necessarily indicative of the
Company's future results. See "Factors That May Affect Future Results" for a
discussion of risk factors which may affect the Company's future results of
operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The risks and other important factors which may affect the Company's business,
operating results, and financial and other conditions include, without
limitation, the following:
The Company's results of operations are affected by a variety of factors,
including economic conditions generally (both domestic and foreign) as well as
those specific to the industry in which it competes, decreases in average
selling price over the life of any particular product, the timing,
manufacturing complexity and expense of new product introductions (both by the
Company and its competitors), the timely implementation of new manufacturing
technologies, the ability to safeguard
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<PAGE> 5
patents and other intellectual property in a rapidly evolving market, the rapid
increase in demand for some products and the rapid decline in demand for others
and the Company's ability to anticipate and plan for that changing market
demand. Certain of these factors are beyond the Company's control.
The Company's expectations regarding future profitability resulting from the
streamlining of the Company's product lines and operations and the achievement
of greater manufacturing efficiencies are dependent upon the successful
identification and implementation of appropriate cost saving and operational
efficiency initiatives. To the extent that these measures are not fully and
successfully implemented and maintained or their implementation is delayed, the
Company's ability to realize such cost reductions and profitability may be
materially adversely affected.
Historically, the Company's shipments during any particular quarter generally
represent orders received either during that quarter or shortly before the
beginning of that quarter. The Company endeavors to maintain sufficient levels
of purchased components to meet the delivery requirements of its customers, but
there can be no assurance that during any given quarter, the Company has or can
procure the appropriate mix of purchased components to accommodate such orders.
Therefore, the Company's financial performance in any quarter is dependent to a
significant degree upon obtaining orders which can be manufactured and
delivered to its customers in that quarter. As a result, financial performance
for any given quarter cannot be known or fully assessed until near the end of
that quarter. The Company's product line streamlining and standardization
initiatives are intended, among other things, to reduce its dependence on same
quarter sales fulfillment through normalized production levels. However, there
can be no assurances that such initiatives will be successfully implemented or
produce the intended benefits.
The Company has also historically recognized a substantial portion of its
product revenues in the last month of each quarter. A significant portion of the
Company's expenses are relatively fixed, and timing of increases in such
expenses is based in large part on the Company's forecast of future revenues. As
a result, if revenues do not meet expectations, the Company may be unable to
quickly adjust expenses to levels appropriate to actual revenues, which could
have a materially adverse effect on the Company's results of operations.
The markets in which the Company competes are intensely competitive and
characterized by increasingly rapid technological change, introduction of new
products with improved performance characteristics, product obsolescence and
price erosion. Failure to keep pace with product and technological advances
could negatively affect the Company's competitive position and prospects for
growth. Customers' anticipation of new or enhanced product offerings by the
Company or a competitor may lead them to defer purchases of the Company's
existing products. In addition, companies that are participants in the broader
computer industry are potential competitors. Some of the Company's competitors
and potential competitors have substantially greater financial, technical,
intellectual property, marketing and human resources than the Company.
The Company's future success depends on its ability to develop and rapidly bring
to market technologically advanced products. From time to time the Company
invests in development stage and other entities who possess or who could
potentially possess strategically important technologies. Due to the nature of
these entities and their operations, there can be no assurance that these
investments will be realizable or will result in marketable and/or successful
products. There can be no assurance that the Company's research and development
activities will lead to the commercially successful introduction of new or
improved products or that the Company will not encounter delays or problems in
connection therewith. The cost of
20
<PAGE> 6
perfecting new and improved technologies to satisfy customer quality and
delivery expectations as they are brought to market cannot always be fully
anticipated and may adversely affect Company operating profits during such
introductions. In addition, the average selling prices for computer products
generally decrease over the products' lives. To mitigate such decreases, the
Company seeks to reduce manufacturing costs of existing products and to
introduce new products, functions and other price/performance-enhancing
features. To the extent that these product enhancements do not occur on a timely
basis or do not result in a sufficient increase in sales prices to end users,
the Company's operating results could be materially adversely affected.
To date, the Company's revenues have been concentrated in the retail industry,
historically representing over 50% of its total revenues. Among other factors,
the economic condition and prospects of current and prospective customers in
the markets which the Company serves may affect the Company's own financial
results. The Company's future growth depends, in part, on its ability to
successfully penetrate and expand its revenues in new markets as well as
increased penetration in the retail market. There can be no assurance that such
penetration and expansion into new and existing markets can be profitably
achieved.
The Company believes its future success is also dependent, in part, upon its
ability to continue to enhance its product offerings through internal
development and the acquisition of new businesses and technologies, but there
can be no assurance that the Company will be able to identify, acquire or
profitably operate new businesses or otherwise implement its growth strategy
successfully. For the Company to manage its growth and integrate any newly
acquired entities, it must continue to improve operations and financial and
management information systems and effectively motivate and manage employees. If
the Company is unable to successfully pursue and manage such growth, its
business and results of operations could be adversely affected. As in the case
of its recent disposition of its Itronix subsidiary, and in the event that, as
part of its efforts to improve its operating efficiencies or otherwise, the
Company elects to divest itself of a majority or greater interest in other of
its technical subsidiaries, the Company's revenues may be adversely affected.
The Company regards certain of its hardware and software technologies as
proprietary and relies on a combination of United States and foreign patent,
copyright, trademark and trade secret laws, as well as license and other
contractual confidentiality provisions, to protect its proprietary rights.
Despite the Company's efforts to safeguard its proprietary rights, there can be
no assurance that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to or otherwise circumvent the
Company's technologies and proprietary rights.
The Company's products utilize hardware and software technologies licensed from
third parties. There can be no assurance that the Company will be able to
license needed technology in the future. An early termination of certain of
these license agreements (including patent rights licensed from Symbol
Technologies, Inc., one of its principal competitors, necessary for the
Company's manufacture and sale of its integrated laser scanning terminals which
account for a material portion of the Company's current sales) could have a
materially adverse effect on the Company's ability to market certain of its
products and, hence, on its business, results of operations and financial
condition. The Company believes that its products, processes and trademarks do
not infringe on the rights of third parties, but third parties have asserted,
and there can be no assurance that they will not in the future assert,
infringement or other related claims against the Company or its licensors. Any
infringement claim or
21
<PAGE> 7
related litigation against the Company, or any challenge to the validity of the
Company's own intellectual property rights, and the expense of defending the
same could materially adversely effect the Company's ability to market its
products and, hence, its business, results of operations and financial
condition.
Certain of the Company's products, sub-assemblies and components are procured
from single source suppliers, and others are procured from only a limited
number of suppliers. The Company has in the past encountered, and may in the
future encounter, shortages of supplies and delays in deliveries of necessary
components. Such shortages and delays could have a materially adverse effect on
the Company's ability to ship products.
As a substantial portion of the Company's total revenues, ranging from
approximately 25%-30% in recent years, is from customers located outside of the
United States, the Company's results could be negatively affected by global and
regional economic conditions, changes in foreign currency exchange rates, trade
protection measures, regulatory acceptance of the Company's products in foreign
countries, longer accounts receivable collection patterns and other
considerations peculiar to the conduct of international business. Additionally,
the Company is subject to similar risks in its procurement of certain of its
products, components and sub-assemblies outside the United States.
Certain of the Company's products intentionally transmit radio signals as part
of their normal operation. These products are subject to regulatory approval,
restrictions on the use of certain frequencies and the creation of interference,
and other requirements by the Federal Communications Commission and
corresponding authorities in each country in which they are marketed. Regulatory
changes could significantly impact the Company's operations by restricting the
Company's development efforts, making current products obsolete or increasing
the opportunity for additional competition. The intentional emission of
electromagnetic radiation has also been the subject of recent public concern
regarding possible health and safety risks, and though the Company believes that
the low power output and the distance typically maintained between a product and
the user means that its products do not pose material safety concerns, there can
be no assurance that such safety issues will not arise in the future and will
not have a materially adverse effect on the Company's business.
Among other things, the Company's future success depends in large part on the
continued service of its key technical, marketing and management personnel and
on its ability to continue to attract and retain qualified employees,
particularly those highly skilled design, process and test engineers involved in
the manufacture of existing products and the development of products and
processes. The competition for such personnel is intense, and the loss of key
employees could have a materially adverse effect on the Company's business,
financial condition and results of operations.
In addition to the factors discussed above and elsewhere in this Form 10-K which
may adversely affect the Company's conduct of its business and the results
thereof, the Company's financial condition is also subject to the possible
adverse effects of certain pending litigation and other contingencies discussed
above under "Item 3. LEGAL PROCEEDINGS", and in Note 18 to the financial
statements included below in Item 8 in this Form 10-K.
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<PAGE> 8
RESULTS OF OPERATIONS
Revenues
- --------
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, Increase (Decrease)
-------------------------------------- ---------------------------------------
Net Revenues: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Product, net.................................... $ 391,406 $ 417,725 $ (26,319) (6.3)%
Customer service, net........................... 74,606 68,744 5,862 8.5%
----------------- ----------------- -----------------
Total net revenues.............................. $ 466,012 $ 486,469 $ (20,457) (4.2)%
================= ================= =================
</TABLE>
Product revenues include the sale of portable tele-transaction computers
("PTCs"), including rugged, wireless mobile computers; pen-based and
touch-screen workslates; hardware accessories; wireless data communication
products; custom application software and software licenses and a variety of
professional services including system integration and project management.
The decrease in consolidated product revenues in fiscal 1997 from fiscal 1996
levels was due primarily to the absence in the fourth quarter of product
revenues from the Company's Itronix subsidiary as the result of the sale of
that subsidiary's business at December 31, 1996. During the fourth quarter of
fiscal 1996, the former Itronix subsidiary recorded total product revenues of
$30.8 million. The Company's fiscal 1997 and 1996 consolidated product
revenues, adjusted for the sale of Itronix by excluding the former Itronix
subsidiary's total product revenues of $62.6 million for the first nine months
of fiscal 1997 and $61.5 million for the twelve months of fiscal 1996, amounted
to $328.8 million and $356.2 million, respectively. In addition to the impact
of the sale of Itronix, the Company's fiscal 1997 product revenues were
negatively impacted by a decrease in PTC unit volume that was partially offset
by an increase in the average selling price per PTC unit. The increased average
selling price per PTC unit was primarily due to the increase in the Company's
sales volume of comprehensive wireless systems and other more complex and
costly products (such as pen-based and touch-screen workslates) as a percentage
of total product revenues.
The increase in consolidated customer service revenues in fiscal 1997 from
fiscal 1996 levels was due primarily to the continued increase in the installed
base of the Company's products.
Revenues from the Company's international operations (including Canada) were
$134.2 million and $123.5 million in fiscal 1997 and 1996, respectively. This
increase was primarily attributable to increased revenues recorded by the
Company's Australian subsidiary and certain of its Canadian operations as well
as increased sales to foreign distributors. The strengthening of the United
States Dollar against the local, functional currency of certain of the Company's
foreign subsidiaries negatively impacted international revenues by $3.3 million
or 3.4% during fiscal 1997 as compared to less than $.1 million or .3% in fiscal
1996.
The Company anticipates increased revenue levels in fiscal 1998 from continuing
operations.
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<PAGE> 9
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- --------------------------------------
Net Revenues: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Product, net.................................... $ 417,725 $ 323,916 $ 93,809 29.0%
Customer service, net........................... 68,744 55,603 13,141 23.6%
----------------- ----------------- -----------------
Total net revenues.............................. $ 486,469 $ 379,519 $ 106,950 28.2%
================= ================= =================
</TABLE>
The increase in consolidated product revenues in fiscal 1996 from fiscal 1995
levels was due primarily to an increase in average selling price per PTC unit
supplemented by a moderate increase in PTC unit volume. Revenues from the
Company's Itronix subsidiary increased $39.4 million and also contributed to
the increase in the average selling price per PTC unit. Further contributing to
the increased average selling price per unit was the Company's movement towards
comprehensive wireless systems which are more complex and therefore more
costly, and increased volumes of pen-based and touch-screen workslates as a
percentage of total product revenues. The increase in product revenues was
aided by high levels of new account and market activity in industries such as
manufacturing, transportation and utilities.
The growth in consolidated customer service revenues in fiscal 1996 from fiscal
1995 levels was due primarily to the increase in the installed base of the
Company's products.
Revenues from the Company's international operations (including Canada) were
$123.5 million and $108.1 million in fiscal 1996 and 1995, respectively. This
increase was primarily attributable to increased European subsidiaries' revenues
resulting from an increased average selling price per unit. Changes in currency
exchange rates and intercompany hedging activities did not have a material
effect on the results of the Company's international operations.
Cost of Revenues
- ----------------
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- ---------------------------------------
Cost of Revenues: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Product......................................... $ 266,624 $ 249,120 $ 17,504 7.0%
Customer service................................ 47,248 39,016 8,232 21.1%
----------------- ----------------- -----------------
Total cost of revenues.......................... $ 313,872 $ 288,136 $ 25,736 8.9%
================= ================= =================
Cost of product revenues as a
percentage of product
revenues, net............................... 68.1% 59.6%
Cost of customer service
revenues as a percentage of
customer service revenues, net.............. 63.3% 56.8%
</TABLE>
The increase in the fiscal 1997 consolidated product revenues cost percentage
from fiscal 1996 levels was primarily due to non-recurring charges recorded
during the third quarter of fiscal 1997. These
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<PAGE> 10
non-recurring items, which included provisions for the decreased carrying value
of the Company's inventories affected by the streamlining of its product lines
and charges related to the Company's workforce reduction and early retirement
initiatives, accounted for approximately $7.2 million and $1.8 million or 2.7%
and .7%, respectively, of the fiscal 1997 consolidated cost of product
revenues. In addition to the impact of these non-recurring charges, product
gross margins declined from fiscal 1996 levels due to an increase in the amount
of large-volume/low margin business and early stage rollouts of new products
during fiscal 1997. Included in the fiscal 1996 results were revenues related
to the sale of non-exclusive software licenses and manufacturing rights to a
third-party business partner which reduced the fiscal 1996 consolidated product
revenues cost percentage by approximately 1%.
The Company anticipates the fiscal 1998 consolidated cost of product revenues
percentage to decrease from fiscal 1997 levels as a result of the absence of the
aforementioned non-recurring charges as well as the continued benefit of the
Company's implementation of its cost reduction and efficiency initiatives.
The increase in the fiscal 1997 consolidated customer service cost percentage
from fiscal 1996 levels was primarily due to non-recurring charges recorded
during the third quarter of fiscal 1997 as well as the increased direct material
and labor costs required to repair the Company's more sophisticated and complex
products. These non-recurring items, which included provisions for the decreased
carrying value of the Company's service inventories affected by the streamlining
of its product lines and charges related to the consolidation of field service
operations, accounted for approximately $1.0 million or 2% of the fiscal 1997
consolidated cost of customer service revenues.
The Company anticipates the fiscal 1998 consolidated customer service cost
percentage to decrease from fiscal 1997 as a result of the absence of the
aforementioned non-recurring charges as well as the continued benefit of the
Company's implementation of its cost reduction and efficiency initiatives.
For the year ended March 31, 1997, inventory allowance accounts increased to
$16.0 million from $10.1 million at March 31, 1996. As a percentage of gross
inventories, inventory allowances increased to 16% at March 31, 1997, from 8%
at March 31, 1996. The increase in the inventory allowance accounts as well as
the increase in the allowance as a percentage of gross inventories reflects the
additional provisions recorded primarily during the third quarter of fiscal
1997 in conjunction with the Company's streamlining of its product lines. The
Company anticipates continuing to provide for inventory obsolescence resulting
from technological change.
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<PAGE> 11
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- --------------------------------------
Cost of revenues: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Product......................................... $ 249,120 $ 189,568 $ 59,552 31.4%
Customer service................................ 39,016 32,455 6,561 20.2%
----------------- ----------------- -----------------
Total cost of revenues.......................... $ 288,136 $ 222,023 $ 66,113 29.8%
================= ================= =================
Cost of product revenues as a
percentage of product
revenues, net............................... 59.6% 58.5%
Cost of customer service
revenues as a percentage of
customer service revenues, net.............. 56.8% 58.4%
</TABLE>
The increase in the fiscal 1996 consolidated product cost percentage from fiscal
1995 levels was primarily due to pricing pressures on certain large accounts and
fulfillment of customer delivery commitments for volume shipments of new
products which required costly, rapid redesign and rework. Revenues related to
software and manufacturing rights agreements and distribution agreements, which
have little incremental cost, and reduced estimates for warranty costs combined
to decrease the cost of product revenues as a percentage of product revenues by
approximately 1%.
The decrease in the fiscal 1996 consolidated customer service cost percentage
from fiscal 1995 levels was primarily attributable to the fact that it was not
necessary to increase customer service personnel and related resources
proportionately with the increase in customer service revenues.
For the year ended March 31, 1996, inventory allowance accounts decreased to
$10.1 million from $10.9 million at March 31, 1995. This decrease was due to the
disposal of obsolete materials and other of $2.8 million offset by provisions
for inventory obsolescence of $2.0 million. As a percentage of gross
inventories, inventory allowances decreased to 8% at March 31, 1996, from 13%
at March 31, 1995.
Operating Expenses
- ------------------
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, Increase (Decrease)
-------------------------------------- --------------------------------------
Operating expenses: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Selling expenses................................ $ 88,321 $ 82,207 $ 6,114 7.4%
Product development and
engineering expenses......................... 44,439 45,383 (944) (2.1)%
General and administrative
expenses..................................... 53,230 39,415 13,815 35.1%
----------------- ----------------- -----------------
Total operating expenses........................ $ 185,990 $ 167,005 $ 18,985 11.4%
================= ================= =================
</TABLE>
Selling expenses as a percentage of total revenues were 19% in fiscal 1997 as
compared to 17% in fiscal 1996. The increase in the fiscal 1997 consolidated
selling expenses as a percentage of total revenues from fiscal 1996 levels was
26
<PAGE> 12
primarily due to non-recurring charges recorded during the third quarter of
fiscal 1997. These non-recurring items included charges related to the redesign
of the Company's worldwide distribution and logistics operations as well as
charges related to the Company's workforce reduction and early retirement
initiatives. In total, these non-recurring items accounted for approximately
$6.0 million or 7% of the selling expenses recorded during fiscal 1997. The
Company anticipates fiscal 1998 selling expenses as a percentage of total
revenues to decrease from fiscal 1997 levels as a result of the absence of the
aforementioned non-recurring charges and the continued benefit of the Company's
implementation of its cost reduction initiatives.
Product development and engineering expenses as a percentage of total revenues
were 10% in fiscal 1997 as compared to 9% in fiscal 1996. Included in the
Company's fiscal 1997 consolidated product development and engineering expenses
were non-recurring charges related to the Company's workforce reduction and
early retirement initiatives and the consolidation of certain product
development and engineering functions. These non-recurring charges, which were
recorded during the third quarter of fiscal 1997 and accounted for
approximately $2.2 million or 5% of the fiscal 1997 consolidated product
development and engineering expenses, were substantially offset by the absence
of fourth quarter product development and engineering expenses of the Company's
former Itronix subsidiary. During the fourth quarter of fiscal 1996, Itronix
recorded product development and engineering expenses of approximately $1.6
million. Included in the Company's consolidated fiscal 1997 results were
approximately $5.2 million of product development and engineering expenses
incurred by Itronix during the first nine months of fiscal 1997. The Company's
fiscal 1996 consolidated results included approximately $4.4 million of product
development and engineering expenses incurred by Itronix. Additionally,
Itronix's fiscal 1996 product development and engineering expenses included a
$1.0 million reimbursement from a customer for certain development expenses
incurred by Itronix during fiscal 1996 specific to that customer. Subsequent to
March 31, 1997, the Company initiated plans to consolidate and relocate certain
of its engineering and product development operations to Houston, Texas. Though
the relocation will entail certain expenditures in the near term, the
consolidation of engineering operations is expected to reduce operating costs
and product-development time as well as improve the Company's ability to
integrate new technologies through concurrent engineering.
During fiscal 1997, the Company capitalized internal software development costs
in accordance with the requirements of Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed" ("SFAS No. 86") aggregating $7.7 million. The
Company anticipates the dollar amount of internal software development costs to
be capitalized during fiscal 1998 to decrease from fiscal 1997 levels.
General and administrative expenses as a percentage of total revenues were 11%
in fiscal 1997 and 8% in fiscal 1996. The increase in the Company's fiscal 1997
consolidated general and administrative expenses from fiscal 1996 levels was
primarily due to non-recurring charges recorded during the third and fourth
quarters of fiscal 1997. The non-recurring third quarter items, which included
charges related to the Company's
27
<PAGE> 13
workforce reduction and early retirement initiatives, corporate information
systems, and certain consulting agreements, accounted for approximately $5.9
million or 11% of the fiscal 1997 consolidated general and administrative
expenses. During the fourth quarter of fiscal 1997, the Company recorded a
non-recurring charge of $5.5 million or 10% of the fiscal 1997 consolidated
general and administrative expenses related to the retirement of Robert F.
Meyerson, the Company's Chairman and CEO. The $5.5 million was comprised of
$2.5 million cash payment for the non-renewal of the Company's consulting
agreement with a company affiliated with Mr. Meyerson and a $3.0 million cash
retirement package. Included in the Company's fiscal 1997 consolidated results
were approximately $1.8 million of general and administrative expenses incurred
by Itronix for the first nine months of fiscal 1997. The Company's fiscal 1996
consolidated results included approximately $1.8 million of general and
administrative expenses incurred by Itronix. The Company anticipates general
and administrative expenses to decrease in fiscal 1998 from fiscal 1997 levels
as a result of the absence of the aforementioned third and fourth quarter
non-recurring charges, the continued benefit of the Company's implementation of
its cost reduction initiatives and the elimination of general and
administrative expenses related to its former Itronix subsidiary.
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- ---------------------------------------
Operating expenses: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Selling expenses................................ $ 82,207 $ 68,279 $ 13,928 20.4%
Product development and
engineering expense........................... 45,383 33,728 11,655 34.6%
General and administrative
expenses..................................... 39,415 34,583 4,832 14.0%
----------------- ----------------- -----------------
Total operating expenses........................ $ 167,005 $ 136,590 $ 30,415 22.3%
================= ================= =================
</TABLE>
Selling expenses as a percentage of total revenues were 17% in fiscal 1996 as
compared to 18% in fiscal 1995. The decrease in the fiscal 1996 consolidated
selling expenses as a percentage of total revenues was primarily attributable
to the leverage of fixed selling expenses over a greater revenue base.
Product development and engineering expenses were 9% of total revenues in both
fiscal 1996 and 1995. The increase in consolidated product development and
engineering expenses, net of capitalized software development costs, in fiscal
1996 as compared to fiscal 1995 was primarily attributable to research and
development activities related to new product development. These activities
included increased research and development costs associated with the further
development of wireless data communications and spread spectrum technology;
evolutionary development of pen-based technology; commercial development of
rugged, wireless mobile computers; pre-commercial research relating to
augmented reality hardware and software, advanced image reading and two
dimensional bar-code technology and improvements to existing PTC and other
products. During the first quarter of fiscal 1996, the Company recognized $1.0
million of development expense reimbursement funding relating to a large order
from a major Itronix customer. The expense reimbursement was offset against the
related development expenses incurred.
During the fourth quarter of fiscal 1996, the Company capitalized software
development costs in accordance with the requirements of SFAS No. 86 aggregating
$7.1 million on a pretax basis.
28
<PAGE> 14
General and administrative expenses as a percentage of total revenues were 8%
and 9% for fiscal years 1996 and 1995, respectively. The increase was primarily
attributable to increased legal expenses and corporate and international
administration necessary to support the Company's revenue growth. At March 31,
1996, there were no accrued amounts remaining from the fiscal 1993 restructuring
charges. All such remaining amounts were paid in fiscal 1996. There were no
material adjustments recorded in fiscal 1996 related to restructuring amounts
recorded in fiscal 1994 or fiscal 1993.
Interest Expense
- ----------------
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- --------------------------------------
Net interest expense: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Interest income................................. $ 1,489 $ 760 $ 729 95.9%
Interest expense................................ (8,056) (6,770) 1,286 19.0%
----------------- ----------------- -----------------
Net interest expense............................ $ (6,567) $ (6,010) $ 557 9.3%
================= ================= =================
</TABLE>
Net interest expense as a percentage of revenues was approximately 1% in both
fiscal 1997 and 1996. The increase in the Company's fiscal 1997 consolidated net
interest expense from fiscal 1996 was primarily due to the fact that the
Company's 5-3/4% convertible subordinated notes, which were issued during the
third quarter of fiscal 1996, were outstanding for the entire 1997 fiscal year.
The Company's cash requirements are discussed below in Cash Flows from Operating
and Investing Activities.
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- ---------------------------------------
Net interest expense: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Interest income................................. $ 760 $ 658 $ 102 15.5%
Interest expense................................ (6,770) (4,354) 2,416 55.5%
----------------- ----------------- -----------------
Net interest expense............................ $ (6,010) $ (3,696) $ 2,314 62.6%
================= ================= =================
</TABLE>
Net interest expense as a percentage of revenues was approximately 1% in both
fiscal 1996 and 1995. The increase in fiscal 1996 as compared to fiscal 1995
reflects the continued borrowing under the Company's credit facilities through
the end of the third quarter of fiscal 1996 and interest costs related to the
Company's 5-3/4% convertible subordinated notes issued during the third quarter
of fiscal 1996.
Income Taxes
- ------------
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, (Decrease)
-------------------------------------- ---------------------------------------
Income taxes: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Provision for income taxes...................... $ 1,368 $ 10,314 $ (8,946) (86.7)%
</TABLE>
The Company's consolidated effective tax rate was 24% in fiscal 1997 and 38% in
fiscal 1996. The consolidated effective tax rate for fiscal 1997 reflects income
before taxes multiplied by the United States federal
29
<PAGE> 15
statutory tax rate. The rate was increased by the net taxes on repatriated
foreign earnings, nondeductible goodwill amortization, international rate
differentials and separate company net operating loss benefits not currently
utilized. The effective tax rate was decreased by research and development
credits and the favorable tax treatment of the foreign sales corporation. The
credit for increasing research and development expenditures, which had expired
at June 30, 1995, was reinstated at July 1, 1996. There were no other
significant tax law changes during fiscal 1997 that had a significant effect on
the calculation of the income tax liability.
The consolidated effective tax rate for fiscal 1996 reflects income before taxes
increased by nondeductible goodwill amortization, the sum of which was
multiplied by the United States federal statutory tax rate and increased by
international tax rate differentials. The increase in the consolidated effective
tax rate arising from the addition of nondeductible goodwill and international
tax rate differentials was partially offset by research and development credits
earned through the first quarter of fiscal 1996 and benefits from research and
development credit carryforwards from prior fiscal years.
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- ---------------------------------------
Income taxes: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Provision for income taxes...................... $ 10,314 $ 8,192 $ 2,122 25.9%
</TABLE>
The Company's consolidated effective tax rate was 38% in fiscal 1996 and 48% in
fiscal 1995. The consolidated effective tax rate for fiscal 1996 reflects income
before taxes increased by nondeductible goodwill amortization, the sum of which
was multiplied by the United States federal statutory tax rate and increased by
international tax rate differentials. These increases were partially offset by
research and development credits earned through the first quarter of fiscal 1996
and benefits from research and development credit carryforwards from prior
fiscal years. The credit available for increasing research and development
expenditures expired at June 30, 1995. There were no other significant tax law
changes during fiscal 1996 that had a significant effect on the calculation of
the income tax liability.
The consolidated effective tax rate for fiscal 1995 reflects income before taxes
increased by nondeductible goodwill amortization, the sum of which was
multiplied by the United States federal statutory rate and increased by
international tax rate differentials. The increase in the consolidated effective
tax rate arising from the addition of nondeductible goodwill and international
tax rate differentials was partially offset by research and development credits.
NON-OPERATING INCOME
1997 vs. 1996
<TABLE>
<CAPTION>
Year ended March 31, Increase (Decrease)
-------------------------------------- --------------------------------------
Non-operating income: 1997 1996 Dollar Percentage
----------------- ----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Gain on sale of subsidiary
stock................ $ -- $ 1,116 $ (1,116) N.M.
Other non-operating expense..................... 34,726 401 34,325 N.M.
----------------- ----------------- -----------------
Total non-operating income...................... $ 34,726 $ 1,517 $ 33,209 N.M.
================= ================= =================
</TABLE>
Effective December 31, 1996, the Company sold substantially all of the assets of
its Itronix Corporation subsidiary, with a net book value of
30
<PAGE> 16
$30.8 million, as well as all of the subsidiary's associated business, for $65.5
million in cash, plus the assumption by the buyer of certain specified
liabilities of the transferred business totaling $8.2 million. The transaction
resulted in a $32.7 million gain, net of transaction costs of $10.3 million,
which has been recorded as other non-operating income in the accompanying
consolidated statement of operations. The buyer is entitled to customary
indemnification from the Company with respect to retained liabilities and,
through March 31, 1998, to the Company's representations, warranties and
covenants in the sale agreement. Under the terms of the sale, the Company is
precluded from competing with the buyer in the manufacture and sale of
ruggedized notebook computers for a period of five years after the date of sale,
other than the Company's resale of products obtained from the buyer under a
mutual reseller agreement.
During fiscal 1997, the Company also engaged in certain transactions involving
the stock of its Aironet and Metanetics subsidiaries, which transactions, as
further discussed in Note 16 of the accompanying consolidated financial
statements, had no net effect on the Company's consolidated non-operating
income. The Company anticipates potential sales of partial ownership interests
in certain of its technical subsidiaries and other operations in the future
through various transactions, which may include public offerings and/or private
placements.
1996 vs. 1995
<TABLE>
<CAPTION>
Year ended March 31, Increase
-------------------------------------- ---------------------------------------
Non-operating income: 1996 1995 Dollar Percentage
----------------- ----------------- ----------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Gain on sale of subsidiary
stock......................................... $ 1,116 $ -- $ 1,116 N.M.
Other non-operating expense..................... 401 -- 401 N.M.
----------------- ----------------- -----------------
Total non-operating income...................... $ 1,517 $ -- $ 1,517 N.M.
================= ================= =================
</TABLE>
During fiscal 1996, the Company sold interests in its Metanetics subsidiary, a
licensor and developer of image reading technology, to certain key executives
and to third-parties. A total of 1.7 million shares of Metanetics' voting common
stock were sold at prices ranging from $.50 per share to $1.04 per share. Total
proceeds aggregated $1.4 million in cash and notes receivable. The resulting
pre-tax gain of $1.1 million, net of related transaction costs, was recorded as
non-operating income in the accompanying consolidated statement of operations.
Deferred taxes of $.5 million for the gain were included in the Company's
provision for income taxes. The Company's remaining percentage interest in the
voting common stock of Metanetics at March 31, 1996, was 49%.
Non-operating income in fiscal 1996 also included realized and unrealized gains
from transactions in trading securities amounting to $.4 million.
31
<PAGE> 17
FINANCIAL CONDITION
Liquidity
- ---------
1997 vs. 1996
<TABLE>
<CAPTION>
March 31, Dollar
------------------------------------------------ Increase
1997 1996 (Decrease)
---------------------- ---------------------- ---------------------
(in thousands except ratios)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 45,386 $ 34,828 $ 10,558
Accounts and notes receivable.......................... 128,271 143,114 (14,843)
Inventories 84,499 111,132 (26,633)
Other.................................................. 11,956 10,841 1,115
---------------------- ---------------------- ---------------------
Total current assets................................... $ 270,112 $ 299,915 $ (29,803)
====================== ====================== =====================
Notes payable.......................................... $ 50 $ 66 $ (16)
Accounts payable....................................... 47,917 59,620 (11,703)
Income taxes payable................................... 3,077 7,029 (3,952)
Accrued liabilities.................................... 49,000 45,152 3,848
Other.................................................. 1,010 2,053 (1,043)
---------------------- ---------------------- ---------------------
Total current liabilities.............................. $ 101,054 $ 113,920 $ (12,866)
====================== ====================== =====================
Working capital (current assets less current
liabilities)....................................... $ 169,058 $ 185,995 $ (16,937)
====================== ====================== =====================
Current ratio (current assets divided by current
liabilities).......................................
2.7 2.6
</TABLE>
The decrease in the Company's working capital at March 31, 1997, from March 31,
1996, was primarily comprised of the decrease in accounts and notes receivable
and inventories and the increase in accrued liabilities, as detailed in the
preceding table. The decrease in accounts and notes receivable at March 31,
1997, from amounts recorded at March 31, 1996, was primarily due to the sale of
the trade receivables of the Company's former Itronix subsidiary. Included in
the Company's consolidated balance sheet at March 31, 1996, were accounts and
notes receivable totaling $8.8 million recorded by the former Itronix
subsidiary. Consolidated days sales outstanding, adjusted for the sale of
Itronix by excluding Itronix's results from both periods, decreased to 88 days
at March 31, 1997, from 95 days at March 31, 1996. The decrease in inventories
at March 31, 1997, from March 31, 1996, was primarily due to the sale of the
inventory of Itronix as well as the increase in the Company's inventory
allowance accounts. Included in the Company's consolidated balance sheet at
March 31, 1996, were inventories of $12.8 million recorded by Itronix. These
decreases in the Company's working capital were partially offset by the
increase in cash and cash equivalents and the decrease in accounts payable and
income taxes payable, as detailed in the preceding table. The increase in cash
and cash equivalents at March 31, 1997, from March 31, 1996, was primarily due
to the receipt of cash proceeds from the sale of Itronix. Similarly, the
decrease in accounts payable at March 31, 1997, from March 31, 1996, was
primarily the result of the buyer's assumption of the accounts payable of
Itronix. Included in
32
<PAGE> 18
the Company's consolidated balance sheet at March 31, 1996, were accounts
payable of $14.1 million recorded by Itronix.
The Company believes its existing resources, including available cash and cash
equivalents, internally generated funds and bank credit facilities will be
sufficient to meet working capital requirements for the next twelve months.
1996 vs. 1995
<TABLE>
<CAPTION>
March 31, Dollar
------------------------------------------------ Increase
1996 1995 (Decrease)
---------------------- ---------------------- ---------------------
(in thousands except ratios)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 34,828 $ 31,364 $ 3,464
Accounts and notes receivable.......................... 143,114 90,724 52,390
Inventories............................................ 111,132 72,078 39,054
Other.................................................. 10,841 11,127 (286)
---------------------- ---------------------- ---------------------
Total current assets................................... $ 299,915 $ 205,293 $ 94,622
====================== ====================== =====================
Notes payable.......................................... $ 66 $ 25,395 $ (25,329)
Accounts payable....................................... 59,620 33,466 26,154
Income taxes payable................................... 7,029 8,315 (1,286)
Accrued liabilities.................................... 45,152 34,388 10,764
Other.................................................. 2,053 2,112 (59)
---------------------- ---------------------- ---------------------
Total current liabilities.............................. $ 113,920 $ 103,676 $ 10,244
====================== ====================== =====================
Working capital (current assets less current
liabilities) ...................................... $ 185,995 $ 101,617 $ 84,378
====================== ====================== =====================
Current ratio (current assets divided by current
liabilities) ......................................
2.6 2.0
</TABLE>
The increase in the Company's working capital at March 31, 1996, from March 31,
1995, was primarily comprised of the increase in cash and cash equivalents,
accounts and notes receivable and inventories as well as the decrease in notes
payable, as detailed in the preceding table. Days sales outstanding, including
Itronix's results, increased to 84 days at March 31, 1996, from 75 days at
March 31, 1995. This increase was primarily due to proportionately greater
revenues during the last month of fiscal 1996 as compared to fiscal 1995 and to
the increase in complex and lengthy installations of local and wide area
networks. The increase in inventories at March 31, 1996, from March 31, 1995,
was primarily due to the increase in the breadth of the Company's product
offerings and the related manufacturing safety stock levels, particularly at
the Company's Itronix subsidiary.
These increases in working capital were partially offset by the increase in
accrued liabilities of $10.8 million, as detailed in the preceding table.
33
<PAGE> 19
P
Cash Flows from Operations
- --------------------------
1997 vs. 1996
<TABLE>
<CAPTION>
Dollar Increase
Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
Cash Flows from Operations: 1997 1996 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Net (loss) income................................... $ (7,059) $ 16,521 $ (23,580)
Depreciation and amortization...................... 28,689 23,747 4,942
Provision for inventory obsolescence................ 11,521 2,026 9,495
Deferred income taxes............................... (947) 4,161 (5,108)
Gain on sale of assets.............................. (32,653) -- (32,653)
Accounts and notes receivable...................... 171 (54,103) 54,274
Inventories......................................... (131) (41,139) 41,008
Intangibles and other assets........................ (2,783) (2,416) (367)
Accounts payable and accrued liabilities............ (7,472) 38,238 (45,710)
Income taxes payable................................ (3,005) (2,302) (703)
Other............................................... 917 2,019 (1,102)
--------------------- --------------------- -------------------------
Net cash used in operating activities............... $ (12,752) $ (13,248) $ 496
===================== ===================== =========================
</TABLE>
The Company's fiscal 1997 cash flows from operations were positively impacted by
the change in the cash flow impact of the non-cash charge for depreciation and
amortization, the change in the cash flow impact of the non-cash provision for
inventory obsolescence, the change in the cash flow impact of accounts and notes
receivable and the change in the cash flow impact of inventories, as detailed in
the preceding table. These positive cash flow impacts were substantially offset
by the negative cash flow impact of the decrease in net income, the change in
the cash flow impact of the non-cash provision for income taxes, the change in
the cash flow impact of the gain on the sale of assets, the change in the cash
flow impact of accounts payable and accrued liabilities and the change in the
cash flow impact of other operating items, as detailed in the preceding table.
34
<PAGE> 20
1996 vs. 1995
<TABLE>
<CAPTION>
Dollar Increase
Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
Cash Flows from Operations: 1996 1995 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Net income.......................................... $ 16,521 $ 9,018 $ 7,503
Depreciation and amortization....................... 23,747 22,179 1,568
Provision for inventory obsolescence................ 2,026 7,407 (5,381)
Deferred income taxes............................... 4,161 (577) 4,738
Accounts and notes receivable....................... (54,103) (21,290) (32,813)
Inventories......................................... (41,139) (178) (40,961)
Intangibles and other assets........................ (2,416) 1,605 (4,021)
Accounts payable and accrued liabilities............ 38,238 (10,030) 48,268
Income taxes payable................................ (2,302) 6,153 (8,455)
Other............................................... 2,019 1,663 356
--------------------- --------------------- -------------------------
Net cash (used in) provided by
operating activities............................ $ (13,248) $ 15,950 $ (29,198)
===================== ===================== =========================
</TABLE>
The Company's fiscal 1996 cash flows from operations were positively impacted by
the increase in net income recorded, the increase in the cash flow impact of the
non-cash provision for income taxes, the change in the cash flow impact of
accounts payable and accrued liabilities and the positive cash flow impact of
other operating items. These positive cash flow impacts were offset by negative
cash flow impacts of the change in inventories, accounts and notes receivable,
income taxes payable, intangibles and other assets, the cash flow impact of the
provision for inventory obsolescence and other negative cash flow impacts.
35
<PAGE> 21
Investing Activities
- --------------------
1997 vs. 1996
<TABLE>
<CAPTION>
Dollar Increase
Cash Flows from Investing Activities: Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
1997 1996 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Proceeds from sale of assets...................... $ 65,674 $ -- $ 65,674
Additions to property and equipment............... (14,576) (22,749) 8,173
Other............................................. (16,422) (13,640) (2,782)
--------------------- --------------------- -------------------------
Net cash provided by (used
in) investing activities....................... $ 34,676 $ (36,389) $ 71,065
===================== ===================== =========================
</TABLE>
The increase in the Company's cash flows from investing activities in fiscal
1997 from fiscal 1996 was primarily due to the receipt of cash proceeds from
the sale of the Company's former Itronix subsidiary and the positive cash flow
impact of the decrease in additions to property and equipment, as detailed in
the preceding table. These positive cash flow impacts were partially offset by
the negative cash flow impact of other investing activity items, as detailed in
the preceding table.
Effective April 1, 1996, the Company sold the assets of certain retail
application software operations, with net assets of approximately $5.0 million
to a third-party for approximately $.2 million in cash and $7.0 million in
secured promissory notes, including interest. In addition to the proceeds from
the sale, the Company also entered into a software license agreement with the
third-party purchaser. The agreement provides for the Company to receive, over
the next five years, license fees amounting to 20% of the revenue generated by
the purchased software, with minimum required payments aggregating $6.6 million.
The $7.0 million in promissory notes received in connection with the divestiture
have been excluded from the accompanying consolidated statement of cash flows
as a non-cash transaction.
During fiscal 1997, the Company sold 808,500 shares of voting common stock of
its Aironet subsidiary, to a corporation owned by Mr. Meyerson at a price of
$1.86 per share in exchange for a secured promissory note in the amount of
approximately $1.5 million. This transaction resulted in the establishment of a
minority interest of approximately $.7 million which has been included in other
long-term liabilities in the consolidated balance sheet at March 31, 1997. At
March 31, 1997, the Company has deferred a gain a of $.8 million related to this
transaction as the criteria for the recognition of gain on the sale of
subsidiary stock had not been met. This sale of Aironet common stock has been
excluded from the accompanying accompanying consolidated statement of cash flows
as a non-cash transaction.
36
<PAGE> 22
1996 vs. 1995
<TABLE>
<CAPTION>
Dollar
Cash Flows from Investing Activities: Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
1996 1995 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Additions to property and equipment................. $ (22,749) $ (15,224) $ (7,525)
Software investments................................ (9,025) (869) (8,156)
Purchase of non-marketable investments.............. (1,562) (150) (1,412)
Additions to long-term notes receivable............. (650) -- (650)
Payments for acquisitions, net of cash acquired..... (2,403) (970) (1,433)
Short-term investments.............................. -- 764 (764)
--------------------- --------------------- -------------------------
Net cash used in investing activities............... $ (36,389) $ (16,449) $ (19,940)
===================== ===================== =========================
</TABLE>
The decrease in the Company's cash flows from investing activities was
primarily caused by an increase in investments in capitalized software
reflecting the transition of software development projects to commercial
readiness, the increase in additions to property and equipment in fiscal 1996
from fiscal 1995 and the increase in payments for acquisitions, as detailed in
the preceding table.
Financing Activities
- --------------------
1997 vs. 1996
<TABLE>
<CAPTION>
Dollar Increase
Cash Flows from Financing Activities: Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
1997 1996 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Notes payable, net.................................. $ (16) $ (30,084) $ 30,068
Proceeds from convertible debt...................... -- 82,500 (82,500)
Purchase of treasury stock.......................... (9,328) -- (9,328)
Other............................................... (1,813) 1,156 (2,969)
--------------------- --------------------- -------------------------
Net cash (used in) provided
by financing activities.......................... $ (11,157) $ 53,572 $ (64,729)
===================== ===================== =========================
</TABLE>
The decrease in the Company's cash flows from financing activities was primarily
due to the cash flow impact of the absence in fiscal 1997 of proceeds from the
issuance of the 5-3/4% convertible subordinated notes in fiscal 1996 and the
Company's repurchase of 633,000 shares of common stock during fiscal 1997 under
its open market repurchase program, as detailed in the preceding table. These
negative cash flow impacts were partially offset by the positive change in the
cash flow impact of notes payable, as detailed in the preceding table.
37
<PAGE> 23
Effective August 6, 1996, the Company's $20 million business purpose revolving
promissory note was extended to August 5, 1997. Additionally, during August
1996, the Company's $100 million credit agreement and $20 million business
purpose revolving promissory note were amended to conditionally grant to the
lenders a security interest in certain assets of the Company which will only
become effective if the Company were to become in default under the credit
agreement and then only if the requisite lenders under that facility were to
direct that the security documents be filed. The Company had no amounts
outstanding under either agreement, and was in compliance with all restrictive
covenants, at March 31, 1997.
During fiscal 1997, the Company had a weighted average of $7.8 million
outstanding under its facilities with a weighted average interest cost of 7.0%.
1996 vs. 1995
<TABLE>
<CAPTION>
Dollar Increase
Cash Flows from Financing Activities Year ended March 31, (Decrease) in
---------------------------------------------- Cash Flow
1996 1995 Impact
--------------------- --------------------- -------------------------
(in thousands)
<S> <C> <C> <C>
Notes payable, net.................................. $ (30,084) $ 5,822 $ (35,906)
Proceeds from convertible debt...................... 82,500 -- 82,500
Other............................................... 1,156 1,111 45
--------------------- --------------------- -------------------------
Net cash provided by financing activities........... $ 53,572 $ 6,933 $ 46,639
===================== ===================== =========================
</TABLE>
The increase in the Company's cash flows from financing activities was primarily
due to proceeds from the Company's issuance of 5-3/4% convertible subordinated
notes, as detailed in the preceding table. This increase was partially offset by
the negative cash flow impact of the decrease in notes payable in fiscal 1996
from fiscal 1995, as detailed in the preceding table.
Effective March 8, 1996, the Company replaced its previous revolving credit,
term loan and security agreement with a new credit agreement with a group of
eight banks. The credit agreement, which expires on March 8, 2001, provides the
Company with a maximum credit facility of $100 million and permits the Company
to borrow funds as domestic or Eurodollar advances. Funds borrowed as domestic
advances bear interest at the greater of the agent bank's "Prime Commercial
Lending Rate" or the Federal Funds Rate plus .50% while Eurodollar advances bear
interest at the agent bank's Eurodollar rate plus .50% to 1.25% based on certain
capitalization levels. In addition, the credit agreement requires the Company to
pay a commitment fee of .15% to .375% per annum, based on certain capitalization
levels, on the unused portion of the revolving commitment amounts. The Company
is also required to pay a utilization fee of .125% to .25% per annum, based on
certain capitalization levels, on Eurodollar advances at certain borrowing
levels. The credit agreement also contains certain restrictive covenants which
requires the Company to maintain certain leverage, net worth and fixed charge
coverage ratios. The Company had no amounts outstanding under the credit
agreement, and was in compliance with all restrictive covenants, at March 31,
1996.
38
<PAGE> 24
Additionally, effective March 20, 1996, the Company entered into a business
purpose revolving promissory note with a bank. The note provides the Company
with a maximum credit facility of $20 million and bears interest at the bank's
"Money Market Rate" plus .50% to 1.25% per annum, based on certain
capitalization levels. The Company had no borrowings outstanding under this
note at March 31, 1996.
Effective December 12, 1995, the Company issued $82.5 million of 5-3/4%
convertible subordinated notes due January 1, 2003. The conversion price for the
notes is $27.50 per common share and is subject to adjustment in certain events.
Interest is payable on January 1 and July 1 in each year, commencing July 1,
1996. On or after January 5, 1999, the notes are redeemable at any time at the
option of the Company, in whole or in part, at the following prices for the
following calendar years: 1999, 103.286%; 2000, 102.464%; 2001, 101.643% and
2002, 100.821%.
During fiscal 1996, the Company had a weighted average of $25.3 million
outstanding under its previous revolving credit and term loan facility with a
weighted average interest cost of 8.9%.
New Accounting Standards
- ------------------------
During fiscal 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 modifies the manner in which an entity computes, presents and
discloses its earnings per share. The Company is required to adopt the
provisions of SFAS No. 128 for the quarter ended December 31, 1997, and will be
required to restate all prior-period earnings per share amounts presented for
comparative purposes. As the adoption of SFAS No. 128 will only modify the
calculation of earnings per share, there will be no effect on the Company's
consolidated financial position or results of operations or cash flows.
During fiscal 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129"). SFAS No. 129 requires an entity to
disclose the rights and privileges of its outstanding securities, the
liquidation preference of its preferred stock and the redemption requirements
of its redeemable stock. The Company is required to adopt the provisions of
SFAS No. 129 for the fiscal year ended March 31, 1998. As the adoption of SFAS
No. 129 will only require additional disclosures, there will be no effect on
the Company's consolidated financial position or results of operations or
cash flows.
During fiscal 1997, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities" ("SOP
96-1"). SOP 96-1 requires an entity to accrue a liability for environmental
remediation if (1) litigation against the entity has commenced or a claim or
assessment against the entity has been asserted, or commencement of litigation
or assertion of a claim or an assessment against the entity is probable, and (2)
the amount of the loss can be reasonably estimated. The Company is required to
adopt the provision of SOP 96-1 for the fiscal year ended March 31, 1998.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's consolidated financial position or results of
operations or cash flows.
39
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Pages
-----
Financial Reports:
Report of Management........................................... 41
Report of Independent Accountants.............................. 42
Consolidated Financial Statements:
Consolidated Balance Sheet..................................... 43
Consolidated Statement of Operations........................... 44
Consolidated Statement of Cash Flows........................... 45
Consolidated Statement of Changes in Stockholders' Equity...... 46
Notes to Consolidated Financial Statements..................... 47 - 70
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves.... 81
All other schedules are omitted because they are not applicable or the required
information is presented in the financial statements or the notes thereto.
40
<PAGE> 26
REPORT OF MANAGEMENT
--------------------
To the Board of Directors and Stockholders
of Telxon Corporation
The management of Telxon is responsible for the preparation, integrity and
objectivity of the financial statements and all other financial information
included in this report. Management believes that the financial statements have
been prepared in accordance with generally accepted accounting principles and
that any amounts included herein which are based on estimates of the expected
effects of events and transactions have been made with sound judgment and
approved by qualified personnel.
Telxon maintains an internal control structure to provide reasonable assurance
that assets are safeguarded and that transactions and events are recorded
properly. The internal control structure is regularly reviewed, evaluated and
revised as necessary by management. Additionally, the Telxon Statement of
Corporate Ethics requires every Company employee to maintain the highest level
of ethical standards in the conduct of all aspects of the Company's business,
and their compliance is regularly monitored.
The financial statements in this report have been audited by the independent
accounting firm of Coopers & Lybrand L.L.P. Their audits were conducted in
accordance with generally accepted auditing standards and included a study and
evaluation of our internal control structure as they considered necessary to
determine the extent of tests and audit procedures required for expressing an
opinion on the Company's financial statements.
The Audit Committee of the Board of Directors, of which all outside directors
are members, meets periodically with the independent auditors and management to
review accounting, auditing, internal control and financial reporting matters.
The external auditors have full and free access to the Audit Committee and its
individual members at any time.
/s/ Frank E. Brick
- -----------------------------------------
Frank E. Brick
President and Chief Executive Officer
/s/ Kenneth W. Haver
- -----------------------------------------
Kenneth W. Haver
Senior Vice President and Chief Financial
Officer
41
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Telxon Corporation
We have audited the consolidated financial statements and the financial
statement schedule of Telxon Corporation and Subsidiaries listed in the index on
page 40 of this Form 10-K. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Telxon
Corporation and Subsidiaries as of March 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
Akron, Ohio
June 27, 1997
42
<PAGE> 28
Telxon Corporation
and Subsidiaries
Consolidated Balance Sheet
- --------------------------
In Thousands (except per share amounts)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
ASSETS 1997 1996
--------------------- -------------------
<S> <C> <C>
Current assets:
Cash (including cash equivalents of $38,100 and
$23,411)........................................................... $ 45,386 $ 34,828
Trading securities..................................................... -- 902
Accounts receivable, net of allowance for
doubtful accounts of $1,596 and $1,731............................. 111,959 133,592
Notes and other accounts receivable.................................... 16,312 9,522
Inventories............................................................ 84,499 111,132
Prepaid expenses and other............................................. 11,956 9,939
--------------------- -------------------
Total current assets.......................................... 270,112 299,915
Property and equipment, net................................................. 45,578 54,673
Intangible and other assets, net............................................ 46,094 34,621
--------------------- -------------------
Total......................................................... $ 361,784 $ 389,209
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable.......................................................... $ 50 $ 66
Current portion of long-term debt...................................... 383 1,156
Capital lease obligations due within one year.......................... 627 897
Accounts payable....................................................... 47,917 59,620
Income taxes payable................................................... 3,077 7,029
Accrued liabilities.................................................... 49,000 45,152
--------------------- -------------------
Total current liabilities..................................... 101,054 113,920
Capital lease obligations................................................... 968 1,982
Convertible subordinated notes and debentures............................... 107,224 107,224
Long-term debt.............................................................. -- 1,331
Other long-term liabilities................................................. 5,837 3,562
--------------------- -------------------
Total liabilities............................................. 215,083 228,019
Stockholders' equity:
Preferred Stock, $1.00 par value per share; 500
shares authorized, none issued..................................... -- --
Common Stock, $.01 par value per share; 50,000
shares authorized, 16,186 and 16,096 shares issued................. 162 161
Additional paid-in capital............................................. 87,105 85,750
Retained earnings...................................................... 70,821 78,096
Equity adjustment for foreign currency translation..................... (2,643) (2,064)
Unearned compensation relating to restricted stock awards.............. (210) (753)
Treasury stock; 557 shares of common stock at cost..................... (8,534) --
--------------------- -------------------
Total stockholders' equity.................................... 146,701 161,190
--------------------- -------------------
Commitments and contingencies (Note 18)..................................... -- --
--------------------- -------------------
Total......................................................... $ 361,784 $ 389,209
===================== ===================
</TABLE>
See accompanying notes to
consolidated financial statements
43
<PAGE> 29
Telxon Corporation
and Subsidiaries
Consolidated Statement of Operations
- ------------------------------------
In Thousands (except per share amounts)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------
1997 1996 1995
--------- --------- ---------
Revenues:
<S> <C> <C> <C>
Product, net ............................... $ 391,406 $ 417,725 $ 323,916
Customer service, net ...................... 74,606 68,744 55,603
--------- --------- ---------
Total net revenues ................... 466,012 486,469 379,519
--------- --------- ---------
Cost of revenues:
Product .................................... 266,624 249,120 189,568
Customer service ........................... 47,248 39,016 32,455
--------- --------- ---------
Total cost of revenues ............... 313,872 288,136 222,023
--------- --------- ---------
Gross profit ............................... 152,140 198,333 157,496
Operating expenses:
Selling expenses ........................... 88,321 82,207 68,279
Product development and
engineering expenses ..................... 44,439 45,383 33,728
General and administrative
expenses ................................. 53,230 39,415 34,583
--------- --------- ---------
Total operating expenses ............. 185,990 167,005 136,590
--------- --------- ---------
(Loss) income from operations ........ (33,850) 31,328 20,906
Interest income ................................ 1,489 760 658
Interest expense ............................... (8,056) (6,770) (4,354)
Gain on sale of subsidiary stock ............... -- 1,116 --
Other non-operating income ..................... 34,726 401 --
--------- --------- ---------
(Loss) income before income
taxes ............................ (5,691) 26,835 17,210
Provision for income taxes ..................... 1,368 10,314 8,192
--------- --------- ---------
Net (loss) income .................... $ (7,059) $ 16,521 $ 9,018
========= ========= =========
Earnings per common and common equivalent share:
Net (loss) income per share .......... $ (.44) $ 1.00 $ .57
========= ========= =========
Average number of common and common
equivalent shares outstanding 16,062 16,490 15,909
</TABLE>
See accompanying notes to
consolidated financial statements
44
<PAGE> 30
Telxon Corporation
and Subsidiaries
Consolidated Statement of Cash Flows
- ------------------------------------
<TABLE>
<CAPTION>
In Thousands Year ended March 31,
--------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .................................... $ (7,059) $ 16,521 $ 9,018
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization .................... 28,570 22,945 21,397
Amortization of restricted stock awards, net ..... 119 802 782
Provision for doubtful accounts .................. 378 1,538 1,158
Provision for inventory obsolescence ............. 11,521 2,026 7,407
Deferred income taxes ............................ (947) 4,161 (577)
Gain on sale of assets ........................... (32,653) -- --
Trading securities, net .......................... 902 (902) --
Loss on disposal of assets ....................... 592 393 145
Changes in assets and liabilities:
Accounts and notes receivable ................ 171 (54,103) (21,290)
Refundable income taxes ...................... -- 935 913
Inventories .................................. (131) (41,139) (178)
Prepaid expenses and other ................... (2,561) (976) (372)
Intangibles and other assets ................. (2,783) (2,416) 1,605
Accounts payable and accrued liabilities ..... (7,472) 38,238 (10,030)
Income taxes payable ......................... (3,005) (2,302) 6,153
Other long-term liabilities .................. 1,606 1,031 (181)
-------- -------- --------
Total adjustments ................... (5,693) (29,769) 6,932
Net cash (used in) provided by operating activities ... (12,752) (13,248) 15,950
Cash flows from investing activities:
Proceeds from sale of assets .......................... 65,674 -- --
Additions to property and equipment ................... (14,576) (22,749) (15,224)
Software investments .................................. (7,731) (9,025) (869)
Purchase of non-marketable investments ................ (6,691) (1,562) (150)
Additions to long-term notes receivable ............... (2,000) (650) --
Payments for acquisitions, net of cash acquired ....... -- (2,403) (970)
Short-term investments ................................ -- -- 764
-------- -------- --------
Net cash provided by (used in) investing activities ... 34,676 (36,389) (16,449)
Cash flows from financing activities:
Notes payable, net .................................... (16) (30,084) 5,822
Principal payments on long-term financing agreement ... (2,104) (230) (247)
Principal payments on capital leases .................. (856) (968) (642)
Proceeds from convertible debt ........................ -- 82,500 --
Debt issue costs paid ................................. (306) (3,463) --
Proceeds from exercise of stock options ............... 1,615 5,977 2,155
Purchase of treasury stock ............................ (9,328) -- --
Payment of cash dividends ............................. (162) (160) (155)
-------- -------- --------
Net cash (used in) provided by financing activities ... (11,157) 53,572 6,933
Effect of exchange rate changes on cash ............... (209) (471) 889
-------- -------- --------
Net increase in cash and cash equivalents ............. 10,558 3,464 7,323
Cash and cash equivalents at beginning of year ........ 34,828 31,364 24,041
-------- -------- --------
Cash and cash equivalents at end of year .............. $ 45,386 $ 34,828 $ 31,364
======== ======== ========
</TABLE>
See accompanying notes to
consolidated financial statements
45
<PAGE> 31
Telxon Corporation
and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statement of
- -------------------------
Changes in Stockholders' Equity
- -------------------------------
In Thousands (except share and per share amounts)
Foreign Unearned
Additional Currency Compensation Treasury
Common Paid-in Retained Translation Restricted Stock at
Stock Capital Earnings Adjustment Stock Cost
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994................. $ 153 $ 74,830 $ 54,653 $ (3,587) $ (1,334) $ --
Exercise of stock options, net of
tax..................................... 2 2,973 (247) -- -- --
Retirement of common stock (72,399
shares)................................. -- (258) (315) -- -- --
Stock issued under restricted stock plan,
net of amortization.................... 1 1,003 -- -- (221) --
Currency translation adjustment........... -- -- -- 2,062 -- --
Dividends paid ($.01 per share)........... -- -- (155) -- -- --
Net income for 1995....................... -- -- 9,018 -- -- --
----- -------- -------- -------- ------ --------
Balance at March 31, 1995................. 156 78,548 62,954 (1,525) (1,555) --
Exercise of stock options, net of
tax..................................... 5 7,260 (734) -- -- --
Retirement of common stock (80,206
shares)................................. -- (241) (485) -- -- --
Amortization of restricted stock.......... -- -- -- -- 802 --
Stock issued under employee stock
purchase plan (8,815 shares)........... -- 183 -- -- -- --
Currency translation adjustment........... -- -- -- (539) -- --
Dividends paid ($.01 per share)........... -- -- (160) -- -- --
Net income for 1996....................... -- -- 16,521 -- -- --
----- -------- -------- -------- ------ --------
Balance at March 31, 1996................. 161 85,750 78,096 (2,064) (753) --
Exercise of stock options, net of
tax..................................... 1 1,670 (51) -- -- --
Retirement of common stock (15,037
shares)................................. -- (2) (3) -- -- --
Amortization of restricted stock.......... -- -- -- -- 376 --
Forfeiture of restricted stock............ -- (424) -- -- 167 --
Repurchase of common stock (633,000
shares)................................ -- -- -- -- -- (9,328)
Reissue of treasury stock under employee
stock purchase plan (75,560 shares).... -- 111 -- -- -- 794
Currency translation adjustment........... -- -- -- (579) -- --
Dividends paid ($.01 per share)........... -- -- (162) -- -- --
Net loss for 1997......................... -- -- (7,059) -- -- --
----- -------- -------- -------- ------ --------
Balance at March 31, 1997................. $ 162 $ 87,105 $ 70,821 $ (2,643) $ (210) $ (8,534)
===== ======== ======== ======== ====== ========
</TABLE>
See accompanying notes to
consolidated financial statements
46
<PAGE> 32
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
- ------------------------------------------
In Thousands (except share and per share amounts)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
Principles of Consolidation
- ---------------------------
The Company's consolidated financial statements include the financial statements
of the Company and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions have been eliminated in consolidation.
Minority Interests
- ------------------
The difference between the proceeds from the sale of stock by a subsidiary and
the Company's carrying value of such stock is recorded as non-operating gains or
losses at the time of the sale, provided that the criteria for gain recognition
on the sale of subsidiary stock have been met. Minority interests then represent
the unaffiliated stockholders' interests in the cumulative earnings of the
subsidiary subsequent to the sale of stock.
At March 31, 1997, the Company has recorded minority interests of approximately
$669 in other long-term liabilities in the accompanying consolidated financial
statements related to the sale of common stock of its Aironet Wireless
Communications, Inc. ("Aironet") subsidiary. Refer to Note 16 -- Subsidiary
Stock Transactions for additional details on the sale of Aironet Wireless
common stock.
Foreign Currency Translation
- ----------------------------
The financial statements of foreign operations are translated into U.S. dollars
using the local currency as the functional currency in accordance with Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation".
Accordingly, all assets and liabilities are translated at current rates of
exchange, and operating transactions are translated at weighted average rates
during the year. The translation gains and losses are accumulated as a separate
component of stockholders' equity until realized. There were no income taxes
allocated to the translation adjustments and transfers to net income in fiscal
1997, 1996 and 1995. Net transaction gains or losses were not material in
fiscal 1997, 1996 and 1995. For further detail by geographic areas, see Note 13
- - Business Segment.
Forward Foreign Currency Exchange Contracts
- -------------------------------------------
The Company enters into forward foreign currency exchange contracts, which
generally involve the exchange of one currency for a second currency at some
future date, to hedge against the impact of changes in foreign currency exchange
rates on specific foreign currency commitments. Unrealized gains and losses on
these forward foreign exchange contracts are deferred and realized upon
settlement of the commitment transaction. Refer to Note 11 -- Fair Value of
Financial Instruments for additional details on forward foreign currency
exchange contracts.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments which are both readily
convertible to cash and have a maturity of three months or less when purchased
to be cash equivalents. At March 31, 1997, the Company had cash
47
<PAGE> 33
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
of $500 held in escrow related to a Standstill Agreement with a third-party.
Trading Securities
- ------------------
Trading securities, which consist of marketable securities that the Company has
purchased with the intent of selling within the near term, have been stated at
fair value in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115"). Under SFAS No. 115, the Company records all unrealized holding gains
and losses as non-operating income or loss.
During fiscal 1996, the Company recognized $339 of net unrealized holding gains
on trading securities.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
- ----------------------
Property and equipment are recorded at historical cost and depreciated over the
estimated useful lives of the assets using the straight-line method for
financial reporting purposes. The ranges of the estimated useful lives are:
buildings, 19 years; machinery and equipment, furniture and fixtures, and
transportation equipment, 3-10 years; marketing and customer service equipment
and tooling, 3 years; and leasehold improvements, over the shorter of the useful
life of the asset or the life of the lease. Gains and losses from the sale or
retirement of property and equipment are included in income. Fully depreciated
assets are written off against accumulated depreciation.
Software Costs, Intangibles and Other Assets
- --------------------------------------------
Software costs are capitalized in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Cost of Computer Software to Be
Sold, Leased, or Otherwise Marketed" and are included in intangible and other
assets in the accompanying consolidated balance sheets. Purchased computer
software is capitalized and amortized for both financial and tax reporting
purposes, using the straight-line method, over the expected useful life of the
software, generally from three to seven years. Similarly, internally developed
computer software for sale or lease is capitalized and amortized for financial
reporting purposes using the straight-line method over three years; for tax
purposes, these costs are generally expensed as incurred, though certain of
these costs have been capitalized and will be amortized using the straight-line
method over three years. Product development and engineering expenses are
expensed as incurred for both financial and tax reporting purposes.
The excess of the purchase cost over the fair value of net assets acquired in an
acquisition (goodwill) is included in intangible and other assets in the
accompanying consolidated balance sheets. Goodwill is amortized on a
straight-line basis over five to ten years. The Company periodically reviews
goodwill to assess recoverability, and impairments, if any, would
48
<PAGE> 34
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
be recognized in results of operations if a permanent reduction in value were to
occur.
Non-compete agreements, deferred financing costs, and license agreements have
also been included in intangible and other assets in the accompanying
consolidated balance sheets. Non-compete and license agreements are amortized on
a straight-line basis over the life of the related contract. Deferred financing
costs are amortized on a straight-line basis over the life of the related debt,
with accelerated amortization recorded on any indebtedness retired prior to its
scheduled maturity. All other assets included in intangible and other assets are
recorded at cost and are amortized on a straight-line basis over their expected
useful lives.
Revenue Recognition
- -------------------
Revenues from computer hardware sales and software licenses are recognized at
the time of shipment or at the time of title transfer if professional services
are also performed. Professional services revenues, which include system
integration and project management fees, are recognized as services are
performed. In accordance with Statement of Position 91-1, "Software Revenue
Recognition", revenues from custom application software sales are recognized
using a percentage-of-completion method. Revenues from customer service
contracts are recognized ratably over the maintenance contract period or as the
services are performed.
During fiscal 1997 and 1996, the Company entered into certain software license
agreements and manufacturing right contracts with third-parties. The sale of
these rights have been recorded as product revenue.
Product Development and Engineering Expenses
- --------------------------------------------
Expenditures for the development and engineering of products are expensed as
incurred in accordance with the requirements of Statement of Financial
Accounting Standards No. 2, "Accounting for Research and Development Costs".
During fiscal 1996, the Company was reimbursed $1,000 by a major customer for
product development and engineering costs incurred by the Company during the
year in connection with a product development agreement between the Company and
the customer. The reimbursement has been recorded as a reduction to the
Company's product development and engineering expenses.
Stock Option and Stock Purchase Plans
- -------------------------------------
Stock options, which are granted to employees and non-employee directors under
the Company's stock option plans at the quoted market price of the Company's
common stock as of the grant date, and stock purchased by eligible employees
under the Company's stock purchase plan are accounted for under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25"). As the stock options are granted at the quoted market price of the
Company's common stock as of the grant date, no compensation expense has been
recorded in accordance with APB 25. The stock purchase plan meets the criteria
of a non-compensatory plan under APB 25.
Earnings Per Share
- ------------------
Computations of earnings per common and common equivalent share of common stock
are based on the weighted average number of common shares outstanding during the
period (16,062,000 in fiscal 1997, 15,910,000 in fiscal 1996 and 15,484,000 in
fiscal 1995), increased by the net shares issuable on the assumed exercise of
stock
49
<PAGE> 35
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
options using the treasury stock method (none in fiscal 1997, 580,000 in fiscal
1996 and 425,000 in fiscal 1995). All securities having an anti-dilutive
effect on earnings per share have been excluded from such computations. Common
stock purchase rights outstanding under the Company's stockholder rights plan,
which potentially have a dilutive effect, have been excluded from the weighted
common shares computation as preconditions to the exercisability of such rights
were not satisfied.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Contingent and Unusual Items
- ----------------------------
Contingent and unusual items are expensed as incurred when events giving rise to
such items are probable and the amounts are estimable in accordance with the
requirements of Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies".
Reclassifications
- -----------------
Certain items in the fiscal 1996 and 1995 consolidated financial statements and
notes thereto have been reclassified to conform to the 1997 presentation.
NOTE 2 -- INVENTORIES
- ---------------------
Inventories at March 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Purchased components........................... $ 29,983 $ 50,022
Work-in-process................................ 31,579 35,379
Finished goods................................. 22,937 25,731
-------- --------
$ 84,499 $111,132
======== ========
</TABLE>
50
<PAGE> 36
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
NOTE 3 -- PROPERTY AND EQUIPMENT
- --------------------------------
Property and equipment, at cost, at March 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Machinery and equipment......................... $56,187 $55,809
Tooling......................................... 24,356 24,349
Furniture and office equipment.................. 19,104 18,098
Buildings, improvements and leasehold
interest............................... 12,242 12,097
Leasehold improvements.......................... 7,992 6,407
Capital lease assets and other.................. 4,553 7,107
Transportation equipment........................ 2,988 2,913
Land ........................................ 1,978 1,978
------- -------
129,400 128,758
Less-accumulated depreciation and
amortization........................... 83,822 74,085
------- -------
$45,578 $54,673
======= =======
</TABLE>
Depreciation expense for fiscal 1997, 1996 and 1995 amounted to $18,893,
$15,184 and $13,419, respectively.
Net capital lease additions (retirements) were $(1,008), $1,348 and $(2,001) in
fiscal 1997, 1996 and 1995, respectively. These additions or retirements are
non-cash transactions and, accordingly, have been excluded from property and
equipment additions in the accompanying consolidated statement of cash flows.
Amortization of capital lease assets has been included in depreciation expense.
Accumulated depreciation related to capital lease assets aggregated $1,177,
$1,680 and $741 in fiscal 1997, 1996 and 1995, respectively.
NOTE 4 -- INTANGIBLE AND OTHER ASSETS
- -------------------------------------
Intangible and other assets, net, consisted of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Capitalized software, net of amortization
of $7,379 and $7,071........................ $11,451 $10,566
Long-term notes receivable......................... 9,855 650
Goodwill relating to acquisitions, net of
amortization of $16,889 and $13,907......... 8,962 14,775
Investments in non-traded, closely
held companies.............................. 8,403 1,712
Deferred financing costs, net of amortization
of $1,708 and $1,096........................ 3,542 3,848
Non-compete agreements with former share-
holders of acquisitions and others, net
of amortization of $2,880 and $2,280........ -- 600
Other, net of amortization of $95 and
$292........................................ 3,881 2,470
------- -------
$46,094 $34,621
======= =======
</TABLE>
51
<PAGE> 37
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
Amortization expense for the years ended March 31, was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Goodwill........................... $4,126 $4,100 $3,748
Capitalized software............... 3,862 2,385 1,341
Deferred financing costs........... 612 164 32
Non-compete agreements............. 600 720 2,024
Licenses........................... -- 350 700
Other ............................ 127 42 133
------ ------ ------
$9,327 $7,761 $7,978
====== ====== ======
</TABLE>
During fiscal 1997, the Company sold the assets of certain retail application
software operations, including capitalized software with a net book value of
$2,545. Refer to Note 15 -- Divestitures for additional details on the sale.
During fiscal 1997, the Company sold substantially all of the assets of its
Itronix Corporation subsidiary, including capitalized software with a net book
value of $439. Additionally, the Company expensed $1,589 of unamortized goodwill
during fiscal 1997 related to the sale. Refer to Note 15 -- Divestitures for
additional details on the sale.
In connection with the acquisition of Teletransaction, Inc. in fiscal 1993, the
Company acquired the rights to consulting services (principally performed by
Robert F. Meyerson, then Chairman of the Board and Chief Executive Officer of
the Company) from Accipiter Corporation ("Accipiter"), a company owned by Mr.
Meyerson's wife, and also secured a non-competition covenant from Accipiter and
Mr. Meyerson. Aggregate payments for these rights were $3,600. The costs of
these rights were amortized over the five year terms of the agreements and are
fully amortized at March 31, 1997.
NOTE 5 -- SHORT-TERM FINANCING
- ------------------------------
Effective March 8, 1996, the Company replaced its previous revolving credit,
term loan, and security agreement with a new credit agreement with a group of
eight banks. The credit agreement, which expires on March 8, 2001, provides the
Company with a maximum credit facility of $100,000 and permits the Company to
borrow funds as domestic or Eurodollar advances. Funds borrowed as domestic
advances bear interest at the greater of the agent bank's "Prime Commercial
Lending Rate" or the Federal Funds rate plus .50% while Eurodollar advances bear
interest at the agent bank's Eurodollar rate plus .50% to 1.25% based on certain
capitalization levels. At March 31, 1997, the interest rate in effect under the
new credit agreement for domestic advances was 8.50% and 6.75% for Eurodollar
advances. In addition, the agreement requires the Company to pay a commitment
fee of .15% to .375% per annum, based on certain capitalization levels, on the
unused portion of the revolving commitment amount. The Company is also required
to pay a utilization fee of .125% to .25% per annum, based on certain
capitalization levels, on Eurodollar advances at certain borrowing levels. At
March 31, 1997, the commitment fee and utilization fee rates were .20% and .125%
per annum, respectively. The agreement also contains
52
<PAGE> 38
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
certain restrictive covenants which requires the Company to maintain certain
leverage, net worth and fixed charge coverage ratios. The Company had no
borrowings outstanding under the credit agreement at March 31, 1997, but has
accrued $50 at March 31, 1997, for utilization fees. At March 31, 1997, the
Company was in compliance with all restrictive covenants contained in the
credit agreement.
Effective March 20, 1996, the Company entered into a business purpose revolving
promissory note with a bank. The note provides the Company with a maximum credit
facility of $20,000 and bears interest at the lending bank's "Money Market Rate"
plus .50% to 1.25% per annum, based on certain capitalization levels. At March
31, 1997, the interest rate in effect under the note was 7.75%. Effective August
6, 1996, the note was extended to August 5, 1997. The Company had no borrowings
outstanding under the promissory note at March 31, 1997.
Both credit facilities were amended in August 1996 to conditionally grant to the
lenders a security interest in certain assets of the Company which will only
become effective if the Company were to become in default under the credit
agreement and then only if the requisite lenders under that facility were to
direct that the security documents be filed.
During fiscal 1997, the Company had a weighted average of $7,760 outstanding
under its $100,000 credit agreement and $20,000 promissory note with a weighted
average interest rate of 7.0% per annum. During fiscal 1996, the Company had a
weighted average of $25,354 outstanding under its previous credit facility with
a weighted average interest rate of 8.9% per annum.
NOTE 6 -- ACCRUED LIABILITIES
- -----------------------------
Accrued liabilities at March 31, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Accrued payroll and other employee compensation......... $15,799 $10,586
Deferred customer service revenues...................... 14,329 15,063
Accrued royalties....................................... 4,516 3,430
Accrued commissions..................................... 3,510 3,808
Accrued taxes other than payroll and income taxes....... 3,162 4,035
Accrued interest........................................ 1,847 2,136
Other accrued liabilities............................... 5,837 6,094
------- -------
$49,000 $45,152
======= =======
</TABLE>
NOTE 7 -- INCOME TAXES
Components of (loss) income before taxes:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic operations ........................ $(19,589) $13,758 $ 7,384
International operations.................... 13,898 13,077 9,826
------- ------- -------
$ (5,691) $26,835 $17,210
======== ======= =======
</TABLE>
53
<PAGE> 39
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under SFAS No. 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are currently in
effect.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the provision for income taxes by taxing jurisdiction are as
follows:
<TABLE>
<CAPTION>
Currently payable (refundable): 1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
U.S...................................... $ (450) $ 3,796 $3,429
State and local.......................... 196 264 120
Foreign.................................. 5,090 4,727 3,400
------ ------- ------
4,836 8,787 6,949
------ ------- ------
Deferred:
U.S...................................... (2,900) 1,586 1,156
State and local.......................... (393) 178 87
Foreign.................................. (175) (237) --
------ ------- ------
......................................... (3,468) 1,527 1,243
------ ------- ------
U.S. and foreign taxes on
income before extraordinary credit....... $1,368 $10,314 $8,192
====== ======= ======
</TABLE>
The reconciliation between the reported total income tax expense and the amount
computed by multiplying income (loss) before income taxes by the U.S. federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory tax rate ........................ (35.0)% 35.0% 35.0%
Net taxes on repatriated earnings....................... 41.8 -- --
Foreign tax rate differential........................... 7.8 1.7 2.4
Research and development credits ....................... (19.7) (2.2) (2.5)
Goodwill................................................ 25.5 5.6 8.3
Foreign sales corporation tax benefit................... (6.3) -- --
Net operating losses not currently utilized............. 7.4 -- --
Other................................................... 2.5 (1.7) 4.4
---- ---- ----
Consolidated effective income tax rate............... 24.0% 38.4% 47.6%
==== ==== ====
</TABLE>
54
<PAGE> 40
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at March 31, are presented below:
<TABLE>
<CAPTION>
1997 1996
------- -------
Deferred tax assets:
<S> <C> <C>
Foreign tax credit carryover........................................... $4,827 $ --
Allowance for doubtful accounts........................................ 1,195 701
Inventory obsolescence and capitalization.............................. 5,794 3,526
State and local income benefits........................................ 2,092 1,748
Net operating loss and research and development
and alternative minimum tax credit carryovers..................... 1,839 1,340
Warranty reserves...................................................... 1,374 1,068
Employee benefits and compensation..................................... 1,929 705
Other .............................................................. 1,816 827
------ ------
Total gross deferred tax assets............................... 20,866 9,915
Less valuation allowance...................................... (7,559) (2,384)
------ ------
Total deferred tax assets..................................... 13,307 7,531
------ ------
Deferred tax liabilities:
Depreciation and amortization.......................................... (5,191) (3,019)
Other .............................................................. (1,265) (1,094)
------ ------
Total gross deferred tax liabilities.......................... (6,456) (4,113)
------ ------
Net deferred tax asset........................................ $6,851 $3,418
====== ======
</TABLE>
The net change in the total valuation allowance for the years ended March 31,
1997 and 1996, was an increase of $5,175 and a decrease of $1,566, respectively.
The net deferred tax asset is deemed realizable and is classified in prepaid
expenses in the accompanying consolidated balance sheets.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of March 31, will be allocated as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Income tax benefit that would be reported in the
consolidated statement of income............................................. $1,402 $1,444
Income tax benefit that would reduce goodwill and
other noncurrent intangible assets........................................... 6,157 940
------ ------
Total $7,559 $2,384
====== ======
</TABLE>
No provision for U.S. income taxes on $9,760 of undistributed earnings of
international subsidiaries at March 31, 1997, was made because these earnings
were indefinitely reinvested in the subsidiaries. Determination of the amount of
the unrecognized deferred tax liability for temporary differences related to
investment in foreign subsidiaries is not practicable.
Income taxes paid in fiscal 1997, 1996 and 1995 were $8,734, $6,340 and $1,804,
respectively. Income tax refunds received in fiscal 1997, 1996 and 1995
aggregated $604, $1,620 and $884, respectively.
55
<PAGE> 41
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
As of March 31, 1997, the Company had foreign operating loss carryovers of
$3,434 for both tax and financial reporting purposes. These foreign carryovers
expire at various dates through fiscal 2004.
As a result of acquisitions in prior years, the Company had domestic operating
loss carryovers and domestic research and development credit carryovers for tax
and financial reporting purposes in the amounts of $1,018 and $157,
respectively. These domestic carryovers expire at various dates through fiscal
2008. As of March 31, 1997, the Company had domestic alternative minimum tax
credit carryovers of $516. The domestic alternative minimum tax credit
carryforward period is indefinite.
As of March 31, 1997, the Company had foreign tax credit carryovers of $2,957.
The carryforward period is five years and expires in fiscal 2002.
There can be no assurance that foreign and domestic tax carryovers will be
utilized.
NOTE 8 -- STOCK OPTIONS AND RESTRICTED STOCK
- --------------------------------------------
The Company accounts for stock based compensation issued to its employees and
non-employee directors in accordance with APB 25 and has elected to adopt the
"disclosure-only" provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS No. 123").
During the periods shown below, the Company had in effect three stock option
plans for the officers and other key employees of the Company - the Telxon
Corporation 1983 Stock Option Plan (the "1983 Plan"), the Telxon Corporation
1988 Stock Option Plan (the "1988 Plan") and the Telxon Corporation 1990 Stock
Option Plan (the "1990 Plan"). The options outstanding under the 1983 Plan, the
1988 Plan and the 1990 Plan generally vest in equal installments over a
three-year period on the first three anniversary dates after the date of grant.
The option price is equal to the market price for the Company's Common Stock at
the time of grant.
56
<PAGE> 42
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
The following is a summary of the activity in the Company's stock option plans
during fiscal 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Stock Options
-----------------------
Average Price
Shares Per Share
------ ---------
<S> <C> <C>
March 31, 1994 ............................................... 1,752,700 $ 10.64
Granted ................................................. 971,500 14.73
Exercised ............................................... (325,245) 8.60
Returned to pool due to employee
terminations ......................................... (112,734) 10.84
----------
March 31, 1995 ............................................... 2,286,221 12.66
Granted ................................................. 1,184,626 19.10
Exercised ............................................... (513,927) 10.94
Returned to pool due to employee
terminations ......................................... (5,990) 12.28
----------
March 31, 1996 ............................................... 2,950,930 15.54
Granted ................................................. 956,500 14.89
Exercised ............................................... (127,337) 11.84
Returned to pool due to employee
terminations ......................................... (665,471) 16.27
----------
March 31, 1997 ............................................... 3,114,622 15.23
==========
</TABLE>
At March 31, 1997, there were 3,114,622 options outstanding under the 1990 Plan
at $8.75 to $23.00 per share.
During fiscal 1996, the Company's stockholders approved an amendment to the 1990
Plan that increased the number of shares available for issuance by 850,000
shares, to a total of 3,350,000 shares. Options available to be granted under
the 1990 Plan at March 31, 1997, were 6,406. No further options can be granted
under the 1983 Plan or the 1988 Plan.
The Company also has in effect a stock option plan for non-employee directors
(the "Director Plan"). During fiscal 1996, the Company's stockholders approved
an amendment to the Director Plan that increased the number of shares available
for issuance by 150,000 shares, to a total of 400,000 shares. During the fiscal
year ended March 31, 1997, 50,000 options were granted at an average price per
share of $12.24. At March 31, 1997, there were 260,000 options outstanding under
the Director Plan at $9.125 to $23.50 per share. At March 31, 1997, there were
106,667 options available to be granted under the Director Plan.
At March 31, 1997 and 1996, there were 6,000 options outstanding and exercisable
at $14.63 per share which were not granted under the Company's stock option
plans.
During fiscal 1993, the Company adopted a Restricted Stock Plan (the "Restricted
Stock Plan"), under which 250,000 shares may be issued. A committee of the Board
of Directors determines the time periods during which and the criteria upon
which the Restricted Stock is subject to
57
<PAGE> 43
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
forfeiture. At March 31, 1997, 163,000 shares granted under the Restricted Stock
Plan had vested, 60,000 shares were outstanding subject to forfeiture and
27,000 shares were available to be granted as a result of shares forfeited
during fiscal 1997.
During fiscal 1996, the Company's stockholders approved the 1995 Employee Stock
Purchase Plan (the "1995 Stock Purchase Plan"), under which 500,000 shares of
authorized but unissued common stock or treasury stock were authorized for sale
to eligible employees at a 15% discount from market value. During fiscal 1997,
the Company re-issued 75,560 shares of its treasury stock in satisfaction of
purchases made under the 1995 Stock Purchase Plan. At March 31, 1997, a total of
84,375 shares had been issued and purchased under the 1995 Stock Purchase Plan
since its inception and 415,625 shares remained available for future purchases.
For SFAS No. 123 purposes, the fair value of each option granted under the 1990
and Director Plans is estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted in fiscal 1997 and 1996, respectively: dividend yield of
.047% and .068%, expected volatility of 56.22% and 49.97%, risk-free interest
rates of 6.40% and 6.05%, and an expected life of five years for grants in both
fiscal 1997 and 1996.
The fair value of each right to purchase stock under the 1995 Stock Purchase
Plan is estimated as of the first day of each six-month payment period using the
Black-Scholes option pricing model with the following weighted average
assumptions used for each purchase right earned in fiscal 1997 and 1996,
respectively: dividend yield of .047% and .053%, expected volatility of 56.22%
and 54.36%, risk-free interest rates of 5.18% and 5.18%, and an expected life of
six and five months.
If the Company had elected to recognize the compensation cost of its stock
option and stock purchase plans based on the fair value of the awards under
those plans in accordance with SFAS No. 123, net income and earnings per share
would have been reduced to the pro forma amounts below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net (loss) income: As reported $ (7,059) $ 16,521
Pro forma (11,651) 14,309
Earnings per share: As reported $ (.44) $ 1.00
Pro forma (.73) .87
</TABLE>
NOTE 9 -- LEASES
- ----------------
The Company leases certain equipment under capital leases generally for terms of
five years or less with renewal and purchase options. The present value of
future minimum lease payments for these capital lease obligations is reflected
in the consolidated balance sheet as current and noncurrent capital lease
obligations. In addition, the Company leases office
58
<PAGE> 44
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
facilities, customer service locations and certain equipment under noncancelable
operating leases.
Future minimum lease payments for years ending March 31, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
1998............................................... $ 746 $ 8,004
1999............................................... 779 7,746
2000............................................... 222 6,158
2001............................................... 31 5,105
2002............................................... 10 2,861
2003 and thereafter................................ 5 3,054
----- -------
1,793 $32,928
=======
Amount representing interest....................... (198)
------
Present value of net minimum lease payments........ 1,595
Current portion ................................. (627)
------
Long-term portion .................................. $ 968
======
</TABLE>
The Company has an option to purchase the 100,000-square-foot facility currently
occupied by its corporate and engineering offices. The purchase option is
exercisable for a price equal to the fair market value of the premises as
determined by an independent appraisal prior to September 1, 2001.
Rent expense for fiscal 1997, 1996 and 1995 amounted to $12,296, $10,623 and
$11,212, respectively.
NOTE 10 -- CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES
Convertible subordinated notes and debentures at March 31, 1997 and 1996,
consisted of $82,500 of 5-3/4% Convertible Subordinated Notes (the "5-3/4%
Notes") and $24,724 of 7-1/2% Convertible Subordinated Debentures (the "7-1/2%
Debentures").
The 5-3/4% Notes, which were issued December 12, 1995, are due January 1, 2003.
The conversion price for the 5-3/4% Notes is $27.50 per common share and is
subject to adjustment in certain events. Interest is payable on January 1 and
July 1 in each year, and commenced July 1, 1996. On or after January 5, 1999,
the 5-3/4% Notes are redeemable at any time at the option of the Company, in
whole or in part, at the following prices for the following calendar years:
1999, 103.286%; 2000, 102.464%; 2001, 101.643% and 2002, 100.821%.
The 7-1/2% Debentures, which were issued June 1, 1987, are due June 1, 2012. The
conversion price for the 7-1/2% Debentures of $26.75 is subject to adjustment in
certain events. Interest is payable on June 1 and December 1 in each year, and
commenced December 1, 1987. At March 31, 1997, the Debentures were redeemable
at any time at the option of the Company, in whole or in part, at 100.75% of
the principal amount redeemed, declining annually to par on and after June 1,
1997. The sinking fund requires mandatory annual payments of 5% of the original
$46,000 principal amount commencing June 1,
59
<PAGE> 45
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
1997, calculated to retire 75% of the issue prior to maturity. During fiscal
1991, the Company purchased and retired Debentures with a principal face amount
aggregating $21,266, which will be applied to the earliest of the Company's
sinking fund payment obligations.
Total interest paid by the Company in fiscal 1997, 1996 and 1995 was $8,368,
$5,046 and $4,392, respectively.
NOTE 11 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
- ----------------------------------------------
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value Financial Instruments", the Company discloses the
fair value of its financial instruments for which it is practicable to estimate
fair value.
The following methods and assumptions were used by the Company in estimating the
fair value of the following financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents approximate fair value due to the
short-term nature of these instruments.
5-3/4% Notes
The fair value of the Company's 5-3/4% Notes is based on discounted cash
flow analysis. Refer to Note 10 -- Convertible Subordinated Notes and
Debentures for additional information concerning the 5-3/4% Notes.
7-1/2% Debentures
The fair value of the Company's publicly traded 7-1/2% Debentures is
based on quoted market prices. Refer to Note 10 -- Convertible
Subordinated Notes and Debentures for additional information concerning
the 7-1/2% Debentures.
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------- ----------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $45,386 $45,386 $34,828 $34,828
5-3/4% Notes 82,500 79,314 82,500 80,503
7-1/2% Debentures 24,724 23,982 24,724 24,724
</TABLE>
Forward Foreign Currency Exchange Contracts
The fair value of forward foreign currency exchange contracts is
estimated based on quotes from currency brokers. At March 31, 1997, the
Company had forward foreign currency exchange contracts to purchase
British Pounds with an aggregate contract value of $7,127 and an
aggregate fair value of $7,214. At March 31, 1997, these contracts were
scheduled to mature in April 1997.
60
<PAGE> 46
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
Investments in Non-traded Companies
It was not practicable for the Company to estimate the fair value of its
investments in certain non-traded, closely held companies because of the
lack of quoted market prices for those investments and the inability to
estimate fair values without incurring excessive costs. These
investments, which the Company holds for purposes other than trading,
totaled $8,403 and $1,712 at March 31, 1997 and 1996, respectively, and
are carried at cost in intangible and other assets in the accompanying
consolidated balance sheets. Refer to Note 4 -- Intangible and Other
Assets for additional information concerning the Company's investments in
non-traded companies.
Long-term Notes Receivable
It was not practicable for the Company to estimate the fair value of its
long-term notes receivable from certain non-traded, closely held
companies because of the lack of quoted market prices for similar
financial instruments and the inability to estimate fair values without
incurring excessive costs. The notes, which the Company intends to hold
to maturity, bear interest at various fixed and variable rates and have
maturities ranging from one to four years. The long-term notes
receivable, which total $9,855 and $650 at March 31, 1997 and 1996,
respectively, are carried at cost in intangible and other assets in the
accompanying consolidated balance sheets. Refer to Note 4 -- Intangible
and Other Assets for additional information concerning long-term notes
receivable.
NOTE 12 -- STOCKHOLDERS' EQUITY
- -------------------------------
The exercise of non-qualified stock options results in state and federal income
tax benefits to the Company equal to the difference between the market price at
the date of exercise and the option price. During fiscal 1997, 1996 and 1995,
$353, $1,751 and $632, respectively, was credited to additional paid-in capital
as a result of such option exercises.
NOTE 13 -- BUSINESS SEGMENT
- ---------------------------
The Company designs, develops, manufactures, markets and services mobile and
wireless transaction systems and solutions for vertical markets. The Company's
business is a single segment. The Company does not believe that it is dependent
upon any one customer or group of customers. No customer accounted for 10% or
more of total revenues in fiscal 1997, 1996 or 1995.
The Company sells its products to customers in diversified industries, primarily
in North America and Europe. The Company realizes approximately one-half of its
revenues from customers in retail industries who are in widely diversified
geographic locations and markets. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses have
historically been within management's expectations.
61
<PAGE> 47
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
The Company has operations in the United States, Europe, Canada, Australia and
Asia. Information for fiscal 1997, 1996 and 1995 follows below.
Of the U.S. revenues from unaffiliated customers in fiscal 1997, 1996 and 1995,
$24,425, $20,070 and $16,293 were exports to Europe, Canada, South America,
Asia, Africa and the Middle East.
Transfers between geographic areas were at cost plus a negotiated mark-up.
Assets of geographic areas are identified with the operations of each area.
Corporate assets consist of property and equipment.
<TABLE>
<CAPTION>
United Adjustment &
1997 States Europe Other Elimination Consolidated
---- ------ ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated
customers..................................... $355,256 $65,292 $45,464 $ -- $466,012
Transfers between geo-
graphic areas................................. 70,251 463 43,874 (114,588) --
--------- ------- ------- --------- --------
Total revenues........................ $425,507 $65,755 $89,338 $(114,588) $466,012
======== ======= ======= ========= ========
Operating income............................... $ 17,105 $ 1,680 $22,036 $ (25,641) $ 15,180
======== ======= ======= =========
Interest expense, net.......................... (6,566)
Non-operating income........................... 34,726
Foreign currency transac-
tion gain (loss), net....................... (19) (387) (58) -- (464)
Corporate expenses, net........................ (48,567)
--------
Income before income
taxes......................................... $ (5,691)
========
Identifiable assets at
March 31, 1997........................ $287,644 $32,578 $27,157 $ -- $347,379
======== ======= ======= ========= ========
Corporate assets............................... 14,405
--------
Total assets at
March 31, 1997........................ $361,784
========
</TABLE>
62
<PAGE> 48
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
<TABLE>
<CAPTION>
United Adjustment &
1996 States Europe Other Elimination Consolidated
---- ------ ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated
customers..................................... $382,156 $69,588 $34,725 $ -- $486,469
Transfers between geo-
graphic areas................................. 45,508 896 38,603 (85,007) --
-------- ------- ------- -------- --------
Total revenues........................ $427,664 $70,484 $73,328 $(85,007) $486,469
======== ======= ======= ======== ========
Operating income............................... $ 50,935 $ 6,506 $ 5,759 $ 996 $ 64,196
======== ======= ======== ========
Interest expense, net.......................... (6,010)
Non-operating income........................... 1,517
Foreign currency transac-
tion gain (loss), net....................... (18) 115 (157) -- (60)
Corporate expenses, net........................ (32,808)
--------
Income before income
taxes......................................... $ 26,835
========
Identifiable assets at
March 31, 1996........................ $297,154 $43,142 $35,130 $ -- $375,426
======== ======= ======= ========
Corporate assets............................... 13,783
--------
Total assets at
March 31, 1996........................ $389,209
========
</TABLE>
<TABLE>
<CAPTION>
United Adjustment &
1995 States Europe Other Elimination Consolidated
---- ------ ------ ----- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from unaffiliated
customers..................................... $285,603 $62,679 $31,237 $ -- $379,519
Transfers between geo-
graphic areas................................. 36,254 443 28,973 (65,670) --
-------- ------- ------- -------- --------
Total revenues........................ $321,857 $63,122 $60,210 $(65,670) $379,519
======== ======= ======= ======== ========
Operating income............................... $ 40,676 $ 3,434 $ 6,658 $ (232) $ 50,536
======== ======= ======= ========
Interest expense, net.......................... (3,696)
Foreign currency transac-
tion gain, net ............................. -- 145 299 -- 444
Corporate expenses, net........................ (30,074)
-------
Income before income
taxes......................................... $ 17,210
========
Identifiable assets at
March 31, 1995........................ $193,077 $40,943 $30,575 $ -- $264,595
======== ======= ======= ========
Corporate assets............................... 11,532
--------
Total assets at
March 31, 1995........................ $276,127
========
</TABLE>
63
<PAGE> 49
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
NOTE 14 -- INTERNATIONAL OPERATIONS
The consolidated financial statements include the following with respect to the
net income and net assets of the Company's international subsidiaries and
branches during the three years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income ........................... $18,484 $ 7,695 $ 6,712
Net assets ........................... $36,727 $58,764 $49,913
</TABLE>
NOTE 15 -- DIVESTITURES
- -----------------------
Effective April 1, 1996, the Company sold the assets of certain retail
application software operations, with net assets of approximately $5,000, to a
third-party in exchange for $150 in cash and $7,000 in secured promissory notes,
including interest. In addition to the proceeds from the sale, the Company also
entered into a software license agreement with the third-party purchaser. The
agreement provides for the Company to receive, over the next five years, license
fees amounting to 20% of the revenue generated by the purchased software, with
minimum required payments aggregating $6,600. The $7,000 in promissory notes
received in connection with the divestiture have been excluded from the
accompanying consolidated statement of cash flows as a non-cash transaction.
Effective December 31, 1996, the Company sold substantially all of the assets of
its Itronix Corporation subsidiary, with a net book value of $30,848, as well as
all of the subsidiary's associated business, in exchange for $65,524 in cash,
plus the buyer's assumption of certain specified liabilities of the transferred
business totaling $8,229. The transaction resulted in a $32,653 gain, net of
transaction costs of $10,252, which has been recorded as other non-operating
income in the accompanying consolidated statement of operations. The buyer is
entitled to customary indemnification from the Company with respect to retained
liabilities and, through March 31, 1998, to the Company's representations,
warranties and covenants in the sale agreement. Under the terms of the sale, the
Company is precluded from competing with the buyer in the manufacture and sale
of ruggedized notebook computers for a period of five years after the date of
sale, other than the Company's resale of products obtained from the buyer under
a mutual reseller agreement.
NOTE 16 -- SUBSIDIARY STOCK TRANSACTIONS
- ----------------------------------------
During fiscal 1997, the Company repurchased 432,558 shares of the voting common
stock of its Metanetics Corporation ("Metanetics") subsidiary, a licensor and
developer of image reading technology, from a former employee. The shares were
repurchased by the Company at a price of $1.04 per share and resulted in a $449
non-operating loss. The Company subsequently re-sold the repurchased shares
during fiscal 1997 to a corporation owned by Mr. Meyerson and his wife at a
price of $1.04 per share price, resulting in
64
<PAGE> 50
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
a non-operating gain of $449. The Company's remaining percentage interest in the
voting common stock of Metanetics at March 31, 1997, was 49%.
During fiscal 1997, the Company sold 808,500 shares of voting common stock of
its Aironet subsidiary, a developer, manufacturer, and marketer of wireless LAN
systems, to a corporation owned by Mr. Meyerson at a price of $1.86 per share in
exchange for a promissory note, secured by the purchased stock, in the amount of
$1,504. This transaction resulted in the establishment of a minority interest of
$669 which has been included in other long-term liabilities in the accompanying
consolidated balance sheets at March 31, 1997. At March 31, 1997, the Company
has deferred a gain of $835 related to this transaction as the criteria for the
recognition of gain on the sale of subsidiary stock had not been met. The
Company's remaining percentage interest in the voting common stock of Aironet at
March 31, 1997, was 90%. The sale of Aironet common stock has been excluded from
the accompanying consolidated statement of cash flows as a non-cash transaction.
NOTE 17 -- TREASURY STOCK TRANSACTIONS
- --------------------------------------
During fiscal 1997, the Company repurchased 633,000 shares of its common stock,
at a weighted average price of $14.74 per share, pursuant to its open market
repurchase program. Additionally, during fiscal 1997, the Company re-issued
75,560 shares of its treasury stock to satisfy purchases made by employees
through the 1995 Stock Purchase Plan at a weighted average price of $11.97 per
share. The remaining 557,440 shares of treasury stock have been accounted for at
cost plus brokerage fees under the caption of treasury stock in the accompanying
consolidated financial statements. The re-issuance of treasury stock in
satisfaction of the purchases made through the 1995 Stock Purchase Plan have
been excluded from the accompanying consolidated statement of cash flows as a
non-cash transaction.
NOTE 18 -- COMMITMENTS AND CONTINGENCIES
- ----------------------------------------
In December 1992, four class action suits were filed in the United States
District Court, Northern District of Ohio, by certain alleged stockholders of
the Company on behalf of themselves and purported classes consisting of Telxon
stockholders, other than defendants and their affiliates, who purchased the
Company's common stock between May 20, 1992 and January 19, 1993. The named
defendants are the Company, former President and Chief Executive Officer Raymond
D. Meyo, and then President, Chief Operating Officer and Chief Financial Officer
Dan R. Wipff. On February 1, 1993, the plaintiffs filed their Amended and
Consolidated Class Action Complaint related to the four actions, alleging claims
for fraud on the market and negligent misrepresentation, arising from alleged
misrepresentations and omissions with respect to the Company's financial
performance and prospects, and alleged trading activities of the named
individual defendants. The Amended Complaint seeks unspecified compensatory
damages, the imposition of a constructive trust on certain of the defendants'
assets and other unspecified extraordinary equitable and/or injunctive relief,
interest, attorneys' fees
65
<PAGE> 51
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
and costs. The defendants, including the Company, filed a Motion to Dismiss
which was denied by the court on June 3, 1993.
On April 16, 1993, the Plaintiffs filed their Motion for Class Certification.
The defendants, including the Company, filed their briefs in opposition to Class
Certification on October 13, 1993. On December 17, 1993, the District Court
certified the class, consisting of Telxon stockholders, other than defendants
and their affiliates, who purchased Telxon common stock between May 20, 1992 and
December 14, 1992.
Following the completion of discovery (other than of experts), each defendant
filed a Motion for Summary Judgment on May 19, 1995, all of which were opposed
by the plaintiffs. On September 14, 1995, the Court granted each defendant
summary judgment on all counts, which the plaintiffs appealed to the United
States Sixth Circuit Court of Appeals. The appeal was heard on October 24, 1996,
and the parties are awaiting the decision from the Court of Appeals. The
defendants intend to continue vigorously defending the Consolidated Class
Action. Though there can be no assurance that the Company's summary judgment
will be upheld on appeal on all counts or as to the ultimate outcome of any
portion of the case with respect to which the summary judgment may be reversed,
no provision has been made in the accompanying consolidated financial statements
for any liability that may result to the Company in such an event.
On September 21, 1993, a derivative Complaint was filed in the Court of Chancery
of the State of Delaware, in and for Newcastle County, by an alleged stockholder
of Telxon derivatively on behalf of Telxon. The named defendants are the
Company; Robert F. Meyerson, former Chairman of the Board, Chief Executive
Officer and director; Dan R. Wipff, then President, Chief Operating Officer and
Chief Financial Officer and director; Robert A. Goodman, Corporate Secretary and
outside director; Norton W. Rose, outside director; and Dr. Raj Reddy, outside
director. The Complaint alleges breach of fiduciary duty to the Company and
waste of the Company's assets in connection with certain transactions entered
into by Telxon and compensation amounts paid by the Company. The Complaint seeks
an accounting, injunction, rescission, attorneys' fees and costs. While the
Company is nominally a defendant in this derivative action, no monetary relief
is sought by the plaintiff from the Company. On November 12, 1993, Telxon and
the individual director defendants filed a Motion to Dismiss. The plaintiff
filed his brief in opposition to the Motion on May 2, 1994, and the defendants
filed a final responsive brief. The Motion was argued before the Court on March
29, 1995, and on July 18, 1995, the Court issued its ruling. The Court dismissed
all of the claims relating to the plaintiff's allegations of corporate waste.
The claims relating to breach of fiduciary duty survived the Motion to Dismiss
and are now the subject of discovery, which is continuing; no deadline for the
completion of the discovery has yet been set by the Court.
On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in the
derivative action on behalf of a new plaintiff stockholder. As part of the
Motion to Intervene, the intervening plaintiff asked that the Court designate as
operative for the action the intervening plaintiff's proposed
66
<PAGE> 52
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
Complaint, which alleges that a series of transactions in which the Company
acquired certain technology from a corporation affiliated with Mr. Meyerson was
wrongful in that Telxon already owned the technology by means of a pre-existing
consulting agreement with another affiliate of Mr. Meyerson; the intervenor's
complaint also names Raymond D. Meyo, President, Chief Executive Officer and
director at the time of the first acquisition transaction, as a new defendant.
The defendants opposed the Motion on grounds that the new claim alleged in the
proposed Complaint and the addition of Mr. Meyo were time-barred by the statute
of limitations and the intervening plaintiff did not satisfy the standards for
intervention. After taking legal briefs, the Court ruled on June 13, 1997 to
permit the intervention. The defendants believe that the post-intervention
claims lack merit, and they intend to continue vigorously defending this action.
While the ultimate outcome of this action cannot presently be determined, the
Company does not anticipate that this matter will have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows and accordingly has not made provisions for any loss or related insurance
recovery in the accompanying consolidated financial statements.
In the normal course of its operations, the Company is subject to performance
under contracts and assertions that technologies it utilizes may infringe third
party intellectual properties, and has various legal actions and certain
contingencies pending, including a claim made by the owner of a manufacturing
facility formerly leased by the Company that the Company caused and should
remediate soil contamination at the facility and may be responsible for
possible diminution in the economic value of the premises allegedly resulting
from the contamination. The Company, with professional assistance, is
continuing to investigate the scope, nature and cause of the contamination.
Information necessary to support a reasonable estimate of the scope of loss, if
any, is not presently available and, accordingly, no provision has been made in
accompanying financial statements. The Company, while not conceding denial of
coverage, has been advised by its insurers that coverage is not available
concerning this matter. While the Company, based on the information currently
available to it, continues to believe the matter's ultimate resolution will not
have a material adverse effect on the Company's business or financial
condition, if the Company were ultimately held responsible for the alleged
contamination, the associated loss could have a material adverse effect on
results of operations for one or more quarters in which the associated
charge(s) would be taken. In management's opinion, all other such outstanding
matters have either been reflected in the consolidated financial statements,
are covered by insurance or would not have a material adverse effect on the
Company's business, consolidated financial position or results of
operations or cash flows.
NOTE 19 -- NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------
During fiscal 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 modifies the manner in which an entity computes, presents and
discloses its earnings per share. The Company is required to adopt the
provisions of SFAS No. 128 beginning with the third quarter ending December 31,
1997, as a part of which the Company will be
67
<PAGE> 53
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
required to restate all prior-period earnings per share amounts presented for
comparative purposes. As the adoption of SFAS No. 128 will only modify the
calculation of earnings per share, there will be no effect on the Company's
consolidated financial position or results of operations or cash flows.
During fiscal 1997, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129"). SFAS No. 129 requires an entity to
disclose the rights and privileges of its outstanding securities, the
liquidation preference of any preferred stock and the redemption requirements
of any redeemable stock. The Company is required to adopt the provisions of SFAS
No. 129 for the fiscal year ending March 31, 1998. As the adoption of SFAS No.
129 will only require additional disclosures, there will be no effect on the
Company's consolidated financial position or results of operations or cash
flows.
During fiscal 1997, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, "Environmental Remediation Liabilities" ("SOP
96-1"). SOP 96-1 requires an entity to accrue a liability for environmental
remediation if (1) litigation against the entity has commenced or a claim or
assessment against the entity has been asserted, or commencement of litigation
or assertion of a claim or an assessment against the entity is probable, and (2)
the amount of the loss can be reasonably estimated. The Company is required to
adopt the provision of SOP 96-1 for the fiscal year ending March 31, 1998.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's consolidated financial position or results of
operations or cash flows.
NOTE 20 -- OTHER TRANSACTIONS
- -----------------------------
Due to the fiscal 1997 retirement of Mr. Meyerson, the Company's former Chairman
of the Board and Chief Executive Officer, the Company did not renew its
consulting agreement with Accipiter. Pursuant to the terms of the consulting
agreement regarding the effects of non-renewal, the Company paid Accipiter
$2,520 in cash. Additionally, the Company provided Mr. Meyerson with a cash
retirement package of $3,000. Both the non-renewal of the consulting agreement
and the retirement package are reflected in the accompanying consolidated
statement of operations.
NOTE 21 -- SUBSEQUENT EVENTS
- ----------------------------
Subsequent to March 31, 1997, the Company repurchased 215,700 shares of its
common stock, at a weighted average price of $15.09 per share, pursuant to its
open market repurchase program.
Subsequent to March 31, 1997, the Company repurchased 80,000 shares of
Metanetics voting common stock at a price of $1.04 per share from former
68
<PAGE> 54
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
key employees. This repurchase of shares resulted in an increase in the
Company's interest in Metanetics to 51%.
NOTE 22 -- QUARTERLY DATA (UNAUDITED)
- -------------------------------------
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------------------------
1997 First Second Third Fourth(a) Year(b)
- ---- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................. $112,383 $108,314 $123,575 $121,740 $466,012
Gross profit.............................. 35,510 34,335 33,963 48,332 152,140
Net (loss) income......................... $ (4,797) $ (4,702) $ 2,135 $ 305 $ (7,059)
======== ======== ======== ======== ========
Earnings per common and common
equivalent share:
Net (loss) income per share .............. $(.29) $(.29) $ .13 $ .02 $ (.44)
======== ======== ======== ======== ========
</TABLE>
(a) Fourth quarter adjustments were not material to the quarterly results of
operations.
(b) The net (loss) income per share for the quarters does not equal net
(loss) per share for the year due to differentials in the impact of
quarterly and annual weighted new stock issuances on the weighted average
number of shares outstanding for each respective period.
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------------------------
1996 First Second Third Fourth(a) Year(b)
- ---- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues ................................... $103,541 $107,016 $131,030 $144,882 $486,469
Gross profit................................ 43,127 45,516 52,491 57,199 198,333
Net income.................................. $ 2,229 $ 2,811 $ 4,205 $ 7,276 $ 16,521
======== ======== ======== ======== ========
Earnings per common and common
equivalent share:
Net income per share ..... .................. $ .14 $ .17 $ .26 $ .45 $ 1.00
======== ======== ======== ======== ========
</TABLE>
(a) During the fourth quarter of fiscal 1996, the Company recorded
capitalized software costs, net of amortization, aggregating $7,075.
Offsetting the software capitalization were other unusual non-recurring
adjustments aggregating $4,255. After the related income tax impact,
the aggregate impact on fourth quarter earnings was $1,749 or $ .11 per
share.
The impact of such quarterly adjustments on the reported earnings
during the first three quarters of fiscal 1996 was not material.
Also during the fourth quarter, the Company refined its estimates for
inventory valuation based on previously unavailable information. As a
result, the Company's inventory valuation reserves for both
69
<PAGE> 55
Telxon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- ------------------------------------------------------
manufacturing and customer service inventories were reduced by $2,863.
After the related income tax benefit, the impact on fourth quarter
earnings was $1,775 or $ .11 per share.
(b) The net income per share for the quarters does not equal net income per
share for the year due to differentials in the impact of quarterly and
annual weighted new stock issuances on the weighted average number of
shares outstanding for each respective period.
70
<PAGE> 56
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements: Reference is made to the
Index on page 40 herein.
(2) Financial Statement Schedule: Reference is made to the
Index on page 40 herein. All other schedules are omitted
because they are not applicable or the required information
is shown in the financial statements of the notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K:
2 Asset Purchase Agreement by and among Dynatech
Corporation, IAQ Corporation, the Registrant and
Itronix Corporation, a wholly owned subsidiary of
the Registrant, dated as of December 28, 1996,
incorporated herein by reference to Exhibit 2 to
Registrant's Form 8-K dated December 31, 1996.
3.1 Restated Certificate of Incorporation of Registrant,
incorporated herein by reference to Exhibit No. 3.1
to Registrant's Form 10-K for the year ended March
31, 1993.
3.2 Amended and Restated By-Laws of Registrant, as
amended, incorporated herein by reference to Exhibit
No. 2(b) to Registrant's Registration Statement on
Form 8-A with respect to its Common Stock filed
pursuant to Section 12(g) of the Securities Exchange
Act, as amended by Amendment No. 1 thereto filed
under cover of a Form 8 and Amendment No. 2 thereto
filed on Form 8-A/A.
4.1 Portions of the Restated Certificate of
Incorporation of Registrant pertaining to the rights
of holders of Registrant's Common Stock, par value
$.01 per share, incorporated herein by
71
<PAGE> 57
reference to Exhibit 3.1 to Registrant's Form 10-K
for the year ended March 31, 1993.
4.2 Text of form of Certificate for Registrant's Common
Stock, par value $.01 per share, and description of
graphic and image material appearing thereon,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended June
30, 1995.
4.3 Rights Agreement between Registrant and KeyBank
National Association, as Rights Agent, dated as of
August 25, 1987, as amended and restated as of July
31, 1996, incorporated herein by reference to
Exhibit 4 to Registrant's Form 8-K dated August 5,
1996.
4.3.1 Form of Rights Certificate (included as
Exhibit A to the Rights Agreement included as
Exhibit 4.3 above). Until the Distribution
Date (as defined in the Rights Agreement),
the Rights Agreement provides that the common
stock purchase rights created thereunder are
evidenced by the certificates for
Registrant's Common Stock (the text of which
and description thereof is included as
Exhibit 4.2 above, which stock certificates
are deemed also to be certificates for such
common stock purchase rights) and not by
separate Rights Certificates; as soon as
practicable after the Distribution Date,
Rights Certificates will be mailed to each
holder of Registrant's Common Stock as of the
close of business on the Distribution Date.
4.3.2 Letter agreement among Registrant, KeyBank
National Association and Harris Trust and
Savings Bank, dated June 11, 1997, with
respect to the appointment of Harris Trust
and Savings Bank as successor Rights Agent
under the Rights Agreement included as
Exhibit 4.3 above, filed with the Original
Filing.
4.4 Indenture by and between Registrant and AmeriTrust
Company National Association, as Trustee, dated as
of June 1, 1987, regarding Registrant's 7-1/2%
Convertible Subordinated Debentures Due 2012,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-14348, filed May 18, 1987.
4.4.1 Form of Registrant's 7-1/2% Convertible
Subordinated Debentures Due 2012 (set forth
in the Indenture included as Exhibit 4.4
above).
72
<PAGE> 58
4.5 Indenture by and between Registrant and Bank One Trust Company,
N.A., as Trustee, dated as of December 1, 1995, regarding
Registrant's 5-3/4% Convertible Subordinated Notes due 2003,
incorporated herein by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-3, Registration No. 333-1189,
filed February 23, 1996.
4.5.1 Form of Registrant's 5-3/4% Convertible Subordinated Notes
due 2003 issued under the Indenture included as Exhibit 4.5
above, incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 333-1189, filed February 23, 1996.
4.5.2 Registration Rights Agreement by and among Registrant and
Hambrecht & Quist LLC and Prudential Securities
Incorporated, as the Initial Purchasers of Registrant's
5-3/4% Convertible Subordinated Notes due 2003, with
respect to the registration of said Notes under applicable
securities laws, incorporated herein by reference to
Exhibit 4.3 to Registrant's Registration Statement on Form
S-3, Registration No. 333-1189, filed February 23, 1996.
10.1 Compensation and Benefits Plans of Registrant.
10.1.1 Amended and Restated Retirement and Uniform Matching
Profit-Sharing Plan of Registrant, effective July 1, 1993,
incorporated herein by reference to Exhibit 10.1.1 to
Registrant's Form 10-K for the year ended March 31, 1994.
10.1.1.a Amendment, dated January 1, 1994, to the Plan
included as Exhibit 10.1.1 above, incorporated
herein by reference to Exhibit 10.1.1.a to
Registrant's Form 10-K for the year ended March
31, 1994.
10.1.1.b Amendment, dated April 1, 1994, to the Plan
included as Exhibit 10.1.1 above, incorporated
herein by reference to Exhibit 10.1.1.b to
Registrant's Form 10-K for the year ended March
31, 1994.
10.1.1.c Amendment, dated January 1, 1994, to the Plan
included as
73
<PAGE> 59
Exhibit 10.1.1 above, incorporated herein by
reference to Exhibit 10.1.1.c to Registrant's Form
10-Q for the quarter ended December 31, 1994.
10.1.2 1990 Stock Option Plan for employees of Registrant, as
amended, incorporated herein by reference to Exhibit 10.1.3
to Registrant's Form 10-Q for the quarter ended September
30, 1995.
10.1.3 1990 Stock Option Plan for Non-Employee Directors of
Registrant, as amended, incorporated herein by reference to
Exhibit 10.1.4 to Registrant's Form 10-Q for the quarter
ended September 30, 1995.
10.1.4 Non-Qualified Stock Option Agreement between Registrant and
Raj Reddy, dated as of October 17, 1988, incorporated
herein by reference to Exhibit 10.1.6 to Registrant's Form
10-K for the year ended March 31, 1994.
10.1.4.a Description of amendment extending the term of the
Agreement included as Exhibit 10.1.4 above,
incorporated herein by reference to Exhibit
10.1.6.a to Registrant's Form 10-Q for the quarter
ended September 30, 1994.
10.1.5 1992 Restricted Stock Plan of Registrant, incorporated
herein by reference to Exhibit 10.1.17 to Registrant's Form
10-Q for the quarter ended December 31, 1993.
10.1.5.a Amendment, dated December 7, 1993, to the Plan
included as Exhibit 10.1.5 above, incorporated
herein by reference to Exhibit 10.1.17.a to
Registrant's Form 10-Q for the quarter ended
December 31, 1993.
10.1.5.b Amendment, dated July 18, 1994, to the Plan
included as Exhibit 10.1.5 above, incorporated
herein by reference to Exhibit 10.1.17.b to
Registrant's Form 10-Q for the quarter ended
September 30, 1994.
74
<PAGE> 60
10.1.6 1995 Employee Stock Purchase Plan of Registrant, as
amended, incorporated herein by reference to Exhibit 10.1.7
to Registrant's Form 10-Q for the quarter ended September
30, 1995.
10.1.7 1996 Stock Option Plan for employees, directors and
advisors of Aironet Wireless Communications, Inc., a
subsidiary of Registrant, filed with the Original Filing.
10.1.8 Non-Competition Agreement by and between Registrant and
Robert F. Meyerson, effective February 27, 1997, filed
with the Original Filing.
10.1.9 Employment Agreement between Registrant and Frank Brick,
effective as of October 15, 1993, incorporated herein by
reference to Exhibit 10.1.16 on Registrant's Form 10-Q for
the quarter ended September 30, 1994.
10.1.10 Employment Agreement between Registrant and Leonard D.
Abeita, effective as of April 1, 1997, filed with the
Original Filing.
10.1.11 Employment Agreement between Registrant and James G.
Cleveland, effective as of April 1, 1997, filed with the
Original Filing.
10.1.12 Employment Agreement between Registrant and Kenneth W.
Haver, effective as of April 1, 1997, filed with the
Original Filing.
10.1.13 Employment Agreement between Registrant and David D.
Loadman, effective as of April 1, 1997, filed with the
Original Filing.
10.1.14 Employment Agreement between Registrant and David W.
Porter, effective as of April 1, 1997, filed with the
Original Filing.
10.1.15 Employment Agreement between Registrant and Dan R. Wipff,
effective as of April 1, 1997, filed with the Original
Filing.
10.1.16 Letter of the Audit Committee of Registrant's Board of
Directors, dated July 22, 1996, engaging Norton Rose to act
as the Committee's delegate to advise and assist
Registrant's management, filed with the Original Filing.
10.2 Material Leases of Registrant.
75
<PAGE> 61
10.2.1 Lease between Registrant and 3330 W. Market
Properties, dated as of December 30, 1986,
incorporated herein by reference to Exhibit 10.2.1
to Registrant's Form 10-K for the year ended March
31, 1994.
10.2.2 Standard Office Lease (Modified Net Lease) between
Registrant and John D. Dellagnese III, dated as of
July 19, 1995, including an Addendum thereto,
incorporated herein by reference to Exhibit 10.2.4
to Registrant's Form 10-K for the year ended March
31, 1996.
10.2.2.a Second Addendum, dated as of October 5,
1995, to the Lease included as Exhibit
10.2.2 above, incorporated herein by
reference to Exhibit 10.2.4.a to
Registrant's Form 10-K for the year ended
March 31, 1996.
10.2.2.b Third Addendum, dated as of March 1, 1996,
to the Lease included as Exhibit 10.2.2
above, incorporated herein by reference to
Exhibit 10.2.4.b to Registrant's Form 10-K
for the year ended March 31, 1996.
10.3 Credit Agreements of Registrant.
10.3.1 Credit Agreement by and among Registrant, the
lenders party thereto from time to time and The Bank
of New York, as letter of credit issuer, swing line
lender and agent for the lenders, dated as of March
8, 1996, incorporated herein by reference to Exhibit
10.3.2 to Registrant's Form 10-K for the year ended
March 31, 1996.
10.3.1.a Amendment No. 1, dated as of August 6,
1996, to the Agreement included as Exhibit
10.3.1 above, incorporated herein by
reference to Exhibit 10.3.2.a to
Registrant's Form 8-K dated August 16,
1996.
10.3.1.b Security Agreement, dated as of August 6,
1996, by and among the Registrant and The
Bank of New York, as Agent, incorporated
herein by reference to Exhibit 10.3.2.b to
Registrant's Form 8-K dated August 16,
1996.
76
<PAGE> 62
10.3.1.c Amendment No. 2, dated as of December 16,
1996, to the Agreement included as Exhibit
10.3.1 above, incorporated herein by
reference to Exhibit 10.3.2.c to
Registrant's Form 8-K dated December 16,
1996.
10.3.2 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
September 8, 1995, and related Letter Agreement
between them of even date, incorporated herein by
reference to Exhibit 10.3.2 to Registrant's Form
10-Q for the quarter ended September 30, 1995.
10.3.3 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
November 24, 1995, and related Letter Agreement
between them dated November 22, 1995, incorporated
herein by reference to Exhibit 10.3.3 to
Registrant's Form 10-Q for the quarter ended
December 31, 1995.
10.3.4 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
January 31, 1996, and related Letter Agreement
between them dated of even date, incorporated herein
by reference to Exhibit 10.3.4 to Registrant's Form
10-Q for the quarter ended December 31, 1995.
10.3.5 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
February 29, 1996, and related Letter Agreement
between them dated of even date, incorporated herein
by reference to Exhibit 10.3.6 to Registrant's Form
10-K for the year ended March 31, 1996.
10.3.6 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One,
Akron, N.A., dated March 20, 1996, incorporated
herein by reference to Exhibit 10.3.7 to
Registrant's Form 10-K for the year ended March 31,
1996.
10.3.7 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One,
Akron, NA, dated August 6, 1996 (in replacement of
the Note included as Exhibit 10.3.7 above),
incorporated herein by reference to
77
<PAGE> 63
Exhibit 10.3.8 to Registrant's Form 8-K dated August
16, 1996.
10.3.7.a Bank One Security Agreement, dated as of
August 6, 1996, by and among Registrant
and Bank One, Akron, NA, incorporated
herein by reference to Exhibit 10.3.8.a to
Registrant's Form 8-K dated August 16,
1996.
10.4 Amended and Restated Agreement between Registrant and
Symbol Technologies, Inc., dated as of September 30, 1992,
incorporated herein by reference to Exhibit 10.4 to
Registrant's Form 10-K for the year ended March 31, 1993.
10.5 Agreement of Purchase and Sale of Assets by and among
Vision Newco, Inc., a subsidiary of Registrant, Virtual
Vision, Inc., as debtor and debtor in possession, and the
Official Unsecured Creditors' Committee, on behalf of the
bankruptcy estate of Virtual Vision, dated as of July 13,
1995, incorporated herein by reference to Exhibit 10.8 to
Registrant's Form 10-Q for the quarter ended June 30, 1995.
10.6 Subscription Agreement by and among New Meta Licensing
Corporation, a subsidiary of Registrant, and certain
officers of Registrant as Purchasers, dated as of September
19, 1995, incorporated herein by reference to Exhibit 10.8
to Registrant's Form 10-Q for the quarter ended September
30, 1995.
10.7 Shareholder Agreement by and among New Meta Licensing
Corporation, a subsidiary of Registrant, and its
Shareholders, including the officers of Registrant party to
the Agreement included as Exhibit 10.6 above, dated as of
September 29, 1995, incorporated herein by reference to
Exhibit 10.9 to Registrant's Form 10-Q for the quarter
ended September 30, 1995.
10.7.1 First Amendment, dated as of September 29, 1995, to
the Agreement included as Exhibit 10.7 above,
incorporated herein by reference to Exhibit 10.9.1
to Registrant's Form 10-Q for the quarter ended
December 31, 1995.
10.7.2 Second Amendment, dated as of January, 1996, to the
Agreement included as Exhibit 10.7 above,
incorporated herein by reference to Exhibit 10.9.2
to Registrant's Form 10-Q for the quarter ended
December 31, 1995.
78
<PAGE> 64
10.7.3 Amended and Restated Shareholder Agreement by
and among Metanetics Corporation (fka New
Meta Licensing Corporation) and its
Shareholders, dated as of March 28, 1996,
superseding the Agreement included as Exhibit
10.7 above, as amended by the First and
Second Amendments thereto included as
Exhibits 10.7.1 and 10.7.2 above,
incorporated herein by reference to Exhibit
10.9.3 to Registrant's Form 10-K for the year
ended March 31, 1996.
10.7.4 First Amendment, dated as of March 30, 1996,
to the Agreement included as Exhibit 10.7.3
above, incorporated herein by reference to
Exhibit 10.9.4 to Registrant's Form 10-K for
the year ended March 31, 1996.
10.8 Stock Purchase Agreement by and among Meta Holding
Corporation, a subsidiary of Registrant, and certain
officers of Registrant as Purchasers, dated as of
March 30, 1996, filed with the Original Filing.
10.9 Stock Purchase Agreement by and between Metanetics
Corporation, a subsidiary of Registrant fka New Meta
Licensing Corporation, and Accipiter II, Inc., dated
as of September 30, 1996, incorporated herein by
reference to Exhibit 10.8 to Registrant's Form 10-Q
for the quarter ended September 30, 1996.
10.10 Stock Purchase Agreement by and between Registrant
and Telantis Capital, Inc., dated as of March 31,
1997, filed with the Original Filing.
11. Computation of Common Shares outstanding and
earnings per share for the fiscal years ended March
31, 1997, 1996 and 1995, filed with the Original
Filing.
21. Subsidiaries of Registrant, filed with the Original
Filing.
23. Consent of Coopers & Lybrand L.L.P., filed herewith.
24. Power of Attorney executed by members of the Board
of Directors of Registrant, filed with the Original
Filing.
27. Financial Data Schedule as of March 31, 1997, filed
with the Original Filing.
(b) Reports on Form 8-K
During the fiscal quarter ended December 31, 1996 for which
this Quarterly Report on Form 10-K is filed, Registrant filed
the following Current Reports on Form 8-K: (i) Current Report
dated December 16, 1996, reporting an amendment to
Registrant's primary credit facility with The Bank of New
York, as Agent for an eight-
79
<PAGE> 65
bank lending group; and (ii) Current Report dated December 31,
1996, reporting the sale by the Company of substantially all of
the assets and all the associated business of its wholly owned
Itronix Corporation subsidiary to IAQ Corporation, a wholly owned
subsidiary of Dynatech Corporation (the "Buyer"), for
approximately $65.5 million (included as Appendix A in the Form
8-K were (1) a pro forma condensed balance sheet as of September
30, 1996, giving effect to (A) the sale of substantially all of
the Itronix assets to, and the assumption of certain specified
Itronix liabilities by, the Buyer, and (B) related pro forma
adjustments, all as though the transaction occurred at September
30, 1996; and (2) unaudited pro forma condensed statements of
operations for the fiscal year ended March 31, 1996, and for the
six months ended September 30, 1996, giving effect to (A) the
elimination of the results of operations of the Registrant's
Itronix subsidiary, as described in Note (A) thereto, and (B)
related pro forma adjustments, all as though the transaction
occurred on April 1, 1995).
80
<PAGE> 66
TELXON CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Dollars in Thousands
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning of Charged to End of
Description Period Costs and Expenses Deductions Period
- ----------- ------ ------------------ ---------- ------
Valuation account for accounts
receivable:
<S> <C> <C> <C> <C>
Year ended March 31, 1997: $ 1,731 $ 378 $ 513 (a) $ 1,596
Year ended March 31, 1996: $ 1,832 $ 1,538 $ 1,639 (a) $ 1,731
Year ended March 31, 1995: $ 1,635 $ 1,158 $ 961 (a) $ 1,832
Valuation account for inventory:
Year ended March 31, 1997: $ 10,063 $ 11,521 $ 5,601 (b) $ 15,983
Year ended March 31, 1996: $ 10,942 $ 2,026 $ 2,905 (b) $ 10,063
Year ended March 31, 1995: $ 9,850 $ 7,407 $ 6,315 (b) $ 10,942
</TABLE>
(a) Doubtful accounts charged off, net of recoveries.
(b) Write off of excess and/or obsolete material.
81
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELXON CORPORATION
Date: August 14, 1997 By: /s/ Kenneth W. Haver
---------------------
Kenneth W. Haver, Senior
Vice President and Chief
Financial Officer
<PAGE> 68
TELXON CORPORATION
EXHIBITS TO
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
(as amended)
<PAGE> 69
INDEX TO EXHIBITS
-----------------
Where
Filed
* 2 Asset Purchase Agreement by and among Dynatech Corporation,
IAQ Corporation, the Registrant and Itronix Corporation, a
wholly owned subsidiary of the Registrant, dated as of
December 28, 1996, incorporated herein by reference to
Exhibit 2 to Registrant's Form 8-K dated December 31, 1996.
* 3.1 Restated Certificate of Incorporation of Registrant,
incorporated herein by reference to Exhibit No. 3.1 to
Registrant's Form 10-K for the year ended March 31, 1993.
* 3.2 Amended and Restated By-Laws of Registrant, as amended,
incorporated herein by reference to Exhibit No. 2(b) to
Registrant's Registration Statement on Form 8-A with
respect to its Common Stock filed pursuant to Section 12(g)
of the Securities Exchange Act, as amended by Amendment No.
1 thereto filed under cover of a Form 8 and Amendment No. 2
thereto filed on Form 8-A/A.
* 4.1 Portions of the Restated Certificate of Incorporation of
Registrant pertaining to the rights of holders of
Registrant's Common Stock, par value $.01 per share,
incorporated herein by reference to Exhibit 3.1 to
Registrant's Form 10-K for the year ended March 31, 1993.
* 4.2 Text of form of Certificate for Registrant's Common Stock,
par value $.01 per share, and description of graphic and
image material appearing thereon, incorporated herein by
reference to Exhibit 4.2 to Registrant's Form 10-Q for the
quarter ended June 30, 1995.
* 4.3 Rights Agreement between Registrant and KeyBank National
Association, as Rights Agent, dated as of August 25, 1987,
as amended and restated as of July 31, 1996, incorporated
herein by reference to Exhibit 4 to Registrant's Form 8-K
dated August 5, 1996.
* 4.3.1 Form of Rights Certificate (included as Exhibit A to
the Rights Agreement included as Exhibit 4.3 above).
Until the Distribution Date (as defined in the
Rights Agreement), the Rights Agreement provides
that the common stock purchase rights created
thereunder are evidenced by the certificates for
Registrant's Common Stock (the text of which and
description thereof is included as Exhibit 4.2
above, which stock
<PAGE> 70
certificates are deemed also to be certificates for
such common stock purchase rights) and not by
separate Rights Certificates; as soon as practicable
after the Distribution Date, Rights Certificates
will be mailed to each holder of Registrant's Common
Stock as of the close of business on the
Distribution Date.
* 4.3.2 Letter agreement among Registrant, KeyBank
National Association and Harris Trust and
Savings Bank, dated June 11, 1997, with
respect to the appointment of Harris Trust
and Savings Bank as successor Rights Agent
under the Rights Agreement included as
Exhibit 4.3 above, filed with the Original
Filing.
* 4.4 Indenture by and between Registrant and AmeriTrust
Company National Association, as Trustee, dated as
of June 1, 1987, regarding Registrant's 7-1/2%
Convertible Subordinated Debentures Due 2012,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-14348, filed May 18, 1987.
* 4.4.1 Form of Registrant's 7-1/2% Convertible
Subordinated Debentures Due 2012 (set forth
in the Indenture included as Exhibit 4.4
above).
* 4.5 Indenture by and between Registrant and Bank One
Trust Company, N.A., as Trustee, dated as of
December 1, 1995, regarding Registrant's 5-3/4%
Convertible Subordinated Notes due 2003,
incorporated herein by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-3,
Registration No. 333-1189, filed February 23, 1996.
* 4.5.1 Form of Registrant's 5-3/4% Convertible
Subordinated Notes due 2003 issued under the
Indenture included as Exhibit 4.5 above,
incorporated herein by reference to Exhibit
4.2 to Registrant's Registration Statement on
Form S-3, Registration No. 333-1189, filed
February 23, 1996.
* 4.5.2 Registration Rights Agreement by and among
Registrant and Hambrecht & Quist LLC and
Prudential Securities Incorporated, as the
Initial Purchasers of Registrant's 5-3/4%
Convertible Subordinated Notes due 2003, with
respect to the registration of said Notes
under applicable securities laws,
incorporated herein by reference to
<PAGE> 71
Exhibit 4.3 to Registrant's Registration Statement
on Form S-3, Registration No. 333-1189, filed
February 23, 1996.
* 10.1 Compensation and Benefits Plans of Registrant.
10.1.1 Amended and Restated Retirement and Uniform Matching
Profit-Sharing Plan of Registrant, effective July 1,
1993, incorporated herein by reference to Exhibit
10.1.1 to Registrant's Form 10-K for the year ended
March 31, 1994.
* 10.1.1.a Amendment, dated January 1, 1994, to the
Plan included as Exhibit 10.1.1 above,
incorporated herein by reference to Exhibit
10.1.1.a to Registrant's Form 10-K for the
year ended March 31, 1994.
* 10.1.1.b Amendment, dated April 1, 1994, to the Plan
included as Exhibit 10.1.1 above,
incorporated herein by reference to Exhibit
10.1.1.b to Registrant's Form 10-K for the
year ended March 31, 1994.
* 10.1.1.c Amendment, dated January 1, 1994, to the
Plan included as Exhibit 10.1.1 above,
incorporated herein by reference to Exhibit
10.1.1.c to Registrant's Form 10-Q for the
quarter ended December 31, 1994.
* 10.1.2 1990 Stock Option Plan for employees of Registrant,
as amended, incorporated herein by reference to
Exhibit 10.1.3 to Registrant's Form 10-Q for the
quarter ended September 30, 1995.
* 10.1.3 1990 Stock Option Plan for Non-Employee Directors of
Registrant, as amended, incorporated herein by
reference to Exhibit 10.1.4 to Registrant's Form
10-Q for the quarter ended September 30, 1995.
* 10.1.4 Non-Qualified Stock Option Agreement between
Registrant and Raj Reddy, dated as of October 17,
1988, incorporated herein by reference to Exhibit
10.1.6 to Registrant's Form 10-K for the year ended
March 31, 1994.
<PAGE> 72
* 10.1.4.a Description of amendment extending the term
of the Agreement included as Exhibit 10.1.4
above, incorporated herein by reference to
Exhibit 10.1.6.a to Registrant's Form 10-Q
for the quarter ended September 30, 1994.
* 10.1.5 1992 Restricted Stock Plan of Registrant,
incorporated herein by reference to Exhibit 10.1.17
to Registrant's Form 10-Q for the quarter ended
December 31, 1993.
* 10.1.5.a Amendment, dated December 7, 1993, to the
Plan included as Exhibit 10.1.5 above,
incorporated herein by reference to Exhibit
10.1.17.a to Registrant's Form 10-Q for the
quarter ended December 31, 1993.
* 10.1.5.b Amendment, dated July 18, 1994, to the Plan
included as Exhibit 10.1.5 above,
incorporated herein by reference to Exhibit
10.1.17.b to Registrant's Form 10-Q for the
quarter ended September 30, 1994.
* 10.1.6 1995 Employee Stock Purchase Plan of Registrant, as
amended, incorporated herein by reference to Exhibit
10.1.7 to Registrant's Form 10-Q for the quarter
ended September 30, 1995.
* 10.1.7 1996 Stock Option Plan for employees, directors and
advisors of Aironet Wireless Communications, Inc., a
subsidiary of Registrant, filed with the Original
Filing.
* 10.1.8 Non-Competition Agreement by and between Registrant
and Robert F. Meyerson, effective February 27, 1997,
filed with the Original Filing.
* 10.1.9 Employment Agreement between Registrant and Frank
Brick, effective as of October 15, 1993,
incorporated herein by reference to Exhibit 10.1.16
on Registrant's Form 10-Q for the quarter ended
September 30, 1994.
<PAGE> 73
* 10.1.10 Employment Agreement between Registrant and Leonard
D. Abeita, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.11 Employment Agreement between Registrant and James
G. Cleveland, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.12 Employment Agreement between Registrant and Kenneth
W. Haver, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.13 Employment Agreement between Registrant and David
D. Loadman, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.14 Employment Agreement between Registrant and David
W. Porter, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.15 Employment Agreement between Registrant and Dan R.
Wipff, effective as of April 1, 1997, filed
with the Original Filing.
* 10.1.16 Letter of the Audit Committee of Registrant's Board
of Directors, dated July 22, 1996, engaging Norton
Rose to act as the Committee's delegate to advise
and assist Registrant's management, filed with the
Original Filing.
10.2 Material Leases of Registrant.
* 10.2.1 Lease between Registrant and 3330 W. Market
Properties, dated as of December 30, 1986,
incorporated herein by reference to Exhibit 10.2.1
to Registrant's Form 10-K for the year ended March
31, 1994.
* 10.2.2 Standard Office Lease (Modified Net Lease) between
Registrant and John D. Dellagnese III, dated as of
July 19, 1995, including an Addendum thereto,
incorporated herein by reference to Exhibit 10.2.4
to Registrant's Form 10-K for the year ended March
31, 1996.
* 10.2.2.a Second Addendum, dated as of October 5,
1995, to the Lease included as Exhibit
10.2.2 above, incorporated herein by
reference to Exhibit 10.2.4.a to
Registrant's Form 10-K for the year ended
March 31, 1996.
* 10.2.2.b Third Addendum, dated as of March 1, 1996,
to the Lease included as Exhibit 10.2.2
<PAGE> 74
above, incorporated herein by reference to
Exhibit 10.2.4.b to Registrant's Form 10-K
for the year ended March 31, 1996.
10.3 Credit Agreements of Registrant.
* 10.3.1 Credit Agreement by and among Registrant, the
lenders party thereto from time to time and
The Bank of New York, as letter of credit
issuer, swing line lender and agent for the
lenders, dated as of March 8, 1996,
incorporated herein by reference to Exhibit
10.3.2 to Registrant's Form 10-K for the year
ended March 31, 1996.
* 10.3.1.a Amendment No. 1, dated as of
August 6, 1996, to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference to
Exhibit 10.3.2.a to Registrant's
Form 8-K dated August 16, 1996.
* 10.3.1.b Security Agreement, dated as of
August 6, 1996, by and among the
Registrant and The Bank of New
York, as Agent, incorporated herein
by reference to Exhibit 10.3.2.b to
Registrant's Form 8-K dated August
16, 1996.
* 10.3.1.c Amendment No. 2, dated as of
December 16, 1996, to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference to
Exhibit 10.3.2.c to Registrant's
Form 8-K dated December 16, 1996.
* 10.3.2 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
September 8, 1995, and related Letter Agreement
between them of even date, incorporated herein by
reference to Exhibit 10.3.2 to Registrant's Form
10-Q for the quarter ended September 30, 1995.
* 10.3.3 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
November 24, 1995, and related Letter Agreement
between them dated November 22, 1995, incorporated
herein by reference to Exhibit 10.3.3 to
Registrant's Form 10-Q for the quarter ended
December 31, 1995.
<PAGE> 75
* 10.3.4 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated January
31, 1996, and related Letter Agreement between them dated
of even date, incorporated herein by reference to Exhibit
10.3.4 to Registrant's Form 10-Q for the quarter ended
December 31, 1995.
* 10.3.5 Business Purpose Revolving Promissory Note made by
Registrant in favor of Bank One, Akron, N.A., dated
February 29, 1996, and related Letter Agreement between
them dated of even date, incorporated herein by reference
to Exhibit 10.3.6 to Registrant's Form 10-K for the year
ended March 31, 1996.
* 10.3.6 Business Purpose Revolving Promissory Note (Swing Line)
made by Registrant in favor of Bank One, Akron, N.A., dated
March 20, 1996, incorporated herein by reference to Exhibit
10.3.7 to Registrant's Form 10-K for the year ended March
31, 1996.
* 10.3.7 Business Purpose Revolving Promissory Note (Swing Line)
made by Registrant in favor of Bank One, Akron, NA, dated
August 6, 1996 (in replacement of the Note included as
Exhibit 10.3.7 above), incorporated herein by reference to
Exhibit 10.3.8 to Registrant's Form 8-K dated August 16,
1996.
* 10.3.7.a Bank One Security Agreement, dated as of August 6,
1996, by and among Registrant and Bank One, Akron,
NA, incorporated herein by reference to Exhibit
10.3.8.a to Registrant's Form 8-K dated August 16,
1996.
* 10.4 Amended and Restated Agreement between Registrant and Symbol
Technologies, Inc., dated as of September 30, 1992, incorporated
herein by reference to Exhibit 10.4 to Registrant's Form 10-K for
the year ended March 31, 1993.
* 10.5 Agreement of Purchase and Sale of Assets by and among Vision
Newco, Inc., a subsidiary of Registrant, Virtual Vision, Inc., as
debtor and debtor in possession, and the Official Unsecured
Creditors' Committee, on behalf of the bankruptcy estate of
Virtual Vision, dated as of July 13, 1995, incorporated herein by
reference to Exhibit
<PAGE> 76
10.8 to Registrant's Form 10-Q for the quarter ended June 30,
1995.
* 10.6 Subscription Agreement by and among New Meta Licensing
Corporation, a subsidiary of Registrant, and certain officers of
Registrant as Purchasers, dated as of September 19, 1995,
incorporated herein by reference to Exhibit 10.8 to Registrant's
Form 10-Q for the quarter ended September 30, 1995.
* 10.7 Shareholder Agreement by and among New Meta Licensing Corporation,
a subsidiary of Registrant, and its Shareholders, including the
officers of Registrant party to the Agreement included as Exhibit
10.6 above, dated as of September 29, 1995, incorporated herein by
reference to Exhibit 10.9 to Registrant's Form 10-Q for the
quarter ended September 30, 1995.
* 10.7.1 First Amendment, dated as of September 29, 1995, to the
Agreement included as Exhibit 10.7 above, incorporated
herein by reference to Exhibit 10.9.1 to Registrant's Form
10-Q for the quarter ended December 31, 1995.
* 10.7.2 Second Amendment, dated as of January, 1996, to the
Agreement included as Exhibit 10.7 above, incorporated
herein by reference to Exhibit 10.9.2 to Registrant's Form
10-Q for the quarter ended December 31, 1995.
* 10.7.3 Amended and Restated Shareholder Agreement by and among
Metanetics Corporation (fka New Meta Licensing Corporation)
and its Shareholders, dated as of March 28, 1996,
superseding the Agreement included as Exhibit 10.7 above,
as amended by the First and Second Amendments thereto
included as Exhibits 10.7.1 and 10.7.2 above, incorporated
herein by reference to Exhibit 10.9.3 to Registrant's Form
10-K for the year ended March 31, 1996.
* 10.7.4 First Amendment, dated as of March 30, 1996, to the
Agreement included as Exhibit 10.7.3 above, incorporated
herein by reference to Exhibit 10.9.4 to Registrant's Form
10-K for the year ended March 31, 1996
* 10.8 Stock Purchase Agreement by and among Meta Holding Corporation, a
subsidiary of Registrant, and certain officers of Registrant as
Purchasers, dated as of March 30, 1996, filed with the Original
Filing.
<PAGE> 77
* 10.9 Stock Purchase Agreement by and between Metanetics Corporation, a
subsidiary of Registrant fka New Meta Licensing Corporation, and
Accipiter II, Inc., dated as of September 30, 1996, incorporated
herein by reference to Exhibit 10.8 to Registrant's Form 10-Q for
the quarter ended September 30, 1996.
* 10.10 Stock Purchase Agreement by and between Registrant and Telantis
Capital, Inc., dated as of March 31, 1997, filed with the
Original Filing.
* 11. Computation of Common Shares outstanding and earnings per share
for the fiscal years ended March 31, 1997, 1996 and 1995, filed
with the Original Filing.
* 21. Subsidiaries of Registrant, filed with the Original Filing.
** 23. Consent of Coopers & Lybrand L.L.P., filed herewith.
* 24. Power of Attorney executed by members of the Board of Directors of
Registrant, filed with the Original Filing.
* 27. Financial Data Schedule as of March 31, 1997, filed with the
Original Filing.
- ------------------
* Previously filed
** Filed herewith
<PAGE> 1
Exhibit 23
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CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statements of
Telxon Corporation (the "Company") on Form S-8 (Nos.33-16939, 33-32600,
33-43314, 33-43318, 33-56205, 33-62957, 333-00449, and 333-33177) and Form S-3
(No. 333-01189) of our report, dated June 27, 1997, on our audits of the
consolidated financial statements and financial statement schedule of the
Company, as of March 31, 1997 and 1996, and for the years ended March 31, 1997,
1996, and 1995, which report is included in this Amendment No. 1 on Form
10-K/A to the Company's Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Akron, Ohio
August 13, 1997
