<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO __________
COMMISSION FILE NUMBER 0-11402
TELXON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-1666060
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3330 WEST MARKET STREET, AKRON, OHIO 44333
(Address of principal executive offices) (Zip Code)
(330) 664-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[ ]. No[ X*].
* The registrant was unable timely to file a complete Form 10-Q for the
quarterly period ended December 31, 1998 for the reason described in the
opening paragraph of this Form 10-Q/A.
At December 31, 1998, there were 16,126,382 outstanding shares of the
Registrant's $.01 par value Common Stock.
<PAGE> 2
This Amendment No. 1 on Form 10-Q/A (this "Amendment") supersedes in its
entirety the Form 10-Q filed by Telxon Corporation ("Telxon" or the
"Registrant", and together with its subsidiaries, the "Company") on February 16,
1999 (the "Original Filing"), except that the exhibits filed with Original
Filing shall continue to be included as part of the Registrant's Form 10-Q
filing for the subject period as amended by this Amendment. This Amendment
includes the disclosures consisting of or based upon the Registrant's financial
statements for the subject period that are responsive to Item 1 of Part I and
the substantial majority of Item 2 of Part II of Form 10-Q, which disclosures
had been omitted from the Original Filing due to the unavailability of the
Registrant's financial statements for the subject period at the time for the
filing of the Original Filing. Additionally, the disclosures responsive to the
non-financial portions of Form 10-Q included in the Original Filing have been
updated from the Original Filing and are restated in full in this Amendment.
TELXON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1: Consolidated Financial Statements
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-17
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-31
PART II. OTHER INFORMATION:
Item 1: Legal Proceedings 32
Item 6: Exhibits and Reports on Form 8-K 32-39
All Items of Form 10-Q other than those listed above have been omitted as
inapplicable.
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
---- ----
(Unaudited) (Unaudited
and As
Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash (including cash equivalents of $10,000 and $6,778) $ 30,057 $ 27,500
Accounts receivable, net of allowance for doubtful
accounts of $9,581 and $4,749 114,507 121,932
Notes and other accounts receivable 13,044 16,532
Inventories 125,450 109,935
Prepaid expenses and other 13,344 16,084
-------- --------
Total current assets 296,402 291,983
Property and equipment, net 67,911 53,969
Intangibles and other assets, net 38,715 35,296
-------- --------
Total $403,028 $381,248
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 70,614 $ 3,000
Capital lease obligations due within one year 710 968
Accounts payable 59,993 58,634
Income taxes payable 2,493 3,466
Accrued liabilities 39,693 41,988
-------- --------
Total current liabilities 173,503 108,056
Capital lease obligations 1,822 1,876
Convertible subordinated notes and debentures 106,913 107,224
Other long-term liabilities 11,011 6,867
-------- --------
Total liabilities 293,249 224,023
Minority interest 3,076 2,791
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 and 16,219 shares issued 162 162
Additional paid-in capital 88,123 87,489
Retained earnings 25,164 75,267
Equity adjustment for foreign currency translation (4,360) (4,929)
Unearned compensation relating to restricted
stock awards (292) (493)
Treasury stock; 108 and 162 shares of common stock
at cost (2,094) (3,062)
-------- --------
Total stockholders' equity 106,703 154,434
-------- --------
Commitments and contingencies -- --
-------- --------
Total $403,028 $381,248
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
(As Restated) (As Restated)
<S> <C> <C> <C> <C>
Revenues:
Product, net $ 76,393 $ 97,581 $ 255,975 $ 274,528
Customer service, net 20,016 19,835 62,222 57,239
---------- ---------- ---------- ----------
Total net revenues 96,409 117,416 318,197 331,767
Cost of revenues:
Product 57,446 57,066 169,388 163,684
Customer service 14,047 12,249 40,375 35,711
---------- ---------- ---------- ----------
Total cost of revenues 71,493 69,315 209,763 199,395
---------- ---------- ---------- ----------
Gross profit 24,916 48,101 108,434 132,372
Operating expenses:
Selling expenses 22,828 20,791 67,699 59,727
Product development and
engineering expenses 10,670 9,876 29,107 28,527
General and administrative expenses 13,610 9,662 33,541 29,030
---------- ---------- ---------- ----------
Total operating expenses before
other operating items 47,108 40,329 130,347 117,284
Other operating items:
Unconsummated business combination
costs 4,491 -- 8,070 --
Asset impairment charge -- 1,434 -- 1,434
---------- ---------- ---------- ----------
Total other operating items 4,491 1,434 8,070 1,434
---------- ---------- ---------- ----------
(Loss) income from operations (26,683) 6,338 (29,983) 13,654
Interest income 226 340 569 1,258
Interest expense (2,499) (1,752) (6,829) (5,355)
Other non-operating (expense)
income, net (238) (160) 1,025 (324)
---------- ---------- ---------- ----------
(Loss) income before income
taxes and cumulative effect
of an accounting change (29,194) 4,766 (35,218) 9,233
Provision for income taxes 16,659 2,280 14,784 4,484
---------- ---------- ---------- ----------
Net (loss) income before
cumulative effect of
accounting change (45,853) 2,486 (50,002) 4,749
Cumulative effect of accounting change,
net of taxes -- 1,240 -- 1,240
---------- ---------- ---------- ----------
Net (loss) income $ (45,853) $ 1,246 $ (50,002) $ 3,509
========== ========== ========== ==========
Net (loss) income per common share before
accounting change:
Basic $ (2.86) $ .16 $ (3.11) $ .30
========== ========== ========== ==========
Diluted $ (2.86) $ .15 $ (3.11) $ .29
========== ========== ========== ==========
Cumulative effect of accounting change:
Basic $ -- $ .08 $ -- $ .08
========== ========== ========== ==========
Diluted $ -- $ .08 $ -- $ .08
========== ========== ========== ==========
Net (loss) income per common share:
Basic $ (2.86) $ .08 $ (3.11) $ .22
========== ========== ========== ==========
Diluted $ (2.86) $ .08 $ (3.11) $ .22
========== ========== ========== ==========
Average number of common shares outstanding:
Basic 16,048 15,685 16,101 15,742
========== ========== ========== ==========
Diluted 16,048 16,262 16,101 16,189
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
------------
1998 1997
---- ----
(As Restated)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(50,002) $ 3,509
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change -- 2,176
Depreciation and amortization 19,622 19,826
Amortization of restricted stock awards, net 201 148
Provision for doubtful accounts 5,249 2,639
Provision for inventory obsolescence 6,787 5,157
Gain on sale of assets (900) --
Loss on disposal of property and equipment 255 825
Asset impairment charges -- 1,434
Minority interest 416 --
Changes in assets and liabilities:
Accounts and notes receivable 13,110 (10,364)
Inventories (22,045) (22,399)
Prepaid expenses and other 3,372 (3,073)
Intangibles and other assets 2,806 (1,985)
Accounts payable and accrued liabilities (836) (8,008)
Other long-term liabilities 4,012 (554)
------- -------
Total adjustments 32,049 (14,178)
------- -------
Net cash used in operating activities (17,953) (10,669)
Cash flows from investing activities:
Additions to property and equipment (26,538) (19,157)
Software and other investments (4,792) (3,172)
Proceeds from the sale of property and equipment -- 866
Proceeds from the sale of non-marketable investments -- 1,033
Purchase of non-marketable investments (1,950) (5,500)
Payments from long-term notes receivable 929 --
Additions to long-term notes receivable (795) (140)
-------- ------
Net cash used in investing activities (33,146) (26,070)
Cash flows from financing activities:
Borrowings on notes payable, net 53,526 2,949
Principal payments on capital leases (589) (479)
Purchase of treasury stock (1,088) (4,928)
Debt issue costs paid (302) (25)
Proceeds from exercise of stock options (includes tax
benefit) 1,793 6,958
------- -------
Net cash provided by financing activities 53,340 4,475
Effect of exchange rate changes on cash 316 (339)
------- -------
Net increase (decrease) in cash and cash equivalents 2,557 (32,603)
Cash and cash equivalents at beginning of period 27,500 45,386
------- -------
Cash and cash equivalents at end of period $30,057 $12,783
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
1. Management Representation
The consolidated financial statements of Telxon Corporation ("Telxon")
and its subsidiaries (collectively with Telxon, the "Company") have
been prepared without audit 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 nine months ended December 31, 1998, are not necessarily
indicative of the results that may be achieved for the year ending
March 31, 1999. The statements, including the unaudited March 31, 1998,
balance sheet data, 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, as amended by Amendments No. 1 and No. 2 on Form
10-K/A, for the fiscal year ended March 31, 1998, subject to a further
amendment on Form 10-K/A to be filed to reflect the restatement matters
discussed in Note 2 - Restatement below.
2. Restatement
On February 23, 1999, the Company announced that, having completed the
review of certain judgmental accounting matters with the Company's
outside auditors previously reported in the Company's January 27, 1999
press release, it would be restating its audited financial statements
for fiscal years 1996, 1997 and 1998 and its unaudited interim
financial statements for the first and second quarters of fiscal 1999.
The accompanying financial statements reflect the announced
restatement, subject to the finalization of the financial statements
for the prior periods affected by the restatement. The more significant
restatement adjustments affecting the periods covered by the
accompanying financial statements are described below.
Product revenue of $14,100 and related cost of product revenue of
$6,800 associated with a product financing arrangement recorded during
the three months ended September 30, 1998, have been reversed as the
criteria for revenue recognition had not fully been satisfied. Such
product revenue and related cost of product revenue will be recognized
upon sell-through to the end-user customer. As of December 31, 1998,
approximately $8,100 of revenue remained deferred as the subject
product had not been sold-through to end-user customers and was held in
the distributor's inventory. Additionally, certain software license
revenue of $2,000 recognized during the three months ended September
30, 1998 has also been deferred as certain contingencies related to the
customer's acceptance of such software had not been satisfied as of the
date of these financial statements. During the three months ended June
30, 1998 and the six months ended September 30, 1998, the Company has
increased its product sales returns reserves by $3,964 and $4,725,
respectively, to better reflect the levels of product returns in the
Company's value-added distribution channel. The Company has also
capitalized $1,950 previously expensed during the three months ended
June 30, 1998, related to the repurchase of the common stock of its
Metanetics Corporation subsidiary ("Metanetics") from a business
partner, resulting in goodwill to be amortized over a useful life of
three years. Adjustments have also been made to increase the Company's
provision for the past due accounts receivable related to a certain
foreign distributor as bad debt expense. Such adjustments totaled
$2,200 and $1,000 for the three months ended June 30, 1998 and
September 30, 1998, respectively. 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
("Virtual Vision"), 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 statement of operations for the three and nine months ended
December 31, 1997 has been restated to reflect additional provisions of
$700 and $2,600, respectively, for the past due accounts receivable
owed by the foreign distributor referenced above. Certain software
license revenues and software royalties accrued related to a previously
divested software operation of a net $300 and $500 for the three and
nine months ended December 31, 1997, respectively, have been reversed
to defer recognition of such items until those transactions are settled
in cash. Additionally, severance amounts of $300 and $600 related to
the Company's international operations for the three and nine months
ended December 31, 1997, respectively, have been expensed that
previously were improperly accrued as restructuring charges during the
three months ended December 31, 1996. The settlement of certain
contingencies related to the divestiture of the Company's Itronix
6
<PAGE> 7
Corporation subsidiary ("Itronix") approximating $400 have been
expensed during the three months ended December 31, 1997.
The results for the three months ended December 31, 1997 have also been
adjusted to reflect a $1,400 asset impairment of the Company's equity
investment in the referenced foreign distributor.
A summary of the effects of the restatement on the Company's statements
of operations for the three months ended June 30 and September 30, 1998
and 1997 and the nine months ended December 31, 1997 follows. Also
presented below is a summary of the effects of the restatement on the
consolidated balance sheet as of March 31, 1998 (in thousands, except
per share data):
7
<PAGE> 8
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Three Months
Ended June 30, 1998 Ended June 30, 1997
(Unaudited)
----------------------------------------------------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenues:
Product, net $ 94,077 $ 90,192 $ 86,691 $ 86,000
Customer service, net 20,970 20,970 18,222 18,222
---------------- ---------------- ---------------- ----------------
Total net revenues 115,047 111,162 104,913 104,222
Cost of revenues:
Product 57,310 54,473 52,561 52,097
Customer service 12,826 12,826 11,126 11,126
---------------- ---------------- ---------------- ----------------
Total cost of revenues 70,136 67,299 63,687 63,223
---------------- ---------------- ---------------- ----------------
Gross profit 44,911 43,863 41,226 40,999
Operating expenses:
Selling expenses 21,361 23,542 18,100 20,310
Product development and
engineering expenses 8,930 9,014 9,126 9,126
General & administrative
expenses 9,436 9,506 9,703 9,525
---------------- ---------------- ---------------- ----------------
Total operating expenses
before other operating
items 39,727 42,062 36,929 38,961
Other operating items:
Unconsummated business
combination costs 1,749 1,749 -- --
Charge related to
transactions with
business partner 1,950 -- -- --
---------------- ---------------- ---------------- ----------------
Total other operating items 3,699 1,749 -- --
Income from operations 1,485 52 4,297 2,038
Interest income 179 179 498 498
Interest expense (1,713) (1,713) (1,792) (1,792)
Other non-operating income
(expense) 460 1,360 (157) (157)
---------------- ---------------- ---------------- ----------------
Income (loss) before income
taxes 411 (122) 2,846 587
Provision (benefit) for
income taxes 165 (22) 1,252 461
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 246 $ (100) $ 1,594 $ 126
================ ================ ================ ================
Net income (loss) per
common share:
Basic $ 0.02 $ (0.01) $ 0.10 $ 0.01
================ ================ ================ ================
Diluted $ 0.01 $ (0.01) $ 0.10 $ 0.01
================ ================ ================ ================
Average number of common
shares outstanding:
Basic 16,080 16,080 15,524 15,524
Diluted 16,938 16,080 15,792 15,792
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Three Months
Ended September 30, 1998 Ended September 30, 1997
(Unaudited)
----------------------------------------------------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenues:
Product, net $ 103,133 $ 89,390 $ 91,138 $ 90,947
Customer service, net 21,236 21,236 19,182 19,182
--------------- --------------- --------------- ---------------
Total net revenues 124,369 110,626 110,320 110,129
Cost of revenues:
Product 62,411 57,469 54,276 54,521
Customer service 13,502 13,502 12,336 12,336
--------------- --------------- --------------- ---------------
Total cost of revenues 75,913 70,971 66,612 66,857
--------------- --------------- --------------- ---------------
Gross profit 48,456 39,655 43,708 43,272
Operating expenses:
Selling expenses 20,317 21,329 18,677 18,626
Product development and
engineering expenses 9,261 9,423 9,525 9,525
General & administrative
expenses 10,425 10,425 9,843 9,843
--------------- --------------- --------------- ---------------
Total operating expenses
before other operating
item 40,003 41,177 38,045 37,994
Other operating item:
Unconsummated business
combination costs 1,830 1,830 -- --
--------------- --------------- --------------- ---------------
Total other operating item 1,830 1,830 -- --
Income from operations 6,623 (3,352) 5,663 5,278
Interest income 164 164 420 420
Interest expense (2,617) (2,617) (1,811) (1,811)
Other non-operating expense -- (97) (7) (7)
--------------- --------------- --------------- ---------------
Income (loss) before income
taxes 4,170 (5,902) 4,265 3,880
Provision (benefit) for
income taxes 1,672 (1,853) 1,877 1,742
--------------- --------------- --------------- ---------------
Net income (loss) $ 2,498 $ (4,049) $ 2,388 $ 2,138
=============== =============== =============== ===============
Net income (loss) per
common share:
Basic $ 0.16 $ (0.25) $ 0.15 $ 0.14
=============== =============== =============== ===============
Diluted $ 0.15 $ (0.25) $ 0.15 $ 0.13
=============== =============== =============== ===============
Average number of common
shares outstanding:
Basic 16,075 16,075 15,772 15,772
Diluted 16,578 16,075 16,273 16,273
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Nine Months
Ended December 31, 1997 Ended December 31, 1997
(Unaudited)
----------------------------------------------------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Revenues:
Product, net $ 97,472 $ 97,581 $ 275,302 $ 274,528
Customer service, net 19,835 19,835 57,239 57,239
--------------- --------------- --------------- ---------------
Total net revenues 117,307 117,416 332,541 331,767
Cost of revenues:
Product 56,482 57,066 163,319 163,684
Customer service 12,249 12,249 35,711 35,711
--------------- --------------- --------------- ---------------
Total cost of revenues 68,731 69,315 199,030 199,395
--------------- --------------- --------------- ---------------
Gross profit 48,576 48,101 133,511 132,372
Operating expenses:
Selling expenses 19,821 20,791 56,598 59,727
Product development and
engineering expenses 9,876 9,876 28,526 28,527
General & administrative
expenses 9,662 9,662 29,210 29,030
--------------- --------------- --------------- ---------------
Total operating expenses
before other operating
item 39,359 40,329 114,334 117,284
Other operating item:
Asset impairment charge -- 1,434 -- 1,434
--------------- --------------- --------------- ---------------
Total other operating item -- 1,434 -- 1,434
Income from operations 9,217 6,338 19,177 13,654
Interest income 340 340 1,257 1,258
Interest expense (1,752) (1,752) (5,354) (5,355)
Other non-operating
expense (160) (160) (325) (324)
--------------- --------------- --------------- ---------------
Income before income taxes
and cumulative effect of
an accounting change 7,645 4,766 14,755 9,233
Provision for income taxes 3,288 2,280 6,416 4,484
--------------- --------------- --------------- ---------------
Income before cumulative
effect of accounting
change 4,357 2,486 8,339 4,749
Cumulative effect of
accounting change, net of
taxes 1,240 1,240 1,240 1,240
--------------- --------------- --------------- ---------------
Net income $ 3,117 $ 1,246 $ 7,099 $ 3,509
=============== =============== =============== ===============
Net income per common share
before accounting change:
Basic $ 0.28 $ 0.16 $ .53 $ 0.30
=============== =============== =============== ===============
Diluted $ 0.27 $ 0.15 $ .52 $ 0.29
=============== =============== =============== ===============
Cumulative effect of
accounting change:
Basic $ 0.08 $ 0.08 $ .08 $ 0.08
=============== =============== =============== ===============
Diluted $ 0.08 $ 0.08 $ .08 $ 0.08
=============== =============== =============== ===============
Net income per common share:
Basic $ 0.20 $ 0.08 $ .45 $ 0.22
=============== =============== =============== ===============
Diluted $ 0.19 $ 0.08 $ .44 $ 0.22
=============== =============== =============== ===============
Average number of common shares
outstanding:
Basic 15,685 15,685 15,742 15,742
Diluted 16,262 16,262 16,189 16,189
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Fiscal Year
Ended March 31, 1998
(Unaudited)
-----------------------------------
As
Previously As
Reported Restated
<S> <C> <C>
ASSETS
Current assets:
Cash $ 27,500 $ 27,500
Accounts receivable, net of allowance for
doubtful accounts of $1,142 and $4,749 125,739 121,932
Notes and other accounts receivable 22,949 16,532
Inventories 108,178 109,935
Prepaid expenses and other 11,307 16,084
--------------- ---------------
Total current assets 295,673 291,983
Property and equipment, net 52,108 53,969
Intangible and other assets, net 42,758 35,296
--------------- ---------------
Total $ 390,539 $ 381,248
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,000 $ 3,000
Capital lease obligations due within one year 968 968
Accounts payable 58,634 58,634
Income taxes payable 3,390 3,466
Accrued liabilities 41,034 41,988
--------------- ---------------
Total current liabilities 107,026 108,056
Capital lease obligations 1,876 1,876
Convertible subordinated debentures 107,224 107,224
Other long-term liabilities 6,897 6,867
--------------- ---------------
Total liabilities 223,023 224,023
Minority interest 2,791 2,791
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, 16,219 issued 162 162
Additional paid-in capital 87,994 87,489
Retained earnings 85,053 75,267
Equity adjustment for foreign currency translation (4,929) (4,929)
Unearned compensation relating to restricted stock
awards (493) (493)
Treasury stock; 162 shares of common stock at cost (3,062) (3,062)
--------------- ---------------
Total stockholders' equity 164,725 154,434
Commitments and contingencies -- --
--------------- ---------------
Total $ 390,539 $ 381,248
=============== ===============
</TABLE>
3. 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 income represents the numerator, and the
shares represent the denominator, in the earnings per share
calculation.
11
<PAGE> 12
<TABLE>
<CAPTION>
For the Three Months Ended For the Three Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(45,853) $ 1,246
======== ========
BASIC EPS
Income available to common
stockholders $(45,853) 16,048 $ (2.86) $ 1,246 15,685 $ .08
======== ======== ======== ========
EFFECT OF DILUTIVE SECURITIES
Options -- 620
-------- --------
DILUTED EPS
Income available to stockholders
of common shares and common
stock equivalents $(45,853) 16,048 $ (2.86) $ 1,246 16,305 $ .08
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months Ended For The Nine Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(50,002) $ 3,509
======== ========
BASIC EPS
Income available to common
stockholders $(50,002) 16,101 $ (3.11) $ 3,509 15,809 $ .22
======== ======== ======== ========
EFFECT OF DILUTIVE SECURITIES
Options -- 438
-------- --------
DILUTED EPS
Income available to stockholders
of common shares and common
stock equivalents $(50,002) 16,101 $ (3.11) $ 3,509 16,247 $ .22
======== ======== ======== ======== ======== ========
</TABLE>
Options to purchase 3,198,753 shares of common stock at a weighted
average exercise price of $17.94 per share were outstanding at December
31, 1998, but were not included in the computation of diluted earnings
per share for the three and nine months ended December 31, 1998 because
the options would have had an anti-dilutive effect on the net loss for
the periods then ended.
Options to purchase 312,550 shares of common stock at an exercise price
of $25.31 per share were outstanding at December 31, 1997, but were not
included in the computation of diluted earnings per share for the three
months then ended because the options' exercise price was greater than
the average market price for the common shares during the period.
Additionally, options to purchase 775,051 shares of common stock at a
weighted average exercise price of $23.82 per share were outstanding
at December 31, 1997, but were not included in the computation of
diluted earnings per share for the nine months then ended because the
options' exercise price was greater than the average market price for
the common shares during 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 December 31, 1998 and 1997, would have had an
anti-dilutive effect on earnings for the three and nine months then
ended.
4. Comprehensive Income
Total comprehensive income consisted of the following:
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
------------
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Net (loss) income $(50,002) $ 3,509
Other comprehensive income (expense):
Foreign Currency Translation Adjustment 569 (1,886)
-------- --------
Total comprehensive (loss) income $(49,433) $ 1,623
======== ========
</TABLE>
12
<PAGE> 13
5. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---- ----
(Unaudited) (Unaudited and
As Restated)
<S> <C> <C>
Purchased components $ 68,316 $ 49,514
Work-in-process 25,659 37,375
Finished goods 31,475 23,046
-------- --------
$125,450 $109,935
======== ========
</TABLE>
6. Accrued Liabilities
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---- ----
(Unaudited) (Unaudited and
As Restated)
<S> <C> <C>
Deferred customer service revenues $13,270 $13,448
Accrued payroll and other employee compensation 7,751 12,353
Other accrued liabilities 18,672 16,187
------- -------
$39,693 $41,988
======= =======
</TABLE>
7. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine Months
Ended
December 31,
------------
1998 1997
---- ----
(Unaudited) (Unaudited and
As Restated)
<S> <C> <C>
Cash paid during the period for:
Interest $8,946 $4,694
Income taxes 5,506 5,502
</TABLE>
The $5,049 decrease in current deferred tax assets and the $5,620
decrease in non-current deferred tax assets during the nine months
ended December 31, 1998, have been included in the cash flow impact of
the changes in prepaid expenses and other long-term liabilities,
respectively, in the accompanying consolidated statement of cash
flows. The $1,934 increase in current deferred tax assets during the
nine months ended December 31, 1997, has been included in the cash
flow impact of the change in prepaid expenses in the accompanying
consolidated statement of cash flows.
Capital lease additions of $276 and $1,819 during the nine months ended
December 31, 1998 and 1997, respectively, have been excluded from the
accompanying consolidated statement of cash flows as non-cash
transactions.
The Company's re-issuance of treasury stock during the first nine
months of fiscal 1999 and 1998 to satisfy purchases made by employees
through the Company's 1995 Employee Stock Purchase Plan have been
excluded from the accompanying consolidated statement of cash flows as
non-cash transactions. See Note 11 - Other Debt and Equity Transactions
for further details on the fiscal 1999 re-issuance.
8. 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 his brief in opposition to the Motion on May 2, 1994, and the
defendants filed a final responsive brief. The Motion was argued before
the Court on March 29, 1995, and on July 18, 1995, the Court issued its
ruling. The Court dismissed all of the claims relating to the
plaintiff's allegations of corporate waste; 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
13
<PAGE> 14
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 defendant in the
case. The post-intervention claims are the subject of ongoing
discovery, and no deadline for the completion of the discovery 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 17, 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 8, 1999 has been reset
to commence on a day during the Court's two week docket beginning
October 25, 1999, with the specific trial date to be set by the Court
at that time. If 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 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.
In December 1998 and January and February 1999, a total of 26 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,
14
<PAGE> 15
who purchased stock during the period May 8, 1998 and January 27, 1999
or various portions thereof. The named defendants are the Company,
President and Chief Executive Officer Frank E. Brick, and Senior Vice
President and Chief Financial Officer Kenneth W. Haver. On February 9,
1999, the plaintiffs filed a Motion to Consolidate all of the actions.
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. Each complaint seeks certification of its purported class,
unspecified compensatory damages, interest, 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 a subpoena duces tecum was served
on the Company on February 11, 1999 requiring the production of
specified documents. The Company has delivered documents to, and
intends to continue cooperating fully with, the Staff.
On February 1, 1999, Telxon filed a Complaint in the United States
District Court, Northern District of Ohio, against Symbol alleging
claims for (i) violation of the Lanham Act, (ii) violation of Ohio's
Unfair Business Practices Statute, (iii) product disparagement, and
(iv) tortious interference with business relationships and contracts.
Each of the Company's claims are based upon false and misleading
statements allegedly made in the marketplace by Symbol, the Company's
primary competitor, which are damaging to Telxon. The Company is
seeking preliminary and permanent injunctive relief and compensatory
damages, punitive damages, and attorneys' fees in amounts to be
determined at trial.
On February 24, 1999, Symbol filed an Answer and Counterclaim to
Telxon's February 1, 1999 Complaint. Symbol's Answer denies the
allegations in Telxon's Complaint, and Symbol's Counterclaim alleges a
single count for fraud in the inducement, related to Symbol's alleged
exploration of a business combination with the Company. Symbol seeks
compensatory damages of not less than $3,000, punitive damages, and
reasonable attorneys' fees in amounts to be determined at trial. The
Company's Response to Symbol's Counterclaim is due on March 17, 1999.
Telxon believes that Symbol's claim lacks merit, and it intends to
vigorously defend the counterclaim.
Also on February 24, 1999, Symbol filed (i) a Motion to Strike from the
February 1, 1999 Complaint the allegations related to a previous
lawsuit by Telxon against Symbol based on unfair business practices by
Symbol, in which judgment for injunctive relief in favor of Telxon was
entered against Symbol, and (ii) a Motion to Dismiss from the Complaint
the claims against Symbol for product disparagement and for tortious
interference with business relationships and contracts, based on
allegations that Telxon fails to state a cause of action as to those
matters. Telxon believes that these motions lack merit, and it intends
to vigorously oppose these motions. Telxon's response to these motions
is due on March 11, 1999.
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.
9. Income Taxes
The Company's consolidated provision for income taxes for the three and
nine months ended December 31, 1998 reflects the valuation allowance
established for the
15
<PAGE> 16
Company's inability to utilize domestic net operating loss benefits.
The consolidated provision for income taxes was also increased by
non-deductible goodwill amortization and foreign tax rate
differentials. As of December 31, 1998, the Company had fully reserved
for its $16,966 domestic net deferred tax assets based on its current
assessment regarding the utilization of such assets.
10. Subsidiary Stock Transactions
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 agreements. The
Company had 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 2 - Restatement above and based, in part,
on an independent valuation of Metanetics, the Company has capitalized
this additional investment as goodwill for the nine months ended
December 31, 1998, 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 December 31, 1998.
During the three months ended June 30, 1998, the Company's Aironet
Wireless Communications, Inc. ("Aironet") subsidiary, a developer,
manufacturer, and marketer of wireless LAN systems, 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 December 31, 1998, was 76%.
During the three months ended June 30, 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 FED Corporation at a
value of $6.00 per share or 750,000 shares. The Company recorded a
pre-tax gain of $900 as non-operating income in the accompanying
consolidated statement of operations.
11. Other Debt and Equity Transactions
In September 1998, the Company entered into a product financing
arrangement with a commercial finance institution under which
$14,100 was advanced to one of the Company's value-added distributors.
The financing agreement called for the payment of various
administrative and advance fees by the Company as well as interest
payable at the financial institution's prime lending rate minus .15%.
As of December 31, 1998, the entire advanced amount remained
outstanding and was recorded as a note payable in the accompanying
consolidated balance sheet. The interest rate on this financing
agreement was the financial institution's prime lending rate plus 2.5%
as of December 31, 1998. Repayment of the advance by the Company is due
March 26, 1999.
During the three months ended June 30, 1998, $311 in aggregate
principal amount of the Company's 7-1/2% Convertible Subordinated
Debentures were surrendered for conversion into 11,621 shares of the
Company's Common Stock, $.01 par value per share. The surrendered
Convertible Subordinated Debentures have been canceled effective as of
their conversion into common stock.
During the first nine months of fiscal 1999, the Company repurchased
63,300 shares of its common stock, at a weighted average price of
$17.19 per share, pursuant to its open market repurchase program.
During the first nine months of fiscal 1999, the Company re-issued
94,234 shares of treasury stock, at a weighted average cost of $21.82
per share, to satisfy options exercised under the Company's stock
option plans. Additionally, the Company re-issued 23,775 shares of
treasury stock, at a weighted average cost of $14.88, during the first
nine months of fiscal 1999 to satisfy purchases made by employees
through the Company's 1995 Employee Stock Purchase Plan.
16
<PAGE> 17
12. Bank Waivers
The Company has obtained waivers with respect to its revolving credit
facility from the group of eight lending banks for certain covenant
violations arising from the restatement described in Note 2 -
Restatement above or the Company's financial results for the quarter
ended December 31, 1998. Effective through March 26, 1999, the waiver
included the covenants requiring the Company to maintain specified
leverage, current asset, net worth and fixed charge coverage ratios.
Additionally, pursuant to the credit facility agreement, the Company
elected in December 1998 to reduce the available maximum credit
facility from $100,000 to $75,000 in order to reduce financing costs.
Then, in February 1999, as part of the most recent of the waivers noted
above, the bank group further reduced the permitted borrowing amount to
the lesser of $55,000 (the amount then, and which continues to be,
outstanding under the facility) or the sum of eligible accounts
receivable and inventory as included in the Company's borrowing base.
Contemporaneously with the above waivers, the Company also obtained
waivers under its separate $20,000 business purpose revolving
promissory note with one of the banks in the above bank group. This
note incorporates the same covenants as apply under the revolving
credit facility, which the bank also waived with respect to the
business purpose revolving promissory note through March 26, 1999.
Approximately $4,000 was at December 31, 1998, and continues to
be, outstanding under the note, and the Company is not able to make any
further borrowings thereunder.
In connection with the above waivers, the lenders under both the
revolving credit facility and the business purpose revolving promissory
note 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.
13. Subsequent Events
Subsequent to December 31, 1998, the Company re-issued 29,224 shares
of treasury stock, at a weighted average cost of $22.98 per share,
to satisfy purchases made by employees through its 1995 Employee
Stock Purchase Plan.
17
<PAGE> 18
TELXON CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL
FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS
REGARDING CERTAIN TRENDS OR OF OTHER FORWARD-LOOKING INFORMATION CONCERNING THE
COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES OR OTHERWISE
AFFECTING OR RELATING TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE
PROTECTIONS AFFORDED "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS
MADE HEREIN AND ELSEWHERE IN THIS FORM 10-Q/A ARE INHERENTLY SUBJECT TO RISKS
AND UNCERTAINTIES, WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE SUMMARY OF CERTAIN OF THE
RISKS AND OTHER IMPORTANT FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL AND OTHER CONDITION UNDER "FACTORS THAT MAY
AFFECT FUTURE RESULTS" BELOW SHOULD BE READ IN CONJUNCTION WITH THE MORE
COMPLETE DISCUSSION OF THOSE AND OTHER RISKS AND IMPORTANT FACTORS AFFECTING THE
BUSINESS, OPERATING RESULTS AND CONDITION OF THE COMPANY UNDER "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION - FACTORS THAT MAY AFFECT FUTURE RESULTS", AND OTHER CAUTIONARY
STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND ELSEWHERE, IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K, AS AMENDED BY AMENDMENTS NO. 1 AND NO. 2 ON FORM
10-K/A, FOR THE FISCAL YEAR ENDED MARCH 31, 1998.
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 outside auditors,
PricewaterhouseCoopers LLP. See Note 2 - 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 2 - Restatement to
the accompanying consolidated financial statements. The Company plans to file
appropriate amended Forms 10-K and 10-Q reflecting the restatement for fiscal
years 1996, 1997 and 1998, the first, second and third quarters of each of
fiscal years 1997 and 1998 and the first and second quarters of fiscal 1999 as
expeditiously as practicable over the coming weeks, and the financial
information presented in this Form 10-Q/A remains subject to the finalization
of the restated financial statements for those prior periods.
OVERVIEW
The Company recorded net losses of $45.9 million or $2.86 per common share
(diluted) and $50.0 million or $3.11 per common share (diluted) for the third
quarter and first nine months of fiscal 1999, respectively. In comparison, the
Company recorded net income of $1.2 million or $.08 per common share (diluted)
and $3.5 million or $.22 per common share (diluted) for the third quarter and
first nine months of fiscal 1998, respectively. The results of the third quarter
and first nine months of fiscal 1999 include charges of $4.5 million and $8.1
million, respectively, for costs incurred in response to takeover and proxy
contest proposals and terminated discussions of proposed business combination
transactions. Third quarter and first nine months of fiscal 1998 results include
an asset impairment charge of $1.4 million related to the reduction of the
carrying value of the Company's equity investment in a foreign distributor. As
stated when the Company announced the restatement, the Company anticipates that
it will incur a loss for the fourth quarter of fiscal 1999 and that it will post
a net loss for fiscal 1999. The Company continues to review all aspects of its
operations to improve profitability, which could result in one-time charges in
the fourth quarter of fiscal 1999.
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/A, 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
18
<PAGE> 19
the Company's control: general and industry-specific economic conditions; the
identification and implementation of appropriate cost reduction, efficiency and
other operating improvement strategies; the continued adequacy of the Company's
internal and external sources of working capital; sales and manufacturing cycles
from quarter to quarter and within each quarter; serving markets characterized
by increasingly rapid technological change and associated changes in market
demand and product obsolescence and by price erosion; intense competition; the
Company's ability to gain and maintain market acceptance of its products; the
levels of customer demand for the Company's products and of 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 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;
risks associated with foreign sales and operations, including the possible
affects of the adoption of the "euro"; 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. In addition to
being subject to the foregoing factors and other cautionary statements elsewhere
in this Form 10-Q/A, the Company's conduct of its business and the results and
condition thereof are also subject to the possible adverse effects of certain
pending litigation and other contingencies discussed in Note 8 Litigation and
Contingencies to the accompanying consolidated financial statements included in
Item 1 above.
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.
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 is working with outside contractors to develop and
install 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
19
<PAGE> 20
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; and services help desk and contract billing.
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 order entry, manufacturing, product repair and
service management, engineering documents management, and accounts receivable
systems. The installation of these complex systems, comprising a substantial
portion of the overall new systems installation, are expected to be
substantially completed during the first quarter of fiscal 2000, though one to
four additional months of work may be required in order to achieve full user
acceptance.
The total capital expenditures for the new systems installation, including the
addition of interfaces for "bolt-on" enhancements, is presently estimated to be
approximately $28.0 million. In addition, the company will also accelerate the
replacement of approximately $2.4 million of computer hardware in connection
with the new systems installation. As of December 31, 1998, the Company had
spent approximately $22.6 million in capital expenditures, purchased $.5 million
of replacement computer hardware and leased an additional $1.0 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 $1.75 million.
In addition to these capitalized expenditures, the Company had incurred
approximately $2.9 million of non-capitalizable expenses as of December 31, 1998
related to the new systems installation. These non-capitalizable expenses
exclude the one-time, after-tax charge of $1.2 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 of an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation". The Company estimates that it may incur an
additional $1.4 million in non-capitalizable expenses in connection with the
completion of the initial installation of the new systems.
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. The consultant's findings and recommendations were
received by the Company on February 8, 1999 and are being reviewed and will be
acted upon by the Company team overseeing the study, which includes senior
management from each of the affected functional areas. 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 are readily available, making that the most likely means of addressing
any remediation needs identified by the consultant. The estimated cost of the
study is immaterial, but until the results of the consultant's study and any
follow-on analyses the company may undertake at the consultant's recommendation
are evaluated by the Company, 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 limited internal resources available, and the increasing
demand for available 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
20
<PAGE> 21
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 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 such as the Company 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 adversely 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 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
REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, INCREASE/(DECREASE)
------------ -------------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenues:
Product, net $76,393 $ 97,581 $(21,188) (21.7)%
Customer service, net 20,016 19,835 181 0.9%
------- -------- --------
Total net revenues $96,409 $117,416 $(21,007) (17.9)%
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, INCREASE/(DECREASE)
------------ -------------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Revenues:
Product, net $255,975 $274,528 $(18,553) (6.8)%
Customer service, net 62,222 57,239 4,983 8.7%
-------- -------- -------
Total net revenues $318,197 $331,767 $(13,570) (4.1)%
======== ======== ========
</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.
21
<PAGE> 22
The decrease in consolidated product revenues during the third quarter of fiscal
1999 from fiscal 1998 levels primarily reflects the absence in the current
quarter of a sale of approximately $30.0 million to a major domestic retail
customer recorded in the third quarter of fiscal 1998. Additionally, third
quarter fiscal 1999 consolidated product revenues were lower than expected due
to the unanticipated cancellation of a $13.0 million order to a large domestic
logistics company in early December 1998 and by the unexpected delay in the
roll-out of two large retail projects totaling $18.0 million. Consolidated
product revenues for the third quarter of fiscal 1999 were also negatively
impacted by a $5.4 million increase in the amounts provided for domestic product
sales returns, necessitated by an increase in the Company's historical product
return experience and specific product return issues, particularly with the
Company's value-added distributors. However, an increase in domestic unit
volumes, adjusted for the $30.0 million prior year transaction, and a $3.2
million increase in International product revenues, driven primarily by higher
Canadian subsidiary and foreign distributor sales, served to partially offset
the overall reduction in consolidated product revenues between the two periods.
Similarly, consolidated product revenues for the first nine months of fiscal
1999 were negatively impacted by the absence of the $30.0 million prior year
sale to a major domestic retail customer, a $11.7 million increase in domestic
product returns and a $11.5 million increase in the amounts provided for
domestic product sales returns. The increase in the domestic product sales
return reserves was necessitated by an increase in the Company's historical
product return experience and specific product return issues, particularly in
the Company's value-added distribution channel. Consolidated product revenues
for the first nine months of fiscal 1999 were also lower due to the
unanticipated cancellation of a $13.0 million order to a large domestic
logistics company in early December 1998 and by the unexpected delay in the
roll-out of two large retail projects totaling $18.0 million. An increase in
domestic unit volumes, adjusted for the $30.0 million prior year transaction,
and a $5.8 million increase in International product revenues, due primarily to
higher Canadian and European subsidiaries and foreign distributor sales, served
to partially offset the overall reduction in consolidated product revenues
between the two periods.
The Company expects consolidated product revenue for the fourth quarter of
fiscal 1999 to be higher than the levels experienced during the third quarter of
fiscal 1999. However, it is anticipated that consolidated product revenues for
the fourth quarter of fiscal 1999 will be less than those in the fourth quarter
of fiscal 1998.
The increase in consolidated customer service revenues during the first nine
months of fiscal 1999 from fiscal 1998 levels was primarily the result of the
continued growth of the installed base of the Company's products.
The Company anticipates that fourth quarter fiscal 1999 customer services
revenues will be slightly greater than those recorded during the third quarter
of fiscal 1999.
Revenues from the Company's international operations (including Canada)
increased $3.7 million or 12.1% and $7.5 million or 8.2% in the third quarter
and first nine months of fiscal 1999, respectively, from fiscal 1998 levels.
This increase was attributable primarily to the increased revenues recorded by
the Company's European and Canadian subsidiaries as well as increased sales to
foreign distributors. The European Economic and Monetary Union and a new
currency, the "euro," began in Europe on January 1, 1999. As the Company
operates in certain of these countries, the adoption of the euro may have an
impact on its financial results. While the Company's initial assessment is that
the adoption of the euro will not have a material adverse affect on the Company,
the Company will continue to monitor trends, issues and events related to the
adoption of the euro and their potential impact on the Company and its financial
results and operations.
22
<PAGE> 23
COST OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, INCREASE
------------ --------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of Revenues:
Product $57,446 $57,066 $ 380 0.7%
Customer service 14,047 12,249 1,798 14.7%
------ ------- ------
Total cost of revenues $71,493 $69,315 $2,178 3.1%
======= ======= ======
Cost of product revenues as a
percentage of product revenues,
net 75.2% 58.5%
Cost of customer service revenues
as a percentage of customer
service revenues, net 70.2% 61.8%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, INCREASE
------------ --------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of Revenues:
Product $169,388 $163,684 $ 5,704 3.5%
Customer service 40,375 35,711 4,664 13.1%
-------- -------- -------
Total cost of revenues $209,763 $199,395 $10,368 5.2%
======== ======== =======
Cost of product revenues as a
percentage of product revenues,
net 66.2% 59.6%
Cost of customer service revenues
as a percentage of customer
service revenues, net 64.9% 62.4%
</TABLE>
Consolidated product gross margin decreased to 24.8% in the third quarter of
fiscal 1999 from 41.5% in the third quarter of fiscal 1998. The decrease in
consolidated product gross margin between the two periods was due, in part, to
the absence in the current quarter of the approximately $30.0 million sale to a
major domestic retail customer recorded in the third quarter of fiscal 1998,
which increased that period's consolidated product gross margin by approximately
5.2%. Consolidated product gross margin was also negatively impacted by
increased costs in the Company's value-added distribution channel, a $1.8
million increase in domestic inventory provisions and a $1.4 million increase in
manufacturing expenses due to lower than expected volumes.
Additionally, consolidated product gross margin for the first nine months of
fiscal 1999 decreased to 33.8% from 40.4% for the first nine months of fiscal
1998. The decrease in consolidated product gross margin between the two periods
was due, in part, to a general increase in domestic manufacturing expenses
during fiscal 1999 that was not offset by an increase in average selling price.
Year-to-date fiscal 1999 consolidated product gross margin was also lower than
comparable fiscal 1998 levels because of the absence in the current fiscal year
of the approximately $30.0 million sale to a major domestic retail customer
recorded during the first nine months of fiscal 1998, which increased that
period's consolidated product gross margin by approximately 1.6%. Consolidated
product gross margin for the first nine months of fiscal 1999 was also
negatively impacted by increased costs in the Company's value-added distribution
channel, a $1.6 million increase in inventory provisions and a $1.6 million
increase in product warranty reserves over fiscal 1998 levels.
The Company expects continued consolidated product gross margin pressures for
the fourth quarter of fiscal 1999. While the Company does anticipate
improvements in the consolidated product gross margin from third quarter fiscal
1999 levels primarily reflecting anticipated increased sales volumes, the fourth
quarter fiscal 1999 consolidated product gross margin is expected to be below
fourth quarter fiscal 1998 levels.
Consolidated customer service gross margin decreased to 29.8% in the third
quarter of fiscal 1999 from 38.2% in the third quarter of fiscal 1998.
Additionally, consolidated customer service margin for the first nine months of
fiscal 1999 decreased to 35.1% from 37.6% during the same period in fiscal 1998.
The decrease in consolidated customer service
23
<PAGE> 24
gross margin in both the third quarter and first nine months of fiscal 1999
from comparable fiscal 1998 levels was primarily the result of the higher costs
associated with servicing the Company's increasingly complex units that were not
entirely offset by increases in maintenance and repair revenues.
The Company expects fourth quarter fiscal 1999 consolidated customer service
gross margin to remain consistent with third quarter fiscal 1999 gross margin
levels.
At December 31, 1998, consolidated inventory allowance accounts increased to
$15.6 million from $11.7 million at March 31, 1998. As a percentage of
consolidated gross inventories, the Company's consolidated inventory allowances
increased to 11.0% at December 31, 1998, from 9.6% at March 31, 1998. The
increase in consolidated inventory allowance accounts during the first nine
months of fiscal 1999 represents the Company's provision for obsolescence as
well as provisions related to the Company's remanufacturing operations and test
equipment held by customers. The Company anticipates continuing to provide for
inventory obsolescence resulting from technological change.
OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, INCREASE/(DECREASE)
------------ -------------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Expenses:
Selling expenses $22,828 $20,791 $ 2,037 9.8%
Product development and
engineering expenses 10,670 9,876 794 8.0%
General and administrative
expenses 13,610 9,662 3,948 40.9%
------- ------ -------
Total operating expenses before
other operating items $47,108 $40,329 $ 6,779 16.8%
======= ======= =======
Other operating items:
Unconsummated business combination
costs $4,491 $ -- $4,491 N.M.
Asset impairment charge -- 1,434 (1,434) (100.0)%
------ ------- --------
Total other operating items $4,491 $ 1,434 $3,057 213.2%
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, INCREASE/DECREASE
------------ -----------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Expenses:
Selling expenses $ 67,699 $ 59,727 $ 7,972 13.3%
Product development and
engineering expenses 29,107 28,527 580 2.0%
General and administrative
expenses 33,541 29,030 4,511 15.5%
-------- -------- -------
Total operating expenses before
other operating items $130,347 $117,284 $13,063 11.1%
======== ======== =======
Other operating items:
Unconsummated business combination
costs $8,070 $ -- $ 8,070 N.M.
Asset impairment charge -- 1,434 (1,434) (100.0)%
------ ------ -------
Total other operating items $8,070 $1,434 $ 6,636 462.8%
====== ====== =======
</TABLE>
Consolidated selling expenses as a percentage of consolidated total revenues
increased to 23.7% in the third quarter of fiscal 1999 from 17.7% in the third
quarter of fiscal 1998. Additionally, selling expenses as a percentage of
consolidated total revenues increased to 21.3% in the first nine months of
fiscal 1999 from 18.0% in the first nine months of fiscal 1998. The increase in
consolidated selling expenses for the third quarter and first nine months of
fiscal 1999 from comparable fiscal 1998 levels was due primarily to the
Company's increased investment in personnel and resources as well as increased
expenditures relating to its value-added distribution channel. Consolidated
selling expenses for the third quarter and first nine months of fiscal 1999 were
also negatively impacted by $.8 million and $2.4 million increases,
respectively, in provisions for doubtful customer accounts over comparable
fiscal 1998 levels. The total provision for doubtful accounts for the third
quarter and first nine months of fiscal 1999 include $.4 million and $3.6
million, respectively, related to the past due accounts receivable of a foreign
distributor. The Company recorded provisions of $.7 million and $2.6 million,
respectively, during the third
24
<PAGE> 25
quarter and first nine months of fiscal 1998 for the past due accounts
receivable of the referenced foreign distributor.
The Company expects fourth quarter fiscal 1999 consolidated selling expenses
(excluding the impact of bad debt write-offs or recoveries related to the
referenced foreign distributor) to be comparable to third quarter fiscal 1999
levels.
Consolidated product development and engineering expenses for the third quarter
and first nine months of fiscal 1999 reflect an increase in domestic product
development and engineering expenses from comparable fiscal 1998 levels,
partially offset by the absence of the engineering costs of the Company's former
Virtual Vision, Inc. subsidiary ("Virtual Vision") sold in the first quarter of
fiscal 1999. Included in the Company's consolidated third quarter and first nine
months of fiscal 1998 results were $.7 million and $1.9 million, respectively,
of product development and engineering expenses incurred by Virtual Vision. The
increase in domestic product development and engineering expenses was due
primarily to the Company's increased utilization of external professional
services in its development of new products as well as higher material costs.
These increases were partially offset by a decrease in internal personnel
expenses. Third quarter and first nine months of fiscal 1999 consolidated
product development and engineering expenses also reflect an increase in the
engineering costs incurred by the Company's Aironet Wireless Communications,
Inc. subsidiary ("Aironet"), a developer, manufacturer and marketer of wireless
LAN systems.
The Company expects fourth quarter fiscal 1999 consolidated product development
and engineering expenses to be comparable to third quarter fiscal 1999 levels.
During the first nine months of fiscal 1999, 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 $4.4 million.
The capitalization of these costs were offset by amortization of $5.6 million on
previously unamortized software.
The Company anticipates the dollar amount of internal software development costs
capitalized during the remainder of fiscal 1999 to be lower than the comparable
fiscal 1998 levels.
The increase in consolidated general and administrative expenses during the
third quarter and first nine months of fiscal 1999 from comparable fiscal 1998
levels was due primarily to increased external professional services costs as
well as higher costs associated with the Company's installation of its new
corporate-wide information systems. During the third quarter and first nine
months of fiscal 1999, the Company expensed $1.2 million and $2.4 million,
respectively, of costs associated with the installation of these new systems. In
comparison, the Company expensed costs of $.2 million and $.4 million,
respectively, during the third quarter and first nine months of fiscal 1998 for
the installation of these new systems. Also included in the consolidated general
and administrative expenses for the third quarter of fiscal 1999 is an
approximately $1.3 million charge related to the purchase of an interest in a
joint venture in the People's Republic of China licensing technology from the
Company's Metanetics Corporation subsidiary ("Metanetics"). As the entity
purchased was a development stage enterprise with no operations, the amount of
the purchase has been expensed as start-up costs in the current period.
The Company anticipates that general and administrative expenses (excluding any
one-time charges) for the fourth quarter of fiscal 1999 will be comparable or
slightly lower than third quarter of fiscal 1999 levels.
During the first nine months of fiscal 1999 the Company incurred costs in
response to an unsolicited takeover proposal in the first quarter and to
a proxy contest initiated by a stockholder of the Company late in the first
quarter which was settled during the second quarter. During the third quarter
of fiscal 1999, the Company also incurred costs relating to discussions of
proposed business combination transactions which have been terminated. For
these items, the Company recorded $4.5 million and $8.1 million for the third
quarter and the nine months, respectively, under the caption of "Unconsummated
Business Combination Costs" on the accompanying statement of operations. The
terms of the proxy contest settlement included an agreement by the Company
that, from September 1, 1998, to May 31, 1999, it will take all actions
necessary to declare its shareholder rights plan inapplicable to any fully
financed, all-cash tender offer that, among other things, ensures holders of
the Company's common stock a price per share that is in excess of the greater
of $40 or 140% of the average closing price per share of the Company's common
stock during a specified period ending before the announcement of the tender
offer.
During the first quarter of fiscal 1999, 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
25
<PAGE> 26
of Metanetics for approximately $2.0 million or $4.875 per share.
Simultaneously, the business partner agreed to pay amounts due of approximately
$1.9 million 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 agreements. The Company had recorded the additional $2.0 million
investment in Metanetics as an operating expense as of June 30, 1998, because of
the historical financial losses and future funding requirements for its
operations. However, after further assessment as part of the restatement
discussed in Note 2 - Restatement and based, in part, on an independent
valuation of Metanetics, the Company has capitalized this additional investment
as goodwill for the nine months ended December 31, 1998, 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 December 31, 1998.
During the third quarter of fiscal 1998, the Company recorded a $1.4 million
asset impairment charge to reduce the carrying value of its equity investment in
the referenced foreign distributor.
The Company continues to assess its long-lived assets for appropriate valuation
as required by SFAS No. 121. The Company may take discrete impairment charges in
the future to adjust the carrying value of these long-lived assets to their
estimated net realizable value if events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
OTHER NON-OPERATING INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, INCREASE/(DECREASE)
------------ -------------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-Operating Income (Expense):
Interest income $ 226 $ 340 $(114) (33.5)%
Interest expense (2,499) (1,752) 747 42.6%
Other non-operating expense, net (238) (160) 78 48.8%
------- ------- -----
Total non-operating expense, net $(2,511) $(1,572) $ 939 59.7%
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, INCREASE/(DECREASE)
------------ -------------------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-Operating Income (Expense):
Interest income $ 569 $ 1,258 $ (689) (54.8)%
Interest expense (6,829) (5,355) 1,474 27.5%
Other non-operating income
(expense), net 1,025 (324) 1,349 416.4%
------- ------- ------
Total non-operating expense, net $(5,235) $(4,421) $ 814 18.4%
======= ======= ======
</TABLE>
The increase in consolidated interest expense during the third quarter and first
nine months of fiscal 1999 from comparable fiscal 1998 levels reflects the
Company's increased borrowings against its revolving credit facilities to meet
operating cash flow requirements. The Company expects consolidated interest
expense for the remainder of fiscal 1999 to increase from comparable fiscal 1998
levels.
During the first quarter of fiscal 1999, the transaction to sell the stock of
Virtual Vision to a third party was consummated, resulting in a $.9 million
non-operating gain.
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 December 31, 1998, was 76%.
26
<PAGE> 27
INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, INCREASE
------------ --------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income Taxes:
Provision for income taxes $16,659 $2,280 $14,379 630.7%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, INCREASE
------------ --------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income Taxes:
Provision for income taxes $14,784 $4,484 $10,300 229.7%
</TABLE>
The increase in the Company's consolidated provision for income taxes in the
third quarter and first nine months of fiscal 1999 from comparable fiscal 1998
levels was due primarily to the valuation allowance established for the
Company's inability to utilize domestic net operating loss benefits. The
consolidated provision for income taxes was also increased by non-deductible
goodwill amortization and foreign tax rate differentials. As of December 31,
1998, the Company had fully reserved for its approximately $17.0 million
domestic net deferred tax assets based on its current assessment regarding the
utilization of such assets.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
DECEMBER 31, (DECREASE)
------------ ----------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cumulative effect of accounting
change, net of taxes $-- $1,240 $(1,240) (100.0)%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31, (DECREASE)
------------ ----------
1998 1997 DOLLAR PERCENTAGE
---- ---- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cumulative effect of accounting
change, net of taxes $-- $1,240 $(1,240) (100.0)%
</TABLE>
During the third quarter of fiscal 1998, the Company recorded a one-time,
after-tax, non-cash charge of $1.2 million to expense previously capitalized
costs associated with the Company's corporate-wide information systems
implementation project. These previously capitalized costs were expensed in
accordance with the FASB's Emerging Issues Task Force consensus ruling,
"Accounting for Costs Incurred in Connection with a Consulting Contract of an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation".
27
<PAGE> 28
FINANCIAL CONDITION
LIQUIDITY
<TABLE>
<CAPTION>
DOLLAR
DECEMBER 31, MARCH 31, INCREASE
1998 1998 (DECREASE)
---- ---- ----------
(IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C>
Cash and cash equivalents $ 30,057 $ 27,500 $ 2,557
Accounts receivable 114,507 121,932 (7,425)
Notes and other receivables 13,044 16,532 (3,488)
Inventories 125,450 109,935 15,515
Other 13,344 16,084 (2,740)
-------- -------- -------
Total current assets $296,402 $291,983 $ 4,419
======== ======== =======
Notes payable $ 70,614 $ 3,000 $67,614
Capital lease obligations 710 968 (258)
Accounts payable 59,993 58,634 1,359
Income taxes payable 2,493 3,466 (973)
Accrued liabilities 39,693 41,988 (2,295)
-------- -------- -------
Total current liabilities $173,503 $108,056 $65,447
======== ======== =======
Working capital (current assets
less current liabilities) $122,899 $183,927 $(61,028)
======== ======== =========
Current ratio (current assets divided
by current liabilities) 1.7 to 1 2.7 to 1
</TABLE>
The decrease in the Company's consolidated working capital at December 31, 1998,
from March 31, 1998, was due primarily to the increase in notes and accounts
payable and decreases in accounts and notes receivable and other current assets.
These reductions in working capital were partially offset by increases in
inventories and cash and a decrease in accrued liabilities. The increase in
notes payable between the two periods reflects the Company's increased reliance
on its revolving credit facilities to meet operating cash flow requirements. The
decrease in accounts receivable between the two periods was due primarily to the
reduction in consolidated total revenues, partially offset by the increase in
consolidated days sales outstanding ("DSO"). Consolidated DSO increased to
approximately 110 days at December 31, 1998, from approximately 84 days at March
31, 1998. The increase in DSO reflects the Company's granting of extended terms
and the increase in the amount of accounts receivable due from distributors who
are granted longer standard payments terms. The increase in consolidated
inventories between the two periods was due primarily to the Company's purchase
of material in anticipation of previously forecasted production levels.
Consolidated inventory turns decreased to 2.0 at December 31, 1998, from 2.3 at
March 31, 1998.
During the second quarter of fiscal 1999, the Company extended to August 3,
1999, the $20.0 million in bank credit which it maintains under its business
purpose revolving promissory note in addition to its larger revolving credit
agreement.
The Company has obtained waivers with respect to its revolving credit facility
from the group of eight lending banks for certain covenant violations arising
from the restatement described in note 2 above or the Company's financial
results for the quarter ended December 31, 1998. Effective through March 26,
1999, the waiver included the covenants requiring the Company to maintain
specified leverage, current asset, net worth and fixed charge coverage ratios.
Additionally, pursuant to the credit facility agreement, the Company elected in
December 1998 to reduce the available maximum credit facility from $100.0
million to $75.0 million in order to reduce financing costs. Then, in February
1999, as part of the most recent of the waivers noted above, the bank group
further reduced the permitted borrowing amount to the lesser of $55.0 million
(the amount then, and which continues to be, outstanding under the facility) or
the sum of eligible accounts receivable and inventory as included in the
Company's borrowing base.
Contemporaneously with the above waivers, the Company also obtained waivers
under its separate $20.0 million business purpose revolving promissory note, the
lender under which is also one of the banks in the above bank group. This note
incorporates the same covenants as apply under the revolving credit facility,
which the bank also waived with respect to the business purpose revolving
promissory note through March 26, 1999. Approximately $4.0 million was at
December 31, 1998, and continues to be, outstanding under the note, and the
Company is not able to make any further borrowings thereunder.
In connection with the above waivers, the lenders under both the revolving
credit facility and the business purpose revolving promissory note exercised
their rights under the terms of their respective loans to file UCC financing
statements to perfect the security
28
<PAGE> 29
interests previously conditionally granted in their favor by the Company in its
accounts receivable, inventory and equipment and the proceeds thereof.
The Company is currently negotiating with its existing lenders in order to
extend the waivers, which will allow the Company to continue its discussions
with several prospective asset-based lenders for a replacement facility. The
Company expects to be able to obtain satisfactory replacement credit
arrangements on a timely basis, but there is no assurance whether or when the
Company will be able to obtain an adequate replacement facility on acceptable
terms. In the event that the current waivers are not extended beyond March 26,
1999, or until a replacement facility is obtained, the Company will be in
default of, and subject to the lenders' rights of acceleration under, its
existing credit agreements and the lenders' rights and remedies as secured
parties.
Pending an agreement by the lenders to permit additional borrowings under the
Company's existing credit facilities or the establishment of a replacement
credit facility, the Company has been relying, and will continue to rely, upon
internally generated cash flows. The Company presently projects that its
collections of accounts receivable will be in amounts and at times that are
believed to be sufficient, together with its cash on hand, to support the
Company's efforts to manage the payment of the amounts presently owing to or
subsequently incurred with its suppliers in a manner which does not disrupt the
flow of necessary materials, components or services to the Company.
The Company is currently considering a variety of measures to increase its cash
flows from operating, financing and investing activities. Operating cash flows
may be enhanced primarily by increased collection of accounts receivable,
reductions in inventories and controls on operating expenses. However, there is
no assurance that (i) the Company will actually generate cash from its internal
sources in the amounts and at the times presently projected by the Company,
(ii) that the cash 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 in a manner which does not disrupt
the flow of necessary materials, components or services to the Company or to
meet the Company's other cash requirements, or (iii) any other internal sources
of cash flows can be accessed on a timely basis in meaningful amounts and on
acceptable terms. In addition, in the event that any payments may ultimately be
required in the near term in respect of the litigation, commitments and
contingencies referenced in note 8 to the accompanying consolidated financial
statements, 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.
CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION> DOLLAR
NINE MONTHS INCREASE
----------- (DECREASE)
ENDED DECEMBER 31, IN
------------------ CASH FLOW
1998 1997 IMPACT
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Net (loss) income $(50,002) $ 3,509 $(53,511)
Cumulative effect of accounting change -- 2,176 (2,176)
Depreciation and amortization 19,622 19,826 (204)
Asset impairment charge -- 1,434 (1,434)
Provision for inventory obsolescence 6,787 5,157 1,630
Provision for doubtful accounts 5,249 2,639 2,610
Accounts and notes receivable 13,110 (10,364) 23,474
Inventories (22,045) (22,399) 354
Prepaid expenses and other 3,372 (3,073) 6,445
Intangibles and other assets 2,806 (1,985) 4,791
Accounts payable and accrued liabilities (836) (8,008) 7,172
Other long-term liabilities 4,012 (554) 4,566
Other (28) 973 (1,001)
-------- -------- --------
Net cash used in operating activities $(17,953) $(10,669) $ (7,284)
======== ======== ========
</TABLE>
The increase in the net cash used in the Company's consolidated operating
activities during the first nine months of fiscal 1999 from comparable fiscal
1998 levels was due primarily to the decrease in the Company's consolidated net
earnings and the absence of the positive cash flow impact of the cumulative
effect of an accounting change and asset impairment charge recorded during the
first nine months of fiscal 1998. These negative cash flow items were partially
offset by the positive cash flow impact of the increase in inventory
obsolescence and doubtful accounts provisions and the overall reduction in
working capital at December 31, 1998, from December 31, 1997 levels.
29
<PAGE> 30
CASH FLOWS FROM INVESTING ACTIVITIES
<TABLE>
<CAPTION> DOLLAR
NINE MONTHS INCREASE
----------- (DECREASE)
ENDED DECEMBER 31, IN
------------------ CASH FLOW
1998 1997 IMPACT
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Additions to property and equipment $(26,538) $(19,157) $(7,381)
Software and other investments (4,792) (3,172) (1,620)
Purchase of non-marketable investments (1,950) (5,500) 3,550
Proceeds from the sale of non-marketable
investments -- 1,033 (1,033)
Proceeds from the sale of property and
equipment -- 866 (866)
Other 134 (140) 274
-------- -------- -------
Net cash used in investing activities $(33,146) $(26,070) $(7,076)
======== ======== =======
</TABLE>
The increase in the net cash used in the Company's consolidated investing
activities during the first nine months of fiscal 1999 from comparable fiscal
1998 levels was due primarily to increased investments in the Company's new
corporate-wide information systems and software for sale or lease to customers
in products or as application software, as well as the absence of proceeds from
the sale of non-marketable investments and property and equipment recorded
during the first nine months of fiscal 1998. These increased uses of cash were
partially offset by the reduction in the purchase of non-marketable investments
in emerging technology companies between the two periods. During the first nine
months of fiscal 1999, the Company recorded a $8.2 million increase in the
capitalization of expenditures relating to the installation of new
corporate-wide information systems from amounts capitalized during the first
nine months of fiscal 1998. As of December 31, 1998, the Company has capitalized
$22.6 million of the total estimated capital expenditures of approximately $28.0
million for the new systems. The Company anticipates additional capitalization
of costs associated with the new corporate-wide information systems during the
remainder of fiscal 1999 and into fiscal 2000 as discussed above under
"Readiness for the Year 2000".
CASH FLOWS FROM FINANCING ACTIVITIES
<TABLE>
<CAPTION> DOLLAR
NINE MONTHS INCREASE
------------ (DECREASE)
ENDED DECEMBER 31, IN
------------------ CASH FLOW
1998 1997 IMPACT
---- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable, net $53,526 $2,949 $50,577
Purchase of treasury stock (1,088) (4,928) 3,840
Proceeds from exercise of stock options 1,793 6,958 (5,165)
Other (891) (504) (387)
------- ------ -------
Net cash provided by financing activities $53,340 $4,475 $48,865
======= ====== =======
</TABLE>
The increase in the net cash provided by the Company's consolidated financing
activities for the first nine months of fiscal 1999 from fiscal 1998 levels was
due primarily to the increase in the Company's borrowings against its revolving
credit facilities to meet operating cash flow requirements and the reduction in
the amount of Company common stock repurchased under its open market repurchase
program. These increases were partially offset by the decrease in the proceeds
from the exercise of stock options, reflecting the decrease in the market price
of the Company's common stock.
In September 1998, the Company entered into a product financing arrangement
with a commercial finance institution under which $14.1 million was advanced
with respect to one of the Company's value-added distributors. The financing
agreement called for the payment of various administrative and advance fees by
the Company as well as interest payable at the financial institution's prime
lending rate minus .15%. As of December 31, 1998, the entire advanced amount
remained outstanding and was recorded as a note payable in the accompanying
consolidated balance sheet. The interest rate on this financing agreement was
the financial institution's prime lending rate plus 2.5% as of December 31,
1998. The Company's repayment of the unpaid balance of the advance is due
March 26, 1999.
30
<PAGE> 31
OTHER TRANSACTIONS
During the first nine months of fiscal 1999, $.3 million in aggregate principal
amount of the Company's 7-1/2% Convertible Subordinated Debentures were
surrendered for conversion into 11,621 shares of the Company's common stock. The
surrendered Convertible Subordinated Debentures have been canceled effective as
of their conversion into common stock.
During the first nine months of fiscal 1999, the Company repurchased 63,300
shares of its common stock, at a weighted average price of $17.19 per share,
pursuant to its open market repurchase program.
During the first nine months of fiscal 1999, the Company re-issued 94,234 shares
of treasury stock, at a weighted average cost of $21.82 per share, to satisfy
stock options exercised under the Company's stock option plans. Additionally,
the Company re-issued 23,775 shares of treasury stock, at a weighted average
cost of $14.88, during the first nine months of fiscal 1999 to satisfy purchases
made by employees through the Company's 1995 Employee Stock Purchase Plan.
SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the Company re-issued 29,224 shares of treasury
stock, at a weighted average cost of $22.98 per share, to satisfy purchases made
by employees through its 1995 Employee Stock Purchase Plan.
31
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 8 to the consolidated financial statements included in Part I of this
Quarterly Report on Form 10-Q/A for a discussion of the material pending legal
proceedings to which the Company is a party, which footnote discussion is
incorporated in this Part II by this reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K:
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 No. 2(b) to Registrant's Registration
Statement on Form 8-A with respect to its Common
Stock filed pursuant to Section 12(g) of the
Securities Exchange Act, as amended by Amendment
No. 1 thereto filed under cover of a Form 8 and
Amendment No. 2 thereto filed on Form 8-A/A.
4.1 Portions of the Restated Certificate of
Incorporation of Registrant pertaining to the
rights of holders of Registrant's Common Stock,
par value $.01 per share, incorporated herein by
reference to Exhibit 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 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
32
<PAGE> 33
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, effective July 1,
1993, incorporated herein by
reference to Exhibit 10.1.1 to
Registrant's Form 10-K for the year
ended March 31, 1994.
10.1.1.a Amendment, dated
January 1, 1994, to
the Plan included as
Exhibit 10.1.1 above,
incorporated herein
by reference to
Exhibit 10.1.1.a to
Registrant's Form
10-K for the year
ended March 31, 1994.
10.1.1.b Amendment, dated
April 1, 1994, to the
Plan included as
Exhibit 10.1.1 above,
incorporated herein
by reference to
Exhibit 10.1.1.b to
Registrant's Form
10-K for the year
ended March 31, 1994.
10.1.1.c Amendment, dated
January 1, 1994, to
the Plan included as
Exhibit 10.1.1 above,
incorporated herein
by reference to
Exhibit 10.1.1.c to
Registrant's Form
10-Q for the quarter
ended December 31,
1994.
10.1.2 1990 Stock Option Plan for employees
of Registrant, as amended,
incorporated herein by reference to
Exhibit 10.1.2 to Registrant's Form
10-Q for the quarter ended September
30, 1997.
10.1.3 1990 Stock Option Plan for
Non-Employee Directors of Registrant,
as amended, incorporated herein by
reference to Exhibit 10.1.3 to
Registrant's Form 10-Q for the
quarter ended September 30, 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 10.1.6 to Registrant's Form
10-K for the year ended March 31,
1994.
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
33
<PAGE> 34
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, filed
herewith.
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.,
a subsidiary of
Registrant,
incorporated herein
by reference to
Exhibit 10.1.7.a to
Registrant's Form
10-K for the year
ended March 31, 1998.
10.1.8 Non-Competition Agreement by and
between Registrant and Robert F.
Meyerson, effective February 27,
1997, incorporated herein by
reference to Exhibit 10.1.8 to
Registrant's Form 10-K for the year
ended March 31, 1997.
10.1.9 Employment Agreement between
Registrant and Frank E. Brick,
incorporated herein by reference to
Exhibit 10.1.9 to Registrant's Form
10-K for the year ended March 31,
1998.
10.1.9.a 1997 Section 162(m)
Performance-Based
Compensation Plan of
Registrant with
respect to its
President and Chief
Executive Officer
adopted by the
Performance-Based
Compensation
Committee of
Registrant's Board of
Directors and
approved by
Registrant's
Stockholders at the
Annual Meeting
thereof, held
September 10, 1997,
incorporated herein
by reference to
Exhibit 10.1.9.a to
Registrant's Form
10-K for the year
ended March 31, 1998.
10.1.10 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.
10.1.11 Amended and Restated Employment
Agreement between Registrant and
Kenneth W. Haver, effective as of
April 1, 1997, incorporated herein by
reference to Exhibit 10.1.11 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.1.12 Amended and Restated Employment
Agreement between Registrant and
David W. Porter, effective as of
April 1, 1997, incorporated herein by
reference to Exhibit 10.1.13 to
Registrant's Form 10-K for the year
ended March 31, 1998.
10.1.13 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.
10.1.14 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.
10.1.14.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.
34
<PAGE> 35
10.1.15 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.
10.2 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,
1994.
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 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.
35
<PAGE> 36
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 Security Agreement,
dated as of August 6,
1996, by and among
Registrant and The
Bank of New York, as
Agent, incorporated
herein by reference
to Exhibit 10.3.2.b
to Registrant's Form
8-K dated August 16,
1996.
10.3.1.c Amendment No. 2,
dated as of December
16, 1996, to the
Agreement included as
Exhibit 10.3.1 above,
incorporated herein
by reference to
Exhibit 10.3.2.c to
Registrant's Form 8-K
dated December 16,
1996.
10.3.1.d 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.e Waiver and Agreement,
dated as of December
29, 1998, with
respect to the
Agreement included as
Exhibit 10.3.1 above,
filed with the
Original Filing.
10.3.1.f Waiver Extension and
Agreement, dated as
of February 12, 1999,
with respect to the
Agreement included as
Exhibit 10.3.1 above,
filed with the
Original Filing.
10.3.2 Business Purpose Revolving Promissory
Note (Swing Line) made by Registrant
in favor of Bank One, Akron, N.A.,
dated August 6, 1996, incorporated
herein by reference to Exhibit 10.3.8
to Registrant's Form 8-K dated August
16, 1996.
10.3.2.a Bank One Security
Agreement, dated as
of August 6, 1996, by
and among Registrant
and Bank One, Akron
N.A., incorporated
herein by reference
to Exhibit 10.3.8.a
to Registrant's Form
8-K dated August 16,
1996.
10.3.3 Business Purpose Revolving Promissory
Note (Swing Line) made by Registrant
in favor of Bank One, NA (fka Bank
One, Akron, N.A.), dated August 5,
1997 (extending the credit facility
evidenced by the Note included as
Exhibit 10.3.2 above), incorporated
herein by reference to Exhibit 10.3.8
to Registrant's Form 10-Q for the
quarter ended June 30, 1997.
10.3.4 Business Purpose Revolving Promissory
Note (Swing Line) made by Registrant
in favor of Bank One, NA (fka Bank
One, Akron, N.A.), dated August 4,
1998 (extending the credit facility
evidenced by the Note included as
Exhibit 10.3.3 above),
36
<PAGE> 37
incorporated herein by reference to
Exhibit 10.3.4 to Registrant's Form
10-Q for the quarter ended June 30,
1998.
10.3.4.a Consent, dated as of
December 29, 1998,
with respect to the
Note included as
Exhibit 10.3.4 above,
filed with the
Original Filing.
10.3.4.b Further Consent,
dated as of February
12, 1999, with
respect to the Note
included as Exhibit
10.3.4 above, filed
with the Original
Filing.
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.
10.6 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.
10.7 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 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.
10.7.1 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.
10.8 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.
10.9 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 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
37
<PAGE> 38
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.
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, filed with the Original
Filing.
27. Financial Data Schedule as of December 31, 1998, filed herewith.
(b) Reports on Form 8-K
During the second quarter of fiscal 1999 to which this Form 10-Q
relates, the Registrant filed the following Current Reports on Form 8-K: (i)
Current Report dated October 20, 1998, attaching the Registrant's press release
of that date, which announced the Registrant's financial results for the second
quarter of fiscal 1999, and the six month period, ended September 30, 1998 (the
press release, as incorporated in the Form 8-K, includes consolidated balance
sheets for the Registrant for September 30, 1998 (unaudited), and March 31,
1998, and condensed consolidated statements of operations for the quarterly and
six- month periods (unaudited) ended September 30, 1998 and 1997); and (ii)
Current Report dated December 11, 1998, attaching the Registrant's press release
of that date (the "December Release"), which announced that the Registrant would
restate the previously released financial results for its second quarter, ended
September 30, 1998, of its 1999 fiscal year to reflect a change in the timing of
recognizing revenues financed under a new floor-plan arrangement to a segment of
its value-added distributor channel and that its revenues and earnings for
fiscal 1999 are anticipated to be negatively affected as a result of unexpected
delays in the general availability of certain models of its pen-based product
line and lower than expected demand from U.S. customers.
Subsequent to the end of the third quarter of fiscal 1999, the Company
filed the following Current Reports on Form 8-K: (1) Current Report dated
January 27, 1999, attaching the Registrant's press release of that date (the
"January Release"), which announced that its financial results for the third
quarter, ended December 31, 1998, of its 1999 fiscal year, and the restated
results for the fiscal year 1999 second quarter, ended September 30, 1998, the
need for which restatement was announced in the December Release, had been
rescheduled to mid-February pending the completion of a review of certain
judgmental accounting matters with its outside auditors and also updated certain
of the information contained in the December Release concerning the Company's
expectations for the fiscal 1999 third and fourth quarters and the full year,
stating that revenues were expected to be under $100 million with less than
targeted gross margins in the third quarter and below prior year levels for the
full year, and that a loss was expected for the fourth quarter and the full
year; (2) Current Report dated February 23, 1999, attaching the Registrant's
press release of that date (the "February Release"), which announced the
Registrant's
38
<PAGE> 39
financial results for the third quarter of fiscal 1999, and the nine month
period, ended December 31, 1998, and that, having completed the review of
certain judgmental accounting matters with the Registrant's outside auditors
previously reported in the January Release, the Registrant will be restating its
audited financial statements for fiscal years 1996, 1997 and 1998 and its
unaudited interim financial statements for the first and second quarters of
fiscal 1999 (the press release, as incorporated in the Form 8-K, includes
comparative unaudited consolidated statements of operations for the Registrant
for its fiscal years ended March 31, 1996, 1997 and 1998 and first and second
quarters ended June 10 and September 30, 1998 [including, as to the September 30
quarter, the effects of the restatement item announced in the December Release]
as previously reported and as restated, as well as consolidated statements of
operations for the quarterly and nine-month periods ended December 31, 1998 and
1997 which give effect to those restatements); and (3) Current Report dated
March 1, 1999, attaching the Registrant's press release of that date, which
announced the Registrant's consolidated balance sheet for the third quarter of
fiscal 1999 ended December 31, 1998, which was not available at the time of the
February Release due to the complexity of deriving it from the restated
consolidated statements of operations included as attachments to the February
Release (the press release, as incorporated in the Form 8-K, includes an
unaudited consolidated balance sheet for the Registrant comparing its financial
position at December 31, 1998 and, as restated to give effect to the restated
consolidated statements of operations attached to the February Release, at the
end of the Registrant's prior fiscal year on March 31, 1998).
39
<PAGE> 40
TELXON CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 10, 1999
TELXON CORPORATION
(Registrant)
/s/ Frank E. Brick
Frank E. Brick, President
and Chief Executive Officer
40
<PAGE> 41
TELXON CORPORATION
-----
EXHIBITS
TO
FORM 10-Q/A
FOR THE QUARTER ENDED DECEMBER 31, 1998
<PAGE> 42
INDEX TO EXHIBITS
WHERE
FILED
- -----
* 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 No. 2(b) to
Registrant's Registration Statement on Form 8-A with respect
to its Common Stock filed pursuant to Section 12(g) of the
Securities Exchange Act, as amended by Amendment No. 1
thereto filed under cover of a Form 8 and Amendment No. 2
thereto filed on Form 8-A/A.
* 4.1 Portions of the Restated Certificate of Incorporation of
Registrant pertaining to the rights of holders of
Registrant's Common Stock, par value $.01 per share,
incorporated herein by reference to Exhibit 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.
<PAGE> 43
* 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,
effective July 1, 1993, incorporated herein by
reference to Exhibit 10.1.1 to Registrant's Form
10-K for the year ended March 31, 1994.
* 10.1.1.a Amendment, dated January 1, 1994, to the
Plan included as Exhibit 10.1.1 above,
incorporated herein by reference to
Exhibit 10.1.1.a to Registrant's Form
10-K for the year ended March 31, 1994.
* 10.1.1.b Amendment, dated April 1, 1994, to the
Plan included as Exhibit 10.1.1 above,
incorporated herein by reference to
<PAGE> 44
Exhibit 10.1.1.b to Registrant's Form
10-K for the year ended March 31, 1994.
* 10.1.1.c Amendment, dated January 1, 1994, to the
Plan included as Exhibit 10.1.1 above,
incorporated herein by reference to
Exhibit 10.1.1.c to Registrant's Form
10-Q for the quarter ended December 31,
1994.
* 10.1.2 1990 Stock Option Plan for employees of
Registrant, as amended, incorporated herein by
reference to Exhibit 10.1.2 to Registrant's Form
10-Q for the quarter ended September 30, 1997.
* 10.1.3 1990 Stock Option Plan for Non-Employee Directors
of Registrant, as amended, incorporated herein by
reference to Exhibit 10.1.3 to Registrant's Form
10-Q for the quarter ended September 30, 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
10.1.6 to Registrant's Form 10-K for the year
ended March 31, 1994.
* 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, filed with the Original Filing.
* 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., a subsidiary of
Registrant, incorporated herein by
reference to Exhibit 10.1.7.a to
Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.1.8 Non-Competition Agreement by and between
Registrant and Robert F. Meyerson, effective
February 27, 1997, incorporated herein by
reference to Exhibit 10.1.8 to Registrant's Form
10-K for the year ended March 31, 1997.
* 10.1.9 Employment Agreement between Registrant and Frank
E. Brick, incorporated herein by reference to
Exhibit
<PAGE> 45
10.1.9 to Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.1.9.a 1997 Section 162(m) Performance-Based
Compensation Plan of Registrant with
respect to its President and Chief
Executive Officer adopted by the
Performance-Based Compensation Committee
of Registrant's Board of Directors and
approved by Registrant's Stockholders at
the Annual Meeting thereof, held
September 10, 1997, incorporated herein
by reference to Exhibit 10.1.9.a to
Registrant's Form 10-K for the year
ended March 31, 1998.
* 10.1.10 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.
* 10.1.11 Amended and Restated Employment Agreement between
Registrant and Kenneth W. Haver, effective as of
April 1, 1997, incorporated herein by reference to
Exhibit 10.1.11 to Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.12 Amended and Restated Employment Agreement between
Registrant and David W. Porter, effective as of
April 1, 1997, incorporated herein by reference to
Exhibit 10.1.13 to Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.13 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.
* 10.1.14 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.
* 10.1.14.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.
* 10.1.15 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.
10.2 Material Leases of Registrant.
<PAGE> 46
* 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, 1994.
* 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
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
10.2.2 above, incorporated herein by
reference to Exhibit 10.2.2.d to
Registrant's Form 10-Q for the quarter
ended June 30, 1997.
* 10.2.3.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
<PAGE> 47
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.
* 10.2.4 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 Security Agreement, dated as of August
6, 1996, by and among Registrant and The
Bank of New York, as Agent, incorporated
herein by reference to Exhibit 10.3.2.b
to Registrant's Form 8-K dated August
16, 1996.
* 10.3.1.c Amendment No. 2, dated as of December
16, 1996, to the Agreement included as
Exhibit 10.3.1 above, incorporated
herein by reference to Exhibit 10.3.2.c
to Registrant's Form 8-K dated December
16, 1996.
* 10.3.1.d Amendment No. 3, dated as of December
12, 1997, to the Agreement included as
Exhibit 10.3.1 above, incorporated
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.e Waiver and Agreement, dated as of
December 29, 1998, with respect to the
Agreement included as Exhibit 10.3.1
above, filed with the Original Filing.
* 10.3.1.f Waiver Extension and Agreement, dated as
of February 12, 1999, with respect to
the Agreement included as Exhibit 10.3.1
above, filed with the Original Filing.
<PAGE> 48
* 10.3.2 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One,
Akron, N.A., dated August 6, 1996, incorporated
herein by reference to Exhibit 10.3.8 to
Registrant's Form 8-K dated August 16, 1996.
* 10.3.2.a Bank One Security Agreement, dated as of
August 6, 1996, by and among Registrant
and Bank One, Akron N.A., incorporated
herein by reference to Exhibit 10.3.8.a
to Registrant's Form 8-K dated August
16, 1996.
* 10.3.3 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One, NA
(fka Bank One, Akron, N.A.), dated August 5, 1997
(extending the credit facility evidenced by the
Note included as Exhibit 10.3.2 above),
incorporated herein by reference to Exhibit 10.3.8
to Registrant's Form 10-Q for the quarter ended
June 30, 1997.
* 10.3.4 Business Purpose Revolving Promissory Note (Swing
Line) made by Registrant in favor of Bank One, NA
(fka Bank One, Akron, N.A.), dated August 5, 1997
(extending the credit facility evidenced by the
Note included as Exhibit 10.3.3 above),
incorporated herein by reference to Exhibit 10.3.4
to Registrant's Form 10-Q for the quarter ended
June 30, 1998.
* 10.3.4.a Consent, dated as of December 29, 1998,
with respect to the Note included as
Exhibit 10.3.4 above, filed with the
Original Filing.
* 10.3.4.b Further Consent, dated as of February
12, 1999, with respect to the Note
included as Exhibit 10.3.4 above, filed
with the Original Filing.
* 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.
* 10.6 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.
* 10.7 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 stock of Virtual
Vision, Inc. (fka Vision Newco, Inc.), incorporated herein
by reference
<PAGE> 49
to Exhibit 10.7 to Registrant's Form 10-K for the year ended
March 31, 1998.
* 10.7.1 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.
* 10.8 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.
* 10.9 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 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.
* 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,
<PAGE> 50
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, filed with the Original Filing.
** 27. Financial Data Schedule as of December 31, 1998, filed
herewith.
- --------------------------
* Previously filed
** Filed herewith
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