<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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
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)
(330) 664-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ].
At December 31, 1997, there were 15,902,312 outstanding shares of the
registrant's Common Stock.
<PAGE> 2
TELXON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION:
Item 1: Consolidated Financial Statements
Balance Sheet.................................................................. 3
Statement of Operations........................................................ 4
Statement of Cash Flows........................................................ 5
Notes to Consolidated Financial Statements..................................... 6-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 10-18
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings......................................................................... 19
Item 6: Exhibits and Reports on Form 8-K.......................................................... 19-24
All Items of Form 10-Q other than those listed above have been omitted as
inapplicable.
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash (including cash equivalents of $5,900 and
$38,100) ................................................................... $ 12,783 $ 45,386
Accounts receivable, net of allowance for
doubtful accounts of $1,756 and $1,596 ..................................... 122,862 111,959
Notes and other accounts receivable .......................................... 15,527 16,312
Inventories .................................................................. 101,547 84,499
Prepaid expenses and other ................................................... 13,049 11,956
--------- ---------
Total current assets ...................................................... 265,768 270,112
Property and equipment, net .................................................... 52,458 45,578
Intangible and other assets, net ............................................... 47,832 46,094
--------- ---------
Total ..................................................................... $ 366,058 $ 361,784
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................ $ 2,999 $ 50
Current portion of long-term debt ............................................ 383 383
Capital lease obligations due within one year ................................ 997 627
Accounts payable ............................................................. 50,240 47,917
Income taxes payable ......................................................... 2,523 3,077
Accrued liabilities .......................................................... 39,349 49,000
--------- ---------
Total current liabilities ................................................. 96,491 101,054
Capital lease obligations ...................................................... 1,926 968
Convertible subordinated notes and debentures .................................. 107,224 107,224
Other long-term liabilities .................................................... 5,910 5,837
--------- ---------
Total liabilities ......................................................... 211,551 215,083
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, 16,203 and 16,186 shares issued ......................... 162 162
Additional paid-in capital ................................................... 86,121 87,105
Retained earnings ............................................................ 77,316 70,821
Equity adjustment for foreign currency translation ........................... (4,529) (2,643)
Unearned compensation relating to restricted stock awards .................... (290) (210)
Treasury stock; 300 and 557 shares of common stock at cost ................... (4,273) (8,534)
--------- ---------
Total stockholders' equity ................................................ 154,507 146,701
--------- ---------
Commitments and contingencies .................................................. -- --
--------- ---------
Total ..................................................................... $ 366,058 $ 361,784
========= =========
</TABLE>
See accompanying notes to
consolidated financial statements
3
<PAGE> 4
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Product, net .......................................... $ 97,472 $ 105,030 $ 275,302 $ 288,494
Customer service, net ................................. 19,835 18,545 57,239 55,778
--------- --------- --------- ---------
Total net revenues ........................... 117,307 123,575 332,541 344,272
Cost of revenues:
Product ............................................... 56,482 76,646 163,319 204,915
Customer service ...................................... 12,249 12,966 35,711 35,548
--------- --------- --------- ---------
Total cost of revenues ....................... 68,731 89,612 199,030 240,463
--------- --------- --------- ---------
Gross profit .......................................... 48,576 33,963 133,511 103,809
Operating expenses:
Selling expenses ...................................... 19,821 27,453 56,598 69,674
Product development and engineering
expenses ......................................... 9,876 13,839 28,526 35,043
General and administrative expenses ................... 9,662 16,206 29,210 37,914
--------- --------- --------- ---------
Total operating expenses ..................... 39,359 57,498 114,334 142,631
--------- --------- --------- ---------
Income (loss) from operations ................ 9,217 (23,535) 19,177 (38,822)
Interest income ............................................ 340 161 1,257 511
Interest expense ........................................... (1,752) (2,130) (5,354) (6,262)
Other non-operating (expense) income ....................... (160) 35,176 (325) 35,249
--------- --------- --------- ---------
Income (loss) before income taxes ............ 7,645 9,672 14,755 (9,324)
Provision (benefit) for income taxes ....................... 3,288 7,537 6,416 (1,961)
--------- --------- --------- ---------
Income (loss) before income taxes............. 7,645 9,672 14,755 (9,324)
Provision (benefit) for income taxes........................ 3,288 7,537 6,416 (1,961)
--------- --------- --------- ---------
Net income (loss) before cumulative
effect of accounting change................... 4,357 2,135 8,339 (7,363)
Cumulative effect of accounting change, net of taxes........ 1,240 -- 1,240 --
--------- --------- --------- ---------
Net income (loss)............................. $ 3,117 $ 2,135 $ 7,099 $ (7,363)
========= ========= ========= =========
Net income (loss) per common share before accounting
change:
Basic......................................... $ .28 $ .13 $ .53 $ (.45)
Diluted....................................... $ .27 $ .13 $ .52 $ (.45)
========= ========= ========= =========
Cumulative effect of accounting change:
Basic......................................... $ .08 -- $ .08 --
Diluted....................................... $ .08 -- $ .08 --
========= ========= ========= =========
Net income (loss) per common share:
Basic......................................... $ .20 $ .13 $ .45 $ (.45)
Diluted....................................... $ .19 $ .13 $ .44 $ (.45)
========= ========= ========= =========
Average number of common shares outstanding:
Basic......................................... 15,685 16,103 15,742 16,207
Diluted....................................... 16,262 16,150 16,189 16,207
========= ========= ========= =========
</TABLE>
See accompanying notes to
consolidated financial statements
4
<PAGE> 5
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 7,099 $ (7,363)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Cumulative effect of accounting change.................. 2,176 --
Depreciation and amortization .......................... 18,560 21,948
Amortization of restricted stock
awards, net ........................................ 148 474
Provision for doubtful accounts ........................ 451 947
Provision for inventory obsolescence ................... 5,398 11,502
Deferred income taxes .................................. (4) (1,026)
Gain on sale of assets ................................. -- (35,176)
Loss on disposal of fixed assets ....................... 825 402
Trading securities, net ................................ -- 902
Changes in assets and liabilities:
Accounts and notes receivable ..................... (11,714) 15,645
Inventories ....................................... (22,399) (1,101)
Prepaid expenses and other ........................ (1,135) (472)
Intangible and other assets ....................... (1,985) (3,047)
Accounts payable and accrued liabilities .......... (8,527) (25,499)
Other long-term liabilities ....................... 73 (1,223)
------------- -------------
Total adjustments ....................... (18,133) (15,724)
------------- -------------
Net cash used in operating activities ........................... (11,034) (23,087)
Cash flows from investing activities:
Additions to property and equipment ............................. (18,791) (10,926)
Software investments ............................................ (3,172) (5,120)
Proceeds from the sale of fixed assets .......................... 866 65,655
Proceeds from the sale of non-marketable investments ............ 1,033 --
Purchase of non-marketable investments .......................... (5,500) (400)
Additions to long-term notes receivable ......................... (140) (1,850)
------------- -------------
Net cash (used in) provided by investing activities ............. (25,704) 47,359
Cash flows from financing activities:
Notes payable, net .............................................. 2,949 1,999
Principal payments on capital leases ............................ (479) (702)
Principal payments on long-term borrowing ....................... -- (2,103)
Purchase of treasury stock ...................................... (4,928) (1,051)
Debt issue costs paid ........................................... (25) (303)
Proceeds from exercise of stock options
(includes tax benefit) ...................................... 6,958 710
------------- -------------
Net cash provided by (used by) financing activities ............. 4,475 (1,450)
Effect of exchange rate changes on cash ......................... (340) 56
------------- -------------
Net (decrease) increase in cash and cash equivalents ............ (32,603) 22,878
Cash and cash equivalents at beginning of period ................ 45,386 34,828
------------- -------------
Cash and cash equivalents at end of period ...................... $ 12,783 $ 57,706
============= =============
</TABLE>
See accompanying notes to
consolidated financial statements
5
<PAGE> 6
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
1. Management Representation
The consolidated financial statements of Telxon Corporation ("Telxon")
and its subsidiaries (collectively with Telxon, the "Company") have
been prepared without audit. In the opinion of the Company, all
adjustments, consisting of normal recurring adjustments necessary for a
fair statement of results for the interim periods, have been made. The
statements, including the March 31, 1997, condensed balance sheet data
derived from audited financial statements, do not include all of the
information and notes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the audited consolidated financial statements as
contained in Telxon's Annual Report on Form 10-K, as amended by
Amendment No. 1 on Form 10-K/A, for the fiscal year ended March 31,
1997.
2. Earnings Per Share
Computations of basic and diluted earnings per share of common stock
have been made in accordance with the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS No. 128"). The Company was required to adopt the
provisions of SFAS No. 128 beginning with the quarter ended December
31, 1997. All prior and interim period earnings per common share
amounts have been restated accordingly. All securities having an
anti-dilutive effect on earnings per common share have been excluded
from such computations. Common stock purchase rights outstanding under
Telxon'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.
<TABLE>
<CAPTION>
RECONCILIATION OF NUMERATORS AND DENOMINATORS OF THE BASIC
AND DILUTED EPS COMPUTATIONS
(DOLLARS IN THOUSAND EXCEPT PER SHARE AMOUNTS)
For the Quarter ended December 31, 1997 For the Quarter ended December 31, 1996
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 3,117 $ 2,135
BASIC EPS
Income Available to
common stockholders 3,117 15,685 $ 0.20 2,135 16,103 $ 0.13
============ ============
EFFECT OF DILUTIVE SECURITIES
Options 577 47
DILUTED EPS
Income available to stockholders
of common shares and
common stock equivalents $ 3,117 16,262 $ 0.19 $ 2,135 16,150 $ 0.13
============ ============ ============ ============ ============ ============
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
For the Nine Months ended December 31, 1997 For the Nine Months ended December 31, 1996
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ 7,099 $ (7,363)
BASIC EPS
Income Available to
common stockholders 7,099 15,742 $ 0.45 (7,363) 16,207 $ (0.45)
============ ============
EFFECT OF DILUTIVE SECURITIES
Options 447
DILUTED EPS
Income (Loss) available to
stockholders of common shares
and common share equivalents $ 7,099 16,189 $ 0.44 $ (7,363) 16,207 $ (0.45)
============ ============ ============ ============ ============ ============
</TABLE>
Options to purchase 457,500 shares of common stock at $21.25 - $24.00 per share
were outstanding during the first nine months of fiscal 1998, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares for the first
nine months of fiscal 1998. The shares issuable upon conversion of Telxon's
5-3/4% Convertible Subordinated Notes and 7-1/2% Convertible Subordinated
Debentures were omitted from the diluted EPS calculation because the
conditions for their conversion were not satisfied as of December 31, 1997.
As more fully described in note 10, subsequent to December 31, 1997, Telxon
reissued 20,972 shares of treasury stock to satisfy purchases made by employees
through its 1995 Employee Stock Purchase Plan and 25,770 shares of treasury
stock to satisfy stock options exercised under its stock option plans.
Additionally, subsequent to December 31, 1997, Telxon repurchased 6,500 shares
of its common stock pursuant to its open market repurchase program.
3. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 March 31,
(Unaudited) 1997
----------- ----
<S> <C> <C>
Purchased components $ 58,011 $ 29,983
Work-in-process 22,642 31,579
Finished goods 20,894 22,937
-------- --------
$101,547 $ 84,499
======== ========
</TABLE>
4. Accrued Liabilities
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 March 31,
(Unaudited) 1997
----------- ----
<S> <C> <C>
Deferred customer service revenues $10,358 $14,329
Accrued payroll and other employee compensation 12,588 19,309
Other accrued liabilities 16,403 15,362
------- -------
$39,349 $49,000
======= =======
</TABLE>
6
<PAGE> 8
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
5. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine Months
Ended December 31,
------------------
1997 1996
---- ----
(Unaudited)
Cash paid during the period for:
<S> <C> <C>
Interest $4,694 $5,846
Income taxes 5,502 7,368
</TABLE>
Capital lease additions of $1,819 (principally for new manufacturing
equipment) and $48 in fiscal 1998 and fiscal 1997, respectively, have
been excluded from the accompanying consolidated statement of cash
flows as non-cash transactions.
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. The $7,000 of secured
promissory notes received in connection with the sale have been
excluded from the accompanying consolidated statement of cash flows as
a non-cash transaction.
Telxon's re-issuances of treasury stock during the second quarter
of each fiscal 1998 and 1997 to satisfy purchases made by employees
through its 1995 Employee Stock Purchase Plan have been excluded
from the accompanying consolidated statement of cash flows as
non-cash transactions.
6. Litigation and Contingencies
In December 1992, four class action suits were filed in the United
States District Court, Northern District of Ohio, by certain alleged
Telxon stockholders on behalf of themselves and purported classes
consisting of Telxon stockholders, other than defendants and
their affiliates, who purchased Telxon common stock between May
20, 1992 and January 19, 1993. The named defendants are Telxon,
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 and costs. The defendants,
including Telxon, 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 Telxon, 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 trial
court granted each defendant summary judgment on all counts, which the
plaintiffs appealed to the United States Sixth Circuit Court of
Appeals. On November 12, 1997, the Court of Appeals affirmed the
summary judgment as to all defendants. The plaintiffs had 90 days from
the entry of the judgement to seek further appeal or other relief, and
it is believed that such time has expired. Accordingly, the Company
does not expect that the trial court's disposition of the case, as
affirmed by the Court of Appeals, will be overturned, and, no provision
has been made in the accompanying consolidated financial statements for
any liability that could result to the Company with respect to the
Consolidated Class Action.
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 Telxon; 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
7
<PAGE> 9
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
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 Telxon is nominally a defendant
in this derivative action, no monetary relief is sought by the
plaintiff from Telxon. 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 but allowed the claims
relating to breach of fiduciary duty to continue.
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 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. Discovery is
continuing, and no deadline for its completion has yet been set by the
Court. 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.
7. Income Taxes
The Company's consolidated effective income tax rate reflects income
before taxes increased by non-deductible goodwill amortization and the
tax effect of subsidiaries' net operating loss benefits not currently
utilized, which sum is multiplied by the United States statutory rate
and increased by foreign tax rate differentials. The effective income
tax rate was decreased by the favorable tax treatment of the Company's
foreign sales corporation.
8. Other Transactions
During the third quarter of fiscal 1998, Telxon re-issued 128,813
shares of treasury stock to satisfy stock options exercised under its
stock option plans. Additionally, during the third quarter of fiscal
1998, Telxon repurchased 72,000 shares of its common stock, at a
weighted average price of $23.22 per share, pursuant to its open market
repurchase program.
8
<PAGE> 10
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
9. Change in Accounting Principle
On November 20, 1997, the Financial Accounting Standards Board's
Emerging Issues Task Force issued a new consensus ruling, "Accounting
for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and
Information Technology Transformation" ("EITF 97-13"). EITF 97-13
requires business process reengineering costs associated with
information system development to be expensed as incurred. The Company
has been involved in a corporate-wide information systems
implementation project that is affected by this pronouncement. In
accordance with this ruling, during the quarter ended December 31,
1997, the Company recorded a one-time, after-tax, non-cash charge of
$1.2 million to expense previously capitalized costs associated with
this project. Such costs had primarily been incurred during the second
quarter of fiscal 1998.
10. Subsequent Events
Subsequent to December 31, 1997, Telxon reissued 20,972 shares of
treasury stock to satisfy purchases made by employees through its 1995
Employee Stock Purchase Plan. Additionally, Telxon reissued 25,770
shares of treasury stock in January 1998 to satisfy stock options
exercised under its stock option plans.
Subsequent to December 31, 1997, Telxon repurchased 6,500 shares of its
common stock at a price of $21.88 per share, pursuant to its open
market repurchase program.
11. Newly Issued Accounting Pronouncements
In October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). The Company is required to adopt the
provisions of SOP 97-2 for the fiscal year ending March 31, 1999.
Management believes that the adoption of this pronouncement will not
have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
12. Reclassifications
Certain items in the fiscal 1997 consolidated financial statements and
notes thereto have been reclassified to conform to the fiscal 1998
presentation.
9
<PAGE> 11
TELXON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
REGARDING CERTAIN TRENDS OR OF OTHER FORWARD-LOOKING INFORMATION CONCERNING THE
COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES OR OTHERWISE
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-Q ARE INHERENTLY SUBJECT TO RISKS AND
UNCERTAINTIES WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE SUMMARY OF CERTAIN OF THE
RISKS AND OTHER IMPORTANT FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL AND OTHER CONDITION UNDER "FACTORS THAT MAY
AFFECT FUTURE RESULTS" BELOW SHOULD BE READ IN CONJUNCTION WITH THE MORE
COMPLETE DISCUSSION OF THOSE AND OTHER RISKS AND IMPORTANT FACTORS AFFECTING THE
BUSINESS, OPERATING RESULTS AND CONDITION OF THE COMPANY UNDER "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - FACTORS THAT MAY AFFECT FUTURE RESULTS" (WHICH IS INCORPORATED
HEREIN BY THIS REFERENCE), AND OTHER CAUTIONARY STATEMENTS APPEARING UNDER "ITEM
1. BUSINESS" AND ELSEWHERE, IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS
AMENDED BY AMENDMENT NO. 1 ON FORM 10-K/A, FOR THE FISCAL YEAR ENDED MARCH 31,
1997.
Overview
The Company recorded net income before the cumulative effect of the accounting
change of $4.4 million or $.27 per share and $8.3 million or $.52 per share for
the third quarter and first nine months of fiscal 1998, respectively. In
comparison, the Company recorded net income of $2.1 million or $.13 per
share for the third quarter of fiscal 1997 and a net loss of $7.4 million or
$.45 per share for the first nine months of fiscal 1997.
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-Q, 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 Company's business, operating results and financial and other conditions may
be affected by a number of risks and other important factors, including, without
limitation, the following, some of which are inherently difficult to identify
and predict and/or are beyond the Company's control: general and
industry-specific economic conditions; the identification and implementation of
appropriate cost saving and operational efficiency initiatives; sales and
manufacturing cycles from quarter to quarter and within each quarter; serving
markets characterized by increasingly rapid technological change and associated
changes in market demand, product obsolescence and price erosion; intense
competition; concentration of revenues in the retail industry; ability to
penetrate and expand revenues in new and existing markets; risks associated with
foreign sales and operations; timely and efficient enhancement of appropriate
product offerings through internal development and acquisition of or investment
in new businesses and technologies; dependence on, and freedom from infringement
of, technologies and other proprietary rights of or by third parties; government
regulation of radio and other products and product health and safety concerns;
dependence on sole source, or limited number of, suppliers; and attracting and
retaining qualified employees. In addition to being subject to the foregoing
factors and other cautionary statements elsewhere in this Form 10-Q, the
Company's conduct of its business and the results and condition thereof are also
subject to the possible adverse effects of certain pending litigation and other
contingencies discussed in Note 6 to the accompanying consolidated financial
statements included in Item 1 above.
Readiness for the Year 2000
Customary computer programming practices, developed prior to the upcoming change
in the century becoming a concern, have used two digits rather than four to
identify the year in a date field. If not corrected, many computer applications
may fail to treat year dates intended to represent years in the twenty-first
century as such but instead treat them as still in the twentieth century,
potentially resulting in system failure or miscalculations disruptive of
business operations, including, among other things, an inability to initiate,
receive, process, invoice or otherwise
10
<PAGE> 12
complete normal business activities. These Year 2000 issues affect virtually all
companies and organizations.
The Year 2000 issues affect both the Company's own internal operations and the
computer products and related services it provides. As further discussed under
"FINANCIAL CONDITION - Cash Flows from Investing Activities" below, the Company
is working with outside contractors to develop and install a new corporate-wide
information system. The new system was identified as a strategic business
initiative independent of Year 2000 considerations. While the new information
system will be a dynamic one permitting ongoing improvements as business needs
are identified, the basic operational systems are expected to be substantially
completed during early 1999 at a total estimated expenditure of approximately
$19.5 million. Those time and cost targets are management's current best
estimates based on presently available information and numerous assumptions.
Given the uncertainties and complexities inherent in any new system
installation, there can be no assurance that the project will be completed
within the expected time and cost parameters. The portions of the Company's
existing information system which would require correction for Year 2000 issues
will be superseded as part of this larger, new system installation, which is
being designed to be Year 2000 ready.
With respect to its own products, the Company has identified those of its
existing products (released prior to December 31, 1997) that are or will be made
Year 2000 ready. Those already- or to-be-made-Year 2000 ready products represent
the existing products which management believes will continue to be a
significant part of the Company's ongoing product line. Customers may continue
to order the Company's other existing products, but with no assurance from the
Company as to their Year 2000 readiness or the feasibility or availability of an
upgrade path to readiness. All new products released after December 31, 1997
will be Year 2000 ready when released.
The Company expects to make the software/firmware upgrades for the existing
products which are not presently, but are to be made, Year 2000 ready available
by June 1998. Subject to negotiated contractual commitments, the Company will
make the upgrades available free of charge for products purchased after December
31, 1997, but customers will be responsible for installing the upgrades (or they
may retain the Company to do so for a fee). The Company does not expect that the
cost of developing the necessary upgrades to significantly adversely affect the
Company's financial performance, but given the technical nature of the task of
isolating and correcting non-compliant programming and the limited internal
resources available, and the increasing demand for available external resources,
to perform the work, there can be no assurance as to if, when and at what cost
the upgrades can be completed.
The impact of Year 2000 issues on the Company will also be affected by the Year
2000 readiness of its customers as well as of its suppliers of raw materials,
components and software and its providers of facilities, equipment and services
and any failure on their part to achieve readiness in their own operations or
with respect to the items they supply or otherwise provide to the Company. While
the Company is beginning to consider what inquires might be appropriate to make
of such other parties (principally of its suppliers and other providers) in
these regards, there can be no assurance that the Year 2000 issues confronting
such other parties and any failure on their part to timely address them will not
have a material adverse effect on the Company.
11
<PAGE> 13
RESULTS OF OPERATIONS
Revenues
- --------
The table below sets forth the consolidated net revenues of the Company for the
quarters and nine month periods ended December 31, 1997 and 1996, without
adjustments for the sale of its former subsidiary Itronix Corporation
("Itronix"), which was effective December 31, 1996. As further explained below,
after adjusting fiscal 1997 revenues to exclude the Itronix operations,
consolidated revenues from the Company's continuing operations for the quarter
and nine months ended December 31, 1997 increased $17.0 million or 16.9% and
$53.6 million or 19.2%, respectively, as compared to the comparable fiscal 1997
periods.
<TABLE>
<CAPTION>
Quarter ended December 31, (Decrease)/Increase
-------------------------- ----------------------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Net Revenues:
Product, net $ 97,472 $105,030 $ (7,558) (7.2)%
Customer service, net 19,835 18,545 1,290 7.0 %
-------- -------- --------
Total net revenues $117,307 $123,575 $ (6,268) (5.1)%
======== ======== ========
<CAPTION>
Nine Months ended December 31, (Decrease)/Increase
------------------------------ -----------------------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Net Revenues:
Product, net $275,302 $288,494 $(13,192) (4.6)%
Customer service, net 57,239 55,778 1,461 2.6 %
-------- -------- --------
Total net revenues $332,541 $344,272 $(11,731) (3.4)%
======== ======== ========
</TABLE>
Net product revenues include the sale of portable tele-transaction computers
("PTCs"), including rugged, wireless mobile computers and 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.
Consolidated product revenues from continuing operations increased $15.2 million
or 18.5% during the third quarter of fiscal 1998 as compared to the third
quarter of fiscal 1997. The reported results of the third quarter of fiscal
1997 include $22.8 million of product revenues recorded by Itronix. The increase
in consolidated product revenues was attributable to a 20.7% increase in
consolidated PTC unit volume offset by a 2.8% decrease in average unit selling
price. The third quarter of fiscal 1998 revenues include a sale of
approximately $30.0 million to a single customer.
Consolidated product revenues from continuing operations increased $50.9 million
or 22.7% during the first nine months of fiscal 1998 as compared to the first
nine months of fiscal 1997. The reported results of the first nine months of
fiscal 1997 include $64.1 million of product revenues recorded by Itronix. The
increase in consolidated product revenues was the result of a 27.9% increase
in the volume of PTC units sold offset by a 4.8% decrease in the average
selling price per PTC unit.
Revenues from the Company's international operations increased $4.4 million or
5.1% during the first nine months of fiscal 1998 as compared to the levels
recorded during the same period of fiscal 1997. These increases are due to a
27.8% increase in the revenues from sales to foreign distributors. The revenues
from international operations for the quarters and nine months ended December
31, 1997 and 1996, exclude the results of the Canadian operations of the
Company's Aironet Wireless Communication Inc. ("Aironet") subsidiary. The
relocation of Aironet's Canadian operations to Akron, Ohio was completed during
the third quarter of fiscal 1998, as a result of which revenues from
Aironet's Canadian operations have been included in the Company's consolidated
domestic results.
Consolidated customer service revenues from continuing operations increased $1.8
million or 9.8% during the third quarter of fiscal 1998 from the third quarter
of fiscal 1997. The consolidated customer service revenues shown for the third
quarter of fiscal 1997 include $.5 million of customer service revenues from
Itronix. The increase in consolidated customer service revenues from continuing
operations was due primarily to the increase in the installed base of the
Company's products.
12
<PAGE> 14
<TABLE>
<CAPTION>
Cost of Revenues
- ----------------
Quarter ended December 31, (Decrease)
-------------------------- ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Cost of Revenues:
Product $56,482 $76,646 $(20,164) (26.3)%
Customer service 12,249 12,966 (717) (5.5)%
------- ------- --------
Total cost of revenues $68,731 $89,612 $(20,881) (23.3)%
======= ======= ========
Cost of product revenues as a
percentage of product revenues,
net 57.9% 73.0%
Cost of customer service revenues
as a percentage of customer
service revenues, net 61.8% 69.9%
<CAPTION>
Nine Months ended December 31, (Decrease)/Increase
----------------------------- -------------------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Cost of Revenues:
Product $163,319 $204,915 $(41,596) (20.3)%
Customer service 35,711 35,548 163 0.5 %
-------- -------- --------
Total cost of revenues $199,030 $240,463 $(41,433) (17.2)%
======== ======== ========
Cost of product revenues as a
percentage of product revenues,
net 59.3% 71.0%
Cost of customer service revenues
as a percentage of customer
service revenues, net 62.4% 63.7%
</TABLE>
The consolidated cost of product revenue percentage decreased in the third
quarter of fiscal 1998 due primarily to the absence of non-recurring charges
recorded during the third quarter of fiscal 1997. The fiscal 1997 non-recurring
items included provisions for the decreased carrying value of the Company's
inventories affected by the streamlining of its product lines ($9.4 million or
12.3% of the consolidated cost of product revenue for the third quarter of
fiscal 1997) and charges related to the Company's workforce reduction and early
retirement initiatives ($1.7 million or 2.3% of the consolidated cost of product
revenue for the third quarter of fiscal 1997). Third quarter fiscal 1998 gross
margins also reflect improvements in operating efficiencies in manufacturing
operations resulting from the Company's standard product strategy and
build-to-stock initiatives.
The decrease in the consolidated cost of product revenue percentage in the first
nine months of fiscal 1998 from the first nine months of fiscal 1997 was due
primarily to the absence of non-recurring charges recorded during fiscal 1997.
These non-recurring charges, which included provisions for the decreased
carrying value of the Company's inventories affected by the streamlining of its
product lines and charges related to the Company's workforce reduction and early
retirement initiatives, accounted for approximately 5.5% of the consolidated
cost of product revenues for the first nine months of fiscal 1997. Consolidated
product gross margins for the first nine months of fiscal 1997 were also
affected by the mix of large-volume/low-margin business and higher costs in
early stage rollouts of new products. Gross margins for the first nine months of
fiscal 1998 also reflect improvements in operating efficiencies in manufacturing
operations resulting from the Company's standard product strategy and
build-to-stock initiatives.
The consolidated customer service cost percentage decreased in the third quarter
of fiscal 1998 from the third quarter of fiscal 1997 due primarily to the
absence of non-recurring charges recorded during the earlier period, which
included provisions for the decreased carrying value of the Company's
inventories affected by the streamlining of its product lines ($.7 million or
5.4% of the consolidated cost of customer service revenues for the third quarter
of fiscal 1997) and charges related to the consolidation of customer service
operations ($.3 million or 2.1% of the consolidated cost of customer service
revenues for the third quarter of fiscal 1997).
At December 31, 1997, consolidated inventory allowance accounts decreased to
$14.7 million from $16.0 million at March 31, 1997. This decrease was primarily
the result of the physical disposition of $4.9 million of fully reserved
obsolete material during the third quarter of fiscal 1998 associated with the
streamlining of the Company's product lines during fiscal 1997, partially offset
by the continued provision for inventory obsolescence resulting from
technological change. As a percentage of consolidated gross inventories, the
Company's consolidated inventory allowances decreased to 12.5% at December 31,
1997, from 15.6% at March 31, 1997.
13
<PAGE> 15
<TABLE>
<CAPTION>
Operating Expenses
- ------------------
Quarter ended December 31, (Decrease)
-------------------------- ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Operating Expenses:
Selling expenses $19,821 $27,453 $ (7,632) (27.8)%
Product development and
engineering expenses 9,876 13,839 (3,963) (28.6)%
General and administrative
expenses 9,662 16,206 (6,544) (40.4)%
------- ------- --------
Total operating expenses $39,359 $57,498 $(18,139) (31.5)%
======= ======= ========
<CAPTION>
Nine Months ended December 31, (Decrease)
------------------------------ ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Operating Expenses:
Selling expenses $56,598 $69,674 $(13,076) (18.8)%
Product development and
engineering expenses 28,526 35,043 (6,517) (18.6)%
General and administrative
expenses 29,210 37,914 (8,704) (23.0)%
------- ------- --------
Total operating expenses $114,334 $142,631 $(28,297) (19.8)%
======== ======== ========
</TABLE>
Selling expenses as a percentage of total net revenues decreased to 16.9% and
17.0%, respectively, in the third quarter and first nine months of fiscal 1998
from 22.2% and 20.2%, respectively, in the third quarter and first nine months
of fiscal 1997. The decrease in selling expenses was due primarily to certain
non-recurring charges recorded during the third quarter of fiscal 1997, which
included charges related to the redesign of the Company's worldwide distribution
and logistics operations ($3.6 million or 13.0% of the selling expenses recorded
during the third quarter of fiscal 1997) as well as charges related to the
Company's workforce reduction and early retirement initiatives ($3.1 million or
10.5% of the selling expenses recorded during the third quarter of fiscal 1997).
In total, these non-recurring charges accounted for approximately 9.6% of the
selling expenses recorded during the first nine months of fiscal 1997. During
the third quarter and the first nine months of fiscal 1997, Itronix recorded
selling expenses of $2.2 million and $6.2 million, respectively. The Company
anticipates its fourth quarter of fiscal 1998 consolidated selling expenses as a
percentage of consolidated total net revenues will decrease from the fourth
quarter of fiscal 1997 as a result of the continued benefit of the Company's
fiscal 1997 workforce reduction and early retirement initiatives.
The decrease in product development and engineering expenses in the third
quarter and first nine months of fiscal 1998 from the levels recorded in the
same periods of fiscal 1997 was primarily attributable to the absence of the
expenses of Itronix and the absence of non-recurring charges recorded during
the third quarter of fiscal 1997, which were partially offset by charges for
certain cost reduction initiatives. These non-recurring items include charges
related to the Company's workforce reduction and early retirement initiatives
($1.7 million or 12.6% of the product development and engineering expenses
recorded during the third quarter of fiscal 1997) as well as charges related to
the consolidation of certain product development and product marketing
functions in Houston, Texas, ($.4 million or 2.8% of the product development
and engineering expenses recorded for the third quarter of fiscal 1997).
Itronix recorded product development and engineering expenses of $2.0 million
and $5.2 million, respectively for the third quarter and first nine months of
fiscal 1997. Excluding the non-recurring charges, product development and
engineering expenses increased 4.0% during the first nine months of fiscal 1998
over the same period of fiscal 1997 as a result of increased development
expense related to pen-based products and the consolidation of the Company's
product development and product marketing operations. The Company anticipates
its fourth quarter of fiscal 1998 consolidated product development and
engineering expenses will increase from the fourth quarter fiscal 1997 levels
as the Company continues to record expenses related to the consolidation of the
Company's product development and product marketing operations to Houston,
Texas.
During the third quarter and first nine months of fiscal 1998, 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"
totaling $.8 million and $2.3 million, respectively. The Company capitalized
$1.6 million and $4.6 million, respectively, of direct internal software
development costs during the third quarter and first nine months of fiscal 1997.
The Company anticipates the dollar amount of internal software development costs
capitalized during the fourth quarter of fiscal 1998 to decrease from the fourth
quarter of fiscal 1997 levels.
14
<PAGE> 16
Consolidated general and administrative expenses decreased in the third quarter
and first nine months of fiscal 1998 from the fiscal 1997 third quarter and
first nine months results due primarily to the non-recurring charges recorded
during the third quarter of fiscal 1997 relating to the Company's workforce
reduction and early retirement initiatives, previously developed corporate
information systems and certain consulting agreements. Additionally, the results
of the third quarter and first nine months of fiscal 1997 include $.5 million
and $1.8 million, respectively, of general and administrative expenses recorded
by Itronix. The Company anticipates the consolidated general and administrative
expenses for the fourth quarter of fiscal 1998 will decrease from the levels
recorded during the fourth quarter of fiscal 1997 as a result of the absence of
fourth quarter fiscal 1997 charges related to the non-renewal of certain
consulting agreements.
<TABLE>
<CAPTION>
Non-Operating (Expense) Income
- ------------------------------
Quarter ended December 31, (Decrease)
-------------------------- ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C>
Non-Operating (Expense) Income:
Other non-operating (expense) income $ (160) $35,176 $(35,336) N.M.
<CAPTION>
Nine Months ended December 31, (Decrease)
------------------------------ ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C>
Non-Operating (Expense) Income:
Other non-operating (expense) income $ (325) $35,249 $(35,574) N.M.
</TABLE>
Effective December 31, 1996, the Company sold substantially all of the assets of
Itronix, with a net book value of $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 the sale, other than the Company's resale of products obtained
from the buyer under a mutual reseller agreement.
<TABLE>
<CAPTION>
Income Taxes
- ------------
Quarter ended December 31, (Decrease)
-------------------------- ----------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Income Taxes:
Provision (benefit)
for income taxes $3,288 $7,537 $(4,249) (56.4)%
<CAPTION>
Nine Months ended December 31, Increase
------------------------------ --------
1997 1996 Dollar Percentage
---- ---- ------ ----------
(in thousands)
<S> <C> <C> <C> <C>
Income Taxes:
Provision (benefit) for
income taxes $6,416 $(1,961) $8,377 427.2%
</TABLE>
The Company's consolidated effective income tax rate for the third quarter and
first nine months of fiscal 1998 was 43.0% and 43.5%, respectively, as compared
to 77.9% and 21.0% for the third quarter and the first nine months of fiscal
1997, respectively.
The decrease in the Company's consolidated effective income tax rate for the
third quarter of fiscal 1998 from the rate experienced during the third quarter
of fiscal 1997 was due primarily to the decrease in foreign income taxed at
higher foreign rates and the absence of the tax effect of non-recurring charges
related to the redesign of certain of the Company's international operations
which occurred during fiscal 1997.
The Company's consolidated effective income tax rate for the first nine months
of fiscal 1998 increased from the rate experienced during the first nine months
of fiscal 1997. This increase is the result of an increase in U.S. taxable
income without increases in non-deductible reconciling items such as
15
<PAGE> 17
goodwill amortization. There were no significant tax law changes during the
first nine months of fiscal 1998 that had a significant effect on the
calculation of the Company's income tax liability.
FINANCIAL CONDITION
Liquidity
- ---------
<TABLE>
<CAPTION>
Dollar
December 31, March 31, (Decrease)
1997 1997 Increase
---- ---- --------
(in thousands except ratios)
<S> <C> <C> <C>
Cash and cash equivalents $ 12,783 $ 45,386 $(32,603)
Accounts and notes receivable 138,389 128,271 10,118
Inventories 101,547 84,499 17,048
Other 13,049 11,956 1,093
-------- -------- --------
Total current assets $265,768 $270,112 $ (4,344)
======== ======== ========
Notes payable $ 2,999 $ 50 $ 2,949
Accounts payable 50,240 47,917 2,323
Income taxes payable 2,523 3,077 (554)
Accrued liabilities 39,349 49,000 (9,651)
Other 1,380 1,010 370
-------- -------- --------
Total current liabilities $ 96,491 $101,054 $ (4,563)
======== ======== ========
Working capital (current assets
less current liabilities) $169,277 $169,058 $ 219
======== ======== ========
Current ratio (current assets divided
by current liabilities) 2.8 to 1 2.7 to 1
</TABLE>
The increase in the Company's consolidated working capital at December 31,
1997, from March 31, 1997, was due primarily to the increases in accounts and
notes receivable and inventories, offset by decreases in cash and accrued
liabilities. The increase in accounts receivable is the result of a supplier
delay in providing manufacturing components, which shifted revenue toward the
end of the quarter. The increase in inventories was due to purchases late in
the quarter in anticipation of fourth quarter sales and the initial production
of the Company's two new pen-based product models. Consolidated days sales
outstanding increased to 97 days at December 31, 1997, from 88 days at March 31,
1997, primarily as the result of the $30 million sale to the single customer, as
previously discussed.
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.
Cash Flows from Operating Activities
- ------------------------------------
<TABLE>
<CAPTION>
Dollar
Increase
(Decrease)
Nine Months ended December 31, in
------------------------------ Cash Flow
1997 1996 Impact
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 7,099 $ (7,363) $ 14,462
Cumulative effect of accounting change 2,176 -- 2,176
Depreciation and amortization 18,708 22,422 (3,714)
Provision for inventory obsolescence 5,398 11,502 (6,104)
Deferred income taxes (4) (1,026) 1,022
Accounts and notes receivable (11,714) 15,645 (27,359)
Inventories (22,399) (1,101) (21,298)
Prepaid expenses and other (1,135) (472) (663)
Accounts payable and accrued liabilities (8,527) (25,499) 16,972
Gain on sale of assets -- (35,176) 35,176
Other (636) (2,019) 1,383
-------- -------- --------
Net cash used in operating activities $(11,034) $(23,087) $ 12,053
======== ======== ========
</TABLE>
The reduction in the amount of cash used in the Company's consolidated operating
activities for the first nine months of fiscal 1998 as compared to the first
nine months of fiscal 1997 is the result of the increase in net income for the
two periods, the absence of the cash flow impact from the gain on the sale of
Itronix and the change in the cash flow impact of accounts payable and accrued
liabilities, partially offset by the change in the cash flow impacts of accounts
and notes receivable, inventories
16
<PAGE> 18
and the non-cash charges for depreciation, amortization and inventory
obsolescence, as detailed in the preceding table.
Cash Flows from Investing Activities
- ------------------------------------
<TABLE>
<CAPTION>
Dollar
Increase
(Decrease)
Nine Months ended December 31, in
------------------------------ Cash Flow
1997 1996 Impact
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Investing Activities:
Additions to property and equipment $(18,791) $(10,926) $ (7,865)
Software investments (3,172) (5,120) 1,948
Purchase of non-marketable investments (5,500) (400) (5,100)
Proceeds from the sale of non-
marketable investments 1,033 -- 1,033
Proceeds from sale of assets 866 65,655 (64,789)
Other (140) (1,850) 1,710
-------- -------- --------
Net cash (used in) provided by investing activities $(25,704) $ 47,359 $(73,063)
======== ======== ========
</TABLE>
The increase in the amount of cash used in the Company's consolidated investing
activities in the first nine months of fiscal 1998 from the first nine months of
fiscal 1997 levels was due to the absence of the proceeds from the sale of
Itronix, the capitalization of $5.7 million of expenditures relating to the
installation of new corporate-wide information system, net of the cumulative
adjustment of $2.2 million (Footnote 9) and a non-marketable investment in a
foreign distributor. These negative cash flow items are partially offset by a
reduction in software investments and the proceeds from the sale of
non-marketable investments, as detailed in the preceding table. The Company
anticipates increased capitalization of costs associated with its installation
of new corporate-wide information systems during the fourth quarter of fiscal
1998.
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 20.0% 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 form the accompanying consolidated statement of cash flows as
a non-cash transaction.
Cash Flows from Financing Activities
- ------------------------------------
<TABLE>
<CAPTION>
Dollar
Increase
(Decrease)
Nine Months ended December 31, in
------------------------------ Cash Flow
1997 1996 Impact
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Notes payable, net $ 2,949 $ 1,999 $ 950
Purchase of treasury stock (4,928) (1,051) (3,877)
Proceeds from exercise of stock options 6,958 710 6,248
Principal payments on long-term borrowing -- (2,103) 2,103
Other (504) (1,005) 501
------- ------- -------
Net cash provided by (used in) financing activities $ 4,475 $(1,450) $ 5,925
======= ======= =======
</TABLE>
The increase in the Company's cash flows from financing activities for the first
nine months of fiscal 1998 from the first nine months of fiscal 1997 was due
primarily to the increased level of stock option exercises in response to the
increase in market price of Telxon common stock during the fiscal 1998 period,
the absence of principal payments on long-term borrowings during the first nine
months of fiscal 1998 and the increase of borrowings against the Company's
revolving credit facilities during fiscal 1998. These positive cash flow items
have been partially offset by Telxon's repurchase of 287,700 shares of its
common stock during the first nine months of fiscal 1998, compared to 100,000
shares repurchased during the first nine months of fiscal 1997, under its open
market repurchase programs.
17
<PAGE> 19
Other Transactions
During the third quarter of fiscal 1998, Telxon re-issued 128,813 shares of
treasury stock to satisfy stock options exercised under its stock option plans.
Additionally, during the third quarter of fiscal 1998, Telxon repurchased 72,000
shares of its common stock, at a weighted average price of $23.22 per share,
pursuant to its open market repurchase program.
Change in Accounting Principle
On November 20, 1997, the Financial Accounting Standards Board's Emerging Issues
Task Force issued a new consensus ruling, "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project That Combines
Business Process Reengineering and Information Technology Transformation" ("EITF
97-13"). EITF 97-13 requires business process reengineering costs associated
with information system development to be expensed as incurred. The Company has
been involved in a corporate-wide information systems implementation project
that is affected by this pronouncement. In accordance with this ruling, during
the quarter ended December 31, 1997, the Company recorded a one-time, after-tax,
non-cash charge of $1.2 million to expense previously capitalized costs
associated with this project. Such costs had primarily been incurred during the
second quarter of fiscal 1998.
Subsequent Events
Subsequent to December 31, 1997, Telxon reissued 20,972 shares of treasury stock
to satisfy purchases made by employees through its 1995 Employee Stock Purchase
Plan. Additionally, Telxon reissued 25,770 shares of treasury stock in January
1998 to satisfy stock options exercised under its stock option plans.
Subsequent to December 31, 1997, Telxon repurchased 6,500 shares of its common
stock at a price of $21.88 per share, pursuant to its open market repurchase
program.
New Accounting Standards
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). The
Company is required to adopt the provisions of SOP 97-2 for the fiscal year
ending March 31, 1999. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
18
<PAGE> 20
ITEM 1. LEGAL PROCEEDINGS
See Note 6 to the consolidated financial statements included in Part I of this
Quarterly Report on Form 10-Q for a discussion of the material pending legal
proceedings to which the Company is a party, which footnote discussion is
incorporated in this Part II by this reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
2 Asset Purchase Agreement by and among Dynatech
Corporation, IAQ Corporation, Registrant and Itronix
Corporation, a wholly owned subsidiary of 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 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, incorporated herein by
reference to Exhibit 4.3.2 to Registrant's
Form 10-K for the year ended March 31, 1997.
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).
19
<PAGE> 21
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 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 10.1.2 to
Registrant's Form 10-Q for the quarter ended
September 30, 1997.
10.1.3 1990 Stock Option Plan for Non-Employee
Directors 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, 1997.
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.
20
<PAGE> 22
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, incorporated herein by reference
to Exhibit 10.1.7 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.8 Non-Competition Agreement by and between
Registrant and Robert F. Meyerson, effective
February 27, 1997, incorporated herein by
reference to Exhibit 10.1.8 to Registrant's
Form 10-K for the year ended March 31, 1997.
10.1.9 Description of terms of employment of Frank
E. Brick with Registrant for the three
fiscal years ending March 31, 2000,
incorporated herein by reference to Exhibit
10.1.9 to Registrant's Form 10-Q for the
quarter ended June 30, 1997.
10.1.10 Employment Agreement between Registrant and
Leonard D. Abeita, effective as of April 1,
1997, incorporated herein by reference to
Exhibit 10.1.10 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.11 Employment Agreement between Registrant and
James G. Cleveland, effective as of April 1,
1997, incorporated herein by reference to
Exhibit 10.1.11 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.12 Employment Agreement between Registrant and
Kenneth W. Haver, effective as of April 1,
1997, incorporated herein by reference to
Exhibit 10.1.12 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.13 Employment Agreement between Registrant and
David D. Loadman, effective as of April 1,
1997, incorporated herein by reference to
Exhibit 10.1.13 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.14 Employment Agreement between Registrant and
David W. Porter, effective as of April 1,
1997, incorporated herein by reference to
Exhibit 10.1.14 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.15 Employment Agreement between Registrant and
Dan R. Wipff, effective as of April 1, 1997,
incorporated herein by reference to Exhibit
10.1.15 to Registrant's Form 10-K for the
year ended March 31, 1997.
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
21
<PAGE> 23
management, incorporated herein by reference
to Exhibit 10.1.16 to Registrant's Form 10-K
for the year ended March 31, 1997.
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 above, incorporated
herein by reference to Exhibit
10.2.4.b to Registrant's Form 10-K
for the year ended March 31, 1996.
10.2.2.c Fourth Addendum, dated as of April
16, 1996, to the Lease included as
Exhibit 10.2.2 above, incorporated
herein by reference to Exhibit
10.2.2.c to Registrant's Form 10-Q
for the quarter ended June 30,
1997.
10.2.2.d Fifth Addendum, dated as of June
24, 1997, to the Lease included as
Exhibit 10.2.2 above, incorporated
herein by reference to Exhibit
10.2.2.d to Registrant's Form 10-Q
for the quarter ended June 30,
1997.
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
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.
22
<PAGE> 24
10.3.2 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.
10.3.3 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.
10.3.4 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.
10.3.5 Business Purpose Revolving Promissory Note
(Swing Line) made by Registrant in favor of
Bank One, Akron, N.A., dated August 6, 1996
(in replacement of the Note included as
Exhibit 10.3.4 above), incorporated herein
by reference to Exhibit 10.3.8 to
Registrant's Form 8-K dated August 16, 1996.
10.3.5.a Bank One Security Agreement, dated
as of August 6, 1996, by and among
Registrant and Bank One, Akron,
N.A., incorporated herein by
reference to Exhibit 10.3.8.a to
Registrant's Form 8-K dated August
16, 1996.
10.3.6 Business Purpose Revolving Promissory Note
(Swing Line) made by Registrant in favor of
Bank One, NA (fka Bank One, Akron, N.A.),
dated August 5, 1997 (extending the credit
facility evidenced by the Note included as
Exhibit 10.3.5 above), incorporated herein
by reference to Exhibit 10.3.8 to
Registrant's Form 10-Q for the quarter ended
June 30, 1997.
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.
23
<PAGE> 25
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, incorporated herein by reference to
Exhibit 10.8 to Registrant's Form 10-K for the year
ended March 31, 1997.
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, incorporated herein by reference to Exhibit
10.10 to Registrant's Form 10-K for the year ended
March 31, 1997.
27. Financial Data Schedule as of December 31, 1997,
filed herewith.
(b) Reports on Form 8-K
Registrant did not file any Current Reports on Form 8-K during the
fiscal quarter for which this Quarterly Report on Form 10-Q is filed.
24
<PAGE> 26
TELXON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 13, 1998
TELXON CORPORATION
(Registrant)
/s/ KENNETH W. HAVER
--------------------
Kenneth W. Haver, Senior
Vice President and Chief
Financial Officer
<PAGE> 27
TELXON CORPORATION
EXHIBITS TO
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
<PAGE> 28
INDEX TO EXHIBITS
Where
Filed
-----
* 2 Asset Purchase Agreement by and among Dynatech Corporation,
IAQ Corporation, Registrant and Itronix Corporation, a wholly
owned subsidiary of 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 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, incorporated herein by reference to
Exhibit 4.3.2 to Registrant's Form 10-K for the year
ended March 31, 1997.
* 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.
<PAGE> 29
* 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 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 10.1.2 to Registrant's Form 10-Q for the
quarter ended September 30, 1997.
* 10.1.3 1990 Stock Option Plan for Non-Employee Directors 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, 1997.
* 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
<PAGE> 30
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, incorporated herein by
reference to Exhibit 10.1.7 to Registrant's Form
10-K for the year ended March 31, 1997.
* 10.1.8 Non-Competition Agreement by and between Registrant
and Robert F. Meyerson, effective February 27, 1997,
incorporated herein by reference to Exhibit 10.1.8
to Registrant's Form 10-K for the year ended March
31, 1997.
* 10.1.9 Description of terms of employment of Frank E. Brick
with Registrant for the three fiscal years ending
March 31, 2000, incorporated herein by reference to
Exhibit 10.1.9 to Registrant's Form 10-Q for the
quarter ended June 30, 1997.
* 10.1.10 Employment Agreement between Registrant and Leonard
D. Abeita, effective as of April 1, 1997,
incorporated herein by reference to Exhibit 10.1.10
to Registrant's Form 10-K for the year ended March
31, 1997.
* 10.1.11 Employment Agreement between Registrant and James G.
Cleveland, effective as of April 1, 1997,
incorporated herein by reference to Exhibit 10.1.11
to Registrant's Form 10-K for the year ended March
31, 1997.
* 10.1.12 Employment Agreement between Registrant and Kenneth
W. Haver, effective as of April 1, 1997,
incorporated herein by reference to Exhibit 10.1.12
to Registrant's Form 10-K for the year ended March
31, 1997.
* 10.1.13 Employment Agreement between Registrant and David D.
Loadman, effective as of April 1, 1997, incorporated
herein by reference to Exhibit 10.1.13 to
Registrant's Form 10-K for the year ended March 31,
1997.
* 10.1.14 Employment Agreement between Registrant and David W.
Porter, effective as of April 1, 1997, incorporated
herein by reference to Exhibit 10.1.14 to
Registrant's Form 10-K for the year ended March 31,
1997.
* 10.1.15 Employment Agreement between Registrant and Dan R.
Wipff, effective as of April 1, 1997, incorporated
herein by reference to Exhibit 10.1.15 to
Registrant's Form 10-K for the year ended March 31,
1997.
<PAGE> 31
* 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, incorporated
herein by reference to Exhibit 10.1.16 to
Registrant's Form 10-K for the year ended March 31,
1997.
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 above, incorporated herein by
reference to Exhibit 10.2.4.b to
Registrant's Form 10-K for the year
ended March 31, 1996.
* 10.2.2.c Fourth Addendum, dated as of April 16,
1996, to the Lease included as Exhibit
10.2.2 above, incorporated herein by
reference to Exhibit 10.2.2.c to
Registrant's Form 10-Q for the quarter
ended June 30, 1997.
* 10.2.2.d Fifth Addendum, dated as of June 24,
1997, to the Lease included as Exhibit
10.2.2 above, incorporated herein by
reference to Exhibit 10.2.2.d to
Registrant's Form 10-Q for the quarter
ended June 30, 1997.
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 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.
<PAGE> 32
* 10.3.2 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.
* 10.3.3 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.
* 10.3.4 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.
* 10.3.5 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One,
Akron, N.A., dated August 6, 1996 (in replacement of
the Note included as Exhibit 10.3.4 above),
incorporated herein by reference to Exhibit 10.3.8
to Registrant's Form 8-K dated August 16, 1996.
* 10.3.5.a Bank One Security Agreement,
dated as of August 6, 1996, by and
among Registrant and Bank One, Akron,
N.A., incorporated herein by reference
to Exhibit 10.3.8.a to Registrant's
Form 8-K dated August 16, 1996.
* 10.3.6 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One, NA
(fka Bank One, Akron, N.A.), dated August 5, 1997
(extending the credit facility evidenced by the Note
included as Exhibit 10.3.5 above), incorporated
herein by reference to Exhibit 10.3.8 to
Registrant's Form 10-Q for the quarter ended June
30, 1997.
* 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.
<PAGE> 33
* 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, incorporated
herein by reference to Exhibit 10.8 to Registrant's Form 10-K for
the year ended March 31, 1997.
* 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, incorporated herein by
reference to Exhibit 10.10 to Registrant's Form 10-K for the year
ended March 31, 1997.
** 27. Financial Data Schedule as of December 31, 1997, filed herewith.
* Previously filed
** Filed herewith
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