<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 JUNE 30, 1999
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)
Registrant's telephone number, including area code (330) 664-1000
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 [ ]. No [X].*
* Other than its Quarterly Report on form 10-Q for the fiscal quarter
ended December 31, 1998 and its Annual Report on Form 10-K for the
fiscal year ended March 31, 1999, the registrant has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (during which the
registrant has been subject to such filing requirements).
At June 30, 1999, there were 16,155,606 outstanding shares of the registrant's
Common Stock.
This document contains 48 pages.
<PAGE> 2
TELXON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION: Page No.
--------
<S> <C>
Item 1: Consolidated Financial Statements
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-19
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 20-35
PART II. OTHER INFORMATION:
Item 6: Exhibits and Reports on Form 8-K 36-47
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
---------------- -----------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash (including cash equivalents of $8,000 and $--) $ 26,095 $ 22,459
Account receivable, net of allowance for doubtful
accounts of $6,677 and $11,069 76,640 84,500
Notes and other accounts receivable 5,687 4,015
Inventories 121,250 129,049
Prepaid expenses and other 8,655 9,029
---------------- -----------------
Total current assets 238,327 249,052
Property and equipment, net 73,272 69,557
Intangibles and other assets, net 28,142 30,235
================ =================
Total $ 339,741 $ 348,844
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 63,482 $ 68,567
Capital lease obligations due within one year 406 525
Accounts payable 69,036 64,966
Income taxes payable 9,017 6,434
Accrued liabilities 80,937 74,285
---------------- -----------------
Total current liabilities 222,878 214,777
Capital lease obligations 1,330 1,435
Convertible subordinated notes and debentures 106,913 106,913
Other long-term liabilities 5,221 5,446
---------------- -----------------
Total liabilities 336,342 328,571
Minority interest 3,371 3,307
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, 16,234 shares issued 162 162
Additional paid-in capital 87,029 87,029
Retained deficit (78,678) (61,977)
Accumulated other comprehensive income for foreign currency translation (5,719) (5,464)
Unearned compensation relating to restricted stock awards (64) (82)
Treasury stock; 78 shares of common stock at cost (1,423) (1,423)
Notes related to purchase of subsidiary stock (1,279) (1,279)
---------------- -----------------
Total stockholders' equity 28 16,966
---------------- -----------------
Commitments and contingencies - -
================ =================
Total $ 339,741 $ 348,844
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------------------
1999 1998
----------------- -----------------
(Restated)
<S> <C> <C>
Revenues:
Product, net $ 77,180 $ 90,192
Customer service, net 20,139 20,970
----------------- -----------------
Total net revenue 97,319 111,162
Cost of revenues:
Product 54,184 54,473
Customer Service 12,433 12,826
----------------- -----------------
Total cost of revenues 66,617 67,299
Gross profit 30,702 43,863
Operating expenses:
Selling expenses 20,965 23,542
Product development and engineering expenses 8,908 9,014
General & administrative expenses 12,240 9,506
Unconsummated business combination costs - 1,749
----------------- -----------------
Total operating expenses 42,113 43,811
(Loss) income from operations (11,411) 52
Interest income 323 179
Interest expense (3,292) (1,713)
Gain on sale of subsidiary stock - 340
Other non-operating (expense) income, net (629) 1,020
----------------- -----------------
Loss before income taxes (15,009) (122)
Provision (benefit) for income taxes 1,692 (22)
----------------- -----------------
Net loss $ (16,701) $ (100)
================= =================
Net loss per common share:
Basic $ (1.03) $ (0.01)
Diluted $ (1.03) $ (0.01)
Average number of common shares outstanding:
Basic 16,156 16,080
Diluted 16,156 16,080
</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>
Three Months Ended
June 30,
-------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities: (Restated)
Net loss $ (16,701) $ (100)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 6,177 6,233
Amortization of restricted stock awards, net 18 78
Provision for doubtful accounts 1,157 2,431
Provision for inventory obsolescence 1,725 688
Gain on sale of subsidiary - (900)
Gain on sale of non-marketable investments (761) -
Loss on disposal of property and equipment 108 32
Loss on carrying value of non-marketable investment 1,283 -
Minority interest 161 37
Changes in assets and liabilities:
Accounts and notes receivable 5,588 (2,805)
Inventories 6,103 (5,707)
Prepaid expense and other 7 (1,706)
Intangibles and other assets (325) (312)
Accounts payable and accrued liabilities 13,312 (17,047)
Other long-term liabilities (323) (1,732)
----------------- -----------------
Net cash provided by (used in) operating activities 17,529 (20,810)
Cash flows from investing activities:
Additions to property and equipment (7,845) (9,868)
Software and other investments (1,031) (1,178)
Purchase of non-marketable investments - (1,950)
Proceeds from the sale of non-marketable investment 1,523 -
Additions to long-term notes receivable - (608)
----------------- -----------------
Net cash used in investing activities (7,353) (13,604)
Cash flows from financing activities:
(Repayments) borrowings on notes payable, net (5,085) 22,005
Principal payments on capital leases (223) (175)
Costs related to public offering of subsidiary (1,179) -
Exercise of stock options (includes tax benefit) - 584
----------------- -----------------
Net cash (used in) provided by financing activities (6,487) 22,414
Effect of exhange rate changes on cash (53) 36
----------------- -----------------
Net increase (decrease) in cash and cash eqivalents 3,636 (11,964)
Cash and cash equivalents at beginning of period 22,459 27,500
----------------- -----------------
Cash and cash equivalents at end of period $ 26,095 $ 15,536
================= =================
</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)
(Unaudited and As Restated)
1. Management Representation
The consolidated financial statements of Telxon Corporation ("Telxon")
and its subsidiaries (collectively with Telxon, the "Company") have
been prepared without audit and in accordance with the instructions to
Form 10-Q. 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 operating results
for the three months ended June 30, 1999, are not necessarily
indicative of the results that may be achieved for the year ending
March 31, 2000. The statements, including the March 31, 1999 balance
sheet, 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 the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
Comparative June 30, 1998 consolidated financial statements are
unaudited and as restated as discussed in Note 3 - Restatement.
2. Financial Results and Liquidity
The Company incurred a net loss in fiscal 1999 of $136,982 with a
decrease in consolidated revenues of $74,862 as compared to fiscal
1998. Cash flows used by operations were $27,616 and cash flows used in
investing activities were $40,921 for fiscal 1999. The primary source
of cash flows for fiscal 1999 was net borrowings under its credit
facilities (including product financing arrangements) which aggregated
$65,567. The Company is currently in violation of its debt covenants
related to these credit facilities and is unable to borrow additional
funds against these facilities. Waivers for non-compliance have been
obtained through August 30, 1999. The Company's stockholders' equity
and working capital at March 31, 1999 was $16,966 and $34,275,
respectively.
During the quarter ended June 30, 1999, the Company incurred a net
loss of $16,701 with a decrease in consolidated revenues of $13,843 as
compared to the quarter ended June 30, 1998. Compared to the fourth
quarter of fiscal 1999 ended March 31, 1999, revenues in the June 30,
1999 quarter increased $20,236. The Company generated cash flows
from operating activities of $17,529 for the quarter ended June 30,
1999. The Company's stockholders' equity and working capital at June
30, 1999 was $28 and $15,449, respectively.
Since joining the Company in March 1999, the Chief Executive Officer
has formed the Company's executive management team and is in the
process of implementing the team's operating plan to stabilize the
Company and pursue growth opportunities in the mobile information
systems industry. Management is actively seeking opportunities to
generate cash from sources such as inventories and accounts receivable,
managing vendor payments and related operating expenditures, and is
improving operating processes (such as material requirements planning
and design-to-cost) required to achieve its operating and financial
goals. However, there can be no assurance that the cash flows generated
from such sources will be sufficient to support the Company's efforts
to manage the payment of the amounts presently owing to, or
subsequently incurred with, its suppliers. If cash flows are not
sufficient there could be disruption of the flow of necessary
materials, components, services or other cash requirements of the
Company. In addition, payments may ultimately be required in the
near-term in settlement of the litigation, commitments and
contingencies referenced in Note 9 - Litigation and
6
<PAGE> 7
Contingencies. Such payments could have a material adverse effect on
the Company's cash flows and, in turn, on the Company's results of
operations and financial condition.
In connection with the granting of the waivers discussed above, the
Company's existing lenders exercised their rights under the terms of
their respective loans to file UCC financing statements to perfect the
security interests previously conditionally granted in their favor by
the Company in its accounts receivable, inventory and equipment, and
the proceeds thereof, and subsequently required that the Company grant
them security interests in substantially all of the Company's assets.
The Company has been negotiating with financial institutions to provide
adequate financial resources to execute the management team's operating
plans.
As discussed in Note 12 - Subsequent Events, the Company has received a
commitment letter from a financial institution for a $100,000 senior
credit facility. This commitment letter contains conditions precedent
and subsequent. Therefore, there can be no absolute assurance that this
credit facility will ultimately be executed and provide the financing
sufficient to fund management's plans.
Subsequent to June 30, 1999 the Company received $20,460 of the
proceeds from the Initial Public Offering ("IPO") of Aironet Wireless
Communications, Inc. ("Aironet"). One-half of these proceeds were used
in order to partially repay the Company's current borrowings under its
existing credit agreement. The remaining proceeds have been
utilized to reduce amounts payable to vendors.
The Company is currently meeting cash flow requirements from internally
generated cash flows and has successfully managed the payments of
vendors and employees without the disruption of the flow of necessary
materials, components and services. However, there can be no assurance
that the Company will continue to do so in the future. If the
contemplated financing is not obtained prior to August 30, 1999, the
Company will be required to obtain additional waivers under its current
credit facilities. The lenders thereunder are under no obligation to
grant such waivers. In the absence of any required further waivers the
Company will be in default and subject to the lenders' rights of
acceleration under its existing credit agreements and the lenders'
rights and remedies as secured parties. Pending establishment of
replacement credit facilities, the Company will continue to rely upon
internally generated cash flows.
Management believes that, despite the financial hurdles, liquidity
shortfall and funding uncertainties going forward, it has a business
plan that, if successfully funded and executed, can significantly
improve the Company's operations and financial results. The support of
the Company's vendors, customers, lenders, stockholders and employees
will continue to be key to the Company's future success.
3. Restatement
On February 23, 1999, the Company announced that it would restate its
previously issued financial statements for the fiscal years 1996, 1997
and 1998, and its unaudited interim financial statements for the first
and second quarters of fiscal 1999. This restatement was based upon the
completion of a review of certain judgmental accounting matters by the
Audit Committee of the Board of Directors, the Company's management and
the Company's then outside auditors, PricewaterhouseCoopers LLP.
7
<PAGE> 8
The accompanying financial statements reflect the announced
restatement. The more significant restatement adjustments affecting the
periods covered by the accompanying financial statements are described
below.
During the three months ended June 30, 1998, the Company has increased
its product sales returns reserves by $3,963 to better reflect the
levels of product returns in the Company's value-add distribution
channel. The Company has also capitalized $1,950 previously expensed
during the three months ended June 30, 1998, related to premiums paid
to repurchase the common stock of its Metanetics Corporation subsidiary
("Metanetics") from a business partner, resulting in an investment to
be amortized over a useful life of three years. Adjustments were also
made to increase the Company's provision for the past due accounts
receivable related to a foreign distributor as a result of questions
regarding the on-going financial viability of the distributor. Such
adjustments totaled $2,181 for the three months ended June 30, 1998.
For the three months ended June 30, 1998, the Company also reduced its
inventory reserves by $697 to better approximate the exposure related
to on-hand inventories. Additionally, the Company has also made an
adjustment to record, during the three months ended June 30, 1998, the
$900 gain related to the sale of its Virtual Vision, Inc. subsidiary,
which was previously recorded during the three months ended March 31,
1998, as certain conditions of the sale, though perfunctory, were not
satisfied until after March 31, 1998.
The following summarizes the effects of the restatement on the
Company's consolidated statement of operations for the three months
ended June 30, 1998:
8
<PAGE> 9
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months
Ended June 30, 1998
(Unaudited)
As
Previously
Reported Restated
-------- --------
<S> <C> <C>
Revenues:
Product, net $ 94,077 $ 90,192
Customer service, net 20,970 20,970
--------- ---------
Total net revenues 115,047 111,162
Cost of revenues:
Product 57,310 54,473
Customer service 12,826 12,826
--------- ---------
Total cost of revenues 70,136 67,299
Gross profit 44,911 43,863
Operating expenses:
Selling expenses 21,361 23,542
Product development and
engineering expenses 8,930 9,014
General & administrative
expenses 9,436 9,506
Unconsummated business
combination costs 1,749 1,749
Charge related to transactions with
business partner 1,950 --
--------- ---------
Total operating expenses 43,426 43,811
--------- ---------
Income from operations 1,485 52
Interest income 179 179
Interest expense (1,713) (1,713)
Gain on sale of subsidiary stock -- 340
Other non-operating income
(expense) 460 1,020
--------- ---------
Income (loss) before income
taxes 411 (122)
Provision (benefit) for
income taxes 165 (22)
--------- ---------
Net income (loss) $ 246 $ (100)
========= =========
Net income (loss) per
common share:
Basic $ .02 $ (.01)
========= =========
Diluted $ .01 $ (.01)
========= =========
Average number of common shares outstanding:
Basic 16,080 16,080
========= =========
Diluted 16,924 16,080
========= =========
</TABLE>
9
<PAGE> 10
4. 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 (FASB) Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". All securities having an anti-dilutive effect on
earnings per share have been excluded from such computations. Common
stock purchase rights outstanding under the Company's stockholder
rights plan, which potentially have a dilutive effect, have been
excluded from the weighted common shares computation as preconditions
to the exercisability of such rights were not satisfied.
Reconciliation of Numerators and Denominators
Of the Basic and Diluted EPS Computations
(In thousands except per share amounts)
In the following table, net loss represents the numerator, and the
shares represent the denominator, in the earnings per share
calculation.
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
June 30, 1999 June 30, 1998
------------------------------------------------ ------------------------------------------
Net Per Share Net Per Share
Loss Shares Amount Loss Shares Amount
----------------- -------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(16,701) $(100)
================= =============
BASIC LOSS PER SHARE
Loss incurred by
common stockholders $(16,701) 16,156 $ (1.03) $(100) 16,080 $(0.01)
================= =============== ============= =============
EFFECT OF DILUTIVE
SECURITIES
Options - -
-------------- -------------
DILUTED LOSS PER SHARE
Loss incurred by
holders of common
stock and common
stock equivalents $(16,701) 16,156 (1.03) $(100) 16,080 $(0.01)
================= ============== =============== ============= ============= =============
</TABLE>
Options to purchase 3,788,385 shares of common stock at a weighted
average exercise price of $14.95 per share were outstanding at June 30,
1999, but were not included in the computation of diluted earnings per
share for the three months then ended because the options would have
had an anti-dilutive effect on the net loss for the period.
Options to purchase 3,240,391 shares of common stock at a weighted
average exercise price of $17.80 per share were outstanding at June 30,
1998, but were not included in the computation of diluted earnings per
share for the three months then ended because the options would have
had an anti-dilutive effect on the net loss for the period.
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 earnings per share calculations because their
inclusion at June 30, 1999 and 1998 would have had an anti-dilutive
effect on earnings for the three months then ended.
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5. Comprehensive Income
Total comprehensive income consisted of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
----------------- -----------------
(Restated)
<S> <C> <C>
Net loss $(16,701) $ (100)
Other comprehensive (expense) income:
Foreign currency translation adjustment (255) (183)
================= =================
Total comprehensive loss $(16,956) $ (283)
================= =================
</TABLE>
6. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------------- -----------------
<S> <C> <C>
Purchased components $ 51,081 $ 51,112
Work-in-process 31,426 32,360
Finished Goods 38,743 45,577
----------------- -----------------
$121,250 $129,049
================= =================
</TABLE>
7. Accrued Liabilities
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
----------------- -----------------
<S> <C> <C>
Deferred customer service revenues $ 15,757 $ 15,351
Deferred product revenues 21,140 14,168
Accrued discontinued product costs 12,667 12,422
Accrued payroll and other
employee compensation 8,323 11,649
Other accrued liabilities 23,050 20,695
----------------- -----------------
$ 80,937 $ 74,285
================= =================
</TABLE>
The Company's domestic accrual for severance costs increased from a balance of
$3,429 at March 31, 1999 to a balance of $3,625 at June 30, 1999. This increase
was caused by severance charges during the first quarter of fiscal 2000 of
$1,018 partially offset by payments to previously terminated employees of $816.
A total of 29 employees were severed during the first quarter of fiscal 2000. Of
the 29 employees, 28 employees were terminated, and 1 employee was given a short
period of notice. The areas of the Company affected were domestic sales
operations, domestic product development, manufacturing operations and corporate
administration. There have been no material changes to the amounts accrued at
either March 31 or June 30, 1999.
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8. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1999 1998
----------------- -----------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 2,649 $ 1,212
Income taxes $ 619 $ 2,156
</TABLE>
Capital lease additions of $276 during the three months ended June 30,
1998 have been excluded from the accompanying consolidated statement of
cash flows as a non-cash transaction. There were no capital lease
additions during the three months ended June 30, 1999.
9. Litigation and Contingencies
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 the Company derivatively on behalf of Telxon.
The named defendants are the Company; Robert F. Meyerson, former
Chairman of the Board, Chief Executive Officer and director; Dan R.
Wipff, then President, Chief Operating Officer and Chief Financial
Officer and director; Robert A. Goodman, Corporate Secretary and
outside director; Norton W. Rose, outside director; and Dr. Raj Reddy,
outside director. The Complaint alleges breach of fiduciary duty to the
Company and waste of the Company's assets in connection with certain
transactions entered into by Telxon and compensation amounts paid by
the Company. The Complaint seeks an accounting, injunction, rescission,
attorney's fees and costs. While the Company is nominally a defendant
in this derivative action, no monetary relief is sought by the
plaintiff from the Company. On November 12, 1993, Telxon and the
individual director defendants filed a Motion to Dismiss. The plaintiff
filed its 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; however, the claims
relating to breach of fiduciary duty survived the Motion to Dismiss.
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 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. On March 18,
1998, defendant Meyo filed a Motion for Judgement on the Pleadings (as
to himself), in response to which Plaintiff filed its Answer and Brief
in Opposition. The Motion was argued before the Court on November 4,
1998, and was granted from the bench, dismissing Meyo as a
12
<PAGE> 13
defendant in the case. The post-intervention claims are the subject of
ongoing discovery, and no deadline for the completion of the discovery
or trial date 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 its financial
statements.
On February 7, 1998, a complaint was filed against the Company in the
District Court of Harris County, Texas, by Southwest Business
Properties, the landlord of the Company's former Wynnwood Lane facility
in Houston, Texas. The complaint alleges counts for breach of contract
and temporary and permanent injunctive relief, all related to alleged
environmental contamination at the Wynnwood property, and seeks
specific performance, unspecified monetary damages for all injuries
suffered by plaintiff, payment of pre-judgement interest, attorneys'
fees and costs and other unspecified relief. In its Answer, Telxon
denied plaintiff's allegations. No hearing has been had on, or is
currently scheduled for, plaintiff's claim for temporary injunctive
relief. The trial previously scheduled for March 1999 has been reset to
commence on a day during the Court's two week docket beginning October
5, 1999, with the specific trial date to be set by the Court at that
time.
While the litigation with the landlord remains pending, Telxon and the
landlord have agreed to file, and on July 7, 1999 filed, a joint
application with the Texas Natural Resource Conservation Commission for
approval of a proposed Response Action Work Plan for the property
pursuant to the Commission's Voluntary Cleanup Program. The proposed
plan projects completion of remediation and issuance of a closure
certificate in 2002. To date, Telxon has not been advised of any action
by the Commission with respect to the proposed plan, which could
require modifications thereto as a condition of approval. Until such
time as the plan is accepted and completed, its actual cost to Telxon
cannot be quantified; however, the Company does not believe that
remediation in accordance with the plan as proposed would have a
material adverse effect on its results of operations for any quarter in
which any associated charges would be taken. If the plan is not
accepted substantially as proposed, or closure is not certified when
contemplated by the proposed plan, and the Company were ultimately to
become 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.
Telxon believes that these claims lack merit, and it intends to
vigorously defend this action.
On May 8, 1998, two class action suits were filed in the Court of
Chancery of the State of Delaware, in and for the County of New Castle,
by certain alleged stockholders of Telxon on behalf of themselves and
purported classes consisting of Telxon stockholders, other than
defendants and their affiliates, relating to an alleged offer by Symbol
Technologies, Inc. ("Symbol") to acquire the Company. The named
defendants are Telxon and its Directors at the time, namely, Frank E.
Brick, Robert A. Goodman, Dr. Raj Reddy, John H. Cribb, Richard J.
Bogomolny, and Norton W. Rose.
The plaintiffs allege that on April 21, 1998, Symbol made an offer to
purchase Telxon for $38.00 per share in cash and that on May 8, 1998,
Telxon rejected
13
<PAGE> 14
Symbol's proposal. Plaintiffs further allege that Telxon has certain
anti-takeover devices in place purportedly designed to thwart hostile
bids for the Company. Plaintiffs charge the Director defendants with
breach of fiduciary duty and claim that they are entrenching themselves
in office. The plaintiffs seek certification of the purported class,
unspecified compensatory damages, equitable and/or injunctive relief
requiring the defendants to act in specified manners consistent with
the defendant Directors' fiduciary duties, and payment of attorney's
fees and costs. The parties have stipulated that the plaintiffs will
file an Amended Complaint and that the defendants will answer only the
Amended Complaint.
On June 2, 1998, the Court ordered consolidation of the above-captioned
cases. This action is in its early stages, with no scheduling order
having been issued by the Court; discovery has not yet commenced. The
defendants believe that these claims lack merit and intend to
vigorously defend the consolidated action.
From December 1998 through March 1999, a total of 27 class actions were
filed in the United States District Court, Northern District of Ohio,
by certain alleged stockholders of the Company on behalf of themselves
and purported classes consisting of Telxon stockholders, other than the
defendants and their affiliates, who purchased stock during the period,
from May 21, 1996 through February 23, 1999 or various portions
thereof. The named defendants are the Company, former President and
Chief Executive Officer Frank E. Brick and former Senior Vice President
and Chief Financial Officer Kenneth W. Haver. The actions have been
referred to a single judge, and on February 9, 1999, the plaintiffs
filed a Motion to Consolidate all of the actions. On April 26, 1999,
the Court heard motions on naming class representatives and lead class
counsel, but the Court has not yet ruled on those motions. The
complaints allege claims for "fraud on the market" arising from alleged
misrepresentations and omissions with respect to the Company's
financial performance and prospects and an alleged violation of
generally accepted accounting principles by improperly recognizing
revenues. The various complaints seek certification of their respective
purported classes, unspecified compensatory and punitive damages, pre-
and post-judgment interest, and attorneys' fees and costs. The
defendants believe that these claims lack merit, and they intend to
vigorously defend these actions. Defendants anticipate filing a Motion
to Dismiss.
By letter dated December 18, 1998, the Staff of the Division of
Enforcement of the Securities and Exchange Commission advised the
Company that it was conducting a preliminary, informal inquiry into
trading of the securities of the Company at or about the time of the
Company's December 11, 1998 press release announcing that the Company
would be restating the revenues for its second fiscal quarter ended
September 30, 1998. In cooperation with the informal inquiry, the
Company has voluntarily provided certain responsive information to the
Staff. On January 20, 1999, the Commission issued a formal Order
Directing Private Investigation And Designating Officers To Take
Testimony with respect to the referenced trading and specified
accounting matters, pursuant to which subpoenas duces tecum have been
served on the Company requiring the production of specified documents.
Similar subpoenas have been issued to one of the Company's directors,
certain current Company officers and, to the belief of the Company,
former Company officers and certain unaffiliated companies and their
officers. The Company has delivered documents to, and intends to
continue cooperating fully with, the Staff. The referenced director and
current officers have also produced documents, and the director
14
<PAGE> 15
has given oral testimony, to the Staff. Telxon believes that the
unaffiliated parties have also responded to the Staff.
The Company has received a number of letters from its customers
requesting Telxon to indemnify them with respect to their defense of
demands which have been made on them by the Lemelson Medical, Education
& Research Foundation Limited Partnership for the payment of a license
fee for the alleged infringement of the Foundation's so-called
"bar-code" patents by the customers' systems utilizing automatic
identification technology, portions of which have been supplied by the
Company. However, the Foundation has not to date asserted any claim
directly against the Company. The Company believes that the patents so
being asserted against its customers are invalid, unenforceable and not
infringed. This position has also been taken by seven other companies
in the automatic identification industry, including the Company's
principal competitors, which in July 1999 announced their joint filing
of a federal court action seeking a declaratory judgment to that effect
against the Foundation.
Except as otherwise specified, in the event that any of the foregoing
litigation ultimately results in a money judgment against the Company
or is otherwise determined adversely to the Company by a court of
competent jurisdiction, such determination could, depending on the
particular circumstances, adversely affect the Company's conduct of its
business and the results and condition thereof. 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 is also subject to various pending legal
actions and contingencies, which may include matters involving
suppliers, customers, lessors of Company products to customers and
lessors of equipment to the Company.
10. Income Taxes
The Company's consolidated income tax provision for the quarter ended
June 30, 1999 of $1,692 consists primarily of $1,325 and $330 related
to the Company's operations in foreign tax jurisdictions and the
Company's Aironet subsidiary, respectively. No tax benefit was
recognized for the U.S. net operating loss for the three months ended
June 30, 1999 based on the Company's assessment that it is more likely
than not that these deferred tax assets will not be utilized through
future taxable income or implementation of tax planning strategies.
11. Subsidiary Stock Transactions and Divestitures
During the three months ended June 30, 1999, the Company repurchased
60,000 shares of the voting common stock of Metanetics from former key
employees, at a price of $2.00 per share. Giving effect to the share
repurchase, the Company's interest in the voting common stock of
Metanetics was 62% at June, 30, 1999. Prior to the repurchase of these
shares, the Company's interest in the voting common stock of Metanetics
was 60%.
During the three months ended June 30, 1998, the Company entered into a
series of transactions with a business partner relating to Metanetics,
a development stage subsidiary that develops image processing
technology. The Company repurchased 400,000 voting common shares of
Metanetics for $1,950 or $4.875 per share. Simultaneously, the business
partner agreed to pay amounts due of $1,850 for previously purchased
manufacturing rights and software licenses. Additionally, the companies
mutually agreed to terminate such agreements and released each other
from any future liability related to the original
15
<PAGE> 16
agreements. The Company had originally recorded the additional $1,950
investment in Metanetics as an operating expense as of June 30, 1998,
because of the historical financial losses of the subsidiary and future
funding requirements for its operations. However, after further
assessment as part of the restatement discussed in Note 3 - Restatement
above, and based in part on an independent valuation of Metanetics, the
Company has capitalized this additional investment as goodwill to be
amortized over a useful life of three years. Giving effect to the share
repurchase, the Company's interest in the voting common stock of
Metanetics was 60% at June 30, 1998. Prior to the repurchase of these
shares, the company's interest in the voting common stock of Metanetics
was 52%.
During the three months ended June 30, 1998, the Company's Aironet
subsidiary sold 222,222 shares of its voting common stock to various
third party investors at a price of $3.50 per share. Proceeds from this
sale of stock were $778. The resulting pre-tax net gain of $340 was
recorded as non-operating income in the accompanying consolidated
statement of operations. In addition to the sale of the shares of
stock, 66,667 warrants at $3.50 per share for the purchase of Aironet
voting common stock were issued. A gain of $47 relating to these
warrants has been deferred until the warrants are exercised or lapse.
The Company's remaining interest in the issued voting common stock of
Aironet at June 30, 1998, was 76%. Prior to the sale of these shares,
the Company's interest in the voting common stock of Aironet was 78%.
Effective March 31, 1998, the Company sold the stock of its Virtual
Vision subsidiary to a third party in exchange for $500 in cash and
$4,500 in Series F Preferred Shares of the purchaser at a value of
$6.00 per share or 750,000 shares. As all of the conditions of the sale
were not satisfied as of March 31, 1998, the related pre-tax gain of
$900 was deferred. During the three months ended June 30, 1998, all of
the conditions of the sale were satisfied and the Company recorded a
pre-tax gain of $900 as non-operating income in the accompanying
consolidated statement of operations.
12. Subsequent Events
Subsequent to June 30, 1999, 6,000,000 Aironet shares of voting common
stock were sold in the IPO on the Nasdaq National Market at an
offering price of $11.00 per share. Of the total number of shares
offered, Aironet sold 4,000,000 shares, and the Company sold 2,000,000
shares. The aggregate proceeds, net of underwriting discounts and
commissions, were $40,920 to Aironet and $20,460 to Telxon. Subsequent
to this transaction the Company's remaining interest in Aironet was
approximately 39%. Prior to the sale of these shares, the Company's
interest in the voting common stock of Aironet was approximately 76%.
As a result of this transaction and the dilution of its voting
interest and control of Aironet, it is anticipated that the Company's
consolidated results will no longer include Aironet.
The following unaudited proforma statement of operations information
for the three months ended June 30, 1999 and 1998 and the balance
sheet data as of June 30, 1999 are presented below. The information
below, which is based upon various assumptions, is not necessarily
indicative of what would have occurred had the sale of Aironet shares
occurred on April 1, 1998. The following proforma financial
information assumes that the results of operations and financial
position of Aironet have been removed from the Company's results of
operations, including profit on intercompany transfers, and financial
position in each period presented. The information presented also
assumes that one-half of the proceeds from the sale
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<PAGE> 17
of Aironet shares was used to partially repay the Company's existing
credit facilities and one half was used to reduce accounts payable.
The reduction in the amounts outstanding under the Company's existing
credit facilities resulted in assumed interest savings computed at
9.75% per annum. Proforma adjustments were also made to record the
investment of Aironet on the equity method as if the Company owned a
39% equity interest in Aironet.
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Total revenues $87,825 $104,942
(Loss) income from operations (12,230) 15
Net (loss) income (16,594) 245
(Loss) earnings per share:
Basic
As reported $(1.03) $(0.01)
Proforma $(1.03) $ 0.02
Diluted
As reported $(1.03) $(0.01)
Proforma $(1.03) $ 0.02
June 30, 1999
-------------
Total assets $318,441
</TABLE>
Subsequent to June 30, 1999, the Company received a commitment letter
from a financial institution to provide a $100,000 senior secured
credit facility to the Company as a replacement for the Company's
existing revolving credit agreement and business purpose promissory
note. Such commitment letter is subject to conditions precedent and
subsequent to closing. Borrowings under the revolving loan provisions
of such facility would be subject to availability on qualifying
accounts receivable and inventory, reduced by amounts borrowed under
the facility's term loan features and amounts outstanding under
letters of credit. Availability under the agreement is estimated to be
$71,000 as of August 1, 1999. The facility would have three term loan
features. The first term loan would have a limit of $6,000, but would
be limited to a portion of the liquidation value of the Company's
machinery and equipment. The repayment terms for this term loan would
be straight-line over a 10-year period. The second term loan would
have a limit of $10,000 and would be limited, together with the
$20,000 term loan discussed below, by specified percentages of the
market value of Aironet capital stock owned by the Company. The
repayment of this term loan would be straight-line over a 3-year
period. The third term loan of $20,000 would be limited by a specified
percentage of the market value of Aironet capital stock owned by the
Company. The repayment term of this loan would be due the earlier of
120 days from closing or upon any sale of additional capital stock of
Aironet by the Company. The interest rate charged on the revolving
loan, the $6,000 term loan, and the $20,000 term loan would be 2.75%
above the Eurodollar rate or 0.5% above the financial institution's
prime lending rate. Interest would be
17
<PAGE> 18
payable monthly. The interest rate charged would be subject to change
based upon the Company's financial results. The interest rate on the
$10,000 term loan would be fixed at 12.5%. The facility also would call
for the payment of an unused line fee of 0.375% per annum on a monthly
basis. The facility will be collateralized by substantially all of the
Company's assets. Restrictive covenants with respect to this facility
have not yet been determined.
13. Business Segments
The company's business consists of four operating segments:
a)handhelds, workslates, and other mobile computing devices, through
which the Company designs, develops, markets, and services a broad
line of handheld devices ranging from low-end batch terminals to
highly integrated mobile computers that incorporate laser bar code
readers, including a variety of pen-based and touch screen workslate
devices; b)its Aironet subsidiary (majority owned by the Company until
the IPO), which designs, develops, markets, and services high speed
standards-based wireless local area networking (LAN) solutions, for
which Aironet's products utilize advanced high radio frequency and
data communication technologies to connect users to computer networks,
ranging in size and complexity from enterprise-wide LANs to home
networks; c)sales and distribution of all its product lines in Europe;
and d)sales and distribution of all of its product lines in
international locations outside of Europe.
Summarized financial information concerning the Company's reportable
segments is shown in the following table.
<TABLE>
<CAPTION>
United States
--------------------------
Other than Consolidated Other Adjustment &
Aironet Aironet Europe Int'l Elimination Consolidated
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999
Revenue from
unaffiliated
customers $60,466 $9,494 $20,875 $6,484 $97,319
Revenue from
intercompany sales 11,054 2,909 154 733 (14,850) $0
------------------------------------------------------------------------------------
Total revenues $71,520 $12,403 $21,029 $7,217 ($14,850) $97,319
====================================================================================
(Loss) income before
income tax ($17,772) $859 $2,320 $1,072 ($1,488) ($15,009)
====================================================================================
Three months ended
June 30, 1998
Revenue from
unaffiliated customers $80,282 $6,220 $17,561 $7,099 $111,162
Revenue from
intercompany sales 10,826 3,256 146 614 (14,842) $0
------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total revenues $91,108 $9,476 $17,707 $7,713 ($14,842) $111,162
====================================================================================
(Loss) income before
income tax ($4,064) $277 $2,383 $1,260 $22 ($122)
====================================================================================
</TABLE>
14. Reclassifications
Certain items in the fiscal 1999 consolidated financial statements and
notes thereto have been reclassified to conform to the fiscal 2000
presentation.
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<PAGE> 20
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 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 OR OTHER FUTURE
EVENTS PERTAINING TO THE COMPANY 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 OR SUCH OTHER FUTURE EVENTS 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", AND OTHER CAUTIONARY
STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND ELSEWHERE, IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K, FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
On February 23, 1999, the Company announced that it would restate its previously
issued financial statements for the fiscal years 1996, 1997 and 1998, and its
unaudited interim financial statements for the first and second quarters of
fiscal 1999. This restatement was based upon the completion of a review of
certain judgmental accounting matters by the Audit Committee of the Board of
Directors, the Company's management and the Company's then outside auditors,
PricewaterhouseCoopers LLP. See Note 3 - Restatement to the accompanying
consolidated financial statements for further detail concerning the restatement
adjustments made. The financial information for all periods included in the
following discussion gives effect to the restatement and should be read in
conjunction with the restated information presented in Note 3 - Restatement to
the accompanying consolidated financial statements.
Overview
The Company recorded a net loss of $16.7 million or $1.03 per common share
(diluted) for the first quarter of fiscal 2000. In comparison, the Company
recorded a net loss of $.1 million or $.01 per common share (diluted) for the
first quarter of fiscal 1999. Consolidated revenues decreased $13.8 million or
13% from the fiscal 1999 first quarter but increased $20.2 million from the
fiscal 1999 fourth quarter. First quarter fiscal 2000 gross profit fell $13.2
million over the same period. Overall operating expenses decreased $1.7 million
in the fiscal 2000 first quarter primarily due to the absence of $1.7 million
of unconsummated business combination costs incurred in response to takeover
and proxy contest proposals during the first quarter of fiscal 1999.
Additionally, the results include a tax provision of $1.7 million on a pre-tax
loss due to foreign taxes and taxes related to the Company's Aironet subsidiary
of $1.3 million and $.3 million, respectively. No tax benefit has been
recognized for the first quarter of fiscal 2000 U.S. operating loss based on
the Company's current assessment regarding the utilization and realization of
such assets. The Company's operating activities provided cash flows of $17.5
million during the first quarter of fiscal 2000. This compares with cash used
by operating activities of $20.8 million during the first quarter of fiscal
1999.
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<PAGE> 21
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 condition 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 reduction, efficiency and other business process improvement
strategies by the Company's new management team; sales and manufacturing cycles
from quarter to quarter and within each quarter; the lengthened sales cycle for
systems sales and possible associated delays in the Company's recognition of
revenue therefrom; serving markets characterized by increasingly rapid
technological change and associated changes in market demand, product
obsolescence and price erosion; intense competition; the Company's ability to
timely and cost-effectively gain and maintain market acceptance of its
products; the levels of customer demand for the Company's products and
customers' commitments of resources to information technology investments;
concentration of revenues in the retail industry and possible decreases in
their purchases from the Company in response to any downturn in general
economic prospects or conditions to the extent that reduced levels of new
store openings are not offset by their investment in the Company's systems to
improve the efficiency of existing stores; ability to penetrate and expand
revenues in new and existing markets; economic and business 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 a limited number of,
suppliers; and attracting and retaining qualified employees. The Company's
business, operating results and financial condition is also dependent upon the
adequacy of the working capital and other financial resources available to it
from time to time as discussed in Note 2 to the accompanying consolidated
financial statements. 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, is also subject
to the possible adverse effects of certain pending litigation and other
contingencies discussed in Note 9 - Litigation and Contingencies to the
accompanying consolidated financial statements included in Item 1 above. The
financial results of the Company historically have not been materially
adversely impacted as a result of inflation. However, there can be no assurance
that inflation will not have a material adverse impact in the future.
Readiness for the Year 2000
THE INFORMATION SET FORTH UNDER THIS CAPTION IS HEREBY DESIGNATED TO BE A "YEAR
2000 READINESS DISCLOSURE" UNDER THE YEAR 2000 INFORMATION READINESS DISCLOSURE
ACT (THE "YEAR 2000 ACT"), PUBLIC LAW 105-271, AND THE STATEMENTS BELOW AND THE
REGISTRANT, AS THE MAKER THEREOF, SHALL BE ENTITLED TO THE PROTECTIONS PROVIDED
BY THE YEAR 2000 ACT.
21
<PAGE> 22
As the end of the twentieth century nears, there is worldwide concern regarding
the use by many existing computer programs of only the last 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 complete normal business activities.
These Year 2000 issues affect virtually all companies and organizations.
Year 2000 issues affect both the Company's offerings of computer products and
related services to its customers as well as its own operations. The Year 2000
readiness of the Company's operations in turn involves not only its corporate
information systems but also computer-based systems used directly in the conduct
of its business ("Process Management Systems"), such as hardware and software
engineering design tools, manufacturing equipment and customer service and
maintenance tracking systems. In addition, the Company could also be affected by
the Year 2000 readiness of its customers and of its suppliers of raw materials,
components, peripherals, finished products and software and its providers of
facilities, equipment and services. The costs of the Company's Year 2000
readiness efforts are being funded from the Company's consolidated operating
cash flows and borrowings.
With respect to its products, the Company has identified those 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 are being designed to be Year 2000
ready.
The Company has completed the software/firmware upgrades for its products which
were identified to be made Year 2000 ready, subject to the completion of
debugging activities. Subject to negotiated contractual commitments, the Company
will make the upgrades available free of charge for products purchased after
December 31, 1997 which were ordered with the latest software version as of the
order date; an upgrade fee will be charged customers who requested an older
software version when they ordered the equipment. Customers will be responsible
for installing the upgrades, or they may retain the Company to do so for a fee.
The costs to date of upgrading the Company's products to Year 2000 readiness
have not been, and the Company does not expect that the remaining cost of doing
so will be, material to the Company's financial position or results of
operations.
The Company has purchased and continues to work with outside contractors to
complete the installation of new corporate-wide information systems. Though the
new systems were identified as a strategic business initiative independent of
Year 2000 considerations, they are also being designed to make the Company's
information systems Year 2000 ready. To date, the Company has installed the
following phases of the new systems installation: key financial reporting,
accounting, services help desk and contract billing, order entry, manufacturing,
engineering documents management, and accounts receivable. One to four
additional months of work may be required in order to achieve full user
acceptance of these installed systems. While the new information systems will be
dynamic ones permitting ongoing improvements as business needs are identified,
the basic operational systems remaining to be installed are the product repair
and service management systems. The installation of these remaining systems,
22
<PAGE> 23
is expected to be substantially completed during the second quarter of fiscal
2000.
The total capital expenditures for the new systems installation, including the
addition of interfaces for "bolt-on" enhancements, is presently estimated to be
approximately $36.0 million. In addition, the company will also accelerate the
replacement of approximately $6.7 million of computer hardware in connection
with the new systems installation. As of June 30, 1999, the Company had spent
approximately $33.3 million in capital expenditures, purchased $.8 million of
replacement computer hardware and leased an additional $4.2 million of
replacement computer hardware. The company anticipates that it will lease all of
its remaining replacement hardware requirements. The forgoing 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. For
example, to the extent that any additional work is required after the targeted
installation date in order to achieve full user acceptance of the new systems,
the Company's monthly systems development expenditures have ranged from
approximately $1.25 million to approximately $2.1 million.
In addition to these capitalized expenditures, the Company had incurred
approximately $5.3 million of non-capitalizable expenses as of June 30, 1999,
related to the new systems installation. These non-capitalizable expenses
exclude the one-time, after-tax charge of $1.0 million recorded during fiscal
1998 as a change in accounting principle in accordance with the Financial
Accounting Standards Board's Emerging Issues Task Force 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." The Company may incur additional non-capitalizable
expenses in its efforts to complete the project within appropriate time
constraints and to management requirements. These expenses cannot be quantified
at this time.
The Company has engaged an outside consultant to evaluate the Year 2000
readiness of its engineering, manufacturing and customer maintenance and service
Process Management Systems and information technology infrastructure. The
consultant's findings and recommendations were received by the Company on
February 8, 1999. The Year 2000 readiness inventory compiled by the consultant
has been under continuing, extensive review by teams, including senior
management from each of the affected functional areas. Giving effect to the
teams' remediation efforts to date, approximately 80% of the inventoried items
are currently Year 2000 ready. The costs of the study and resulting remediation
are currently being borne by the respective functional areas. The functional
teams continue to work toward completing their review and any necessary
remediation as soon as practicable. To the extent any Year 2000 issues are
identified, remediation options will include re-writing the affected software or
replacing the affected hardware or software with hardware or software that is
Year 2000 ready. The Company believes that, in general, replacement, Year 2000
ready hardware and software for its Process Management Systems and information
technology infrastructure are readily available, making that the most likely
means of addressing any remediation needs. The timetable and cost for any
remediation that may ultimately be required with respect to the Company's
Process Management Systems cannot be estimated.
To the extent that the re-writing of affected software is selected as the means
for remediating any Year 2000 issues, whether in preparing upgrades to Company
products, making Process Management Systems Year 2000 ready or otherwise, given
the technical nature of the task of isolating and correcting non-compliant
programming and the
23
<PAGE> 24
limited internal resources available, the increasing demand for available
external resources and the Company's ability to fund the use of external
resources, to perform the work, there can be no assurances as to if, when and at
what cost any such software work can be completed.
The Company's own Year 2000 readiness is also affected by the Year 2000
readiness of its customers as well as of its suppliers of raw materials,
components, peripherals, finished products 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. Insofar as no single customer has accounted
for more than ten percent of the Company's revenues in recent fiscal years, the
Company does not anticipate that its operating results will be materially
adversely affected by the failure of any particular customer to itself be Year
2000 ready. The volume of Year 2000 inquiries which the Company has received
from its customers regarding the Year 2000 readiness of the Company products
they use further suggests that the Company's customers are addressing their Year
2000 issues. The Company has made Year 2000 readiness inquiries of the current
suppliers to its engineering, manufacturing and service functions and is
assessing the responses, which to date have been received from approximately
three-quarters of those suppliers. The responses received from the suppliers
have not identified any material Year 2000 issues but generally indicate only
that the respective suppliers are in the midst of their own Year 2000 readiness
efforts. The Company has also made readiness inquires of its providers of
facilities and related equipment and services (elevators, HVAC, utilities,
etc.). As the result of a limited number of potential Year 2000 issues which
those inquiries have identified to date, the Company has replaced or is in the
process of updating the affected items at a nominal cost. The Company is still
in the process of receiving, assessing and following up on the providers'
responses, most of which have indicated only that the respective providers are
in the midst of their own Year 2000 readiness efforts.
There are several possible scenarios, which, alone or in aggregate effect,
could, depending on the particular circumstances, materially adversely affect
the Company's business and/or its financial results or conditions. These
scenarios could affect the Year 2000 readiness of the Company's own product or
service offerings, disrupt its business operations or negatively impact its
operating results. The Company could be adversely affected by the failure of one
or more of its suppliers of raw materials, components, peripherals, finished
products or software or its providers of facilities, equipment and services to
achieve Year 2000 readiness in their own operations or with respect to the items
they supply or otherwise provide to the Company. If such an event were to, or
circumstances indicate that one is likely to, occur, the Company would seek
alternative sources of supply (the Company periodically reviews its sourcing
options as part of its general operating procedures independent of Year 2000
concerns) or seek to develop or obtain a software upgrade to make the affected
item Year 2000 ready. As with all businesses engaged in some facet of the
computer industry, there is a risk that the Company's customers may, in advance
of or after the change in the millennium, experience Year 2000 failures or other
difficulties in their use of computer systems comprised of or incorporating
products or services furnished by the Company and may commence legal action or
seek other compensation for their resulting losses; such legal actions, even if
not ultimately determined adverse to the Company, would likely involve
significant defense costs to the Company, particularly where the combination of
products and/or services of several different vendors in addition to the Company
in the subject customer system presents complex issues for isolating the cause
of the Year 2000 problem and determining the vendor responsible for that
problem. Disruptions in the economy generally, domestically and/or in foreign
countries, resulting from Year 2000 issues could also materially affect the
Company. At this time, the Company does not believe
24
<PAGE> 25
that the likelihood of any of the above scenarios occurring can be reliably
predicted, or that the nature or extent of their possible adverse effects on the
Company, can be reasonably estimated. Though the Company currently does not have
formal contingency plans in place to address any particular possible Year 2000
scenario, the Company intends to develop appropriate contingency plans if and
when any significant risks relating to its Year 2000 readiness can be more
definitely identified.
RESULTS OF OPERATIONS
The results of operations and financial position of the company discussed below
contains the results of operations and financial position of Aironet for all
periods presented.
Revenues
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30, Decrease
--------------------------------------------- --------------------------------------
1999 1998 Dollar Percentage
--------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Product, net $77,180 $ 90,192 $ (13,012) -14.4%
Customer service, net 20,139 20,970 (831) -4.0%
--------------- ----------------- ------------------
Total net revenues $97,319 $111,162 $ (13,843) -12.5%
=============== ================= ==================
</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, network management software and software
licenses; and a variety of professional services, including system integration
and project management.
The decrease in consolidated product revenues for the first quarter of fiscal
2000 as compared to the first quarter of fiscal 1999 was primarily due the
absence of a large rollout of the Company's product to a large domestic
retailer, for which revenue was deferred pending customer acceptance of such
product. The amount of revenue deferred related to this transaction was $8.4
million. The revenues related to this one customer, in total, decreased $5.3
during the first quarter of fiscal 2000 as compared to the first quarter of
fiscal 1999. Additionally, there was an absence of a large rollout of the
Company's product to a mobile services and repair operation of a manufacturing
company which took place in the first quarter of fiscal 1999. The revenues
related to this one transaction were $7.8 million. Also, the volume of revenues
recorded in the Company's Value-Add distributor channel decreased approximately
$5.9 million for the first quarter of fiscal 2000 as compared with the first
quarter of fiscal 1999 as the Company's new management is emphasizing the direct
sales channel. These decreases were partially offset by increases in revenues
recorded in the Company's international operations and at Aironet.
The decrease in the consolidated customer service revenues during the first
quarter of fiscal 2000 was primarily the result of decreased "time and material"
repair billings due to start-up issues with the Company's new business
information systems. This was
25
<PAGE> 26
also supplemented by the impact of decreased product revenues over the past two
quarters. Partially offsetting these decreases was the continued growth in the
Company's installed base of product.
Revenues from the Company's international operations (including Canada)
increased $1.8 million or 5.7% during the first quarter of fiscal 2000 as
compared to fiscal 1999 levels. The increase in the Company's international
revenues was primarily caused by a $2.1 million increase in the Company's
revenues in Germany, where a large rollout to a single customer took place and a
$1.1 million increase in revenues in France. These increases were offset by a
$1.2 million decrease in the Company's Canadian operation's revenues. Changes in
foreign exchange rates did not have a material impact on the results of the
Company's international operations.
The Company's reserve for sales returns and allowances decreased from a balance
at March 31, 1999 of $15.0 million to a balance of $10.8 million at June 30,
1999. This decrease was caused by fewer outstanding accounts receivable from the
Company's Value-Add distributors and improved rates of return and cash
collections in the Company's direct sales channel.
<TABLE>
<CAPTION>
Cost of Revenues
(in thousands)
Three Months Ended
June 30, Decrease
---------------------------------- -------------------------------------
Cost of Revenues: 1999 1998 Dollar Percentage
--------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Product $54,184 $54,473 $ (289) -0.5%
Customer service 12,433 12,826 (393) -3.1%
--------------- ---------------- -----------------
Total cost of revenues $66,617 $67,299 $ (682) -1.0%
=============== ================ =================
Cost of product revenue as a
percentage of product revenue,
net 70.2% 60.4%
Cost of customer service revenue
as a percentage of customer
service revenue, net 61.7% 61.2%
</TABLE>
The increase in the consolidated cost of product revenues as a percentage of
consolidated product revenues was primarily the result of underabsorbed
manufacturing overhead costs of $3.7 million due to lower than expected volumes
and manufacturing inefficiencies. Also contributing to the increased cost
percentage was an increase in the provisions for excess and obsolete
manufacturing components of $.9 million, a negative purchase price variance
related to manufacturing purchased components of $.3 million, and a provision
for the write-down of equipment held subject to a lease of $.6 million. Fees
accrued for distribution services provided by the Company's Value-Add
distributors increased $.9 million during the first quarter of fiscal 2000 as
compared with the first quarter of fiscal 1999. The Company also incurred
severance charges of $.4 million related to terminated manufacturing personnel.
The Company is subject to a high degree of technological change in market and
customer demands. The Company therefore continually monitors its inventories for
excess and obsolete items based upon a combination of historical usage and
forecasted usage of such inventories. Additionally, discrete provisions are made
26
<PAGE> 27
when existing facts and circumstances indicate that the subject inventory will
not be utilized.
Management disposes of excess and obsolete inventory as necessary and as
manpower permits, although there are no formal plans to do so. During the first
quarter of fiscal 2000, the Company physically disposed of $1.2 million of
excess and obsolete material. Of this amount, $1.0 million of manufacturing
purchased components were scrapped and $.2 million of inventories in the
Company's international operations were disposed of. There were no recoveries
related to the disposal of this material.
Inventory allowance provisions for the quarter were composed of manufacturing
purchased components of $1.3 million, customer service spare parts and used
equipment of $.1 million and international finished goods inventories of $.3
million. At June 30, 1999, the inventory allowance accounts totaled $29.2
million and were composed of manufacturing purchased components of $22.7
million, customer service spare parts and used equipment of $4.1 million and
international finished goods inventories of $2.0 million. In addition to the
inventory allowance accounts, the Company has recorded accrued liabilities
totaling $12.7 million for the purchase commitments to outside contract
manufacturers for discontinued products.
At June 30, 1999, the Company had approximately $21.9 million of finished goods
inventory held at distributors and customers and approximately $5.5 million of
manufacturing components at contract manufacturers. At March 31, 1999, the
Company had approximately $25.7 million of finished goods inventory held at
distributors and customers and approximately $5.7 million of manufacturing
components at contract manufacturers. The decrease in the amount of finished
goods held at distributors and customers is the result of revenue recognized
upon installation and customer acceptance of the Company's product.
Additionally, the inventory value of finished goods due back from customers as
a result of product returns decreased in proportion to the decrease in the
reserve for sales returns and allowances.
The Company accrues fees due its distributors for the distribution services and
technical support provided to end users as well as cooperative advertising
costs. These fees are generally based upon the sales value of the goods to the
end user. During the first quarter of fiscal 2000, the company incurred $.9
million of these fees.
The increase in the customer service cost of revenues as a percentage of
customer service revenues during the first quarter of fiscal 2000 from
comparable fiscal 1999 levels was due to the decrease in repair volumes as a
result of lower revenues. The decrease in revenues resulted in fixed overhead
costs being spread over a smaller revenue base and therefore negatively
impacting customer service gross margins.
27
<PAGE> 28
<TABLE>
<CAPTION>
Operating Expenses
(in thousands)
Three Months Ended (Decrease)
June 30, Increase
------------------------------------ -----------------------------------
Operating expenses: 1999 1998 Dollar Percentage
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Selling Expenses $ 20,965 $23,542 $(2,577) -10.9%
Product development and
engineering expenses 8,908 9,014 (106) -1.2%
General and administrative
expenses 12,240 9,506 2,734 28.8%
Unconsummated business
combination costs - 1,749 (1,749) -100.0%
---------------- --------------- ---------------
Total operating expenses $ 42,113 $43,811 $(1,698) -3.9%
================ =============== ===============
</TABLE>
Consolidated selling expenses as a percentage of total revenues increased to 22%
in the first quarter of fiscal 2000 from 21% in the first quarter of fiscal
1999. The overall decrease in consolidated selling expenses was primarily due to
a decrease in the provision for doubtful accounts related to the past due
accounts receivable of a foreign distributor of $1.5 million. The provision
recorded for the first quarter of fiscal 2000 was $.7 million as compared to
$2.2 million in the first quarter of fiscal 1999. Commission expenses recorded
during the first quarter of fiscal 2000 decreased $1.1 million due to the
overall decrease in product revenues for the quarter as compared to the first
quarter of fiscal 1999. During the first quarter of fiscal 2000, the Company
experienced a decreased level of write-offs related to test equipment sent to
customers of $.6 million and reduced recruitment and relocation costs of $.3
million. These decreases were partially offset by severance costs of $.3
million. Also offsetting the decreases above were increased selling and
marketing expenses at the Company's Aironet subsidiary.
The Company's allowance for doubtful accounts decreased from a balance of $11.1
million at March 31, 1999 to a balance of $6.7 million at June 30, 1999. The
Company provided for $1.1 million of bad debts and bad debt write-offs totaled
$5.5 million during the first quarter of fiscal 2000. These bad debt write-offs
included $3.3 million of accounts receivable related to the foreign distributor
referenced above.
Consolidated product development and engineering expenses as a percentage of
total revenues increased to 9% in the first quarter of fiscal 2000 from 8% in
the first quarter of fiscal 1999. Consolidated product development and
engineering expenses for the first quarter of fiscal 2000 remained consistent
with product development and engineering expenses from comparable fiscal 1999
levels. However, there were decreases in domestic product development and
engineering expenses related to the absence of costs related to the relocation
of certain product development and engineering operations from Akron, Ohio to
Houston, Texas. These costs totaled $.6 million and included recruitment and
relocation costs, duplicate rent, and travel expenses. Engineering and
development efforts also increased at the Company's Metanetics subsidiary $.3
million from comparable fiscal 1999 levels. The Company also incurred severance
charges of $.2 million during the first quarter of fiscal 2000 related to its
product development and engineering operations.
During the first quarter of fiscal 2000, 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" aggregating $.7 million,
offset by amortization of $1.1 million on previously unamortized software.
28
<PAGE> 29
Consolidated general and administrative expenses as a percentage of total
revenues were 13% and 9% for the first quarters of fiscal 2000 and 1999,
respectively. Consolidated general and administrative expenses increased
primarily due to increased expenses of $1.5 million related to its corporate
information systems project. Of this increase in costs, $.5 million was due to
an increase in amortization of previously capitalized project costs for systems
modules placed in service and the remaining $1.0 million was related to
increased training and data conversion costs. Also contributing to the increase
in general and administrative expenses was increased depreciation and computer
hardware and software maintenance primarily related to the Company's on-going
information systems of $.7 million. Severance charges of $.1 million also
increased general and administrative expenses for the first quarter of fiscal
2000.
The Company's domestic accrual for severance costs increased from a balance of
$3.4 million at March 31, 1999 to a balance of $3.6 million at June 30, 1999.
This increase was caused by severance charges during the first quarter of fiscal
2000 of $1.0 million partially offset by payments to previously terminated
employees of $.8 million. A total of 29 employees were severed during the first
quarter of fiscal 2000. Of the 29 employees, 28 employees were terminated and 1
employee was given a short period of notice. The areas of the Company affected
were domestic sales operations, domestic product development, manufacturing
operations and corporate administration. There have been no material changes to
the amounts accrued at either March 31 or June 30, 1999.
Operating expenses for fiscal 2000 were favorably impacted by the absence of
unconsummated business combination costs incurred in response to an unsolicited
takeover proposal and to a proxy contest of $1.7 million.
Interest Expense and Other Non-operating Income (Expense), net
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Increase
June 30, (Decrease)
----------------------------------- ------------------------------------
1999 1998 Dollar Percentage
--------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest income $ 323 $ 179 $ 144 80.4%
Interest expense (3,292) (1,713) (1,579) 92.2%
Gain on sale of subsidiary stock - 340 (340) -100.0%
Other non-operating (expense)
income (629) 1,020 (1,649) -161.7%
--------------- ----------------- ----------------
Total interest expense and other
non-operating (expense) income, net $ (3,598) $ (174) $ (3,424) N.M.
=============== ================= ================
</TABLE>
Interest expense increased for the first quarter of fiscal 2000 as compared to
the first quarter of fiscal 1999 due to the increased amounts outstanding under
the Company's credit facilities. Amounts oustanding under these facilities
were $63.5 million as of June 30, 1999 and $25.0 million as of June 30, 1998.
During the first quarter of fiscal 2000, the Company recorded $1.3 million of
non-operating expense related to the reduction in carrying value of an
investment in non-marketable securities. The Company's estimate of the reduction
was based upon
29
<PAGE> 30
the market value of subsequent equity transactions of the investee with third
parties. The investment is composed of preferred shares in the development-stage
technology company that purchased the Company's Virtual Vision subsidiary.
During the first quarter of fiscal 2000, the Company sold an investment in
marketable securities for cash proceeds of $1.5 million. As this investment was
previously non-marketable, its carrying value was based upon the cost basis and
was $.7 million. The Company therefore recorded a pre-tax gain of $.8 million.
During the first quarter of fiscal 1999, the transaction to sell the stock of
Virtual Vision to a third party was consummated, resulting in the recording of a
$.9 million non-operating gain. Subsequent to the consummation of the
transaction, positive adjustments to such gain totaling $.1 million were
recorded. These adjustments related to changes in purchase price based upon key
employee retention rates subsequent to the transaction.
During the first quarter of fiscal 1999, Aironet sold 222,222 shares of its
voting common stock to various third-party investors at a price of $3.50 per
share. The resulting pre-tax net gain of approximately $.3 million was recorded
as other non-operating income in the accompanying consolidated statement of
operations. In addition to the sale of the shares of stock, 66,667 warrants at
$3.50 per share for the purchase of Aironet voting common stock were issued. A
gain of approximately $.05 million relating to these warrants has been deferred
until the warrants are exercised or lapse. The Company's remaining interest in
the voting common stock of Aironet at June 30, 1998, was approximately 76%.
<TABLE>
<CAPTION>
Income Taxes
(in thousands)
Three Months Ended
June 30, Increase
----------------------------------- -----------------------------------
1999 1998 Dollar Percentage
-------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C>
Provision (benefit) for
income taxes $1,692 $ (22) $1,714 N.M.
</TABLE>
The Company's consolidated tax provision of $1.7 million on a pre-tax loss was
due to foreign taxes and taxes related to the Company's Aironet subsidiary of
$1.3 million and $.3 million, respectively. No tax benefit has been recognized
for the first quarter of fiscal 2000 U.S. operating loss based on the
Company's current assessment that it is more likely than not that these
deferred tax assets will not be utilized through future taxable income or
implementation of tax planning strategies.
30
<PAGE> 31
<TABLE>
<CAPTION>
Liquidity
(in thousands, except ratios) Dollar
June 30, March 31, Increase
1999 1999 (Decrease)
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash and cash equivalents $ 26,095 $ 22,459 $ 3,636
Accounts receivable 76,640 84,500 (7,860)
Notes and other receivables 5,687 4,015 1,672
Inventories 121,250 129,049 (7,799)
Other 8,655 9,029 (374)
---------------- ---------------- -----------------
Total current assets $238,327 $249,052 $(10,725)
================ ================ =================
Notes payable $ 63,482 $ 68,567 $ (5,085)
Capital lease obligations 406 525 (119)
Accounts payable 69,036 64,966 4,070
Income taxes payable 9,017 6,434 2,583
Accrued liabilities 80,937 74,285 6,652
---------------- ---------------- -----------------
Total current liabilities $222,878 $214,777 $ 8,101
================ ================ =================
Working capital (current assets
less current liabilities) $ 15,449 $ 34,275 $(18,826)
================ ================ =================
Current ratio (current assets
divided by current liabilities) 1.1 to 1 1.2 to 1
</TABLE>
The decrease in the Company's consolidated working capital at June 30, 1999,
from March 31, 1999, was due primarily to the decrease in accounts receivable
and inventories and the increases in accrued liabilities and accounts payable.
These reductions in working capital were partially offset by increases in cash
and a decrease in the notes payable balance. The decrease in the accounts
receivable balance reflects improved cash collections in the Company's domestic
operations for the month of June, 1999. Accordingly, consolidated days sales
outstanding decreased from 98 days at March 31, 1999 to 72 days at June 30,
1999. The decrease in the Company's inventories related to the Company's
finished goods inventory held at customers as the Company's reserve for sales
returns and allowances was reduced, and revenues related to such goods has been
recognized. Inventories related to manufacturing operations also declined due to
a decrease in the purchase of components for the Company's products. Finished
goods inventories declined primarily due to a large rollout that occurred in
Germany. These decreases were partially offset by an increase in customer
service spare parts inventories. Consolidated inventory turns decreased to
approximately 1.8 at June 30, 1999, from approximately 2.3 at March 31, 1999.
This decrease in inventory turns was primarily caused by the absence of
inventory and other cost of revenues charges that occurred during the fourth
quarter of fiscal 1999. Accrued liabilities increased primarily due to the
increase in deferred hardware revenues as a large retail customer paid for the
Company's products in advance of delivery of such products. Accounts payable
increased as the Company continues to manage its payments to vendors. Notes
payable decreased as the Company repaid amounts outstanding to financial
institutions. These repayments were primarily related to a product financing
arrangement.
31
<PAGE> 32
<TABLE>
<CAPTION>
Cash Flows from Operating Activities
(in thousands) Dollar
Three Months Ended (Decrease)
June 30, Increase
--------------------------------------- in Cash Flow
1999 1998 Impact
---------------- ----------------- --------------------
<S> <C> <C> <C>
Net loss $(16,701) $ (100) $ (16,601)
Depreciation and amortization 6,177 6,233 (56)
Provision for doubtful accounts 1,157 2,431 (1,274)
Provision for inventory obsolescence 1,725 688 1,037
Accounts and notes receivable 5,588 (2,805) 8,393
Gain on sale of subsidiary - (900) 900
Inventories 6,103 (5,707) 11,810
Prepaid expenses and other 7 (1,706) 1,713
Accounts payable and acrued liabilities 13,312 (17,047) 30,359
Other 161 (1,897) 2,058
Net cash provided by (used in)
================ ================= ====================
operating activities $ 17,529 $(20,810) $ 38,339
================ ================= ====================
</TABLE>
The increase in cash flows from the Company's consolidated operating activities
for the first quarter of fiscal 2000 from the corresponding fiscal 1999 period
was primarily due to the increased cash flow impact of accounts payable and
accrued liabilities, inventories, and accounts and notes receivable. These
positive cash flow impacts were partially offset by the increase in the net
loss incurred and decrease in the provision for doubtful accounts.
<TABLE>
<CAPTION>
Cash Flows from Investing Activities
(in thousands)
Three Months Ended Dollar
June 30, Increase
------------------------------------- in Cash Flow
1999 1998 Impact
--------------- ----------------- -------------------
<S> <C> <C> <C>
Additions to property and equipment $(7,845) $ (9,868) $ 2,023
Software and other investments (1,031) (1,178) 147
Purchase of non-marketable investments - (1,950) 1,950
Proceeds from sale of non-marketable
investments 1,523 - 1,523
Other - (608) 608
=============== ================= ===================
Net cash used in investing activities $(7,353) $(13,604) $ 6,251
=============== ================= ===================
</TABLE>
The decrease in cash flows used in investing activities was primarily due to a
decrease in the fixed asset additions for the first quarter of fiscal 2000 as
compared to the first quarter of fiscal 1999. The decrease in fixed asset
additions was primarily the result of the absence of $2.7 million of capital
additions related to the Company's relocation of certain product development and
engineering operations from Akron, Ohio to Houston, Texas. This decrease was
partially offset by a $1.4 million increase in the amount of capitalization of
costs related to the Company's new corporate-wide information systems as this
project nears completion. Capitalized project costs related to the project were
$5.2 million during the first
32
<PAGE> 33
quarter of fiscal 2000 as compared to $3.8 million in the first quarter of
fiscal 1999. Also contributing to the decrease in cash flows used in investing
activities was the absence of purchases of non-marketable investments. Proceeds
from the sale of non-marketable securities occurring during the first quarter of
fiscal 2000 also contributed to the net decrease in cash flows used in investing
activities.
<TABLE>
<CAPTION>
Cash Flows from Financing Activities
(in thousands)
Three Months Ended Dollar
June 30, Decrease
--------------- --------------- in Cash Flow
1999 1998 Impact
--------------- --------------- --------------------
<S> <C> <C> <C>
(Repayments) borrowings on notes
payable, net $(5,085) $22,005 $ (27,090)
Principal payments on capital leases (223) (175) (48)
Costs related to the public offering of
subsidiary (1,179) - (1,179)
Proceeds from exercise of stock options - 584 (584)
=============== =============== ====================
Net cash (used in) provided by
financing activities $(6,487) $22,414 $ (28,901)
=============== =============== ====================
</TABLE>
The decrease in cash flows provided by financing activities was primarily the
result of increased borrowings during the first quarter of fiscal 1999 in order
to meet operating cash flow requirements for that period. There were no similar
borrowings during the first quarter of fiscal 2000 as the Company could not
borrow additional amounts under its existing credit facilities. The Company
repayment of amounts due under product financing arrangements during the
quarter reduced the outstanding notes payable balance.
Subsequent Events
Subsequent to June 30, 1999, the Company's Aironet subsidiary sold 6,000,000
shares of Aironet voting common stock in an initial public offering on the
Nasdaq National Market at an offering price of $11.00 per share. Of the total
number of shares offered, Aironet sold 4,000,000 shares and the Company sold
2,000,000 shares. The aggregate proceeds, net of underwriting discounts and
commissions, were $40.9 million to Aironet and $20.5 million to Telxon.
Subsequent to this transaction the Company's remaining interest in Aironet was
approximately 39%. Prior to the sale of these shares, the Company's interest in
the voting common stock of Aironet was approximately 76%. As a result of this
transaction and the dilution of its voting interest and control of Aironet, the
Company intends to cease consolidation of the results of Aironet.
Subsequent to June 30, 1999, the Company received a commitment letter from a
financial institution to provide a $100.0 million senior secured credit facility
to the Company as a replacement for the Company's existing revolving credit
agreement and business purpose promissory note. Such commitment letter is
subject to conditions precedent and subsequent to closing. Borrowings under the
revolving loan provisions of such facility would be subject to availability on
qualifying accounts receivable and inventory, reduced by amounts borrowed under
the facility's term loan features and amounts outstanding under letters of
credit. Availability under the agreement is estimated to be $71.0 million as of
August 1, 1999. The facility would have three term loan features. The first term
loan would have a limit of $6.0 million, but would be limited to a portion of
the liquidation value of the Company's machinery and equipment. The repayment
terms for this term loan
33
<PAGE> 34
would be straight-line over a 10-year period. The second term loan would have a
limit of $10.0 million and would be limited, together with the $20.0 million
term loan discussed below, by specified percentages of the market value of
Aironet capital stock owned by the Company. The repayment of this term loan
would be straight-line over a 3-year period. The third term loan of $20.0
million would be limited by a specific percentages of the market value of
Aironet capital stock owned by the Company. The repayment term of this loan
would be due the earlier of 120 days from closing or upon any sale of
additional capital stock of Aironet by the Company. The interest rate charged
on the revolving loan, the $6.0 million term loan, and the $20.0 million term
loan would be 2.75% above the Eurodollar rate or 0.5% above the financial
institution's prime lending rate. Interest would be payable monthly. The
interest rate charged would be subject to change based upon the Company's
financial results. The interest rate on the $10.0 million term loan would be
fixed at 12.5%. The facility also would call for the payment of an unused line
fee of 0.375% per annum on a monthly basis. The facility will be collateralized
by substantially all of the Company's assets. Restrictive covenants with
respect to this facility have not yet been determined.
New Accounting Standards
In fiscal 1998, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income, which has been defined as the
change in equity of an entity during a period from transactions and other events
and circumstances from nonowner sources, in the basic financial statements. The
Company was required to adopt the provisions of SFAS No. 130 for the fiscal year
ended March 31, 1999, beginning with the quarter ended June 30, 1998, and to
restate any prior period financial statements included for comparative purposes
to reflect the application of SFAS No. 130. As the adoption of this
pronouncement only modifies disclosures, there is no effect on the Company's
consolidated financial position, results of operations or cash flows.
During fiscal 1998, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 revises the manner in which an entity determines
the operating segments it must report as well as requires the disclosure of
additional segment information. The Company adopted the provisions of SFAS No.
131 for the fiscal year ended March 31, 1999, and has restated prior period
financial statements included for comparative purposes to reflect the
application of SFAS No. 131. As the adoption of this pronouncement only modifies
disclosures, there is no effect on the Company's consolidated financial
position, results of operations or cash flows.
In fiscal 1998, the AICPA issued Statement of Position 97-2, "Software Revenue
Recognition" ("SOP 97-2"). SOP 97-2 provides guidance on the recognition of
revenue for the licensing, selling, leasing and marketing of computer software
to customers. The Company adopted the provisions of SOP 97-2 for the fiscal year
ended March 31, 1999. The adoption of this pronouncement did not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows.
In fiscal 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1").
SOP 98-1 requires the capitalization of certain costs incurred in the
development of software used by a company for its own internal operations. The
Company adopted the provisions of SOP 98-1 for the fiscal year ended March 31,
1999. The adoption of this pronouncement did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
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<PAGE> 35
During fiscal 1999, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company adopted the provisions of SOP 98-5 for the fiscal year ended March 31,
1999. The adoption of this pronouncement did not have a material effect on the
Company's consolidation financial position, results of operations or cash flows.
During fiscal 1999, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 provides accounting and reporting standards for
derivative instruments. This standard will require the Company to recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. The Company is required
to adopt the provisions of SFAS No. 133 during the first quarter of fiscal 2002
(as delayed by Statement of Financial Accounting Standards No. 137 - Deferral of
the Effective Date of FASB Statement No. 133). 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.
35
<PAGE> 36
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
3.1 Restated Certificate of Incorporation of Registrant,
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.
3.2 Amended and Restated By-Laws of Registrant,
incorporated herein by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended March 31,
1999.
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 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.
4.2 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.
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<PAGE> 37
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).
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, as amended, incorporated
herein by reference to Exhibit 10.1.1
to Registrant's Form 10-K for the year
ended March 31, 1999.
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.
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<PAGE> 38
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, 1998.
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 10.1.4
to Registrant's Form 10-Q for the year
ended March 31, 1999.
10.1.4.a Description of
amendments extending
the term of the
Agreement included as
Exhibit 10.1.4 above,
incorporated herein
by reference to
Exhibit 10.1.4.a to
Registrant's Form
10-Q for the quarter
ended September 30,
1998.
10.1.5 1992 Restricted Stock Plan of
Registrant, as amended, incorporated
herein by reference to Exhibit 10.1.5
to Registrant's Form 10-Q for the
quarter ended December 31, 1998.
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.
10.1.7.a Amended and Restated
1996 Stock Option
Plan for employees,
directors and
advisors of Aironet
Wireless
Communications, Inc.,
incorporated herein
by reference to
Exhibit 10.1.7.a to
Registrant's Form
10-K for the year
ended March 31, 1998.
10.1.7.b First Amendment to
Amended and Restated
1996 Stock Option
Plan for employees,
directors and
advisors of Aironet
Wireless
Communications, Inc.,
incorporated herein
by reference to
Exhibit 10.1.7.b to
Registrant's Form
10-K for the year
ended March 31, 1999.
10.1.8 1999 Stock Option Plan for Non-Employee
Directors of Aironet Wireless
Communications, Inc., incorporated
herein by reference to Exhibit 10.1.8
to Registrant's Form 10-K for the year
ended March 31, 1999.
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<PAGE> 39
10.1.9 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.
10.1.10 Employment Agreement between Registrant
and John W. Paxton, Sr., effective as
of March 22, 1999, incorporated herein
by reference to Exhibit 10.1.10 to
Registrant's Form 10-K for the year
ended March 31, 1999.
10.1.11 Employment Agreement between Registrant
and Kenneth A. Cassady, effective as of
June 7, 1999, incorporated herein by
reference to Exhibit 10.1.11 to
Registrant's Form 10-K for the year
ended March 31, 1999.
10.1.12 Employment Agreement between Registrant
and Woody M. McGee, effective as of
June 1, 1999, incorporated herein by
reference to Exhibit 10.1.12 to
Registrant's Form 10-K for the year
ended March 31, 1999.
10.1.13 Amended and Restated Employment
Agreement between Registrant and James
G. Cleveland, 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, 1998.
10.1.14 Amended and Restated Employment
Agreement between Registrant and Danny
R. Wipff, 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, 1998.
10.1.15 Description of Key Employee Retention
Program, incorporated herein by
reference to Exhibit 10.1.15 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.1.15.a Form of letter
agreement made with
key employees
selected under the
retention program
described in Exhibit
10.1.15 above,
incorporated herein
by reference to
Exhibit 10.1.15.a to
Registrant's Form
10-K for the year
ended March 31, 1998.
10.1.16 Employment Agreement, effective as of
April 1, 1997, between Registrant and
Frank E. Brick, a former executive
officer, incorporated herein by
reference to Exhibit 10.1.9 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.1.17 Amended and Restated Employment
Agreement, effective as of April 1,
1997, between Registrant and Kenneth W.
Haver, a former executive officer,
incorporated herein by
39
<PAGE> 40
reference to Exhibit 10.1.11 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.1.18 Amended and Restated Employment
Agreement, effective as of April 1,
1997, between Registrant and David W.
Porter, a former executive officer,
incorporated herein by reference to
Exhibit 10.1.13 to Registrant's Form
10-K for the year ended March 31, 1998.
10.1.19 Letter agreement of Registrant with
Robert A. Goodman, dated as of December
29, 1997 and executed and delivered
January 20, 1998, for continued
consulting services following certain
changes in his law practice,
incorporated herein by reference to
Exhibit 10.1.17 to Registrant's Form
10-K for the year ended March 31, 1998.
10.1.20 Amended and Restated Employment
Agreement between Registrant and
Gerald J. Gabriel, effective as of
April 1, 1997, incorporated herein by
reference to Exhibit 10.1.20 to
Amendment No. 1 on Form 10-K/A to
Registrant's Form 10-K for the year
ended March 31, 1999.
10.1.21 Amended and Restated Employment
Agreement between Registrant and David
D. Loadman, a former executive
officer, incorporated herein by
reference to Exhibit 10.1.12 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.2 Material Leases of Registrant.
10.2.1 Lease between Registrant and 3330 W.
Market Properties, dated as of December
30, 1986, for premises at 3330 West
Market Street, Akron, Ohio,
incorporated herein by reference to
Exhibit 10.2.1 to Registrant's Form
10-K for the year ended March 31, 1999.
10.2.2 Lease Agreement between The Woodlands
Commercial Properties Company, L.P. and
Registrant, made and entered into as of
January 16, 1998, including Rider No. 1
thereto, for premises at 8302 New
Trails Drive, The Woodlands, Texas,
incorporated herein by reference to
Exhibit 10.2.2 to Registrant's Form
10-K for the year ended March 31, 1998.
10.2.3 Standard Office Lease (Modified Net
Lease) between Registrant and John D.
Dellagnese III, dated as of July 19,
1995, for premises at 3875 Embassy
Parkway, Bath, Ohio, 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.
10.2.3.a Second Addendum,
dated as of October
5, 1995, to the Lease
included as Exhibit
10.2.3 above,
incorporated herein
by reference to
Exhibit 10.2.4.a to
Registrant's Form
10-K for the year
ended March 31, 1996.
10.2.3.b Third Addendum, dated
as of March 1, 1996,
to the Lease included
as Exhibit 10.2.3
above, incorporated
herein by reference
to Exhibit 10.2.4.b
to Registrant's Form
10-K for the year
ended March 31, 1996.
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<PAGE> 41
10.2.3.c Fourth Addendum,
dated as of April 16,
1996, to the Lease
included as Exhibit
10.2.3 above,
incorporated herein
by reference to
Exhibit 10.2.2.c to
Registrant's Form
10-Q for the quarter
ended June 30, 1997.
10.2.3.d Fifth Addendum, dated
as of June 24, 1997,
to the Lease included
as Exhibit 10.2.3
above, incorporated
herein by reference
to Exhibit 10.2.2.d
to Registrant's Form
10-Q for the quarter
ended June 30, 1997.
10.2.3.e Sixth Addendum, dated
as of March, 1998, to
the Lease included as
Exhibit 10.2.3 above,
incorporated herein
by reference to
Exhibit 10.2.3.e to
Registrant's Form
10-Q for the quarter
ended September 30,
1998.
10.2.3.f Seventh Addendum,
dated as of July 20,
1998, to the Lease
included as Exhibit
10.2.3 above,
incorporated herein
by reference to
Exhibit 10.2.3.f to
Registrant's Form
10-Q for the quarter
ended September 30,
1998.
10.2.3.g Eighth Addendum,
dated as of September
8, 1998, to the Lease
included as Exhibit
10.2.3 above,
incorporated herein
by reference to
Exhibit 10.2.3.g to
Registrant's Form
10-Q for the quarter
ended September 30,
1998.
10.2.3.h Sublease Agreement,
dated as of
September 1,
1998, between
Registrant and
Aironet Wireless
Communications, Inc.
for the premises
subject to the Lease
included as Exhibit
10.2.3 above, as
amended through the
Eighth Addendum
thereto included as
Exhibit 10.2.3.g
above, incorporated
herein by reference
to Exhibit 10.2.3.h
to Registrant's
Form 10-K for the
year ended March 31,
1999.
10.2.3.i Renewal, dated June
16, 1999, with
respect to the
Sublease Agreement
included as Exhibit
10.2.3.h above,
incorporated herein
by reference to
Exhibit 10.2.3.i to
Registrant's Form
41
<PAGE> 42
10-K for the year
ended March 31, 1999.
10.2.4 Lease Contract between Desarrollos \
Inmobiliarios Paso del Norte, S.A. de
C.V. and Productos y Servicios de
Telxon, S.A. de C.V., a subsidiary of
Registrant, for premises in Ciudad
Juarez, Chihuahua, Mexico, made and
entered into as of April 10, 1997,
incorporated herein by reference to
Exhibit 10.2.4 to Registrant's Form
10-K for the year ended March 31, 1998.
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 Amendment No. 2,
dated as of December
16, 1996, to the
Agreement included as
Exhibit 10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.2.c to
Registrant's Form 8-K
dated December 16,
1996.
10.3.1.c Amendment No. 3,
dated as of December
12, 1997, to the
Agreement included as
Exhibit 10.3.1 above,
included herein by
reference to Exhibit
10.3.1.d to
Registrant's Form
10-K for the year
ended March 31, 1998.
10.3.1.d Waiver and Agreement,
dated as of December
29, 1998, with
respect to the
Agreement included as
Exhibit 10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1.e to
Registrant's Form
10-Q for the quarter
ended December 31,
1998.
10.3.1.e Waiver Extension and
Agreement, dated as
of February 12, 1999,
with respect to the
Agreement included as
Exhibit 10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1.f to
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<PAGE> 43
Registrant's Form
10-Q for the quarter
ended December 31,
1998.
10.3.1.f Second Waiver
Extension Agreement
and Amendment No. 4,
dated as of March 26,
1999, with respect to
the Agreement
included as Exhibit
10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1.a to
Registrant's Form 8-K
dated April 1, 1999.
10.3.1.g Amended and Restated
Security Agreement,
dated as of March
26, 1999, by and
among Registrant and
The Bank of New
York, as Agent for
the Lenders from
time to time party to
the Agreement
included as Exhibit
10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1.b to
Registrant's Form
8-K dated April 1,
1999.
10.3.1.h Deed of Trust,
Assignment of Leases
and Rents, Security
Agreement, Fixture
Filing and Financing
Statement, dated as
of March 26, 1999,
by Registrant to
First American Title
Insurance Company as
Trustee for the
benefit of The Bank
of New York, as
Agent for the
Lenders from time to
time party to the
Agreement included
as Exhibit 10.3.1
above, incorporated
herein by reference
to Exhibit 10..3.1.h
to Registrant's Form
10-K for the year
ended March 31, 1999.
10.3.1.i Patent and Trademark
Security Agreement,
dated as of March 26,
1999, by Registrant
and certain of its
subsidiaries to The
Bank of New York, as
Agent for the
benefit of the
Lenders from time to
time party to the
Agreement included as
Exhibit 10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1 to
Registrant's Form
10-K for the year
ended March 31, 1999.
10.3.1.j Pledge Agreement,
dated as of March 26,
1999, by Registrant
to The Bank of New
York, as Agent for
the benefit of the
Lenders from time to
time party to the
Agreement included as
Exhibit 10.3.1
above, incorporated
herein by reference
to Exhibit 10.3.1.j
to Registrant's Form
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<PAGE> 44
10-K for the year
ended March 31, 1999.
10.3.1.k Third Waiver
Extension Agreement
and Amendment No. 5,
dated as of June 29,
1999, with respect to
the Agreement
included as Exhibit
10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.1.a to
Registrant's Form 8-K
dated July 1, 1999.
10.3.2 Business Purpose Revolving Promissory
Note (Swing Line) made by Registrant in
favor of Bank One, NA , dated August 4,
1998 , incorporated herein by reference
to Exhibit 10.3.4 to Registrant's Form
10-Q for the quarter ended June 30,
1998.
10.3.2.a Consent, dated as of
December 29, 1998,
with respect to the
Note included as
Exhibit 10.3.2 above,
incorporated herein
by reference to
Exhibit 10.3.4.a to
Registrant's Form
10-Q for the quarter
ended December 31,
1998.
10.3.2.b Further Consent,
dated as of February
12, 1999, with
respect to the Note
included as Exhibit
10.3.2 above,
incorporated herein
by reference to
Exhibit 10.3.4.a to
Registrant's Form
10-Q for the quarter
ended December 31,
1998.
10.3.2.c Second Further
Consent and
Agreement, dated as
of March 26, 1999,
with respect to the
Note included as
Exhibit 10.3.2 above,
incorporated herein
by reference to
Exhibit 10.3.4.c b to
Registrant's Form 8-K
dated April 1, 1999.
10.3.2.d Amended and
Restated Security
Agreement, dated as
of March 26, 1999,
by and among
Registrant and Bank
One, NA with respect
to the Note included
as Exhibit 10.3.2
above, incorporated
herein by reference
to Exhibit 10..3.2.d
to Registrant's Form
10-K for the year
ended March 31, 1999.
10.3.2.e Deed of Trust,
Assignment of Leases
and Rents, Security
Agreement, Fixture
Filing and Financing
Statement, dated as
of March 26, 1999,
by Registrant to
First American Title
Insurance Company as
Trustee for the
44
<PAGE> 45
benefit of Bank One,
NA with respect to
the Note included as
Exhibit 10.3.2 above,
incorporated herein
by reference to
Exhibit 10.3.2.e to
Registrant's Form
10-K for the year
ended March 31,
1999..
10.3.2.f Patent and Trademark
Security Agreement,
dated as of March
26, 1999, by
Registrant and
certain of its
subsidiaries to Bank
One, NA with respect
to the Note included
as Exhibit 10.3.2
above, incorporated
herein by reference
to Exhibit 10.3.2.f
to Registrant's Form
10-K for the year
ended March 31, 1999.
10.3.2.g Third Further Consent
and Note Modification
Agreement, dated as
of June 29, 1999,
with respect to the
Note included as
Exhibit 10.3.2 above,
incorporated herein
by reference to
Exhibit 10.3.2.g b to
Registrant's Form 8-K
dated July 1, 1999.
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, 1998.
10.5 License, Rights, and Supply Agreement between Aironet
Wireless Communications, Inc., a subsidiary of
Registrant, and Registrant, dated as of March 31,
1998, incorporated herein by reference to Exhibit
10.5 to Registrant's Form 10-K for the year ended
March 31, 1998.
10.5.1 First Amendment, dated as of March 8,
1996, to the Agreement included as
Exhibit 10.5 above, incorporated
herein by reference to Exhibit 10.5.1
to Registrant's Form 10-K for the year
ended March 31, 1999.
10.6 Asset Purchase Agreement by and among Dynatech
Corporation, IAQ Corporation, Registrant and Itronix
Corporation, then a 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.
10.7 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.
10.8 Stock Purchase Agreement by and among Registrant and
FED Corporation, dated as of March 31, 1998, with
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<PAGE> 46
respect to FED Corporation's purchase of all of the
stock of Virtual Vision, Inc. (fka Vision Newco,
Inc.), incorporated herein by reference to Exhibit
10.7 to Registrant's Form 10-K for the year ended
March 31, 1998.
10.8.1 Escrow Agreement by and among FED
Corporation, Registrant and First Union
National Bank, with respect to the
transactions under the Stock Purchase
Agreement included as Exhibit 10.7
above, incorporated herein by reference
to Exhibit 10.7.1 to Registrant's Form
10-K for the year ended March 31, 1998.
10.9 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.
10.10 Amended and Restated Shareholder Agreement by and
among Metanetics Corporation fka New Meta Licensing
Corporation, and its Shareholders, including the
officers of Registrant party to the Agreement
included as Exhibit 10.8 above, dated as of March 28,
1996, incorporated herein by reference to Exhibit
10.9.3 to Registrant's Form 10-K for the year ended
March 31, 1996.
10.10.1 First Amendment, dated as of March 30,
1996, to the Agreement included as
Exhibit 10.9 above, incorporated herein
by reference to Exhibit 10.9.4 to
Registrant's Form 10-K for the year
ended March 31, 1996.
10.11 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.
10.12 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.
10.13 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.
10.14 Subscription Agreement by and among Aironet Wireless
Communications, Inc., a subsidiary of Registrant, and
the investors who executed the same, dated as of
March 31, 1998, incorporated herein by reference to
Exhibit 10.14 to Registrant's Form 10-K for the year
ended March 31, 1998.
46
<PAGE> 47
10.14.1 Form of Warrant issued pursuant to the
Subscription Agreement included as
Exhibit 10.14 above, incorporated
herein by reference to Exhibit 10.14.1
to Registrant's Form 10-K for the year
ended March 31, 1998.
10.14.2 Stockholders Agreement by and among
Aironet Wireless Communications, Inc.
and its Stockholders party thereto,
including Registrant and the investors
party to the Subscription Agreement
included as Exhibit 10.14 above,
entered into as of March 31, 1998 in
connection with the transactions under
the Subscription Agreement,
incorporated herein by reference to
Exhibit 10.14.2 to Registrant's Form
10-K for the year ended March 31, 1998.
10.14.3 Registration Rights Agreement by and
among Aironet Wireless Communications,
Inc. and certain of its security
holders, including Registrant and the
investors party to the Subscription
Agreement included as Exhibit 10.14
above, entered into as of March 31,
1998 in connection with the
transactions under the Subscription
Agreement, incorporated herein by
reference to Exhibit 10.14.3 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.15 DFS Vendor Agreement between Registrant and Deutsche
Financial Services Corporation, dated as of September
30, 1998, incorporated herein by reference to Exhibit
10.15 to Registrant's Form 10-Q for the quarter ended
December 31, 1998.
27. Financial Data Schedule as of June 30, 1999, filed
herewith.
(b) Reports on Form 8-K
During the first quarter of fiscal 2000 to which this Annual Report on
Form 10-Q relates, the Registrant filed the following Current Reports on Form
8-K: (1) Current Report bearing a cover date of April 1, 1999, attaching
Registrant's press release of that date, announcing the extension of waivers
under Registrant's revolving credit facility and separate business purpose
revolving promissory note, effective through June 29, 1999, and certain related
amendments to the underlying credit agreements, including the broadening of the
lenders' collateral, as well as an approximately 4% reduction in Registrant's
workforce; (2) Current Report bearing a cover date of May 14, 1999, attaching
the press release issued by Registrant's Aironet Wireless Communications, Inc.
subsidiary on that date regarding the filing of a Registration Statement with
the Securities and Exchange Commission for a contemplated initial public
offering of Aironet common stock; (3) Current Report bearing a cover date of
June 16, 1999, attaching the Registrant's press release of that date,
announcing a delay in the release of its financial results for the fourth
quarter, ended March 31, 1999, of its 1999 fiscal year, that it expects a
significant loss for the quarter, including adjustments for the "end-of-life"
and discontinuation of certain products, a further restatement of the
previously released results for its second fiscal quarter ended September 30,
1998 based on a year-end review by Registrant's outside auditors of a customer
lease transaction and progress made by Registrant in the implementation of its
new strategic plan.
Subsequent to the end of the first quarter of fiscal 2000, Registrant
filed the following Current Reports on Form 8-K: (i) Current Report bearing a
cover date of July 1, 1999, attaching Registrant's press release of that date,
announcing the further extension of waivers under Registrant's revolving credit
facility and separate business purpose revolving promissory note, effective
through August 30, 1999, and certain related amendments to the underlying
credit agreements as well as a delay in the filing of the Form 10-K for
Registrant's fiscal year ended March 31, 1999 pending completion of the closing
of the Registrant's fourth fiscal quarter and the annual audit of its fiscal
1999 financial statements; (ii) Current Report bearing a cover date of July 14,
1999, which announced Registrant's financial results for the fourth quarter of
fiscal 1999, and the fiscal year, ended March 31, 1999 (the press release, as
incorporated in the Form 8-K, includes unaudited condensed consolidated balance
sheets for the Registrant for March 31, 1999 and March 31, 1998 and unaudited
condensed consolidated statements of operations for Registrant for the
quarterly and twelve-month periods ended March 31, 1999 and March 31, 1998,
which financial statements give effect to the restatements previously discussed
in the Registrant's February 23, 1999, March 1, 1999 and June 16, 1999 press
releases, each of which have been filed under cover of a form 8-K bearing a
cover date as of the respective press release dates); and (iii) Current Report
bearing a cover date of July 19, 1999, reporting the Company's engagement of
Arthur Andersen LLP to audit the Company's consolidated financial statements
for the fiscal year ending March 31, 2000 and the dismissal of
PricewaterhouseCoopers LLP as the principal accountant to audit the Company's
consolidated financial statements effective upon the completion of the audit of
the Company's consolidated financial statements for the fiscal year ended
March 31, 1999 and the issuance of their report thereon.
47
<PAGE> 48
TELXON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,the
registrant has duly caused this Form 10-Q to be signed and on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1999
TELXON CORPORATION
(Registrant)
/s/ Woody M. McGee
-----------------------
Woody M. McGee,
Vice President and Chief
Financial Officer
48
<PAGE> 49
TELXON CORPORATION
EXHIBITS
TO
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
<PAGE> 50
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Where
Filed
- -----
<S> <C> <C>
* 3.1 Restated Certificate of Incorporation of Registrant, 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.
* 3.2 Amended and Restated By-Laws of Registrant, as amended, incorporated herein by
reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended March
31, 1999.
* 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 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.
* 4.2 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
</TABLE>
<PAGE> 51
<TABLE>
<S> <C>
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).
* 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, as amended, incorporated herein
by reference to Exhibit 10.1.1 to Registrant's Form 10-K for the
year ended March 31, 1999.
* 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.
</TABLE>
<PAGE> 52
* 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, 1998.
* 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
10.1.4 to Registrant's Form 10-K for the year ended
March 31, 1999.
* 10.1.4.a Description of amendments extending the term
of the Agreement included as Exhibit 10.1.4
above, incorporated herein by reference to
Exhibit 10.1.4.a to Registrant's Form 10-Q
for the quarter ended September 30, 1998.
* 10.1.5 1992 Restricted Stock Plan of Registrant, as amended,
incorporated herein by reference to Exhibit 10.1.5 to
Registrant's Form 10-Q for the quarter ended December
31, 1998.
* 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.
* 10.1.7.a Amended and Restated 1996 Stock Option Plan
for employees, directors and advisors of
Aironet Wireless Communications, Inc.,
incorporated herein by reference to Exhibit
10.1.7.a to Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.7.b First Amendment to Amended and Restated 1996
Stock Option Plan for employees, directors
and advisors of Aironet Wireless
Communications, Inc., incorporated herein by
reference to Exhibit 10.1.7.b to
Registrant's Form 10-K for the year ended
March 31, 1999.
* 10.1.8 1999 Stock Option Plan for Non-Employee Directors of
Aironet Wireless Communications, Inc., incorporated
herein by reference to Exhibit 10.1.8 to
Registrant's Form 10-K for the year ended
March 31, 1999.
* 10.1.9 Non-Competition Agreement by and between Registrant
and Robert F. Meyerson, effective
<PAGE> 53
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.
* 10.1.10 Employment Agreement between Registrant and John
W. Paxton, Sr., effective as of March 22, 1999,
incorporated herein by reference to Exhibit
10.1.10 to Registrant's Form 10-K for the year
ended March 31, 1999.
* 10.1.11 Employment Agreement between Registrant and
Kenneth A. Cassady, effective as of June 7, 1999,
incorporated herein by reference to Exhibit
10.1.11 to Registrant's Form 10-K for the year
ended March 31, 1999.
* 10.1.12 Employment Agreement between Registrant and Woody
M. McGee, effective as of June 1, 1999,
incorporated herein by reference to Exhibit
10.1.12 to Registrant's Form 10-K for the year
ended March 31, 1999.
* 10.1.13 Amended and Restated Employment Agreement between
Registrant and James G. Cleveland, 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, 1998.
* 10.1.14 Amended and Restated Employment Agreement between
Registrant and Danny R. Wipff, 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, 1998.
* 10.1.15 Description of Key Employee Retention Program,
incorporated herein by reference to Exhibit
10.1.15 to Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.1.15.a Form of letter agreement made with key
employees selected under the retention
program described in Exhibit 10.1.15
above, incorporated herein by reference
to Exhibit 10.1.15.a to Registrant's
Form 10-K for the year ended March 31,
1998.
* 10.1.16 Employment Agreement, effective as of April 1,
1997, between Registrant and Frank E. Brick, a
former executive officer, incorporated herein by
reference to Exhibit 10.1.9 to Registrant's Form
10-K for the year ended March 31, 1998.
* 10.1.17 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between Registrant
and Kenneth W. Haver, a former executive officer,
incorporated herein by reference to Exhibit
10.1.11 to Registrant's Form 10-K for the year
ended March 31, 1998.
<PAGE> 54
* 10.1.18 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between Registrant
and David W. Porter, a former executive officer,
incorporated herein by reference to Exhibit
10.1.13 to Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.1.19 Letter agreement of Registrant with Robert A.
Goodman, dated as of December 29, 1997 and
executed and delivered January 20, 1998, for
continued consulting services following certain
changes in his law practice, incorporated herein
by reference to Exhibit 10.1.17 to Registrant's
Form 10-K for the year ended March 31, 1998.
* 10.1.20 Amended and Restated Employment Agreement
between Registrant and Gerald J. Gabriel,
effective as of April 1, 1997, incorporated
herein by reference to Exhibit 10.1.20 to
Amendment No. 1 on Form 10-K/A to Registrant's
Form 10-K for the year ended March 31, 1999.
* 10.1.21 Amended and Restated Employment Agreement
between Registrant and David D. Loadman, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.12 to Registrant's
Form 10-K for the year ended March 31, 1998.
10.2 Material Leases of Registrant.
* 10.2.1 Lease between Registrant and 3330 W. Market
Properties, dated as of December 30, 1986, for
premises at 3330 West Market Street, Akron, Ohio,
incorporated herein by reference to Exhibit 10.2.1
to Registrant's Form 10-K for the year ended March
31, 1999.
* 10.2.2 Lease Agreement between The Woodlands Commercial
Properties Company, L.P. and Registrant, made and
entered into as of January 16, 1998, including
Rider No. 1 thereto, for premises at 8302 New
Trails Drive, The Woodlands, Texas, incorporated
herein by reference to Exhibit 10.2.2 to
Registrant's Form 10-K for the year ended March
31, 1998.
* 10.2.3 Standard Office Lease (Modified Net Lease) between
Registrant and John D. Dellagnese III, dated as of
July 19, 1995, for premises at 3875 Embassy
Parkway, Bath, Ohio, 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.
* 10.2.3.a Second Addendum, dated as of October 5,
1995, to the Lease included as Exhibit
10.2.3 above, incorporated herein by
reference to Exhibit 10.2.4.a to
Registrant's Form 10-K for the year
ended March 31, 1996.
* 10.2.3.b Third Addendum, dated as of March 1,
1996, to the Lease included as Exhibit
10.2.3 above, incorporated herein by
reference to Exhibit 10.2.4.b to
Registrant's Form 10-K for the year
ended March 31, 1996.
* 10.2.3.c Fourth Addendum, dated as of April 16,
1996, to the Lease included as Exhibit
10.2.3 above, incorporated herein by
<PAGE> 55
reference to Exhibit 10.2.2.c to
Registrant's Form 10-Q for the quarter
ended June 30, 1997.
* 10.2.3.d Fifth Addendum, dated as of June 24,
1997, to the Lease included as
Exhibit 10.2.3 above, incorporated
herein by reference to Exhibit 10.2.2.d
to Registrant's Form 10-Q for the
quarter ended June 30, 1997.
* 10.2.3.e Sixth Addendum, dated as of March,
1998, to the Lease included as Exhibit
10.2.3 above, incorporated herein by
reference to Exhibit 10.2.3.e to
Registrant's Form 10-Q for the quarter
ended September 30, 1998.
* 10.2.3.f Seventh Addendum, dated as of July 20,
1998, to the Lease included as Exhibit
10.2.3 above, incorporated herein by
reference to Exhibit 10.2.3.f to
Registrant's Form 10-Q for the quarter
ended September 30, 1998.
* 10.2.3.g Eighth Addendum, dated as of September
8, 1998, to the Lease included as
Exhibit 10.2.3 above, incorporated
herein by reference to Exhibit 10.2.3.g
to Registrant's Form 10-Q for the
quarter ended September 30, 1998.
* 10.2.3.h Sublease Agreement, dated as of
September 1, 1998, between Registrant
and Aironet Wireless Communications,
Inc. for the premises subject to the
Lease included as Exhibit 10.2.3 above,
as amended through the Eighth
Addendum thereto included as Exhibit
10.2.3.g above, incorporated herein by
reference to Exhibit 10.2.3.h to
Registrant's Form 10-K for the year
ended March 31, 1999.
* 10.2.3.i Renewal, dated June 16, 1999, with
respect to the Sublease Agreement
included as Exhibit 10.2.3.h above,
incorporated herein by reference to
Exhibit 10.2.3.i to Registrant's Form
10-K for the year ended March 31, 1999.
<PAGE> 56
* 10.2.4 Lease Contract between Desarrollos \ Inmobiliarios
Paso del Norte, S.A. de C.V. and Productos y
Servicios de Telxon, S.A. de C.V., a subsidiary of
Registrant, for premises in Ciudad Juarez,
Chihuahua, Mexico, made and entered into as of
April 10, 1997, incorporated herein by reference
to Exhibit 10.2.4 to Registrant's Form 10-K for
the year ended March 31, 1998.
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 Amendment No. 2, dated as of December
16, 1996, to the Agreement included as
Exhibit 10.3.1 above, incorporated
herein by reference to Exhibit 10.3.2.c
to Registrant's Form 8-K dated December
16, 1996.
* 10.3.1.c Amendment No. 3, dated as of December
12, 1997, to the Agreement included as
Exhibit 10.3.1 above, included herein by
reference to Exhibit 10.3.1.d to
Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.3.1.d Waiver and Agreement, dated as of
December 29, 1998, with respect to the
Agreement included as Exhibit 10.3.1
above, incorporated herein by reference
to Exhibit 10.3.1.e to Registrant's Form
10-Q for the quarter ended December 31,
1998.
* 10.3.1.e Waiver Extension and Agreement, dated as
of February 12, 1999, with respect to
the Agreement included as Exhibit 10.3.1
above, incorporated herein by reference
to Exhibit 10.3.1.f to Registrant's Form
10-Q for the quarter ended December 31,
1998.
<PAGE> 57
* 10.3.1.f Second Waiver Extension Agreement and
Amendment No. 4, dated as of March 26,
1999, with respect to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference to
Exhibit 10.3.1.a to Registrant's Form
8-K dated April 1, 1999.
* 10.3.1.g Amended and Restated Security Agreement,
dated as of March 26, 1999, by and among
Registrant and The Bank of New York, as
Agent for the Lenders from time to time
party to the Agreement included as
Exhibit 10.3.1 above, incorporated
herein by reference to Exhibit 10.3.1.b
to Registrant's Form 8-K dated April 1,
1999.
* 10.3.1.h Deed of Trust, Assignment of Leases and
Rents, Security Agreement, Fixture
Filing and Financing Statement, dated as
of March 26, 1999, by Registrant to
First American Title Insurance Company
as Trustee for the benefit of The Bank
of New York, as Agent for the Lenders
from time to time party to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference to
Exhibit 10.3.1.h to Registrant's Form
10-K for the year ended March 31, 1999.
* 10.3.1.i Patent and Trademark Security Agreement,
dated as of March 26, 1999, by
Registrant and certain of its
subsidiaries to The Bank of New York, as
Agent for the benefit of the Lenders
from time to time party to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference to
Exhibit 10.3.1.i to Registrant's Form
10-K for the year ended March 31, 1999.
* 10.3.1.j Pledge Agreement, dated as of March 26,
1999, by Registrant to The Bank of New
York, as Agent for the benefit of the
Lenders from time to time party to the
Agreement included as Exhibit 10.3.1
above, incorporated herein by reference
to Exhibit 10.3.1.j to Registrant's Form
10-K for the year ended March 31, 1999.
<PAGE> 58
* 10.3.1.k Third Waiver Extension Agreement and Amendment No.
5, dated as of June 29, 1999, with respect to the
Agreement included as Exhibit 10.3.1 above,
incorporated herein by reference to Exhibit
10.3.1.a to Registrant's Form 8-K dated July 1,
1999.
* 10.3.2 Business Purpose Revolving Promissory Note (Swing Line) made
by Registrant in favor of Bank One, NA , dated August 4,
1998 , incorporated herein by reference to Exhibit 10.3.4 to
Registrant's Form 10-Q for the quarter ended June 30, 1998.
* 10.3.2.a Consent, dated as of December 29, 1998, with
respect to the Note included as Exhibit 10.3.2
above, incorporated herein by reference to Exhibit
10.3.4.a to Registrant's Form 10-Q for the quarter
ended December 31, 1998.
* 10.3.2.b Further Consent, dated as of February 12, 1999,
with respect to the Note included as Exhibit
10.3.2 above, incorporated herein by reference to
Exhibit 10.3.4.a to Registrant's Form 10-Q for the
quarter ended December 31, 1998.
* 10.3.2.c Second Further Consent and Agreement, dated as of
March 26, 1999, with respect to the Note included
as Exhibit 10.3.2 above, incorporated herein by
reference to Exhibit 10.3.4.c b to Registrant's
Form 8-K dated April 1, 1999.
* 10.3.2.d Amended and Restated Security Agreement, dated as
of March 26, 1999, by and among Registrant and
Bank One, NA with respect to the Note included as
Exhibit 10.3.2 above, incorporated herein by
reference to Exhibit 10.3.2.d to Registrant's Form
10-K for the year ended March 31, 1999.
* 10.3.2.e Deed of Trust, Assignment of Leases and Rents,
Security Agreement, Fixture Filing and Financing
Statement, dated as of March 26, 1999, by
Registrant to First American Title Insurance
Company as Trustee for the benefit of Bank One, NA
with respect to the Note included as Exhibit
10.3.2 above,
<PAGE> 59
incorporated herein by reference to
Exhibit 10.3.2.e to Registrant's Form
10-K for the year ended March 31, 1999.
* 10.3.2.f Patent and Trademark Security Agreement,
dated as of March 26, 1999, by
Registrant and certain of its
subsidiaries to Bank One, NA with
respect to the Note included as Exhibit
10.3.2 above, incorporated herein by
reference to Exhibit 10.3.2.f to
Registrant's Form 10-K for the year
ended March 31, 1999.
* 10.3.2.g Third Further Consent and Note
Modification Agreement, dated as of June
29, 1999, with respect to the Note
included as Exhibit 10.3.2 above,
incorporated herein by reference to
Exhibit 10.3.2.g b to Registrant's Form
8-K dated July 1, 1999.
* 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, 1998.
* 10.5 License, Rights, and Supply Agreement between Aironet
Wireless Communications, Inc., a subsidiary of Registrant,
and Registrant, dated as of March 31, 1998, incorporated
herein by reference to Exhibit 10.5 to Registrant's Form
10-K for the year ended March 31, 1998.
* 10.5.1 First Amendment, dated as of March 8, 1996, to the
Agreement included as Exhibit 10.5 above,
incorporated herein by reference to Exhibit 10.5.1
to Registrant's Form 10-K for the year ended March
31, 1999.
* 10.6 Asset Purchase Agreement by and among Dynatech Corporation,
IAQ Corporation, Registrant and Itronix Corporation, then a
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.
* 10.7 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.
* 10.8 Stock Purchase Agreement by and among Registrant and FED
Corporation, dated as of March 31, 1998, with respect to FED
Corporation's purchase of all of the
<PAGE> 60
stock of Virtual Vision, Inc. (fka Vision Newco, Inc.),
incorporated herein by reference to Exhibit 10.7 to
Registrant's Form 10-K for the year ended March 31, 1998.
* 10.8.1 Escrow Agreement by and among FED Corporation,
Registrant and First Union National Bank, with
respect to the transactions under the Stock
Purchase Agreement included as Exhibit 10.7 above,
incorporated herein by reference to Exhibit 10.7.1
to Registrant's Form 10-K for the year ended March
31, 1998.
* 10.9 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.
* 10.10 Amended and Restated Shareholder Agreement by and among
Metanetics Corporation fka New Meta Licensing Corporation,
and its Shareholders, including the officers of Registrant
party to the Agreement included as Exhibit 10.8 above, dated
as of March 28, 1996, incorporated herein by reference to
Exhibit 10.9.3 to Registrant's Form 10-K for the year ended
March 31, 1996.
* 10.10.1 First Amendment, dated as of March 30, 1996, to
the Agreement included as Exhibit 10.9 above,
incorporated herein by reference to Exhibit 10.9.4
to Registrant's Form 10-K for the year ended March
31, 1996.
* 10.11 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.
* 10.12 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.
* 10.13 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.
* 10.14 Subscription Agreement by and among Aironet Wireless
Communications, Inc., a subsidiary of Registrant, and the
investors who executed the same, dated as of March 31, 1998,
incorporated herein by reference to Exhibit 10.14 to
Registrant's Form 10-K for the year ended March 31, 1998.
<PAGE> 61
* 10.14.1 Form of Warrant issued pursuant to the
Subscription Agreement included as
Exhibit 10.14 above, incorporated herein
by reference to Exhibit 10.14.1 to
Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.14.2 Stockholders Agreement by and among
Aironet Wireless Communications, Inc.
and its Stockholders party thereto,
including Registrant and the investors
party to the Subscription Agreement
included as Exhibit 10.14 above, entered
into as of March 31, 1998 in connection
with the transactions under the
Subscription Agreement, incorporated
herein by reference to Exhibit 10.14.2
to Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.14.3 Registration Rights Agreement by and
among Aironet Wireless Communications,
Inc. and certain of its security
holders, including Registrant and the
investors party to the Subscription
Agreement included as Exhibit 10.14
above, entered into as of March 31, 1998
in connection with the transactions
under the Subscription Agreement,
incorporated herein by reference to
Exhibit 10.14.3 to Registrant's Form
10-K for the year ended March 31, 1998.
* 10.15 DFS Vendor Agreement between Registrant and
Deutsche Financial Services Corporation, dated as
of September 30, 1998, incorporated herein by
reference to Exhibit 10.15 to Registrant's Form
10-Q for the quarter ended December 31, 1998.
** 27. Financial Data Schedule as of June 30, 1999, filed
herewith.
- -------------------------------
* Previously filed
** Filed herewith
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