<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-11402
TELXON CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-1666060
State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
1000 SUMMIT DRIVE CINCINNATI, OHIO 45150
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (330) 664-1000
Securities registered pursuant Name of each exchange
to Section 12(b) of the Act: On Which Registered:
---------------------------- --------------------
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
7-1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2012
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
The aggregate market value of registrant's Common Stock held by non-affiliates
as of May 31, 2000, based on the last reported sales price of the Common Stock
as reported on the Nasdaq National Market for such date, was $259,377,871.
At May 31, 2000, there were 17,511,472 outstanding shares of the registrant's
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its 2000 Annual Meeting of
Stockholders to be held on September 15, 2000, which the registrant intends to
file with the Securities and Exchange Commission within 120 days of the close of
its fiscal year ended March 31, 2000, is incorporated by reference in Part III
of this Annual Report on Form 10-K from the date of filing such document.
<PAGE> 2
PART I
ITEM 1. BUSINESS
--------
GENERAL
Description of Company's Business
Telxon Corporation (including its majority and wholly owned subsidiaries,
"Telxon" or the "Company") designs, manufactures, integrates, markets and
supports transaction-based mobile information systems. The Company's mobile
computing devices and wireless local area network ("LAN") products are
integrated with its customers' host enterprise computer systems and third party
wide area networks ("WANs"), enabling mobile workers to process information on a
real-time basis at the point of transaction. The needs of its customers to
reduce cycle times, improve asset management and create new services drive their
requirements for real-time information throughout their organizations. Telxon's
products are sold worldwide for use in key targeted markets, including in-store
retail, transportation and logistics, mobile workforce automation, and public
safety. The Company also serves a broad array of other markets, such as
manufacturing, healthcare, education, and government, among others, through its
indirect sales channel.
Historical Overview
The Company was incorporated in Delaware in 1969 as "Electronic Laboratories,
Inc.", as the successor to a business established in Texas in 1967. The
Company's name was changed to "Telxon Corporation" in 1974.
Telxon completed its initial public offering of 1,600,000 shares of common stock
in July 1983, a secondary offering of 1,150,000 common shares in July 1985, a
$46 million issue of 7-1/2% convertible subordinated debentures due 2012 in June
1987, and an $82.5 million issue of 5-3/4% convertible subordinated notes due
2003 in December 1995. During fiscal 1991, the Company purchased and retired
$21.3 million of the 7-1/2% debentures, and to date, the holders of $.3 million
of the 7-1/2% debentures have elected to convert them into common shares.
For three decades, the Company has developed and marketed portable handheld
terminals to retailers and wholesalers in the grocery, drug, hardware, mass
merchandising, full-line department store and specialty retail chain segments.
An increasing number of markets outside retail are also adopting mobile
transaction-based systems, including transportation and logistics, mobile
workforce automation, and public safety.
Through its former subsidiary, Aironet Wireless Communications(R), Inc.
("Aironet"(R)), Telxon pioneered the commercialization of spread spectrum radio
frequency ("RF") technology in wireless LANs for vertical market applications.
Telxon is a leading supplier of RF-enabled devices, having shipped nearly
1,000,000 units to date.
The Company's core mobile computing and wireless data communication products
integrate a wide array of electronic and RF components and advanced data
collection technologies. Through a combination of proprietary
application-specific integrated circuit ("ASIC") technology, RF technology and
market-responsive packaging, the Company seeks to deliver cost-effective
products that meet the technical and ergonomic needs of the Company's targeted
markets. The Company's wireless data networks are designed to allow mobile
devices to roam seamlessly through large buildings and groups of buildings with
uninterrupted flow of information.
The Company competes in a highly competitive marketplace characterized by
rapidly evolving technology. Certain of the important factors, risks and
uncertainties affecting its business and results of operations are referenced in
the discussion of the Company's business that follows. For a more detailed
discussion of those and other such factors, risks and uncertainties, see
"FACTORS THAT MAY AFFECT FUTURE RESULTS" under Item 7.
1
<PAGE> 3
ITEM 1. BUSINESS (CONTINUED)
-------------------
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" below in this Form 10-K, which discussion should be read in
conjunction with the discussion under this Item 1.
Formation of Strategic Plan
To stabilize the Company, position it for profitable growth within the mobile
information systems industry, and improve the return to its stockholders,
Telxon's senior management team began implementing a new, three-year strategic
plan during fiscal 2000.
The strategic plan is tied to an operational plan with milestones for each
objective to be implemented and measured. Emphasis is being placed on regaining
Telxon's leadership position by reducing costs, being competitive in the
marketplace and returning the Company to profitability. A primary focus of the
plan is on preserving and protecting Telxon's core competencies and
technologies. The Company has conducted an in-depth review of its product
development process, aimed at improving productivity through the implementation
of such tools as a design-to-cost program. The Company also implemented a MRPII
materials resource planning process to ensure customer satisfaction through
enabling the Company's sales force to accurately forecast and commit to customer
delivery dates.
Global Sales and Marketing
The Company's sales in the United States and Canada are made directly through
its own sales force as well as indirectly through selected distributors,
value-added resellers ("VARs"), independent software vendors ("ISVs"), system
integrators, outside equipment manufacturers ("OEMs") and strategic partners.
The Company's international sales are made through subsidiaries located in
Australia, Belgium, France, Germany, Italy, Japan, Spain and the United Kingdom,
and through distributors in Africa, Asia, Europe, Mexico, the Middle East and
South America. Distributor support offices are located in Belgium, Brazil and
Singapore. (For further information regarding geographical segments and revenues
from the Company's International Division, see Note 16 to the consolidated
financial statements and Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION.")
Other than sales to Wal*Mart, which accounted for 16% of the Company's total
revenues, no customer accounted for 10% or more of the Company's total revenues
in fiscal 2000.
Systems Integration with Vertical Market Focus
Telxon delivers transaction-based mobile information systems to its customers on
a worldwide basis. The Company utilizes its global technical resources to
integrate its full line of mobile computing products with a wide array of
operating systems and application software, advanced data collection
technologies and wireless networking systems. The end result is a fully
integrated solution that seamlessly connects the customers' mobile workers with
its host enterprise system, providing them with real-time access to the
information they need. The Company has developed a full menu of system
integration services, including engineering site surveys and project management.
The Company's global technical resources are available in each of its targeted
markets. Telxon employs marketing specialists with industry-specific knowledge
to partner with its direct sales representatives and systems engineers, VARs and
system integrators to provide industry specific solutions for its customers.
Technical Subsidiaries
The Company's technical subsidiaries have been structured to work together with
its own advanced research and product development resources to design, develop
and produce leading-edge technology products for the future. The Company's
current subsidiaries are detailed below.
2
<PAGE> 4
ITEM 1. BUSINESS (CONTINUED)
-------------------
- Metanetics(R) Corporation
> Metanetics Corporation ("Metanetics") was formed in January
1994 in Fort Myers, Florida, in part from the acquisition of
Metamedia Corporation of Port Jefferson, New York.
> Metanetics develops two dimensional (2D) barcode encoding and
auto discriminating decoding software and advanced digital
image-processing technology.
- PenRight! (R) Corporation
> In February 1994, the Company acquired PenRight! Corporation
("PenRight!") of Fremont, California. PenRight! is a leading
developer of pen-based operating environments and application
development tools. PenRight! MobileBuilder(R) is specifically
designed to quickly create powerful pen-based applications for
the widest choice of mobile platforms on the market today. Its
open, flexible development environment creates cross-platform
applications for Windows(R) NT, Windows 98, Windows 95,
Windows 3.1, MS-DOS(R), DPMI, and in the near future, Palm OS
and Windows CE operating systems.
Advanced Research and Product Development
The Company utilizes advanced hardware, software, and firmware designs that
include Telxon proprietary ASIC chips. The Company's product development
strategy is to enhance the functionality and improve the price and performance
of its hardware and software, and to improve the packaging of its mobile
computing devices to address the specific requirements of each targeted market.
Products and systems are designed for modularity and the ability to upgrade,
where possible.
There can be no assurance that the Company's engineering and development
activities will lead to the introduction of new or improved products with
functional features and performance satisfactory in the market place at a
financial return acceptable to the Company or that the Company will not
encounter delays, unanticipated expenses or other problems in connection
therewith. Furthermore, customers may defer purchases of existing products in
anticipation of new or improved products by the Company or its competitors.
Although the Company contemplates the introduction of new products in calendar
year 2000, there can be no assurance that there will not be delays in commencing
production of such products or that such products will ultimately be
commercially successful.
During fiscal 2000, 1999 and 1998, the Company spent $28.8 million, $43.0
million and $37.5 million, respectively, for Company-sponsored product
development and engineering. For further discussion, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -
Operating Expenses."
Manufacturing and Product Maintenance
Manufacturing Operations
Manufacturing operations consist of the assembly, testing and quality assurance
of components, sub-assemblies and finished products. The Company's products are
built and configured with various memory sizes, packaging, peripherals,
keyboards and displays.
In 1994, the Company's principal manufacturing operations were consolidated into
a newly constructed, Company-owned 116,000 square foot facility. The facility
provides a more efficient plant layout and an opportunity for expansion of
manufacturing capacity in the future. For further information regarding the
Company's manufacturing facility see "Item 2 -- PROPERTIES."
-------------------
- Metanetics is a registered trademark of Metanetics Corporation.
- PenRight! and PenRight! Pro are registered trademarks of PenRight!
Corporation.
- Microsoft and Pen for Windows are registered trademarks of Microsoft
Corporation.
3
<PAGE> 5
ITEM 1. BUSINESS (CONTINUED)
-------------------
All component parts in the Company's products are purchased from outside
sources. Packaging, custom-integrated circuits, keyboards and printed circuit
boards are produced to the Company's specifications. A number of peripheral
products, including wands, laser scanners, controllers and receivers, are
purchased as completed assemblies and attached to and staged with Telxon's own
products before delivery. Outside contract manufacturers produce some of the
Company's products.
Telxon's International Procurement Office ("IPO"), located in Singapore,
provides the Company with an opportunity to procure materials from lower cost,
Far East suppliers. As the IPO staff procures more commodities, continued cost
savings are expected. The Company has not to date experienced any adverse
effects from its Singapore procurement operations as the result of the economic
difficulties experienced in Southeast Asia, though there can be no assurance
that future events, including government economic regulation, civil unrest or
otherwise, will not materially adversely affect the Singapore operations and, in
turn, the operations and financial results of the Company.
The Company has in the past encountered, and may in the future encounter,
shortages of supplies and delays in deliveries of necessary components. While
such shortages and delays could have a material adverse effect on the Company's
ability to ship products, the Company has not suffered any such effects as the
result of past shortages and delays. Additionally, the Company does not believe
that the loss of any one supplier or subassembly manufacturer would have a
material, long-term, adverse effect on its business, although set-up costs and
delays could occur if the Company changed any single source supplier.
Product Maintenance Operations
The Company currently provides maintenance and repair services for Telxon
customers from its 36,000 square foot National Service Center in Houston,
Texas. The Company also services various third party products, including
personal computers, printers and communication devices. The Company has
serviced its high volume, low-end products at a newly constructed 50,000
square foot leased facility built for the Company in Ciudad Juarez, Mexico in
1997. In late June 2000, the Company determined to transfer to the Ciudad
Juarez facility, during the second and third quarters of the current fiscal
year, all of the National Service Center repair and maintenance operations
(except for that of new products generally within the first year of their
release, which will be relocated to space within the Company's Houston
manufacturing building). The Company also maintains a number of customer
specific service depots to provide service to users with large concentrations
of Telxon products.
The Company offers a broad array of repair services and maintenance agreements
ranging from time and material charges to sophisticated plans, such as the "just
in time" program that offers spare Telxon equipment supplied on-site to the
customer, virtually eliminating any system downtime.
PRODUCTS AND SYSTEMS
Handhelds, Workslates and Other Mobile Computing Devices
The Company has developed a broad line of handheld devices, which range from
low-end batch terminals to highly integrated mobile computers incorporating
advanced data capture technologies and spread spectrum radios, including a
variety of pen-based and touch-screen workslate devices.
Wireless Data Communication Products, Network Systems and Software
Telxon provides wireless data communication solutions for mobile information
systems through handheld or mountable devices equipped with radios to transfer
information to and from other computers or peripheral devices while remaining
mobile. The four types of available radios are (1) spread spectrum (both direct
sequence and frequency hopping), (2) wide area, (3) micro, and (4) narrow band
FM. The Company uses industry standard "open" system protocols to provide
seamless connectivity across a wide range of host computer systems, including
SNA and TCP/IP and other manufacturers' communication networks.
Through its prior affiliation with its former Aironet subsidiary, the Company
has developed a series of spread spectrum radios, access points, repeaters,
routers and bridges. Certain of these products are manufactured by Telxon under
a license agreement with Aironet, while others are
4
<PAGE> 6
ITEM 1. BUSINESS (CONTINUED)
-------------------
procured directly from Aironet, which is now part of Cisco Systems, Inc. The
current products use the 900 MHz or 2.4 GHz frequency bands, available
utilizing either direct sequence or frequency hopping technology, at data rates
ranging up to 11 Mbps. These radio products are integrated with Telxon's
AirAWARE(TM) family of enterprise software for mobile information solutions and
Telxon's Microcellular Architecture ("TMA") software to build wireless
networks.
Telxon's Air-I/O(TM) System utilizes 900 MHz and 2.4 GHz spread spectrum radio
technology for fast, robust, wireless, data communications by using spread
spectrum technology and the Company's Gateway Connectivity System(TM) ("GCS") to
create a wireless interface between Telxon mobile devices and customers' host
computers.
The Air-I/O System creates one or more radio cells, with each cell supporting an
area of coverage. TMA allows mobile devices to move from cell to cell while
maintaining a wireless connection to the host computer. Implementations of the
system have included an installation providing coverage for over 4 million
square feet.
Third party wide area network radios are integrated with the Company's mobile
computing devices for access to wireless wide area packet data networks such as
ARDIS(R), RAM(R) or CDPD.
"Micro radios" are small, low-power FM radios designed and manufactured by the
Company and integrated into Telxon mobile devices and peripherals to provide
cable-free data communications between system components.
Telxon has provided narrow band FM radios from major manufacturers since 1984.
These radios operate in the 450 MHz band and require FCC site licensing.
In June, 1998, the Company announced ShopKeeper(TM), a low cost wireless
solution that will enable retail chains with small store formats to link their
in-store processors, POS systems and wireless mobile computers together on the
same network. ShopKeeper is based on the Company's new MiniNet(TM) 2.4 GHz radio
and new, low cost Connection Manager(TM), which combine with AirAWARE to create
a single cell wireless network supporting up to eight Telxon wireless mobile
computers for a single site retail environment.
Peripherals
The Company integrates a variety of peripheral products into or with its regular
product line, including laser bar code readers (internal and external), modular
printers, chargers, cradles, modems and communication interfaces. Many of these
products or components are purchased from outside vendors.
Software Operating Systems, Languages and Applications
The Company is transitioning to a new generation of modularly designed mobile
computers, which embrace industry standard, open systems architectures in order
to offer its customers access to a multitude of operating systems, including
Windows(R) NT, Windows CE, Windows 98 and Windows 95.
The Company develops, through its PenRight! and Metanetics subsidiaries,
advanced character recognition software, advanced digital image processing and
2D bar code encoding and auto discriminating decode software.
----------------
- Air-I/O, AirAWARE, Gateway Connectivity System and GCS are trademarks
of Telxon Corporation.
- ARDIS is a registered trademark of IBM Corporation and Motorola
Corporation.
- RAM is a registered trademark of RAM Mobile Data, Inc.
- ShopKeeper and MiniNet are trademarks of Telxon Corporation.
- Windows is a registered trademark of Microsoft Corporation.
5
<PAGE> 7
ITEM 1. BUSINESS (CONTINUED)
-------------------
INTELLECTUAL PROPERTY
The Company regards certain of its hardware and software products as proprietary
and relies on a combination of United States and foreign patent, copyright,
trademark and trade secret laws and licenses and other contractual
confidentiality provisions to protect its proprietary rights. In addition, the
Company's products also utilize hardware and software technologies licensed from
third parties. Given the rapidly changing nature of the industry's technology,
the competence and creative ability of the Company's development, engineering,
programming, marketing and service personnel may be as or more important to its
competitive position as the legal protections and rights afforded by patent and
other owned or licensed intellectual property rights. The Company believes that
its products and trademarks do not infringe on the rights of third parties, but
there can be no assurance that third parties will not assert infringement
claims.
GOVERNMENT REGULATION
The Company believes that its products are in material compliance with current
government regulations; however, regulatory changes may require modifications to
Company products in order for the Company to continue to be able to manufacture
and market these products. There can be no assurance that more stringent
regulations will not be issued in the future which could have an adverse effect
on the business of the Company. In addition, sales of the Company's products
could be adversely affected if customers adopt more stringent safety standards.
Certain Company products intentionally transmit radio signals as part of their
normal operation. These products are subject to regulatory approval by the FCC
and corresponding authorities in each country in which they are marketed. Such
approvals are typically valid for the life of the product unless and until the
circuitry of the product is altered in material respects, in which case a new
approval may be required.
BACKLOG
Backlog at any particular date is dependent on timing of receipt of orders and,
therefore, is not a reliable indicator of future sales over an extended period
of time.
Historically, shipments made by the Company during any particular quarter have
generally represented orders received either during that quarter or shortly
before the beginning of that quarter, and shipments for orders received in a
fiscal quarter have generally been filled from products manufactured in that
quarter. The Company maintains significant levels of raw materials to facilitate
meeting delivery requirements of its customers, but there can be no assurance
that during any given quarter, the Company has or can procure the appropriate
mix of raw materials in order to accommodate such orders. Therefore, the
Company's financial performance in any quarter has generally been dependent to a
significant degree upon obtaining orders in that quarter which can be
manufactured and delivered to its customers in that quarter.
COMPETITION
The computer industry, of which Telxon's mobile computing systems are a part, is
highly competitive and characterized by advances in technology which frequently
result in the introduction of new products with improved performance
characteristics. Failure to keep pace with product and technological advances
could negatively affect the Company's competitive position and prospects for
growth and, in turn, its business, results of operations and financial
condition.
The Company competes directly and indirectly with a number of companies in its
market segments. Frequent competitors include Symbol Technologies, Inc.,
Holtsville, New York, and
6
<PAGE> 8
ITEM 1. BUSINESS (CONTINUED)
-------------------
the Intermec and Norand divisions of UNOVA, Inc., Woodland Hills, California. In
addition, companies that are participants in the broader computer industry are
potential competitors. Some of the Company's competitors and potential
competitors have substantially greater financial, technical, intellectual
property, marketing and human resources than the Company.
EMPLOYEES
As of May 31, 2000, the Company employed approximately 1,549 full-time
personnel. The Company also employs temporary production and other personnel.
ITEM 2. PROPERTIES
----------
In April 2000 the Company opened its new executive offices in the eastern
Cincinnati, Ohio suburb of Milford. Occupying 22,000 square feet of a 195,000
square foot two-story office building of masonry construction built on a wooded
campus in 1992, the facility includes a state-of-the-art Product Demonstration
Suite in support of the Company's sales operations, geographically complementing
the similar Demonstration Center at its World Technology Center in The
Woodlands, Texas, a suburb north of Houston.
The establishment of the new headquarters is part of the initiative announced
by the Company in November 1999 to substantially curtail its Akron, Ohio
operations. As of June 30, 2000 the Company had substantially completed the
transition of its remaining corporate office functions from Akron to The
Woodlands, with its continuing, reduced Akron operations consisting principally
of its Advanced Technical Consulting, Project Management, and Quality Assurance
groups, as well as selected Software Development groups and a regional sales
office. The Company intends to relocate its continuing Akron operations to a
smaller leased facility in that area and is in the process of seeking, but has
not yet secured, a replacement tenant for its 100,000 square foot former
headquarters facility, which is under lease through December 31, 2001. The
lease provides the Company with an option, exercisable on September 1, 2001, to
purchase the office building and the land on which it is situated for its then
current fair market value. The Company also has a lease obligation through
February 28, 2001 for approximately 34,000 square feet of office space within a
three-mile radius of its former Akron corporate offices. That second Akron
facility is subleased to the Company's former Aironet Wireless Communications,
Inc. subsidiary (acquired in March 2000 by Cisco Systems, Inc.), to which the
Company also leases for a coterminous period the one-story, 32,500 square foot
facility owned by the Company within approximately one mile from its former
corporate offices.
The Company's World Technology Center in The Woodlands, opened in May 1998, is a
one-story, 70,000 square foot leased building of concrete and glazed curtain
wall construction, which was designed and constructed specifically to support
the Company's Engineering, Research, Software and Product Development functions
and supporting administration, which had also previously been conducted in
Akron. The World Technology Center also houses a Customer Support Call Center,
the Company's Industry and Product Marketing operations and a Customer
Conferencing and Executive Briefing Center. Expiring in May 2008, the lease for
the World Technology Center includes a renewal option for an additional ten-year
term. In order to accommodate the corporate office administrative and accounting
functions which have relocated to The Woodlands from Akron, the Company has
leased through August 2001 an additional 36,000 square feet in a one-story,
42,000 square foot office building built of like construction in 1994 within
three-quarters of a mile of the World Technology Center.
The Company owns two buildings in Houston, Texas of concrete tilt-wall
construction, located on a 15-acre site. The first building is an 116,000 square
foot manufacturing facility, which was completed in April 1994. That building
houses all domestic Telxon manufacturing operations, as well as warehousing
operations and administrative and manufacturing engineering offices. The second
building is the Company's 36,000 square foot National Service Center, completed
in November 1993, which has housed its product repair and
7
<PAGE> 9
ITEM 2. PROPERTIES (CONTINUED)
----------------------
maintenance operations. The Company maintains an additional 12,000 square feet
of warehouse space at a nearby Houston location leased through May 31, 2001.
As of the end of the second quarter of fiscal 1998, the Company relocated over
50% of its product repair and maintenance operations to a new 50,000 square foot
facility of masonry construction in Ciudad Juarez, Chihuahua, Mexico. The
facility is leased for an initial term that expires in April 2004, with two
five-year renewal options, and the Company has an option to purchase the
facility at the end of the initial term or any renewal term for its then current
fair market value. In late June 2000, the Company determined to transfer to the
Ciudad Juarez facility, during the second and third quarters of the current
fiscal year, all of the remaining product repair and maintenance operations at
its Houston National Service Center (except for that of new products generally
within the first year of their release, which will be relocated to space within
the Company's Houston manufacturing building). The Company is evaluating
possible alternatives for the disposition of the National Service Center
facility. The Company currently leases 20,000 square feet of warehouse space in
El Paso, Texas as a companion receiving, staging and parts-stocking facility
for the Mexican operations for an initial term of five years, with two
five-year renewal options, and is in negotiations with its current landlord
toward the substitution of 50,000 square feet of leased space in El Paso for
the current El Paso facility to support the planned expansion of the Mexican
operations.
In addition to these principal locations, the Company maintains 53 locations in
the United States, Canada, Western Europe, Australia, Japan and Southeast Asia
which are used principally for sales and customer service offices, as well as
for executive, engineering and procurement offices for certain of its domestic
and international subsidiaries. These locations are generally leased for terms
ranging from one to three years.
The Company believes that its existing facilities will be adequate for its
reasonably foreseeable level of operations, though the Company regularly reviews
its facilities usage as part of its continuing efforts to improve the efficiency
of its operations and believes that alternate or additional leased space is
generally available at acceptable cost to satisfy any new facilities
requirements that may be so identified. Should the operations of the Company's
principal corporate offices, engineering and research and development,
manufacturing, or repair and maintenance facilities be lost or disrupted by
natural disaster, fire or other cause, the Company's operations would be
materially adversely affected until replacement operations could be established.
ITEM 3. LEGAL PROCEEDINGS
-----------------
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, then an 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, the
plaintiff seeks no monetary relief from the Company.
On November 12, 1993, Telxon and the individual director defendants filed a
Motion to Dismiss. The plaintiff filed its brief in opposition to the Motion on
May 2, 1994, and the defendants filed a final responsive brief. The Motion was
argued before the Court on March 29, 1995, and on July 18, 1995, the Court
issued its ruling. The Court dismissed all of the claims relating to the
plaintiff's allegations of corporate waste; however, the claims relating to
breach of fiduciary duty survived the Motion to Dismiss.
On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in the
derivative action on behalf of a new plaintiff stockholder. As part of the
Motion to Intervene, the intervening plaintiff asked that the Court designate as
operative for the action the intervening plaintiff's proposed Complaint, which
alleges that a series of transactions in which the Company acquired technology
from a corporation affiliated with Mr. Meyerson was wrongful in that Telxon
already owned the technology by means of a pre-existing consulting agreement
with another affiliate of Mr. Meyerson; the intervenor's complaint also names
Raymond D. Meyo, President, Chief Executive Officer and director at the time of
the first acquisition transaction, as a new defendant. The defendants opposed
the Motion on grounds that the new claim alleged in the proposed Complaint and
the addition
8
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
-----------------------------
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 defendants filed a Motion for Summary Judgment on November 15, 1999, and the
plaintiff filed a cross Motion for Summary Judgment on December 7,1999. The
Motions were argued before the Court in February 2000. Following the hearing,
the parties submitted supplemental briefs, the last of which was filed on March
6, 2000. The parties are awaiting the Court's decision on the cross motions for
summary judgment. No trial date has been set.
The defendants believe that the post-intervention claims lack merit, and they
intend to continue vigorously defending this action. While the ultimate outcome
of this action cannot presently be determined, the Company does not anticipate
that this matter will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows and
accordingly has not made provisions for any loss or related insurance recovery
in its financial statements.
On February 7, 1998, a complaint was filed against the Company in the District
Court of Harris County, Texas, by Southwest Business Properties, the landlord of
the Company's former Wynnwood Lane facility in Houston, Texas, alleging counts
for breach of contract and temporary and permanent injunctive relief, all
related to alleged environmental contamination at the Wynnwood property, and
seeking 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 December 1999, the case was settled by
the parties, and the $500,000 cost of the initial settlement, $275,000 of which
has been covered by the Company's insurer, was recorded in the Company's
financial statements; additional amounts of up to $100,000 are required to be
paid as part of the settlement in the event that the remediation described below
is not timely completed.
While the litigation with the landlord was pending, Telxon and the landlord
filed on July 7, 1999 a joint application with the Texas Natural Resource
Conservation Commission for approval of a proposed Response Action Work Plan for
the property pursuant to the Commission's Voluntary Cleanup Program. The plan,
which was approved by the Commission in August 1999, projects completion of
remediation and issuance of a closure certificate in 2002, for which the Company
had at March 31, 2000 accrued the then estimated costs of $250,000. As the
result of changes to the remediation plan made after March 31, 2000 to better
assure its completion within the projected schedule, the Company has increased
its estimate of the total expected remediation cost to $350,000. If closure of
the remediation is not certified when contemplated by the plan, and the Company
were ultimately to become responsible for the alleged contamination, the
associated loss could have a material adverse effect on results of operations
for one or more quarters in which the associated charge(s) would be taken.
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.
Named as defendants were 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 alleged 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 alleged that Telxon
has certain anti-takeover devices in place purportedly designed to thwart
hostile bids for the Company. Plaintiffs charged the Director defendants with
breach of fiduciary duty and claimed that they entrenched themselves in office.
On February 10, 2000, the plaintiffs filed a notice for the dismissal of the
action without prejudice, which was approved by the Court on February 17, 2000.
From December 1998 through March 1999, a total of 27 class actions were filed in
the United States District Court, Northern District of Ohio, by certain alleged
stockholders of the Company on behalf of themselves and purported classes
consisting of Telxon stockholders, other than the defendants and their
affiliates, who purchased stock during the period, from May 21, 1996 through
February 23, 1999 or various portions thereof, alleging claims for "fraud on the
market" arising from alleged misrepresentations and omissions with respect to
the Company's financial performance and prospects and an alleged violation of
generally accepted accounting principles by improperly recognizing revenues. The
named defendants are the Company, former President and Chief Executive Officer
Frank E. Brick and former Senior Vice President and Chief Financial Officer
Kenneth W. Haver. The actions were referred to a single judge. On February 9,
1999, the plaintiffs filed a Motion to consolidate all of the actions and the
Court heard motions on naming class representatives and lead class counsel on
April 26, 1999.
9
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
-----------------------------
On August 25, 1999, the Court appointed lead plaintiffs and their counsel,
ordered the filing of an Amended Complaint, and dismissed 26 of the 27 class
action suits without prejudice and consolidated those 26 cases into the first
filed action. The appointed lead plaintiffs appointed by the Court filed an
Amended Class Action Complaint on September 30, 1999. The Amended Complaint
alleges that the defendants engaged in a scheme to defraud investors through
improper revenue recognition practices and concealment of material adverse
conditions in Telxon's business and finances. The Amended Complaint seeks
certification of the identified class, unspecified compensatory and punitive
damages, pre- and post-judgment interest, and attorneys' fees and costs. Various
appeals and writs challenging the District Court's August 25, 1999 rulings were
filed by two of the unsuccessful plaintiffs but have all been denied by the
Court of Appeals.
On November 8, 1999, the defendants jointly moved to dismiss the Amended
Complaint. The Court held a case management conference on November 16, 1999 at
which it set a conditional schedule. Briefing of the defendants' motion to
dismiss and the plaintiffs' opposition thereto was completed January 18, 2000.
The motion to dismiss remains pending, and all discovery remains stayed pending
the Court's ruling on the motion. A motion filed by the plaintiffs on November
16, 1999 to lift the discovery stay to allow the serving of discovery requests
on a non-party has been denied by the Court. The defendants believe that these
claims lack merit, and they intend to vigorously defend the consolidated action.
By letter dated December 18, 1998, the Staff of the Division of Enforcement of
the Securities and Exchange Commission (the "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. On January 20, 1999, the
Commission issued a formal Order Directing Private Investigation And Designating
Officers To Take Testimony with respect to the referenced trading and specified
accounting matters, pursuant to which subpoenas have been served requiring the
production of specified documents and testimony. The Company and its current and
former independent accountants are also currently assessing the effects of
recent comments issued to the Company by the Commission's Division of
Corporation Finance as part of its ongoing review of various accounting matters
in the Company's previous filings with the Commission, including, but not
limited to, the recognition of revenues from the Company's indirect sales
channel and the timing of charges which the Company recorded during fiscal 1999,
1998 and 1997 for inventory obsolescence, severance and asset impairment. The
Company has cooperated, and intends to continue cooperating fully with, the
Commission Staff. The Company has not accrued for any fines or penalties under
SFAS 5 because it has no basis to conclude that it is probable that at the
conclusion of the investigation the Commission will seek a fine or penalty, and
because the amount of any such fine or penalty is not estimable.
10
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
-----------------------------
On December 30, 1999, 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; the then directors of the Company, Richard J. Bogomolny, John H. Cribb,
Robert A. Goodman, Raj Reddy, Frank Brick and Norton Rose; Robert F. Meyerson,
former Chairman of the Board, Chief Executive Officer and director; and Telantis
Venture Partners V Inc., an affiliate of Robert F. Meyerson. The Complaint
alleges that Telxon's sale of stock in its then Aironet Wireless Communications,
Inc. subsidiary to Meyerson interests constitutes a waste and gift of Telxon
assets in breach of the defendant directors' duties of care and to act in good
faith. The Complaint also alleges that the defendant directors' opposition of an
alleged offer by Symbol to acquire the Company in the Spring of 1998 violated
their duties of loyalty, good faith and due care and wasted Company's assets.
The Complaint seeks an order rescinding the Aironet stock transactions (or in
the event such relief cannot be granted, recissory damages), requiring the
defendants other than the Company to account for Telxon's losses in connection
with the alleged wrongs (including the funds spent resisting the alleged Symbol
bid) and awarding plaintiff its attorneys' fees and expenses. While the Company
is nominally a defendant in this derivative action, the plaintiff seeks no
monetary relief from the Company.
On March 8, 2000, all defendants except Messrs. Goodman and Meyerson answered
the complaint and moved for judgment on the pleadings. Messrs. Goodman and
Meyerson have filed motions to dismiss. In addition, all defendants have moved
to stay discovery. All of these motions are currently being briefed, and no
hearing date has been scheduled for any of the motions.
The defendants believe that these derivative claims lack merit and intend to
vigorously defend 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.
The Company has received a number of letters from its customers requesting
Telxon to indemnify them with respect to their defense of demands which have
been made on them by the Lemelson Medical, Education & Research Foundation
Limited Partnership for the payment of a license fee for the alleged
infringement of the Foundation's so-called "bar-code" patents by the customers'
systems utilizing automatic identification technology, portions of which have
been supplied by the Company. On October 27, 1999, the Foundation also sent a
letter directly to the Company similarly demanding that the Company purchase a
license with respect to "Telxon's use of machine vision and bar coding
technology." On April 14, 2000 the Foundation filed five lawsuits against a
total of approximately 430 end users, including a number of the Company's
customers, whom the Foundation alleges use automatic identification technology
which infringes the Foundation's patents; the Company is not named as a
defendant in any of these lawsuits. The Company continues to receive requests
for indemnity from customers with regard to claims being informally asserted
against them by the Foundation as well as from customers who have been formally
sued by the Foundation.
The Company believes that the patents so being asserted against it and its
customers are invalid, unenforceable and not infringed and on April 24, 2000
filed a federal court action against the Foundation seeking a declaratory
judgment to that effect. The Company's declaratory judgment action is
substantially similar to the federal court action jointly filed by seven other
companies in the automatic identification industry, including the Company's
principal competitors, in July 1999 seeking like declaratory relief against the
Foundation. On May 30, 2000 the Foundation filed an answer and counterclaim
against the Company in response to its declaratory judgment action denying the
invalidity of its patents are invalid, unenforceable or not infringed by the
Company or its customers and counter-claiming that the Company likely induces or
contributes to the direct infringement of unspecified claims of the Foundation's
patents. The Foundation's counterclaim against the Company is the same as the
one which has been asserted by the Foundation against the companies which filed
the other declaratory judgement action. Discovery in the Company's declaratory
judgment action is just beginning. The Company believes that the Foundation's
counterclaim is without merit and intends to vigorously defend against it.
Except as otherwise specified, in the event that any of the foregoing litigation
ultimately results in a money judgment against the Company or is otherwise
determined adversely to the Company by a court of competent jurisdiction, such
determination could,
11
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
-----------------------------
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, lessors of equipment to the
Company and existing and potential business and development partners. The
Company is vigorously defending all such claims that do not lack merit. While
the ultimate outcome of such matters cannot presently be determined, the Company
does not anticipate that these matters 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 losses or related
insurance recoveries in its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There were no matters submitted to a vote of security holders during the year
ended March 31, 2000.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following are the executive officers of the Company, who have been either
elected by the Board of Directors of the Company or appointed by the Chief
Executive Officer and ratified and approved by the Board of Directors:
John W. Paxton, Sr., age 63, has been Chairman of the Board of
Directors and CEO since June 1999. Mr. Paxton was Chairman, President
and CEO from March 1999 to June 1999. He has been a director of the
Company since he joined it in March 1999. From December 1998 until
March 1999, Mr. Paxton was Chairman of Odyssey Industrial Technologies
L.L.C., a joint venture with Odyssey Investment Partners, a private
equity fund. From March 1997 until November 1998, Mr. Paxton was
Executive Vice President of Paxar Corporation and, upon its formation
in June 1998, President of Paxar's Printing Solutions Group. He was
President and Chief Executive Officer of Monarch Marking Systems, Inc.
from October 1995 until Paxar combined newly acquired operations with
its existing Monarch operations to form the Paxar Printing Solutions
Group. From March 1994 until October 1995, Mr. Paxton was Corporate
Executive Vice President and Chief Operating Officer of The Industrial
Automation Systems Group of Western Atlas Inc. Mr. Paxton is a member
of the Board of Directors of TransDigm, Inc. (supplier of highly
engineered commercial and military aircraft parts).
Kenneth A. Cassady, age 46, has been President and Chief Operating
Officer since joining the Company in June 1999. From March 1996 to June
1999, Mr. Cassady was President of Monarch Marking Systems, a
manufacturer and distributor of bar code printing and price marking
systems, and a subsidiary of Paxar Corporation. From September 1995 to
March 1996, Mr. Cassady was Vice President, Business Operations for the
Environmental Group of Lockheed Martin Corporation. He was Vice
President of Mergers and Acquisitions for Lockheed from March 1995 to
September 1995 and served as Vice President, Business Operations for
Lockheed's Information Group from May 1993 to March 1995.
Woody M. McGee, age 48, has been Vice President and Chief Financial
Officer since joining the Company in June 1999. From March 1997 to May
1999, Mr. McGee was Senior Vice President, General Manager of HK
Systems, a supplier of material handling systems (which was purchased
from Western Atlas in 1996). From September 1996 to March 1997, Mr.
McGee was Vice President, CFO/Treasurer of Mosler, Inc., a supplier of
currency handling systems and security products (to the gaming,
financial, commercial and government communities). From May 1995 to
September 1996, Mr. McGee was Vice President of Sales for the Material
Handling Systems Division (MHSD) of Western Atlas. He was Vice
President of Operations and CFO for the MHSD of Western
12
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
---------------------------------------------------------------
Atlas and President and Chief Operating Officer of its Installation
Division, from January 1991 to May 1995.
David H. Biggs, age 54, has been Vice President and Chief Technology
Officer since joining the Company in June 1999. From June 1997 to June
1999, Mr. Biggs was Vice President of RD Garwood, Inc., a consulting
and educational firm specializing in business process improvements.
From December 1996 to May 1997, Mr. Biggs was a Senior Vice President
of Bently Nevada Corporation (machinery vibration instrumentation).
From March 1988 to December 1996, Mr. Biggs was Senior Vice President
of Operations and Product Development for Bently. He was Vice President
of Product Development for Bently from June 1985 to March 1988, and its
Vice President of Manufacturing from January 1981 to June 1985.
William J. Murphy, age 66, has been Executive Vice President, Americas
of the Company since January 2000. He has served the Company in various
executive sales capacities since his tenure as the Company's President
and Chief Operating Officer from January 1995 to June 1996, including
as Senior Executive Vice President, Global Sales from June 1996 to
February 1997, Senior Vice President, Divisional Sales from February
1997 to July 1998, and Regional Vice President from July 1998 to
January 2000. Mr. Murphy had previously served the Company as Executive
Vice President, North American Operations from January 1993 to January
1995; Area Vice President, East from November 1992 to January 1993; a
District Manager from September 1989 to November 1992; and Area Vice
President, North Eastern Region from May 1989 to August 1989. From
January 1995 to June 1996, he was a member of the Company's Board of
Directors.
Peter A. Lomax, age 48, has been Executive Vice President,
Europe/Middle East/Africa of the Company since June 1999. He has also
served the Company as Executive Vice President, International
Operations from June 1998 to June 1999; and was head of the Company's
International Business Development Group from June 1997 to June 1998.
Mr. Lomax joined the Company from Sunguard Business Systems, where he
had served as European Sales Director from January 1993 to April 1997.
Gene S. Harmegnies, age 48, joined the Company as Vice President,
Consulting and Systems Integration in January 2000. He had previously
been with Intermec Technologies Corporation, where he was Director,
Worldwide Support Services from January 1997 to May 1999; Director,
North American Service Operations from March 1992 to January 1997; and
National Service Manager from June 1985 to March 1992.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
----------------------------------------------------------------
MATTERS
-------
The Company's common stock has been publicly traded since July 21, 1983, in the
over-the-counter market under the symbol TLXN. The principal trading market for
the Company's Common Stock is The NASDAQ stock market National Market ("NNM").
The following table sets forth, with respect to the past two fiscal years of the
Company, the range of high and low closing prices as reported in the NNM and
cash dividends paid. During fiscal 2000, the Company's Board of Directors
elected to discontinue the payment of dividends to its shareholders. Prior to
fiscal 2000, the Company had not paid other than nominal dividends. The Company
intends to follow a policy of retaining earnings in order to finance the
continued growth and development of its business. Payment of dividends has been
within the discretion of the Company's Board of Directors. Prospective changes
in the Company's dividend policy will depend on, among other factors, earnings,
capital requirements and the operating and financial condition of the Company.
<TABLE>
<CAPTION>
Fiscal Quarter
--------------
Year Ended March 31, First Second Third Fourth Year
-------------------- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
2000
High $12.25 $10.56 $20.50 $28.25 $28.25
Low 7.63 6.44 8.25 13.00 6.44
Dividends paid -- -- -- -- --
</TABLE>
13
<PAGE> 15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
----------------------------------------------------------------
MATTERS (CONTINUED)
------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
1999
High $35.94 $32.25 $30.13 $15.00 $35.94
Low 24.50 17.13 11.06 5.75 5.75
Dividends paid -- -- -- .01 .01
</TABLE>
As of May 31, 2000, there were approximately 774 holders of record of the
Company's Common Stock.
Historically, variations in the Company's actual or expected results of
operations, changes in analysts' earnings estimates and investment
recommendations and rumors of or publicly disclosed proposals for business
combination transactions involving the Company have resulted in significant
changes in the market price of the Company's common stock. As a result, the
market price of the Company's common stock, like that of other technology
companies, has been subject to significant volatility. The Company's stock may
also be affected by broader market trends unrelated to the Company's own
performance that involve the Company's competitors, technology stocks in general
or the economy as a whole.
While the Company does, from time to time, communicate with securities analysts,
any opinions, projections and forecasts contained in reports issued by
securities analysts have been prepared by each analyst based on his or her own
judgment and research and are not the responsibility of the Company. It should
not be assumed that the Company agrees with any report issued by any analyst.
The Company effected the following issuances of unregistered shares of its
common stock during fiscal 2000:
Pursuant to an agreement made by the Company with R. Dave Garwood,
prior to his election as one the Company's current Directors, for his
rendering of employee training and consulting services relating to the
Company's adoption and implementation of an MRP-II material resource
planning process, the Company issued him an aggregate of 20,197 shares
of common stock subject to vesting and forfeiture conditions based on
his completion of the subject services. As of March 31, 2000, 10,098
of the subject shares had vested and were no longer subject to
forfeiture, and all the remaining shares vested and were freed of the
forfeiture condition upon the completion of the subject services in
June 2000. The shares constitute Mr. Garwood's remuneration for the
subject services, and the issuance thereof did not otherwise result in
any proceeds to the Company.
Pursuant to an agreement made by the Company with a consulting firm,
not otherwise affiliated with the Company, for strategic product
consulting services, the Company has issued the consultant an
aggregate of 1,476 shares of common stock subject to vesting and
forfeiture conditions based on his completion of the subject services.
As of March 31, 2000, all of the subject shares had vested and were no
longer subject to forfeiture. As part (in addition to cash fees) of
the consultant's remuneration for the subject services, this issuance
did not otherwise result in any proceeds to the Company.
Pursuant to the Company's employment agreement with David H. Biggs,
the Company's Vice President and Chief Technology Officer, the Company
has issued him an aggregate of 35,000 shares of common stock (23,200
of which were issued under the Company's Restricted Stock Plan, the
shares awarded under which are registered on Form S-8) subject to
vesting and forfeiture conditions based on his completion of the
subject services and to a deferred compensation election. As of March
31, 2000, 25,000 of the subject shares (including all 11,800 of the
unregistered shares awarded him outside of the Restricted Stock Plan)
had vested and were no longer subject to forfeiture. The shares
constitute Mr. Biggs' remuneration for his services, and the issuance
thereof did not otherwise result in any proceeds to the Company.
14
<PAGE> 16
During the fourth quarter of fiscal 2000, John W. Paxton, Sr., the
Company's Chairman of the Board and Chief Executive Officer,
completed his purchase of 300,000 shares of common stock provided for
in his employment agreement with the Company. The purchase was made
at the price established therefor in the employment agreement, and
the proceeds were used by the Company for general working capital
purposes. See Note 11 - Stock Options and Restricted Stock and Note
22 - Subsequent Event to the consolidated financial statements
included in this Annual Report on Form 10-K for further information
relating to Mr. Paxton's stock purchase.
Also during the fourth quarter of fiscal 2000, the Company issued
477,790 shares of common stock in exchange for the approximately 29%
common stock ownership interest of the last remaining minority
stockholders in the Company's Metanetics Corporation subsidiary
pursuant to the Plan and Agreement of Merger, dated as of February 22,
2000, among the Company, its wholly owned Meta Technologies
Corporation subsidiary and Metanetics included as Exhibit 10.12 to
this Annual Report on Form 10-K.
Each of the above sales of securities was pursuant to privately negotiated
transactions between the Company and the recipient of the respective recipients
of the subject shares deemed to be exempt from registration under the Securities
Act of 1933 in reliance on Section 4(2) of such Act, as constituting
transactions by an issuer not involving a public offering. Each of the
recipients of shares in these transactions made written representations to the
Company in connection with such issuances confirming their intention to acquire
the securities for investment only and not with a view to, or for sale in
connection with, any distribution thereof, and appropriate legends were affixed
to the share certificates issued in such transactions. All of the recipients
also confirmed that they had access to their satisfaction, through the Company's
public securities filings and their respective relationships with the Company,
to information concerning the Company and its financial and business affairs.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Set forth below are selected financial data for the five years ended March 31,
2000, which have been derived from the Company's audited consolidated financial
statements for the periods indicated. The selected financial data should be read
in conjunction with the consolidated financial statements, including the notes
thereto, for the three years ended March 31, 2000, 1999 and 1998, as included in
Item 8 herein. The fiscal 1999 and 1998 accounts have been restated as described
in Note 3 - Restatement to the consolidated financial statements.
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Product revenues, net $284,706 $ 313,480 $378,310 $386,791 $415,383
Customer service revenues, net 81,045 82,914 76,746 74,606 68,744
--------------------------------------------------------------------
Total net revenues 365,751 396,394 455,056 461,397 484,127
Cost of product revenues 234,616 246,125 222,990 262,862 249,610
Cost of customer service revenues 50,266 55,078 48,836 47,248 39,016
Selling expenses 79,237 96,109 82,054 88,374 82,207
Product development and engineering exp. 28,828 42,986 37,500 45,189 45,383
General and administrative expenses 63,167 54,923 39,462 53,408 39,415
Asset impairment charge -- -- 6,069 -- --
Unconsummated business combination costs -- 8,070 -- -- --
--------------------------------------------------------------------
Total costs and expenses 456,114 503,291 436,911 497,081 455,631
(Loss) income from operations (90,363) (106,897) 18,145 (35,684) 28,496
Interest income 652 801 1,573 1,489 760
Interest expense (14,070) (9,872) (7,181) (8,056) (6,770)
Other non-operating income (expense) 428,725 (414) 625 34,726 1,517
--------------------------------------------------------------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of an accounting change 324,944 (116,382) 13,162 (7,525) 24,003
Provision for income taxes 72,833 18,624 5,963 726 9,028
--------------------------------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of an
accounting change, net of tax 252,111 (135,006) 7,199 (8,251) 14,975
--------------------------------------------------------------------
Extraordinary item, net of tax 1,113 -- -- -- --
Income (loss) before cumulative effect
of an accounting change 250,998 (135,006) 7,199 (8,251) 14,975
--------------------------------------------------------------------
Cumulative effect of an accounting
change, net of tax -- -- 1,016 -- --
--------------------------------------------------------------------
Net income (loss) $250,998 $(135,006) $ 6,183 $ (8,251) $ 14,975
====================================================================
</TABLE>
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
-----------------------------------
<TABLE>
<CAPTION>
Earnings per common and common
equivalent share: YEAR ENDED MARCH 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Income (loss) before extraordinary
item and cumulative effect of an
accounting change:
Basic $15.41 $(8.38) $ 0.45 $(0.51) $0.94
Diluted $15.16 $(8.38) $ 0.44 $(0.51) $0.91
Extraordinary item:
Basic $(0.07) -- -- -- --
Diluted $(0.07) -- -- -- --
Income (loss) before cumulative effect
of an accounting change:
Basic $15.34 $(8.38) $ 0.45 $(0.51) $0.94
Diluted $15.09 $(8.38) $ 0.44 $(0.51) $0.91
Cumulative effect of an accounting
change:
Basic -- -- $(0.06) -- --
Diluted -- -- $(0.06) -- --
Net income (loss) per share:
Basic $15.34 $(8.38) $ 0.39 $(0.51) $0.94
Diluted $15.09 $(8.38) $ 0.38 $(0.51) $0.91
Average number of common shares outstanding:
Basic 16,362 16,108 15,809 16,062 15,910
Diluted 16,628 16,108 16,317 16,062 16,472
Cash dividends per common share -- $ 0.01 $ 0.01 $ 0.01 $0.01
</TABLE>
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION
-------------------
Summary
The following table sets forth for the periods indicated (1) certain expense and
income items expressed as a percentage of total revenues, and (2) the percentage
increase or decrease of such items as compared to the corresponding prior
period. This table and the textual discussion and analysis which follows should
be read in conjunction with the accompanying consolidated financial statements,
including the notes thereto, for each of the three years in the period ended
March 31, 2000, as included in Item 8 herein.
<TABLE>
<CAPTION>
Period to Period
----------------
Percentage of Total Revenues (Decrease)/Increase
---------------------------- ------------------------------------
2000 1999
Year Ended March 31, Compared to Compared to
2000 1999 1998 1999 1998
--------------------------------------------- ------------------------------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Product revenues, net 77.8% 79.1% 83.1% (9.2)% (17.1)%
Customer service revenues, net 22.2 20.9 16.9 (2.3) 8.0
---------------------------------------------
Total net revenues 100.0 100.0 100.0 (7.7) (12.9)
Cost of product revenues 64.1 62.1 49.0 (4.7) 10.4
Cost of customer service revenues 13.7 13.9 10.7 (8.7) 12.8
Selling expenses 21.7 24.3 18.0 (17.6) 17.1
Product development and engineering exp. 7.9 10.8 8.3 (32.9) 14.6
General and administrative expenses 17.3 13.9 8.7 15.0 39.2
Other operating items 0.0 2.0 1.3 N.M. 33.0
---------------------------------------------
Total costs and expenses 124.7 127.0 96.0 (9.4) 15.2
(Loss) income from operations (24.7) (27.0) 4.0 (15.5) (689.1)
Interest income 0.1 0.2 0.4 (18.6) (49.1)
Interest expense (3.8) (2.5) (1.6) 42.5 37.5
Other non-operating income (expense) 117.2 (0.1) 0.1 230.2 (166.2)
---------------------------------------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of an accounting change 88.8 (29.4) 2.9 379.2 (984.2)
Provision for income taxes 19.9 4.7 1.3 291.1 212.3
---------------------------------------------
Income (loss) before extraordinary
item and cumulative effect of an
accounting change 68.9 (34.1) 1.6 286.7 (1,975.3)
---------------------------------------------
Extraordinary item, net of tax 0.3 -- -- N.M. --
Income (loss) before cumulative effect
of an accounting change 68.6 (34.1) 1.6 285.9 (1,975.3)
---------------------------------------------
Cumulative effect of an accounting
change, net of tax -- -- 0.2 -- N.M.
---------------------------------------------
Net income (loss) 68.6% (34.1)% 1.4% 285.9% N.M.
=============================================
</TABLE>
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL
FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS
REGARDING CERTAIN TRENDS OR OTHER FORWARD-LOOKING INFORMATION CONCERNING THE
COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES AFFECTING OR RELATING
TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE PROTECTIONS AFFORDED
"FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS MADE HEREIN AND
ELSEWHERE IN THIS FORM 10-K ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES,
WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
FORWARD-LOOKING STATEMENTS. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW
AND OTHER CAUTIONARY STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND
ELSEWHERE, IN THIS FORM 10-K FOR A DISCUSSION OF THE IMPORTANT FACTORS AFFECTING
THE REALIZATION OF THOSE RESULTS.
Overview
In fiscal 2000, the Company recorded net income of $251.0 million or $15.09 per
common share (diluted) as compared to net loss of $135.0 million or $8.38 per
common share (diluted) recorded in fiscal 1999. Consolidated revenues decreased
$30.6 million or 8% from fiscal 1999 levels to $365.8 million. The Company
recorded a loss from operations of $90.4 million for fiscal 2000 compared to
$106.9 million incurred in fiscal 1999. The fiscal 2000 operating results
included significant inventory and bad debt charges aggregating $30.7 million
and $5.1 million, respectively. Furthermore, the Company's results included
significant charges related to the transition of its headquarters from Akron to
Cincinnati, to the repurchase of the minority interests of Metanetics
Corporation ("Metanetics"), a subsidiary and a licensor and developer of image
processing technology, and to a loss on a sales contract with a major domestic
retailer of $4.0 million, $3.1 million and $2.0 million, respectively. The
fiscal 1999 operating results included $8.1 million of costs incurred in
response to takeover and proxy contest proposals as well as terminated
discussions of proposed business combination transactions.
During fiscal 2000, the Company recorded two significant transactions related
to its former Aironet subsidiary. During July 1999, Aironet became publicly
traded through a public offering producing proceeds, net of cash given of $6.1
million, to the Company of $17.2 million and a non-operating gain on sale of
subsidiary stock of $32.0 million. As a result of this transaction, the Company
ceased consolidation of Aironet effective April 1, 1999. During March 2000, the
merger of Aironet with Cicso Systems, Inc. ("Cisco") was consummated. The
Company recorded the increase in the carrying value of Aironet common stock
held to the fair value of the Cisco stock held upon consummation, which
resulted in a net pre-tax gain of $396.2 million. Shortly after the
consummation of the merger noted above, the Company sold $150.0 million of its
Cisco holdings, extinguished its existing bank debt of $76.6 million and paid
off a significant portion of its current obligations. At March 31, 2000, the
Company held $321.9 million of Cisco shares which it held at fair value. As a
result of the events described above, the Company's liquidity has improved
markedly between fiscal 2000 and fiscal 1999. The Company's working capital has
increased to $126.0 million at March 31, 2000 as compared to $34.3 million at
March 31, 1999. Additionally, the Company's investments in accounts receivable
and inventories decreased $60.8 million between fiscal 2000 and fiscal 1999.
The Company's stockholders' equity increased to $321.8 million for fiscal 2000
as compared to $17.0 million for fiscal 1999. Refer to Note 17 - Divestitures
and Subsidiary Stock Transactions for a discussion of these transactions.
Additionally, the Company's results include a tax provision of $72.8 million,
excluding extraordinary items, on pre-tax income of $324.9 million. The Company
reestablished net deferred tax assets based on the Company's current assessment
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
regarding the utilization of such assets which took into account the gains noted
above and related tax planning strategies. At March 31, 2000 the Company had net
deferred tax assets of $25.6 million and net deferred tax liabilities of $109.5
million.
The Company anticipates that it will incur an operating loss in the first three
quarters subsequent to March 31, 2000 as the Company's management continues to
review all aspects of operations in order to improve profitability. Management
actions taken to increase the efficiency of the Company's operations may result
in one-time charges during the upcoming fiscal year.
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. Further, there is no assurance that the Company's strategies and
plans will take into account all market conditions and changes thereto or that
such strategies and plans will be successfully implemented. Accordingly,
neither the historical results presented in the Company's consolidated
financial statements and discussed herein, nor any forward-looking statements
in this Form 10-K, are necessarily indicative of the Company's future results.
See "Factors That May Affect Future Results" for a discussion of risk factors
which may affect the Company's future results of operations.
Factors That May Affect Future Results
The risks and other important factors which may affect the Company's business,
operating results, and financial and other conditions include, without
limitation, the following:
The Company's results of operations are affected by a variety of factors,
including economic conditions generally (both domestic and foreign) as well as
those specific to the industry in which it competes, decreases in average
selling price over the life of any particular product, the timing, manufacturing
complexity and expense of new product introductions (both by the Company and its
competitors), the timely implementation of new manufacturing technologies, the
ability to safeguard patents and other intellectual property in a rapidly
evolving market, the rapid increase in demand for some products and the rapid
decline in demand for others and the Company's ability to anticipate and plan
for that changing market demand. Certain of these factors are beyond the
Company's control.
Historically, the Company's shipments during any particular quarter generally
represent orders received either during that quarter or shortly before the
beginning of that quarter. The Company endeavors to maintain sufficient levels
of purchased components to meet the delivery requirements of its customers, but
there can be no assurance that during any given quarter, the Company has or can
procure the appropriate mix of purchased components to accommodate such orders.
Therefore, the Company's financial performance in any quarter is dependent to a
significant degree upon obtaining orders which can be manufactured and delivered
to its customers in that quarter. As a result, financial performance for any
given quarter cannot be known or fully assessed until near the end of that
quarter.
The Company has also historically recognized a substantial portion of its
product revenues in the last month of each quarter. A significant portion of the
Company's expenses are relatively fixed, and timing of increases in such
expenses is based in large part on the Company's forecast of future revenues. As
a result, if revenues do not meet expectations, the Company may be unable to
quickly adjust expenses to levels appropriate to actual revenues, which could
have a materially adverse effect on the Company's results of operations.
The Company's sales efforts have increasingly been focused on sales, both by the
Company directly and through OEMs, VARs, ISVs and other indirect sales channels,
of complete data transaction systems rather than on sales of handheld computer
products alone. System sales tend to be more costly and, therefore, require a
longer selling cycle, longer payment terms and more complex integration and
installation services.
20
<PAGE> 22
The markets in which the Company competes are intensely competitive and
characterized by increasingly rapid technological change, introduction of new
products with improved performance characteristics, product obsolescence and
price erosion. Failure to keep pace with product and technological advances
could negatively affect the Company's competitive position and prospects for
growth. Customers' anticipation of new or enhanced product offerings by the
Company or a competitor may lead them to defer purchases of the Company's
existing products. In addition, companies that are participants in the broader
computer industry are potential competitors. Some of the Company's competitors
and potential competitors have substantially greater financial, technical,
intellectual property, marketing and human resources than the Company.
The Company's future success depends on its ability to develop and rapidly bring
to market technologically advanced products. From time to time the Company
invests in development stage and other entities who possess or who could
potentially possess strategically important technologies. Due to the nature of
these entities and their operations, there can be no assurance that these
investments will be realizable or will result in marketable and/or successful
products. There can be no assurance that the Company's research and development
activities will lead to the commercially successful introduction of new or
improved products or that the Company will not encounter delays or problems in
connection with those products. The cost of perfecting new and improved
technologies to satisfy customer quality and delivery expectations as they are
brought to market cannot always be fully anticipated and may adversely affect
Company operating profits during such introductions. In addition, the average
selling prices for computer products generally decrease over the products'
lives. To mitigate such decreases, the Company seeks to reduce manufacturing
costs of existing products and to introduce new products, functions and other
price/performance-enhancing features. To the extent that these product
enhancements do not occur on a timely basis or do not result in a sufficient
increase in sales prices to end users, the Company's operating results could be
materially adversely affected.
To date, the Company's revenues have been concentrated in the retail industry,
historically representing over 50% of its total revenues. Among other factors,
the economic condition and prospects of current and prospective customers in the
markets which the Company serves may affect the Company's own financial results.
The Company's future growth depends, in part, on its ability to successfully
penetrate and expand its revenues in new markets as well as increased
penetration in the retail market. There can be no assurance that penetration and
expansion into new and existing markets can be profitably achieved.
The Company believes its future success is also dependent, in part, upon its
ability to continue to enhance its product offerings through internal
development and the acquisition of new businesses and technologies, but there
can be no assurance that the Company will be able to identify, acquire or
profitably operate new businesses or otherwise implement its growth strategy
successfully. For the Company to manage its growth and integrate any newly
acquired entities, it must continue to improve operations and financial and
management information systems and effectively motivate and manage employees. If
the Company is unable to successfully pursue and manage such growth, its
business and results of operations could be adversely affected.
The Company regards certain of its hardware and software technologies as
proprietary and relies on a combination of United States and foreign patent,
copyright, trademark and trade secret laws, as well as license and other
contractual confidentiality provisions, to protect its proprietary rights.
Despite the Company's efforts to safeguard its proprietary rights, there can be
no assurance that the Company will be successful in doing so or that the
Company's competitors will not independently develop or patent technologies that
are substantially equivalent or superior to or otherwise circumvent the
Company's technologies and proprietary rights.
21
<PAGE> 23
The Company's products utilize hardware and software technologies licensed from
third parties. There can be no assurance that the Company will be able to
license needed technology in the future. An early termination of certain of
these license agreements (including patent rights licensed from Symbol
Technologies, Inc., one of its principal competitors, necessary for the
Company's manufacture and sale of its integrated laser scanning terminals which
account for a material portion of the Company's current sales) could have a
materially adverse effect on the Company's ability to market certain of its
products and, hence, on its business, results of operations and financial
condition. The Company believes that its products, processes and trademarks do
not infringe on the rights of third parties, but third parties have asserted,
and there can be no assurance that they will not in the future assert,
infringement or other related claims against the Company or its licensors. Any
infringement claim or related litigation against the Company, or any challenge
to the validity of the Company's own intellectual property rights, and the
expense of defending the same could materially adversely effect the Company's
ability to market its products and, hence, its business, results of operations
and financial condition.
Certain of the Company's products, sub-assemblies and components are procured
from single source suppliers, and others are procured from only a limited number
of suppliers. The Company has in the past encountered, and may in the future
encounter, shortages of supplies and delays in deliveries of product,
sub-assemblies and components from its third party suppliers; shortages in
supplies may also be accompanied by increased prices for the limited quantities
that are available. Such shortages and delays, or should any third party
supplier become unable or unwilling to supply such items to the Company
consistent with the Company's volume and quality requirements, could have a
material adverse effect on the Company's ability to ship products, and in turn,
its business and results of operations could be materially adversely affected.
As a substantial portion of the Company's total revenues, ranging from
approximately 25%-30% in recent years, is from customers located outside of the
United States, the Company's results could be negatively affected by global and
regional economic conditions, changes in foreign currency exchange rates, trade
protection measures, regulatory acceptance of the Company's products in foreign
countries, longer accounts receivable collection patterns and other
considerations peculiar to the conduct of international business. Additionally,
the Company is subject to similar risks in its procurement of certain of its
products, components and sub-assemblies outside the United States. Economic
difficulties experienced in one or more foreign countries can have an adverse
impact on business activities elsewhere in the world, which could materially
adversely affect the Company's results of operations.
Certain of the Company's products intentionally transmit radio signals as part
of their normal operation. These products are subject to regulatory approval,
restrictions on the use of certain frequencies and the creation of interference,
and other requirements by the Federal Communications Commission and
corresponding authorities in each country in which they are marketed. Regulatory
changes could significantly impact the Company's operations by restricting the
Company's development efforts, making current products obsolete or increasing
the opportunity for additional competition. The intentional emission of
electromagnetic radiation has also been the subject of recent public concern
regarding possible health and safety risks, and though the Company believes that
the low power output and the distance typically maintained between a product and
the user means that its products do not pose material safety concerns, there can
be no assurance that such safety issues will not arise in the future and will
not have a materially adverse effect on the Company's business.
The Company's management team continues to work on the implementation of the
"design-to-cost" program, MRP-II material resource planning process and other
business process improvement initiatives begun during fiscal 2000 to foster
future, profitable growth. Though management believes that those initiatives are
the best means for improving the Company's business operations, financial
results and future prospects, there can be no assurance that management will be
able to obtain and successfully deploy the necessary technical, production,
financial, human and other resources and otherwise implement the initiatives or
that their business improvement strategy will achieve the desired results. If
management is unable to successfully achieve and manage the desired growth, its
business and results of operations could be adversely affected
22
<PAGE> 24
Among other things, the Company's future success depends in large part on the
continued service of its key technical, marketing and management personnel and
on its ability to continue to attract and retain qualified employees,
particularly those highly skilled design, process and test engineers involved in
the manufacture of existing products and the development of products and
processes. The competition for such personnel is intense, and the loss of key
employees could have a materially adverse effect on the Company's business,
financial condition and results of operations.
In addition to the factors discussed above and elsewhere in this Annual Report
on Form 10-K which may adversely affect the Company's conduct of its business
and the results thereof, the Company's financial condition is also subject to
the possible adverse effects of certain pending litigation and other
contingencies discussed above under "Item 3. LEGAL PROCEEDINGS" and in Note 19 -
Commitments and Contingencies to the consolidated financial statements included
below in Item 8.
Readiness for the Year 2000
As the end of the twentieth century neared, there was worldwide concern
regarding the use by many computer programs of only the last two digits rather
than four to identify the year in a date field and the potential that that
programming convention could cause system failures and miscalculations
disruptive of business operations when processing dates in the twenty-first
century. The Company, like many others, took precautionary measures to protect
against such difficulties as previously reported in the Company's filings. As
there discussed, the Company's new corporate-wide information systems
installation, substantially completed during the Company's second quarter of
fiscal 2000, was undertaken as a strategic business initiative independent of
Year 2000 considerations, that project was also designed to make the Company's
information systems Year 2000 ready; for cost and other additional information
regarding the information systems installation project, see "Operating Expenses"
and "Cash Flows from Investing Activities" below. Since the turn of the
millennium, the Company has not encountered any material Year 2000 readiness
issues that have had or may have a material effect on the Company's business,
financial condition or results of operations.
<TABLE>
<CAPTION>
Revenues
(In thousands)
2000 vs. 1999
Year ended March 31, (Decrease) Increase
-------------------------------------- --------------------------------------
2000 1999 Dollar Percentage
-------------- ------------------ ---------------- ----------------
(Restated)
<S> <C> <C> <C> <C>
Product, net $284,706 $313,480 $(28,774) (9.2)%
Customer service, net 81,045 82,914 (1,869) (2.3)%
-------------- ------------------ ----------------
Total net revenues $365,751 $396,394 $(30,643) (7.7)%
============== ================== ================
</TABLE>
The Company's consolidated revenues for fiscal 1999 included revenues from
Aironet related to outside customers of $28.4 million. Due to the
deconsolidation of Aironet as noted above, the Company experienced a decrease in
revenues since it did not include these Aironet revenues in its fiscal 2000
results.
During the fiscal years presented, product revenues include the sale of portable
tele-transaction computers ("PTCs") including rugged, wireless, mobile computers
and pen-based, touch-screen workslates; telephony products; hardware
accessories; wireless data communication products; custom application software
and software licenses; and a variety of professional services, including system
integration and project management.
23
<PAGE> 25
Consolidated product revenues decreased during fiscal 2000 as compared to fiscal
1999 levels after removing the impact of deferred revenue at March 31, 1999. The
changes to consolidated product revenue as described herein include the effect
of the restatement of $8.1 million of revenue from fiscal 1998 to fiscal 1999
(refer to Note 3 - Restatement for further detail regarding the restatement).
Demand for the Company's products was lower as compared with fiscal 1999,
particularly in the Company's North American operations where the Company's
legacy products continue to experience competitive pressures. Overall, both
quantities shipped and average selling prices per unit decreased. The Company's
revenues during fiscal 2000 also contained a relatively high proportion of batch
products. This product mixture, as well as a general decrease in selling prices
per PTC unit, served to reduce the average selling price of the Company's
products.
Product revenues for fiscal 2000 included revenues of $44.7 million related to
the rollout of Company products to a large domestic retailer. Revenues related
to this one customer accounted for 16% of the Company's consolidated product
revenues for fiscal 2000. Product revenues related to this customer were $21.7
million in fiscal 1999. Revenues related to this customer are earned primarily
from high volume-low margin business of the Company's PTC 960 product.
Therefore, the relatively high volume of business with this customer contributed
to the lowered average selling price of the Company's products as described
above.
24
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
Deferred revenues at March 31, 2000, including reductions to accounts receivable
and deferred hardware revenue liabilities, decreased significantly to $3.5
million from $27.7 million at March 31, 1999. Of this decrease, $21.8 million
represents revenue recognized in fiscal 2000 related to products that were
shipped but deferred in fiscal 1999, pending the satisfaction of the Company's
revenue recognition criteria. The primary reasons for the deferral of these
revenues, during fiscal 1999, included the shipment of products prior to
installation by the Company, the products not conforming to customer
specifications or the treatment of transactions as operating leases due to the
Company's guarantee of customers' lease payments. During fiscal 2000, revenues
previously deferred under operating lease accounting of $6.9 million were
re-characterized as a liability due to a financial institution under the related
guarantee of the Customer's lease payments. The primary cause of deferrals of
revenues at March 31, 2000 related to the shipment of the Company's products to
customers that did not meet the Company's revenue recognition criteria regarding
customer acceptance.
The volume of net revenues from the Company's Value-Added Distributor ("VAD")
channel, excluding the impact of changes to the reserve for sales returns and
allowances, decreased approximately $59.2 million for fiscal 2000 as compared to
fiscal 1999. This decrease was caused by new management's emphasis on the
Company's direct sales channel. Revenues related to Value-Added Distributors now
represent less than 10% of product revenues. This decrease is included in the
discussion of revenue increases and decreases above.
The Company anticipates that product revenues will increase during the next
twelve months to over $300.0 million. The Company also anticipates that product
revenues from a single domestic retail customer will remain a significant
portion of the Company's product revenues, but will diminish as a percentage of
product revenues due to growth in other areas. Should these revenues not
materialize as anticipated, or should unforeseen circumstances prevent the
introduction or market acceptance of these products, product revenues could be
negatively affected.
Consolidated customer service revenues decreased $1.9 million or 2% for fiscal
2000 as compared to fiscal 1999. The majority of the decrease in customer
service revenues was caused by a decrease in spare parts, time and material
repairs and upgrade revenues. These decreases were offset by increases in
contract revenues during fiscal 2000 of approximately 6% as compared to fiscal
1999. The decrease in customer service revenue also reflects the impact of
decreased product revenues over the past four quarters. Additionally, a portion
of the decrease was caused by the absence of Aironet's customer service revenues
of $.8 million.
The Company anticipates an increase of approximately 5% in customer service
revenues for fiscal 2001 as compared to fiscal 2000.
Revenues from the Company's international operations including distributors and
Canada, aggregated $127.6 million for fiscal 2000 and decreased $3.1 million or
2% during fiscal 2000 as compared to fiscal 1999. The results of the Company's
international operations were negatively impacted by approximately $4.6 million
due to changes in foreign currency exchange rates during fiscal 2000. The
decrease in the Company's international revenues for the year was the result of
decreased revenues from shipments to the Company's international distributors,
particularly in Latin America, of $4.4 million, as well as, decreased revenues
in the Company's Canadian subsidiary of $3.5 million. These decreases were
partially offset by increased revenues from the Company's European subsidiaries
of $3.1 million and revenues from the Pacific Rim region of $1.7 million.
25
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
The Company's reserve for sales returns and allowances decreased from a balance
at March 31, 1999 of $15.0 million to $5.3 million at March 31, 2000. During
fiscal 2000, the Company issued credits for sales returns and allowances of
$20.9 million as compared to $42.2 million issued during fiscal 1999. The total
impact of credits issued, and changes to the reserve for sales returns and
allowances on product revenues, for fiscal 2000 was $11.1 million compared to
$54.0 million for fiscal 1999. The overall decrease in the reserve for sales
returns and allowances was caused by fewer sales and corresponding outstanding
accounts receivable from the Company's Value Added Distributors ("VADs") and by
reduced rates of return and cash collections in the Company's direct sales
channel. At March 31, 2000 the Company had $4.2 million outstanding accounts
receivable from VADs and a reserve of $2.4 million against those accounts. This
compares to outstanding accounts receivable of $21.4 million and a reserve of
$9.0 million at March 31, 1999. Sales credit, returns and allowance rates for
the VAD channel for fiscal 2000 increased to 36% from a rate of 20% experienced
in fiscal 1999. The sales credit, returns and allowance rates for the Company's
other sales channels, predominantly direct sales to customers, decreased to 5%
in fiscal 2000 as compared to 8% experienced in fiscal 1999. This decrease was
the primary cause for the decrease in the reserve for sales returns and
allowance for customers other than VADs to $2.9 million at March 31, 2000, down
from $6.0 million at March 31, 1999. The secondary cause of this decrease was
the decrease in the outstanding accounts receivable base for customers other
than VADs.
<TABLE>
<CAPTION>
Revenues
(In thousands)
1999 vs. 1998
Year Ended March 31, (Decrease) Increase
------------------------------------------ --------------------------------------
1999 1998 Dollar Percentage
-------------------- ------------------ ---------------- -----------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Product, net $313,480 $378,310 $(64,830) (17.1)%
Customer service, net 82,914 76,746 6,168 8.0 %
------------------ ----------------
--------------------
Total net revenues $396,394 $455,056 $(58,662) (12.9)%
==================== ================== ================
</TABLE>
Consolidated product revenues decreased $64.8 million or 17% during fiscal 1999
as compared to fiscal 1998. These changes include the restatement of $8.1
million of revenues from fiscal 1998 to 1999 (Refer to Note 3 - Restatement for
further detail regarding the restatement). Product revenues were negatively
impacted by the absence, during fiscal 1999, of a sale of approximately $30.0
million to a major domestic retail customer recorded in the third quarter of
fiscal 1998. Additionally, fiscal 1999 revenues were negatively impacted by the
cancellation, during the third quarter of fiscal 1999, of a $13.0 million order
to a large domestic logistics company. Fiscal 1999 product revenues were further
negatively impacted by a delay in the recognition of revenue from extended
rollouts of Company products to customer sites of $12.5 million. An additional
$10.4 million in revenue related to goods shipped to customers was delayed due
to customer acceptance and product non-conformance issues. The Company's product
nonconformance issues and the timing of revenue transactions where the Company
provides professional services on extended product rollouts were the primary
causes of the increase in the amount of revenues deferred between fiscal years
1999 and 1998. There were a few transactions of relatively large size that gave
rise to these deferrals. The extended product rollouts involved new customers
where the Company's products would be installed at all of the customers store
sites over periods ranging from one month to almost one year. The product
nonconformance issues experienced by the Company occurred with a large domestic
retailer and
26
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
involved one of the Company's new wireless product configurations. This one
transaction accounted for $8.5 million of the deferred product revenue. Revenue
for goods shipped of $8.0 million was deferred due to the Company's guarantee
of lease payments to third-party lessors of Company products. The increase in
the Company's reserve for sales returns and allowances of $11.8 million
contributed to the decrease in consolidated revenue. The increase in sales
returns and allowances was due to several factors. The average sales returns
were higher during fiscal 1999 as compared to fiscal 1998. The amount of sales
returns which reduced consolidated product revenues recorded during fiscal 1999
were $54.0 million as compared to $13.3 million during fiscal 1998, an increase
of $40.7 million. The amount of credits issued also increased to $42.2 million,
up from $14.8 million issued in fiscal 1998. The significant increase in the
domestic sales returns was partially caused by increased returns of direct
product revenues whose average credits as a percentage of gross revenues
increased from 4% during fiscal 1998 to 8% during fiscal 1999. The increase in
revenue credits granted was primarily the result of product quality issues with
the Company's pen-based product offerings, as well as, weakening demand for
those products during the later half of the fiscal year. The Company's newer
more sophisticated pen-based products and the multiple configurations of those
products, along with newer more complex installations, caused product quality
issues while attempting to meet customer performance demands and
specifications. The Company also experienced significant sales returns within
the Company's Value-Added Distributor ("VAD") sales channel. Product quality
issues, price protection adjustments and distributor stock balancing returns
increased the return rate for the VAD sales channel as the Company tried to
better manage this relatively new sales channel. Additionally, lower revenue
levels due to decreased management emphasis on the indirect sales channel
during the year further increased the average credits as a percentage of gross
revenues.
The $6.2 million or 8% increase in consolidated customer service revenue during
fiscal 1999 as compared to fiscal 1998 was primarily due to the continued
increase in the installed base of the Company's products, which in turn
generated increased maintenance and "time and material" billings. Consolidated
customer service revenues, as a percentage of total revenues, increased to 21%
in fiscal 1999 from 17% in fiscal 1998. This increase was primarily due to a
decrease in product revenues for the reasons described above. The product
revenue issues described above did not have an immediate impact on the levels of
customer service revenues recorded in fiscal 1999, but may limit service revenue
growth in future years.
The Company's international operations (including Canada and international
distributors) provided revenues of $130.7 million and $133.7 million in fiscal
1999 and 1998, respectively. This decrease was primarily due to the relocation
of the Company's Aironet Wireless Communication, Inc. ("Aironet") subsidiary, a
developer, manufacturer, and marketer of wireless LAN systems, Canadian
operations to Akron, Ohio during the second and third quarters of fiscal 1998.
This decrease of $6.5 million was offset by a $2.4 million increase in revenue
reported by other foreign Company subsidiaries as well as increased sales to
foreign distributors. The strength of the United States dollar against the
local, functional currencies of certain of the Company's foreign subsidiaries
negatively impacted international revenues by $1.5 million or 1.5% during fiscal
1999 as compared to the $6.2 million or 6.3% foreign currency impact in fiscal
1998.
27
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Cost of Revenues
(In thousands)
2000 vs. 1999
Year ended March 31, (Decrease)
------------------------------------- --------------------------------------
2000 1999 Dollar Percentage
--------------- ------------------ ----------------- ----------------
(Restated)
<S> <C> <C> <C> <C>
Product $234,616 $246,125 $(11,509) (4.7)%
Customer service 50,266 55,078 (4,812) (8.7)%
--------------- ------------------ -----------------
Total cost of revenues $284,882 $301,203 $(16,321) (5.4)%
=============== ================== =================
Cost of product revenues as
percentage of product
revenues, net 82.4% 78.5%
Cost of customer service
revenues as a percentage
of customer service 62.0% 66.4%
revenues, net
</TABLE>
The Company's consolidated cost of revenues for fiscal 1999 included costs of
revenues related to Aironet's outside customers of $18.7 million. Due to the
deconsolidation of Aironet as noted above, the Company experienced a decrease in
cost of revenues since it did not include Aironet's costs of revenues in its
fiscal 2000 results.
The increase of 4% in the consolidated cost of product revenues as a percentage
of consolidated product revenues during fiscal 2000 as compared to fiscal 1999
was primarily the result of several offsetting factors as follows. As mentioned
above, the cost percentage increased due to the deconsolidation of the results
of Aironet for fiscal 2000. The intercompany profit benefit related to Aironet
products used as components of the Company's product was reduced for fiscal 2000
by $9.2 million as compared to fiscal 1999. The Company recorded a loss on a
large retail contract and a loss of normal gross margin for products shipped
under this contract in fiscal 2000 of $3.5 million. Additionally, the Company
experienced greater purchase price variances of $3.3 million compared to the
prior year. For fiscal 2000, increased fixed royalty costs related to a supply
agreement with Aironet were $3.0 million. Additionally, the Company recorded a
charge of $2.6 million related to losses on inventory purchase commitments.
Finally, during fiscal 2000, warranty accruals were increased $.6 million due to
specific warranty concessions granted to selected customers, and additional
provisions of $.7 million were recorded for increased taxes, other than income
taxes, related to manufacturing operations.
These increases to the cost percentage were partially offset by the following
decreases to the cost percentage. The provisions for inventory obsolescence
decreased $6.8 million in fiscal 2000 as compared to fiscal 1999. The cost
percentage was also favorably impacted by lower provisions for fulfillment fees
payable to the Company's VADs of $2.4 million, due to the lower volume of goods
sold through that distribution channel. Lower amounts of amortization of
capitalized software costs of $1.5 million and decreased provisions for losses
and obsolescence related to test equipment held by customers of $1.3 million
also caused a decrease in the cost percentage. The decrease in amortization of
capitalized software was due to lower amounts capitalized in prior years. The
decrease in the provisions related to test equipment was a result of improved
procedures at customer sites. Increased gross margins from the Company's
international and North American operations also contributed to the favorable
decrease in the cost percentage of approximately .5%.
28
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
The Company is subject to a high degree of technological change in market and
customer demands. The Company therefore continually monitors its inventories for
excess and obsolete items based upon a combination of historical usage and
forecasted usage of such inventories. Additionally, discrete provisions are made
when existing facts and circumstances indicate that the subject inventory will
not be utilized.
Management disposes of excess and obsolete inventory as necessary and as
manpower permits although there are no formal plans in place to do so. During
fiscal 2000, the Company disposed of $24.6 million of excess and obsolete
material. Of this amount $16.3 million related to manufacturing purchased
components, $1.8 million related to the Company's customer service inventories
and $1.0 million related to the Company's international operations. There were
no material recoveries related to the disposal of this material. Based upon
facts and circumstances that occurred in the fourth quarter of fiscal 2000 there
was an $.8 million recovery of the $37.4 million provision made in fiscal 1999
for excess and obsolete inventory. This recovery related to $10.2 million of
inventory purchased by an outsourced manufacturer to build products for the
Company that were identified as obsolete in fiscal 1999. The outsourced
manufacturer utilized $.8 million of this obsolete inventory for certain of
their other customers. The Company previously agreed to reimburse the outsourced
manufacturer for this $10.2 million of inventory that they purchased based on
projected orders from the Company that did not materialize. The $.8 million
recovery reduced the outstanding obligation due to this outsourced manufacturer.
Inventory allowance provisions for fiscal 2000 were composed of manufacturing
purchased components of $14.6 million, customer service spare parts and used
equipment of $.4 million, trade-in and remanufacturing inventory of $14.5
million and international finished goods inventories of $1.2 million. The $14.6
million provision for manufacturing purchased components was due to a reduction
in shipments and expected demand for certain of the Company's older product
lines and the Company's refinement of the product life cycle which takes into
account technological and market conditions including the impact of the
introduction of new products. The $14.5 million provision for trade-in and
remanufacturing inventory was primarily due to a net realizable value charge on
existing inventory which came about due to the impact of the acceptance of large
quantities of trade-ins of the Company's older products to satisfy a major
customer's requirements. The $1.2 million provision for international finished
goods was due to a write-down of the carrying value on older products.
At March 31, 2000, inventory allowance accounts aggregated $40.5 million and
were composed of manufacturing purchased components of $30.5 million, customer
service spare parts and used equipment of $8.1 million and international
finished goods inventories of $1.9 million. In addition to the inventory
allowance accounts, the Company has recorded accrued liabilities totaling $.2
million for purchase commitments to outside contract manufacturers for
discontinued products and $2.6 million for a loss on an inventory purchase
commitment to a vendor.
At March 31, 2000, the Company had approximately $6.2 million of finished goods
inventory held at distributors and customers, and approximately $10.1 million of
manufacturing purchased components at contract manufacturers. At March 31, 1999,
the Company had approximately $25.7 million of finished goods inventory held at
distributors and customers, and approximately $5.7 million of manufacturing
purchased components at contract manufacturers. The decrease in the amount of
finished goods held at distributors and customers was the result of revenue
recognized, for previously deferred transactions, upon installation and customer
29
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
acceptance of the Company's products. Additionally, the inventory value of
finished goods due back from customers for product returns decreased in
proportion to the decrease in the reserve for sales returns and allowances.
The Company accrues fees due its VADs for the distribution services and
technical support provided to end users, as well as, cooperative advertising
costs. The Company accrues for these distributor fees as goods are shipped to
VADs and the related revenues are recognized, in order to match revenues and
related costs. Cooperative advertising costs and technical support are accrued
throughout the fiscal year based upon the prior year's experience levels and
current agreements with VADs. During fiscal 2000, the Company incurred $1.4
million of these fees.
The decrease in the customer service cost of revenues as a percentage of
customer service revenues during fiscal 2000 resulted primarily from cost
containment efforts and lower cost benefits derived from the Company's service
repair operations in Ciudad Juarez, Mexico.
The Company believes it will realize improvements in the consolidated gross
margin percentage during the next fiscal year as compared to fiscal 2000. These
improvements are anticipated primarily due to the expected absence of unusual
charges that were experienced in fiscal 2000.
<TABLE>
<CAPTION>
Cost of Revenues
(In thousands)
1999 vs. 1998
Year Ended March 31, Increase
--------------------------------------- --------------------------------------
1999 1998 Dollar Percentage
----------------- ------------------ ----------------- -----------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Product $246,125 $222,990 $23,135 10.4%
Customer service 55,078 48,836 6,242 12.8%
----------------- ------------------ -----------------
Total cost of revenues $301,203 $271,826 $29,377 10.8%
================= ================== =================
Cost of product revenues as
percentage of product
revenues, net 78.5% 58.9%
Cost of customer service
revenues as a percentage
of customer service
revenues, net 66.4% 63.6%
</TABLE>
The consolidated cost of product revenues increased $23.1 million or 10% during
fiscal 1999 as compared to fiscal 1998. Cost of product revenues increased
despite the overall decrease in product revenues in fiscal 1999 of $64.8 million
as compared to fiscal 1998. In addition to the total excess and obsolete
inventory provisions of $37.4 million as discussed below, the Company incurred
increased costs related to underabsorbed manufacturing overhead costs due to
decreased volumes and manufacturing inefficiencies of $9.8 million and material
rework and repair costs of $3.0 million. The underabsorbed manufacturing
overhead costs were primarily caused by decreased and below normal production
volumes during the third and fourth quarters of fiscal 1999. The unfavorable
volume variances within the underabsorbed manufacturing overhead rates were not
capitalized within ending inventory. The manufacturing inefficiencies incurred
at the manufacturing plant were due to small sales order quantities, unplanned
sales order changes and sales order cancellations. These actions caused excess
and lost labor costs, overhead costs, purchase order changes, purchase order
cancellations, cancellation fees and restocking charges. The Company also
incurred severance charges related to
30
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
terminated manufacturing personnel of $.7 million, increased provisions for
warranties related to the Company's international operations of $.3 million, and
provisions for disputed royalties and vendor charges of $.7 million.
Consolidated inventory allowance accounts increased to $28.8 million at March
31, 1999, from $11.7 million at March 31, 1998. In addition to the inventory
allowance accounts, accrued liabilities totaling $12.4 million were provided for
purchase commitments to outside contract manufacturers for discontinued
products.
At March 31, 1999, the inventory allowance accounts were primarily composed of
manufactured purchased components of $22.9 million, customer service spare parts
and used equipment of $4.0 million and international finished goods inventories
of $1.9 million. The overall increase in the allowance accounts was due to
provisions related to the discontinuance of several of the Company's products,
including the PTC 1194, PTC 1124, PTC 1134 and PTC 1184 as well as other
products. The total charges that were related to the discontinuance of these
products were $23.6 million. These charges included costs for the net realizable
value of related tooling of $.8 million, reserves for related test and
demonstration equipment of $1.1 million and vendor contract cancellation costs
of $.8 million. A number of factors arose during the later part of the fiscal
year that contributed to management's decision to discontinue these products.
These factors included the extended length of time the development cycle
experienced with these products, customer acceptance issues related to products
shipped and more advanced features contained in competing products. These
factors led to a reduction in customer demand and a related backlog for these
products. Additionally, the effort required to modify the existing products to
meet increased customer demands for performance features was determined to be
cost prohibitive.
Provisions were made for manufactured components of $35.1 million customer
service spare parts and used equipment of $1.1 million and international
finished goods of $1.2 million. The provisions for remanufacturing obsolescence
were made as revenues related to the Company's remanufacturing operations did
not materialize as anticipated. During the fourth quarter of the fiscal year
ended March 31, 1999, the Company significantly reduced its management emphasis
on remanufacturing operations. Provisions for test equipment held by customers
were made as such inventory aged and was determined either not to be salable to
such customers or able to be returned and utilized by the Company. During the
year ended March 31, 1999, the Company reduced its shipments of test equipment
to customers as a sales tool.
During fiscal 1999, the following amounts were scrapped: manufactured purchased
components $3.7 million international inventories of finished goods $.5 million
and test equipment held at customers $3.7 million. Recoveries that were related
to the disposition of such inventory were immaterial.
At March 31, 1999, the Company had approximately $25.7 million of finished goods
inventory held at customers and distributors and approximately $5.7 million of
manufacturing components at contract manufacturers. At March 31, 1998, the
Company had approximately $12.5 million of finished goods inventory held at
distributors and customers and approximately $2.0 million of manufacturing
components at contract manufacturers. The increase in the inventories held by
distributors and customers directly corresponds to the deferral of revenue on
transactions that occurred late in fiscal 1999. Revenues related to these
transactions were deferred due to product quality and related customer
acceptance issues and future performance obligations of the Company such as
professional services on extended product rollouts. The Company did not have
these issues due to timing considerations at March 31, 1998; therefore, no
corresponding balance existed in
31
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
fiscal 1998. The increase in the reserve for sales returns and allowances was
also a factor in the increase in inventory held by distributors and customers
since the salvage value of product returns was included in this inventory. The
salvage value of inventory related to returned goods increased $4.7 million
between years. This increase was partially offset by a decrease in the amount of
test equipment held by customers.
The Company accrues fees due its VADs for distribution services and technical
support provided to end users, as well as, cooperative advertising costs. The
Company accrues for these distributor fees as goods are shipped to VADs and the
related revenues are recognized, in order to match revenues and related costs.
Cooperative advertising costs and technical support are accrued throughout the
fiscal year based upon the prior year's experience levels and current agreements
with VADs. During fiscal 1999, the Company incurred $2.4 million of these fees.
The increase in the fiscal 1999 consolidated customer service cost percentage
was primarily due to increased internal and contract labor and parts costs
associated with repair work performed on the Company's more sophisticated
products. It is estimated that these greater direct costs and excess repair
costs for warranty repairs was approximately $2.0 million. In addition to these
costs the Company also incurred severance charges related to terminated domestic
customer service personnel of $.3 million.
<TABLE>
<CAPTION>
Operating Expenses
(In thousands)
2000 vs. 1999
Year ended March 31, (Decrease) Increase
------------------------------------- --------------------------------------
2000 1999 Dollar Percentage
--------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Selling expenses $ 79,237 $ 96,109 $(16,872) (17.6)%
Product development and
engineering expenses 28,828 42,986 (14,158) (32.9)%
General and administrative
expenses 63,167 54,923 8,244 15.0 %
Unconsummated business
combination costs - 8,070 (8,070) (100.0)%
------------ ---------------- ---------------
Total operating expenses $171,232 $202,088 $(30,856) (15.3)%
============ ================ ===============
</TABLE>
The Company's consolidated selling expenses for fiscal 1999 included selling
expenses related to Aironet of $6.7 million. Due to the deconsolidation of
Aironet as noted above, the Company experienced a decrease in selling expenses
since it did not include the selling expenses related to Aironet in its fiscal
2000 results.
Consolidated selling expenses, as a percentage of revenues, decreased for fiscal
2000 as compared to fiscal 1999 from 24% to 22%. Contributing to the overall
dollar decrease in selling expenses was a decrease in U.S. commissions of $1.0
million for fiscal 2000 as compared to fiscal 1999. The decrease in commission
expense was primarily due to the decreased gross margin base on which
commissions were paid and fewer layers of sales management personnel earning
commissions. The domestic provision for bad debts decreased for fiscal 2000 by
$2.3 million. This decrease is primarily the result of net recoveries for
doubtful accounts related to a foreign distributor for fiscal 2000 of $.1
million as compared to provisions of $3.6 million for fiscal 1999. This resulted
in a reduction to fiscal 2000 provisions of $3.7 million as compared to fiscal
1999 as the foreign distributor's financial condition and payment history
improved. This decrease to the provisions
32
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
for doubtful accounts was partially offset by increased provisions of
approximately $1.0 million in the U.S. for small account balances that have aged
substantially and have not been collected. Management has turned these accounts
over to collection agencies and reserved for estimated losses. Also contributing
to the decrease in selling expenses were cost containment efforts in the
Company's North American sales operations, whose expenses decreased $7.7 million
for fiscal 2000 as compared to fiscal 1999. These decreases were composed
primarily of lower salaries and wages, sales expediting costs, advertising,
sales events and recruiting. These decreases were offset by incentive
compensation for the retention of key sales personnel of $1.0 million and
severance charges of $.6 million for 3 sales management personnel that were
terminated. Additionally, selling expenses for fiscal 2000 related to the
Company's international operations decreased by $.4 million and was the result
of the elimination of sales administration costs in the Company's Belgian
international headquarters of $1.6 million offset by severance charges related
to the Company's international sales operations of $1.2 million. Finally,
selling expenses for the Company's Metanetics subsidiary decreased $.4 million.
The Company's allowance for doubtful accounts decreased from a balance of $11.1
million at March 31, 1999 to a balance of $7.1 million at March 31, 2000. The
Company provided for $5.1 million of bad debts, and bad debt write-offs totaled
$9.0 million. These bad debt write-offs were primarily related to accounts
receivable from the foreign distributor referenced above.
Consolidated product development and engineering expenses as a percentage of
revenues decreased to 8% for fiscal 2000 as compared to 11% for fiscal 1999.
Product development and engineering expenses related to Aironet were $6.6
million for fiscal 1999. Approximately 46% of the decrease in product
development and engineering expenses was the result of the deconsolidation of
Aironet in fiscal 2000. The overall dollar decreases in product development and
engineering expenses were due to current management efforts to perform more
engineering tasks with Company personnel rather than with more expensive
contract engineering firms. These actions have reduced expenses related to
contract labor and outside engineering services by $3.6 million for fiscal 2000
as compared to fiscal 1999. Additionally, increased management focus on
engineering processes and job completion has resulted in reduced rework costs
and engineering scrap of $4.4 million. Engineering component parts usage also
decreased by $1.2 million in fiscal 2000 as compared to fiscal 1999. Indirect
engineering costs decreased due to cost containment efforts as employee
relocation expenses, rent and travel decreased by $1.6 million. Additionally,
the Company reduced its prototype costs by approximately $.8 million and
increased the capitalization of software costs which reduced gross expenses by
approximately $1.3 million. These decreases to engineering expenses were
partially offset by increased salaries and wages of $.2 million and increased
patent amortization costs of $1.6 million for fiscal 2000 as compared to fiscal
1999. The Company also incurred a nonrecurring compensation charge of $3.1
million for certain key employees concurrently with the repurchase of Metanetics
subsidiary stock, which resulted in compensation to certain key employees and
former option holders of Metanetics. The Company incurred third party
development charges of $.6 million during the third and fourth quarters of
fiscal 2000. The Company also incurred severance charges of $.2 million during
fiscal 2000 related to personnel changes in its product development and
engineering operations.
During fiscal 2000, the Company capitalized 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
33
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
Marketed" ("SFAS 86") of $3.6 million. These capitalized costs effectively
represent reductions to engineering expenses.
Consolidated general and administrative expenses as a percentage of revenues
increased to 17% for fiscal 2000 compared to 14% for fiscal 1999. The increase
in general and administrative expenses for fiscal 2000 was primarily due to a
$8.6 million increase in expenses related to the Company's corporate
information systems project. Included in this increase was amortization of
costs related to installed modules of $3.3 million as well as other costs which
may not be capitalized such as training and debugging costs of $5.3 million.
Additionally, the Company incurred greater bank fees of $2.2 million for fiscal
2000 related to its credit facilities as compared to fiscal 1999. The Company
also incurred increased professional fees of $1.0 million predominantly related
to SEC, audit and accounting as well as litigation matters. The Company accrued
$.9 million for net the present value of consulting fees payable under a
letter arrangement dated December 27, 1997, to Director and Secretary, Robert
A. Goodman upon his retirement from the Goodman Weiss Miller law firm, in
fiscal 2000. This agreement calls for payments aggregating $1.5 million,
payable in equal monthly installments over a ten-year period. The Company also
incurred several charges related to the relocation of its operations in Akron,
Ohio to Cincinnati, Ohio and The Woodlands, Texas. In accordance with the
requirements of Emerging Issues Task Force Issue No. 94-3 "Liability
Recognition for Cost to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3") and Staff Accounting Bulletin No. 100
"Restructuring and Impairment Charges" ("SAB 100"), the Company accrued $1.6
million for stay-on bonuses, healthcare and outplacement benefits for employees
in Akron who elected not to relocate and stayed through the transition process.
All of these accruals were made based upon specific employee termination
contracts and provisions were made based upon the amount of stay-on bonuses
earned during the transition period ending June 30, 2000. Additionally, the
Company incurred duplicate salaries related to the transition aggregating $.5
million. The Company also incurred excess contract labor costs of $1.4 million
to complete the transition of its new information management systems.
Recruiting and relocation expenses also increased by $.6 million due to the
transition. The Company also incurred lease abandonment charges, accelerated
depreciation of leasehold improvements and contract cancellation charges
related to its Akron, Ohio offices of $1.5 million, $.4 million and $.2 million
respectively. The Company also accrued $.5 million in incentive compensation
for its management group. No such accrual was made in fiscal 1999. During
fiscal 2000, the Company incurred $.4 million in asset impairment charges
related to the cessation of the Company's corporate jet operations, and
severance charges aggregating $.2 million.
These increases during fiscal 2000 were offset by a decrease in expenses due to
the absence of the $1.3 million charge related to start-up costs of a joint
venture in the People's Republic of China by the Company's Metanetics subsidiary
incurred during the third quarter of fiscal 1999. Additionally, the cessation of
the Company's corporate jet operations reduced operating expenses by $.9
million. General and administrative expenses decreased as the result of the
absence of a $1.3 million charge in fiscal 1999 related to the discontinuation
of consulting contracts between the Company and the Company's former Chairman
and CEO, Robert F. Meyerson. Also, the Company incurred $1.7 million in fiscal
1999 related to the termination of its then CEO and CFO, Frank E. Brick and
Kenneth W. Haver, respectively. No such charges took place in fiscal 2000.
Finally, travel expenses were reduced by $.6 million for fiscal 2000 compared to
fiscal 1999.
General and administrative expenses related to Aironet were $6.3 million during
fiscal 1999. These expenses included a $3.4 million stock based compensation
34
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
charge due to variable plan accounting and changes to the vesting provisions of
the underlying plan. Due to the removal of Aironet from the consolidated
financial statements of the Company, the Company incurred a charge of $.5
million to reflect the sublease loss and impaired value of leasehold
improvements on property leased by the Company and subleased to Aironet in
Akron, Ohio.
The Company's domestic accrual for severance costs decreased from a balance of
$3.4 million at March 31, 1999 to a balance of $1.8 million at March 31, 2000.
This decrease was caused by severance charges of $1.9 million during fiscal
2000, which were more than offset by severance payments of $3.5 million to
terminated employees. A total of 47 domestic employees were terminated during
fiscal 2000. The areas of the Company affected were domestic sales operations,
domestic product development, manufacturing operations and corporate
administration. In addition to the domestic severance activity, 4 employees were
terminated in the Company's international sales operations during fiscal 2000.
The severance recorded related to these employees was $1.2 million. At March 31,
2000, $.1 million was accrued related to international operations; $1.1 million
of the amount accrued of this severance has been paid. As discussed above, the
Company recorded $1.6 million in stay-on bonuses, healthcare and outplacement
benefits for 103 employees in Akron who elected not to relocate and stayed
through the transition process.
Fiscal 2000 operating expenses were favorably impacted by the absence of costs
incurred in response to an unsolicited takeover proposal and to a proxy contest
during fiscal 1999 of $8.1 million.
On November 10, 1999, the Company announced that it intended to relocate
approximately 170 employees located at its Akron, Ohio headquarters. The Company
anticipated that the relocation would entail moving 30 to 40 positions to a new
facility in Cincinnati, Ohio and approximately 75 positions to its World
Technology Center in The Woodlands, Texas. Approximately 35 employees in the
Company's software development, advanced consulting, Akron sales and project
management groups are being relocated to a smaller, more cost efficient facility
in the Akron area. The Company anticipates that the additional net costs of
relocation over the next three quarters will be approximately $2.0 million. The
Company's Board of Directors approved the relocation plans for this action on
November 1, 1999. Although the Company did have plans to carryout the relocation
and these plans were approved by the appropriate level of management the
documentation was not sufficient under the requirements of SAB 100 to warrant
the accrual of these costs as restructuring charges as of the date of
commitment. However, as noted above, the Company has recorded charges based upon
individual employee termination contracts, the physical abandonment of leased
office space and reassessed the remaining useful lives of affected assets as
appropriate under the guidelines established by EITF 94-3 and SAB 100.
The Company believes it will reduce operating expenses during the next fiscal
year both in absolute dollars and as a percentage of revenues. The Company
anticipates that total operating expenses will be in the range of 36% to 38% of
revenues, absent any unusual non-recurring charge.
35
<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Operating Expenses
(In thousands)
1999 vs. 1998
------------------------------------- ---------------------------------------
Year ended March 31, Increase (Decrease)
------------------------------------- ---------------------------------------
1999 1998 Dollar Percentage
--------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Selling expenses $96,109 $ 82,054 $14,055 17.1%
Product development and
engineering expenses 42,986 37,500 5,486 14.6%
General and administrative
expenses 54,923 39,462 15,461 39.2%
Asset impairment charge - 6,069 (6,069) N.M.
Unconsummated business
combination costs 8,070 - 8,070 N.M.
------------- ---------------- --------------
$202,088 $165,085 $37,003 22.4%
============= ================ ==============
</TABLE>
Consolidated selling expenses as a percentage of total revenues were 24% and 18%
in fiscal 1999 and 1998, respectively. The primary reasons for these increases
were as follows. Bad debt provisions related to specific customer accounts
increased substantially during fiscal 1999. Provisions that related to these
accounts aggregated $4.3 million. Also contributing to the increased selling
expenses were increases in the Company's international infrastructure of $2.9
million and approximately $.3 million of severance charges related to the
Company's international operations. Selling and marketing expenses increased
$2.2 million at Aironet as it increased its selling and marketing efforts in
order to expand its outside customer base and promote separate name recognition.
Domestic marketing expense increased $1.8 million due to the inclusion in fiscal
1999 results of a full year of expenditures related to a new marketing group
created during fiscal 1998. Domestic advertising expenses increased $.7 million
in fiscal 1999. Increased provisions for past due accounts receivable related to
a foreign distributor of $.7 million also increased overall selling expenses.
Total provisions related to this one distributor were $3.6 million in fiscal
1999.
Consolidated product development and engineering expenses as a percentage of
total revenues were 11% and 8% in fiscal 1999 and 1998, respectively. The
increase in product development and engineering expenses was primarily related
to the decreased amount of capitalization of internal software development costs
of $4.5 million as the result of a shift in the nature of those development
efforts and the inability to qualify for capitalization under accounting
principles generally accepted in the United States. Additionally, overall
expense levels increased in the Company's engineering and product development
functions due to large amounts of open design projects associated with the
Company's pen-based products and new products. Direct expenses such as labor,
contract labor, outside design services and operating parts and supplies
increased $6.1 million in fiscal 1999 as compared to fiscal 1998 levels.
Engineering expenses were also increased by greater spending at the Company's
Metanetics subsidiary of $.6 million related to the development of its optical
scanning product line and at Aironet of $.9 million related to the continued
development of wireless network products. During fiscal 1999, amortization of
goodwill of $.5 million resulting from the repurchase of Metanetics common stock
was recorded as engineering expense. As part of the management change and
related workforce reductions during the fourth quarter of fiscal 1999, severance
charges of $.3 million were incurred. These increases were offset by the absence
of $2.4 million of expenses incurred in fiscal 1998 to relocate certain of the
Company's engineering and product development operations from Akron, Ohio to The
Woodlands, Texas. Additionally, product development and engineering expenses
were decreased by the absence of $2.6 million of development expenses related to
36
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
the Company's Virtual Vision subsidiary, which was divested in April 1998. Also,
engineering expenses were decreased by the absence of amortization of goodwill
related to the acquisition of Teletransaction of $1.3 million, since that asset
had become fully amortized during fiscal 1998.
During fiscal 1999, the Company continued to capitalize internal software
development costs in accordance with the requirements of SFAS 86 aggregating
$3.3 million. Amortization related to capitalized internal software development
costs was $7.2 million. During the year, the Company provided for accelerated
amortization of $.7 million under the requirements of SFAS 86 as the subject
software was either replaced with newer versions or the related hardware
products were discontinued.
General and administrative expenses as a percentage of total revenues were 14%
and 9% in fiscal 1999 and 1998, respectively. The increase in general and
administrative expenses was primarily related to the following items. The
Company experienced increased non-capitalizable expenses related to its
corporate information systems project of $3.4 million. Stock based compensation
related to Aironet of $3.4 million was recorded due to the impact of variable
plan accounting and changes to the vesting provisions of the underlying plan. As
part of the management change and related workforce reductions and
discontinuation during the fourth quarter of fiscal 1999, severance charges of
$2.0 million were incurred. The change in the Company's management also led to
the discontinuation of consulting contracts with Robert F. Meyerson, the
Company's former Chairman and CEO, as these services will no longer be utilized.
The discontinuation of such contracts resulted in a charge of $1.3 million. The
Company also incurred start-up costs related to a joint venture entered into by
Metanetics of $1.3 million. These start-up costs were paid to Robert F. Meyerson
for services performed on behalf of the Company. Also contributing to the
increase in general and administrative expenses was increased legal and
accounting fees related to the Company's announced restatement of earnings,
related shareholders suits and regulatory investigations of approximately $1.2
million. Depreciation and computer hardware and software maintenance primarily
related to the Company's on-going information systems integration increased $.8
million and $1.2 million, respectively, in fiscal 1999 as compared to fiscal
1998. Additionally, rent allocated to general and administrative functions
increased $.6 million in fiscal 1999 due to the move of the Company's
engineering functions in fiscal 1998. The Company also incurred $.5 million of
bank waiver fees related to its violation of its credit facility covenants.
As discussed above, the Company incurred significant severance charges due to
its management changes, which included related charges for the CEO, CFO and CTO
of the Company as well as other members of senior executive management, and a
general workforce reduction that took place during the fourth quarter of fiscal
1999. The areas of the Company effected were executive management, domestic
sales operations, domestic product development, customer service and
manufacturing operations. A total of 53 employees were terminated. Of this
number, 5 employees were given a short-term stay notice. All other employees
were terminated prior to March 31, 1999. The remaining employees were terminated
subsequent to March 31, 1999. There have been no material changes to the amounts
accrued.
During fiscal 1999, the Company incurred charges aggregating $8.1 million as
follows: unsolicited takeover bid, $3.2 million; proxy contest and settlement
with shareholder, $.4 million; two unconsummated business combination
transaction of $2.9 million and $1.6 million.
37
<PAGE> 39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Interest Expense
(In thousands)
2000 vs. 1999
Year ended March 31, (Decrease) Increase
---------------------------------------- ----------------------------------------
2000 1999 Dollar Percentage
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income $ 652 $ 801 $ (149) (18.6)%
Interest expense (14,070) (9,872) 4,198 42.5%
--------------- ---------------- ---------------
Net interest expense $(13,418) $(9,071) $4,347 47.9%
=============== ================ ===============
</TABLE>
Net interest expense as a percentage of total revenues increased to 4% in fiscal
2000 as compared to 2% in fiscal 1999. This increase was primarily due to the
increased borrowings and interest charged under the Company's credit facilities.
The weighted-average of the amounts borrowed under the credit facility increased
$16.7 million from that experienced in fiscal 1999 to $66.4 million in fiscal
2000. The increased expense was also the result of a higher cost of funds in
fiscal 2000 compared to fiscal 1999. The weighted-average interest rate on
borrowings during fiscal 2000 was 10% compared to 9% in fiscal 1999.
The Company does not anticipate the continued need for significant additional
borrowings during the next fiscal year. However, the Company has made
arrangements with a lender to ensure that any future working capital
requirements are met. Therefore, the Company believes that interest expense will
decrease during the next fiscal year as compared with fiscal 2000.
<TABLE>
<CAPTION>
Interest Expense
(In thousands)
1999 vs. 1998
Year ended March 31, (Decrease) Increase
---------------------------------------- ----------------------------------------
1999 1998 Dollar Percentage
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income $ 801 $ 1,573 $ (772) (49.1)%
Interest expense (9,872) (7,181) 2,691 37.5%
--------------- --------------- ---------------
Net interest expense $(9,071) $(5,608) $3,463 61.8%
=============== =============== ===============
</TABLE>
Net interest expense as a percentage of total revenues increased to 2% in fiscal
1999 as compared to 1% in fiscal 1998. This increase was primarily due to the
increase in the fiscal 1999 weighted-average borrowings under the Company's
credit agreements and product financing arrangements of $49.7 million as
compared to $3.5 million in fiscal 1998. The impact of this increase was
partially offset by the increased capitalization of interest costs related to
the Company's corporate information systems project. The increased
capitalization of these costs reduced interest expense by $1.2 million in fiscal
1999 as compared to $.3 million in fiscal 1998.
<TABLE>
<CAPTION>
Non-operating Income
(In thousands)
2000 vs. 1999
Year ended March 31, Increase
---------------------------------------- ----------------------------------------
2000 1999 Dollar Percentage
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Gain on investment
in subsidiary $ 32,025 $ 340 $ 31,685 N.M.
</TABLE>
38
<PAGE> 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<S> <C> <C> <C>
Gain on sale of
marketable securities 396,161 - 396,161 N.M.
Other non-operating
income (expense) 539 (754) 1,293 N.M.
------------------ ------------------ ------------------
Total non-operating
income (expense) $428,725 $ (414) $ 429,139 N.M.
================== ================== ==================
</TABLE>
As described in Note 17 - Divestitures and Subsidiary Stock Transactions, the
Company's former Aironet subsidiary was acquired by Cisco Systems, Inc.
("Cisco") through a merger in which Aironet stockholders received shares of
Cisco common stock. Subsequent to the Cisco/Aironet merger, the Company
accounted for the investment retained in Cisco shares as "available for sale"
securities in accordance with the requirements of SFAS 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115") based upon the
Company's intent to hold the securities for an extended length of time and to
not engage in the frequent buying and selling of the securities. SFAS 115
requires investments in marketable equity securities to be recorded at fair
value. Accordingly, the difference between the carrying value of the Company's
investment under the equity method of accounting in Aironet prior to the
Cisco/Aironet merger, $21.8 million, and the fair value on the date of the
transaction, $409.4 million, has been recorded as a non-operating pre-tax gain
of $387.6 million. Once the merger between Aironet and Cisco was consummated
the Company sold a portion of its marketable securities of Cisco to satisfy
various debt and working capital obligations. Upon the sale of these marketable
securities the Company realized an additional gain on marketable securities of
$8.5 million in accordance with the provisions of SFAS 115. This realized
non-operating gain was calculated as the difference between the Company's basis
in Cisco shares, calculated as of the consummation date, March 15, 2000, and
the market value of the shares sold to a third party on the date of sale, March
22, 2000.
During the second quarter of fiscal 2000, Aironet and the Company sold 6,919,434
shares of Aironet's voting common stock in an initial public offering on the
NASDAQ National Market at an offering price of $11.00 per share. Of the total
number of shares offered, Aironet sold 4,637,196 shares, and the Company sold
2,282,238 shares. The aggregate proceeds, net of underwriting discounts and
commissions, were $47.4 million to Aironet and $23.3 million to Telxon.
Subsequent to this transaction, the Company's remaining interest in Aironet was
approximately 35%. As a result of this transaction, the Company recorded a
non-operating gain of approximately $32.0 million, net of transaction costs of
$1.5 million. Also as a result of this transaction, the Company ceased
consolidation of Aironet effective April 1, 1999. The Company then accounted for
its investment in Aironet under the equity method of accounting. Equity income
of $1.1 million was recorded related to the Company's interest in the earnings
of Aironet from the date of this transaction until the consummation of the
Aironet/Cisco merger described above.
During the second quarter of fiscal 2000, the Company entered into a set of
transactions whereby the Company repurchased its corporate jet which was
previously sold and leased-back, and resold the corporate jet to a third party.
As a result of these transactions, the Company retained net cash proceeds of $.3
million. This was recorded as a non-operating gain.
During the first quarter of fiscal 2000, the Company recorded $1.3 million of
non-operating expense related to the reduction in carrying value of an
investment in non-marketable securities. The Company's estimate of the reduction
was based upon the market value of subsequent equity transactions of the
investee with third parties. The investment consists of stock in the
development-stage technology company that purchased the Company's Virtual Vision
subsidiary. Also, during the
39
<PAGE> 41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
first quarter of fiscal 2000, the Company sold an investment in marketable
securities of another development stage technology company for cash proceeds of
$1.5 million. As this investment was previously non-marketable, its carrying
value was based upon the cost basis, and was $.7 million. The Company therefore
recorded a pre-tax gain of $.8 million.
<TABLE>
<CAPTION>
Non-operating Income
(In thousands)
1999 vs. 1998
Year ended March 31, (Decrease)
---------------------------------------- ----------------------------------------
1999 1998 Dollar Percentage
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Gain on sale of
subsidiary stock $ 340 $ 1,637 $ (1,297) (79.2)%
Other non-operating
income (expense) (754) (1,012) (258) (25.5)%
------------- --------------- ----------------
Total non-operating
income (expense) $ (414) $ 625 $ (1,039) (166.2)%
============= =============== ================
</TABLE>
In fiscal 1999, the Company recorded minority interest of $.3 million as other
non-operating income due to its minority interest share of Aironet's losses.
During the fourth quarter of fiscal 1999, the Company reduced the carrying value
of a $4.5 million investment in non-marketable securities by $1.7 million. The
Company's estimate of the decrease in the carrying value was based upon
subsequent equity transactions of the investee with third parties. This
investment is composed of preferred shares in the development-stage technology
company that purchased the Company's Virtual Vision subsidiary.
The Company also reduced the carrying value of certain notes receivable from
third-parties totaling $.4 million based upon subsequent settlements of amounts
due, during the fourth quarter of fiscal 1999.
During the first quarter of fiscal 1999, a transaction to sell the stock of the
Company's Virtual Vision subsidiary was consummated, resulting in a $.9 million
gain. Subsequent to the consummation of the transaction, positive adjustments to
such gain totaling $.2 million were recorded. These adjustments related to
changes in key employee retention rates subsequent to the transaction.
During the first quarter of fiscal 1999, Aironet sold 222,222 shares of its
voting common stock to various third party investors at a price of $3.50 per
share. Proceeds from this sale of stock totaled $.8 million in cash and notes
receivable. The resulting pre-tax gain of $.3 million was recorded as a gain on
sale of subsidiary stock 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 stock of Aironet at March 31, 1999 was 76%, as compared to 78% at
March 31, 1998.
During the fourth quarter of fiscal 1998, the Company recorded non-operating
expense of $.4 million related to the minority interest in the income of
Aironet, $1.2 million of non-operating expense related to the revaluation of
certain non-marketable investments and approximately $1.0 million of
non-operating income related to the sale of its investment in a start-up
wireless technology entity. During the third quarter 1998, the Company recorded
a non-operating loss of $.4 million related to a
40
<PAGE> 42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
discrete litigation settlement caused by the divestiture of Itronix, a former
subsidiary of the Company.
During fiscal 1998, the Company sold 984,126 shares of voting common stock of
Aironet to third party investors at a price of $3.50 per share. Proceeds from
this sale of stock totaled $3.4 million in cash. The resulting pre-tax gain of
$.4 million, net of related transaction costs, was recorded as a gain on sale of
subsidiary stock in the accompanying Consolidated Statement of Operations. The
Company's remaining interest in the voting common stock of Aironet at March 31,
1998, was 78%.
During fiscal 1998, certain employees of Aironet exercised 270,000 options to
purchase Aironet voting common stock at $1.86 per share. The pre-tax gain of $.2
million was recorded as a gain on sale of subsidiary stock in the accompanying
Consolidated Statements of Operations.
During fiscal 1997, the Company sold 808,500 shares of Aironet stock in a
transaction which, resulted in a $1.0 million deferred gain at March 31, 1997
since the criteria for the recognition of gain on the sale of subsidiary stock
had not been met. During fiscal 1998, the criteria for the recognition of a gain
on the sale of subsidiary stock were fulfilled, and accordingly, the deferred
gain was recorded as a gain on sale of subsidiary stock.
<TABLE>
<CAPTION>
Income Taxes
(In thousands)
2000 vs. 1999
Year ended March 31, Increase
---------------------------------------- ----------------------------------------
2000 1999 Dollar Percentage
------------------ ------------------ ------------------ ------------------
(Restated)
<S> <C> <C> <C> <C>
Provision for income
taxes $ 72,833 $ 18,624 $ 54,209 291.1%
</TABLE>
The Company's consolidated fiscal 2000 effective tax rate of 22.4% reflected
U.S. federal income tax increased by provisions for state and local income
taxes, net of federal benefit, and decreased by the utilization of the U.S. net
operating losses and a decrease in the valuation allowance for deferred tax
assets.
The Company provided $10.3 million for state and local income taxes that
increased the Company's effective income tax rate by 3.2%.
The decrease in the valuation allowance of $48.2 million reflected the Company's
reassessment of the valuation allowance established against the net deferred tax
assets during fiscal 1999 to fully reserve the deferred tax assets of the
Company excluding those related to Aironet. This full valuation allowance was
based on the Company's assessment at that time that it was more likely than not
that these deferred tax assets would not be utilized through future taxable
income or implementation of tax planning strategies. Based on the tax impact of
the merger transaction between Aironet and Cisco during fiscal 2000 and the
subsequent sale of $150.0 million of the Company's holdings of Cisco common
stock, the Company reassessed that position. The Company concluded that it was
more likely than not that these deferred tax assets would be utilized through
future taxable income or tax planning strategies made available by the
Aironet/Cisco transaction. Therefore, the valuation allowance was significantly
reduced. The reassessment of the valuation allowance decreased the Company's
effective income tax rate by 14.8%.
At March 31, 2000 the Company had substantial deferred income tax assets and
liabilities recorded on the consolidated balance sheet. These deferred tax
assets
41
<PAGE> 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
and liabilities included net current deferred tax assets aggregating $25.6
million and long-term deferred tax liabilities aggregating $109.5 million.
<TABLE>
<CAPTION>
Income Taxes
(In thousands)
1999 vs. 1998
Year ended March 31, Increase
---------------------------------------- ----------------------------------------
1999 1998 Dollar Percentage
------------------ ------------------ ------------------ ------------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Provision for income
taxes $ 18,624 $ 5,963 $ 12,661 212.3%
</TABLE>
The Company's consolidated fiscal 1999 tax provision reflected a valuation
allowance of $10.1 million established against the net deferred tax asset at the
beginning of fiscal 1999 and foreign income taxes of $5.2 million. No tax
benefit was recognized for the fiscal 1999 net operating loss based on the
Company's assessment at March 31, 1999, that it was more likely than not that
these deferred tax assets would not be utilized through future taxable income or
implementation of tax planning strategies.
<TABLE>
<CAPTION>
Liquidity
(In thousands)
2000 vs. 1999
Year ended March 31, Dollar
--------------------------------------- Increase
2000 1999 (Decrease)
----------------- ----------------- ------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 34,197 $ 22,459 $ 11,738
Accounts and notes receivable 75,376 88,515 (13,139)
Inventories 81,923 129,049 (47,126)
Deferred income taxes 25,642 4,305 21,337
Other 3,973 4,724 (751)
--------- --------- ---------
Total current assets $ 221,111 $ 249,052 $ (27,941)
========= ========= =========
Notes payable $ -- $ 68,567 $ (68,567)
Accounts payable 30,116 64,966 (34,850)
Income taxes payable 11,039 6,434 4,605
Accrued liabilities 53,771 74,285 (20,514)
Other 236 525 (289)
--------- --------- ---------
Total current liabilities $ 95,162 $ 214,777 $(119,615)
========= ========= =========
Working capital (current assets
less current liabilities) $ 125,949 $ 34,275 $ 91,674
========= ========= =========
Current ratio (current assets divided
by current liabilities) 2.3 to 1 1.2 to 1
</TABLE>
The increase in the Company's working capital at March 31, 2000 from March 31,
1999 was primarily due to the extinguishment of the Company's notes payable,
repayment of accounts payable and accrued liabilities aided by increases in cash
and deferred income taxes. These increases in working capital were partially
offset by reductions in accounts and notes receivable, inventories and an
increase in income taxes payable.
During March 2000, the Company sold approximately $150.0 million of its holdings
of Cisco common shares. The proceeds from this sale were utilized to extinguish
amounts outstanding under the Company's senior secured credit facility of
approximately $76.6 million (including repayment of the long-term portion of
$10.1 million and accrued interest of $.5 million), pay the related prepayment
penalty of
42
<PAGE> 44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
$1.5 million, repay structured notes and to pay accounts payable with outside
processors of approximately $13.2 million. The proceeds noted above were also
utilized to repay a financial institution for amounts owed under a guarantee of
a customer's lease payments of $3.0 million, repay accelerated lease obligations
of $1.3 million and to repay a note to a professional services provider of $1.2
million. The remaining proceeds were used to pay critical vendor accounts
payable of $12.0 million, past due accounts payable to other vendors of $13.5
million and to increase the Company's cash and short-term investments position
by $27.1 million.
The Company reestablished, and therefore increased, its current net deferred tax
assets by $21.3 million based upon its assessment that it is more likely than
not that these deferred tax assets will be utilized through future taxable
income realized through the implementation of tax planning strategies.
The decrease in accounts receivable reflects improved cash collections in the
Company's domestic operations. Accordingly, consolidated sales outstanding
decreased from 98 days at March 31, 1999 to 76 days at March 31, 2000. Gross
accounts receivable decreased $27.4 million for fiscal 2000 as compared to
fiscal 1999. Of this decrease, $22.1 million was from the Company's domestic
operations, $4.6 million reflects the absence of Aironet accounts receivable
from outside customers that were present at March 31, 1999 and $.5 million
relates to a decrease in the Company's international operations. The majority of
the decrease in gross accounts receivable resulted from a decrease in accounts
receivable related to the Company's VAD distribution channel of $17.2 million.
Partially offsetting these decreases were reduced reserves for doubtful accounts
and sales returns and allowances of $4.0 million and $9.8 million, respectively.
Virtually all of these reductions to reserves and allowances occurred in the
Company's domestic operations since the Company's bad debt experience with a
foreign distributor and sales return experience improved. A reduction in the
Company's reserve for sales returns and allowances related to VADs accounted for
$6.7 million of the overall decrease in that reserve. Overall VAD volumes have
decreased considerably in fiscal 2000 as current management has focused on the
direct sales channel.
The Company's inventories decreased primarily as a result of a decrease of $19.1
million in the Company's finished goods held at customers and distributors due
to customer acceptance of these goods after March 31, 1999. At March 31, 2000,
the amount of deferred revenues was significantly decreased as a result of
installations of equipment for customer rollouts, customer acceptance of amounts
deferred in fiscal 1999 and a reduction in extended rollouts of customer
products in fiscal 2000. Also, $3.9 million of the decrease in inventory held by
distributors and customers is directly attributable to the decrease in the
inventory value of the reserve for sales returns and allowances. Additionally,
inventories staged to rollout to customer sites decreased $5.5 million.
Inventories were also reduced as the Company increased its valuation reserves
for its customer service spare parts and used components by $4.0 million. Also
causing the decrease in inventories was the absence of Aironet's net
manufacturing inventories of $4.6 million. A net decrease in raw material and
work-in-process inventories of $10.6 million was the result of management's
efforts to decrease inventory levels, as well as, increased reserves for excess
and obsolete purchased components. The Company's product line continues to
experience competitive pressures in the marketplace and new products have been
introduced. Management has estimated that these factors will increase provisions
for excess and obsolete inventories in the near-term and the Company's reserve
methodology has taken these factors and other quantitative and qualitative
factors into account. Additionally, decreased inventory levels can also be
attributed to the Company providing an
43
<PAGE> 45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
aggregate of $30.7 million, including amounts noted above, for excess and
obsolete inventory during fiscal 2000. These provisions were in excess of the
amount of inventories disposed of approximating $24.6 million. Consolidated
inventory turns increased to 3.4 at March 31, 2000 compared to 2.3 at March 31,
1999.
The following contributed significantly to the decrease in accrued liabilities;
the recognition of $13.5 million of hardware revenues previously deferred and
the payment of a $9.3 million accrued liability to an outside processor of the
Company's products. Additionally, decreases were caused by the payment of $5.3
million to a financial institution related to the guarantee of a customer's
lease payments, the payment of $2.6 in professional fees for unconsummated
business combinations and a $3.5 million decrease in deferred customer service
revenues. Furthermore, these decreases included a $1.6 million dollar decrease
in accrued severance, a $1.2 million decrease to accrued employee compensation
expense and a $1.0 million decrease to accrued sales commissions.
These decreases in accrued liabilities were partially offset by an increase in
accruals for sales and property taxes of $3.6 million, provisions for a loss on
a customer contract of $3.5 million and a provision for a loss on purchase
commitments for manufacturing components of $2.6 million. Additionally, amounts
were accrued for the lease abandonment of the Company's Akron, Ohio offices,
related contract cancellations of $1.7 million, and for stay-on bonuses and
related healthcare and outplacement benefits for Akron employees who elected not
to relocate with the Company of $1.6 million. Accruals were also made for
consulting fees of $.9 million, incremental product royalties of $.6 million,
professional fees of $.5 million, joint marketing and product development fees
of $.4 million, incremental product warranties of $.3 million and miscellaneous
accruals of $.7 million. The Company also accrued incentive compensation for
executives and compensation for the retention of key sales personnel aggregating
$1.1 million.
During fiscal 2000, the Company entered into a loan and pledge agreement
arranged with a lending institution to provide the Company with an open line of
credit not to exceed $236 million collateralized by the Company's investment in
marketable securities. The maximum availability of $236 million is based on 90%
of the floor value of two derivative financial instruments or "Collar" as
described in Note 7 - Marketable Securities and Derivatives. The collateral for
the loan is the Company's investment in Cisco common stock, which is also
described in Note 17 - Divestitures and Subsidiary Stock Transactions. The
options contained within the Collar agreement have an expiration date of March
26, 2001, and may only be exercised on this date. The line of credit, which
carries a borrowing rate of LIBOR plus thirty basis points, has no fees
associated with it. The one-month LIBOR rate at March 31, 2000 was 6.13%. There
are no borrowings against this line of credit as of March 31, 2000. The purpose
of the facility is to ensure that the Company meets its working capital
requirements.
During fiscal 2000, the Company also entered into an unsecured revolving
promissory note with a bank for $5.0 million. The note matures April 30, 2001.
Interest on advances is at the bank's prime rate plus 2.00%. There are no
borrowings against this note as of March 31, 2000.
The Company believes that its existing resources, including cash and cash
equivalents, short-term investments and credit facilities will be sufficient to
meet working capital requirements for the next twelve months.
44
<PAGE> 46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Liquidity
(In thousands)
1999 vs. 1998
Year ended March 31, Dollar
---------------------------- (Decrease)
1999 1998 Increase
--------- --------- ----------
(Restated)
<S> <C> <C> <C>
Cash and cash equivalents $ 22,459 $ 27,500 $ (5,041)
Accounts and notes receivable 88,515 129,585 (41,070)
Inventories 129,049 114,795 14,254
Other 9,029 16,084 (7,055)
--------- --------- ---------
Total current assets $ 249,052 $ 287,964 $ (38,912)
========= ========= =========
Notes payable $ 68,567 $ 3,000 $ 65,567
Accounts payable 64,966 58,634 6,332
Income taxes payable 6,434 2,202 4,232
Accrued liabilities 74,285 41,988 32,297
Other 525 968 (443)
--------- --------- ---------
Total current liabilities $ 214,777 $ 106,792 $ 107,985
========= ========= =========
Working capital (current assets
less current liabilities) $ 34,275 $ 181,172 $(146,897)
========= ========= =========
Current ratio (current assets divided
by current liabilities) 1.2 to 1 2.7 to 1
</TABLE>
The decrease in the Company's working capital at March 31, 1999, from March 31,
1998, was primarily attributable to the increase in notes payable, accrued
liabilities and accounts payable, supplemented by a decrease in accounts
receivable and partially offset by an increase in inventories. The increase in
notes payable was due to increased financing needs as a result of the net loss
incurred during the last half of fiscal 1999, high levels of inventory
purchases, and capital expenditures of $36.0 million, including expenditures
related to the Company's corporate information systems project. The increase in
accrued liabilities and accounts payable was primarily due to amounts recorded
for deferred product revenues of $14.2 million and for costs related to the
purchase of components related to discontinued products of $12.4 million, as
well as, decreased payments to vendors. Inventories increased during fiscal 1999
primarily due to a $13.2 million increase of finished goods inventory held by
customers and distributors. The increase in the amount of inventory held at
customers and distributors was due primarily to an increase in inventory shipped
to customers where revenue was not recognized since installation of the product
or ultimate customer acceptance of the product did not occur. Consolidated
inventory turns increased to 2.3 as of March 31, 1999 from 2.1 at March 31,
1998.
Accounts receivable decreased between fiscal years primarily due to decreased
revenues during the last quarter of fiscal 1999 as compared to fiscal 1998. The
overall increases of accounts receivable allowance accounts for bad debts of
$6.3 million and sales returns and allowances of $11.8 million also contributed
to the decrease in accounts receivable. Additionally, the reclassification of
$4.5 million of proceeds in the form of shares related to the sale of Virtual
Vision from other accounts receivable into long-term assets when such proceeds
were released from escrow added to the decrease in accounts receivable. Days
sales outstanding increased from 84 days at March 31, 1998 to 98 days at March
31, 1999 as revenues for the last quarter of fiscal 1999, relative to those
recorded in the
45
<PAGE> 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
last quarter of fiscal 1998, decreased at a faster rate than the net accounts
receivable balance. Other decreases of $10.4 million included other accounts
receivable and prepaid assets. Other decreases in prepaid assets were in part
due to decreased deferred income tax assets, which were subject to a
substantial valuation allowance during fiscal 1999.
The Company incurred a net loss in fiscal 1999 of $135.0 million with a decrease
in consolidated revenues of $58.6 million as compared to fiscal 1998. Cash flows
used by operations were $27.6 million, and cash flows used in investing
activities were $40.9 million. The primary source of cash flows for fiscal 1999
were net borrowings under the Company's credit facilities including product
financing arrangements, which aggregated $65.6 million. The Company was in
violation of debt covenants related to certain of these credit facilities and
was unable to borrow additional funds against these facilities. Waivers for
non-compliance had been received through August 30, 1999. The Company's
stockholders' equity and working capital at March 31, 1999 were $17.0 million
and $34.3 million, respectively.
<TABLE>
<CAPTION>
Cash Flows from Operating Activities
(In thousands)
2000 vs. 1999 Increase
Year Ended March 31, (Decrease)
--------------------------------------- in Cash
2000 1999 Flow Impact
------------------- ------------------ ------------------
(Restated)
<S> <C> <C> <C>
Net income (loss) $250,998 $ (135,006) $ 386,004
Depreciation and amortization 28,583 29,174 (591)
Amortization of restricted stock awards, net 447 152 295
Non-cash compensation expense, net of
minority interest impact in 1999 615 2,340 (1,725)
Provision for doubtful accounts 5,080 7,752 (2,672)
Provision for sales returns and allowances 11,097 54,000 (42,903)
Provision for inventory obsolescence 30,673 37,430 (6,757)
Deferred income taxes 62,817 9,525 53,292
Gain on sale of non-marketable investment (761) - (761)
Gain on marketable securities (396,161) - (396,161)
Gain on sale of subsidiary stock (32,025) (1,240) (30,785)
Asset impairment charge 381 - 381
Equity in earnings of affiliate (1,066) - (1,066)
Loss (gain) on disposal of assets 123 (88) 211
Loss related to carrying value of
non-marketable investments 1,558 2,094 (536)
Minority interest - (258) 258
Changes in operating assets and liabilities:
Accounts and notes receivable (9,617) (24,894) 15,277
Inventories 5,357 (39,229) 44,586
Prepaid expenses and other current assets 1,364 2,408 (1,044)
Intangibles and other assets 347 (833) 1,180
Accounts payable and accrued liabilities (39,534) 29,305 (68,839)
Income taxes payable 4,645 3,791 854
Other long-term liabilities (225) (4,039) 3,814
------------------- ------------------ ------------------
Net cash used in operating activities $(75,304) $ (27,616) $ (47,688)
=================== ================== ==================
</TABLE>
The net cash used in operating activities of $75.3 million for fiscal 2000
resulted primarily from the operating loss of $90.4 million and the payment of
$39.5 million of accounts payable and accrued liabilities, offset by non-cash
charges impacting current assets and liabilities of $76.0 million and changes in
current assets and liabilities increasing cash flows by $1.7 million.
46
<PAGE> 48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
The increase in the Company's cash flows used in operating activities was
primarily the result of the payment of accounts payable and accrued liabilities
as cash became available from the sale of $150.0 million of Cisco common stock
late in the fiscal year. Due to the financial condition of the Company at March
31, 1999, the Company was actively managing its cash position and was delaying
payment of non-critical vendors that lead to an increase in the accounts payable
and accrued liabilities as of that date. The cash flow impact of accounts and
notes receivable also decreased due to the significant decrease of accounts
receivable in the prior year. These decreases were partially offset by an
increase in the cash flow impact of inventories. For fiscal 1999, the Company
used significant amounts of cash to purchase manufacturing inventory components
and had a significant amount of finished goods remaining in inventory at
customer sites. During fiscal 2000, the Company had managed the purchasing of
inventory more effectively and significantly decreased inventory levels of
finished goods at customer sites which was also in part due to the recognition
of revenues and costs that were previously deferred.
<TABLE>
<CAPTION>
Cash Flows from Operating Activities
(In thousands)
1999 vs. 1998 Increase
Year Ended March 31, (Decrease)
----------------------------- in Cash
1999 1998 Flow Impact
--------- --------- -----------
(Restated) (Restated)
<S> <C> <C> <C>
Net income (loss) $(135,006) $ 6,183 $(141,189)
Cumulative effect of an accounting change -- 2,176 (2,176)
Depreciation and amortization 29,174 26,872 2,302
Amortization of restricted stock awards, net 152 199 (47)
Non-cash compensation expense, net of
minority interest impact 2,340 -- 2,340
Provision for doubtful accounts 7,752 3,038 4,714
Provision for sales returns and allowances 54,000 13,310 40,690
Provision for inventory obsolescence 37,430 4,999 32,431
Deferred income taxes 9,525 (3,306) 12,831
Gain on sale of subsidiary and subsidiary
stock (1,240) (1,637) 397
Gain on sale of assets (88) (669) 581
Asset impairment charge -- 6,069 (6,069)
Loss related to carrying value of
non-marketable investments 2,094 -- 2,094
Loss on disposal of assets -- 800 (800)
Minority interest (258) 659 (917)
Changes in operating assets and liabilities:
Accounts and notes receivable (24,894) (19,496) (5,398)
Inventories (39,229) (35,694) (3,535)
Prepaid expenses and other current assets 2,408 2,094 314
Intangibles and other assets (833) 1,254 (2,087)
Accounts payable and accrued liabilities 29,305 3,333 25,972
Income taxes payable 3,791 (456) 4,247
Other long-term liabilities (4,039) (2,913) (1,126)
--------- --------- ---------
Net cash (used in) provided by operating
activities $ (27,616) $ 6,815 $ (34,431)
========= ========= =========
</TABLE>
The decrease in the Company's cash flows from operating activities was primarily
the result of a decrease in cash flows resulting from a change in net income
from $6.2 million in fiscal 1998 to a net loss of $135.0 million in fiscal 1999.
This negative cash flow impact was partially offset by positive cash flow
impacts related to increased provisions for inventory obsolescence, sales
returns and allowances, the net change in accounts payable and accrued
liabilities and the cash flow impact of deferred income taxes.
47
<PAGE> 49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Cash Flows from Investing Activities
(In thousands)
2000 vs. 1999 Increase
Year Ended March 31, (Decrease)
----------------------------- in Cash
2000 1999 Flow Impact
-------- --------- -----------
<S> <C> <C> <C>
Proceeds from sale of subsidiary stock $ 17,211 $ 700 $ 16,511
Proceeds from sale of marketable
equity securities 149,995 -- 149,995
Additions to property and equipment (13,159) (36,024) 22,865
Software improvements (4,501) (3,781) (720)
Purchase of non-marketable investments -- (795) 795
Proceeds from non-marketable investments 3,527 929 2,598
Repurchase of subsidiary stock (3,142) (1,950) (1,192)
----------------------------------------------
Net cash provided by (used in) investing
activities $ 149,931 $ (40,921) $ 190,852
========= ========= =========
</TABLE>
Fiscal 2000 cash flows from investing activities were positively impacted by the
cash received from the sale of Cisco common stock of $150.0 million that
occurred in the fourth quarter of the fiscal year. Also positively impacting
cash flows from investing activities was the net cash received from the sale of
Aironet common stock during its initial public offering of $17.2 million.
Additionally, the Company's investments in property and equipment were reduced
by $22.8 million. The decrease in additions to property and equipment was
primarily due to the Company's completion of its corporate information systems
project and related computer hardware and capitalized interest costs.
Capitalized outside professional costs and internal costs caused the majority of
the reduction and decreased $14.0 million for fiscal 2000 as compared to fiscal
1999.
<TABLE>
<CAPTION>
Cash Flows from Investing Activities
(In thousands)
1999 vs. 1998 (Decrease)
Year Ended March 31, Increase
----------------------------- in Cash
1999 1998 Flow Impact
-------- --------- -----------
<S> <C> <C> <C>
Proceeds from sale of assets $ -- $ 5,444 $ (5,444)
Proceeds from sale of subsidiary stock 700 3,100 (2,400)
Additions to property and equipment (36,024) (26,490) (9,534)
Software investments (3,781) (6,936) 3,155
Purchase of non-marketable investments (795) (5,600) 4,805
Additions to long-term notes receivable -- (580) 580
Proceeds from non-marketable investments 929 1,033 (104)
Repurchase of subsidiary stock (1,950) -- (1,950)
-------- -------- --------
Net cash used in investing activities $(40,921) $(30,029) $ (10,892)
======== ======== ========
</TABLE>
Fiscal 1999 cash flows from investing activities were negatively impacted by the
increase in additions to property and equipment, the cash paid for the
repurchase of subsidiary stock and decreases in proceeds from asset and
subsidiary stock sales. These decreases were partially offset by a positive cash
flow impact due to reduced software investments and the absence of further
purchases of non-marketable investments. The increase in additions to property
and equipment was primarily due to the Company's increased investment in its
corporate information systems project and related computer hardware and
capitalized interest costs.
48
<PAGE> 50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
<TABLE>
<CAPTION>
Cash Flows from Financing Activities
(In thousands)
2000 vs. 1999 (Decrease)
Year Ended March 31, Increase
------------------------- in Cash
2000 1999 Flow Impact
--------- --------- ------------
<S> <C> <C> <C>
Notes payable, net $ 26,536 $ 65,567 $ (39,031)
Extinguishment of credit facilities,
short-term (114,930) -- (114,930)
Proceeds from short-term bridge loan 20,000 -- 20,000
Extinguishment of credit facilities,
long-term (10,100) -- (10,100)
Proceeds from long-term credit facilities 14,394 -- 14,394
Principal payments on long-term facility (1,967) -- (1,967)
Principal payments on capital leases (2,014) (884) (1,130)
Debt issue costs and waiver fees paid (2,690) (1,150) (1,540)
Early termination fee paid (1,500) -- (1,500)
Proceeds from the sale of common stock 2,616 -- 2,616
Proceeds from exercise of stock options 7,197 1,397 5,800
Purchase of treasury stock -- (1,202) 1,202
Payment of cash dividends -- (162) 162
--------- --------- ---------
Net cash (used for) provided by financing
activities $ (62,458) $ 63,566 $(126,024)
========= ========= =========
</TABLE>
The Company's cash flows from financing activities decreased for fiscal 2000 as
a result of the net repayment of the Company's short-term borrowings of $68.3
million as compared to increased borrowing during fiscal 1999 under the
Company's credit facilities. This borrowing was necessitated by the Company's
net loss for the year as well as investments in inventories and a cash outlay
related to the Company's corporate information systems project during fiscal
1999. The Company was able to repay the amounts owed under the credit facilities
and certain capital lease obligations of $2.0 million due to the sale of $150.0
million of Cisco common stock noted above. Proceeds from the exercise of
employee stock options increased by $5.8 million due to the increase in the
price of the Company's common stock and employee terminations whereby options
are forfeited if not exercised within 30 days of termination. The Company also
recorded proceeds from the sale of its common stock of $2.6 million to John W.
Paxton, the Company's Chief Executive Officer.
<TABLE>
<CAPTION>
Cash Flows from Financing Activities
(In thousands)
1999 vs. 1998 Increase
Year Ended March 31, (Decrease)
----------------------- in Cash
1999 1998 Flow Impact
--------- --------- -----------
<S> <C> <C> <C>
Notes payable, net $ 65,567 $ 2,567 $ 63,000
Principal payments on capital leases (884) (832) (52)
Debt issue costs and waiver fees paid (1,150) (24) (1,126)
Proceeds from the exercise of stock options 1,397 9,190 (7,793)
Purchase of treasury stock (1,202) (5,070) 3,868
Payment of cash dividends (162) (162) --
--------- --------- ---------
Net cash provided by financing activities $ 63,566 $ 5,669 $ 57,897
========= ========= =========
</TABLE>
The Company's cash flows from financing activities increased during fiscal 1999
as a result of increased borrowing under the Company's credit facilities. This
borrowing was necessitated by the Company's net loss for the year as well as
investments in inventories and a cash outlay related to the Company's corporate
information systems project. Also increasing the cash provided by financing
49
<PAGE> 51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
-----------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
-------------------------------
activities was a reduction in the Company's common stock repurchase activity
during fiscal 1999 (63,300 shares during fiscal 1999 at a weighted-average price
of $17.19 per share vs. 294,200 shares during fiscal 1998 at a weighted-average
price of $17.23 per share). These increases in cash flows from financing
activities were partially offset by reduced cash proceeds from exercises of
stock options due to a decrease in the market value of the Company's common
stock, during the last half of fiscal 1999.
Accounting Change
On November 20, 1997, the FASB's Emerging Issues Task Force issued a new
consensus ruling, "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation" ("EITF 97-13"). EITF 97-13 requires
business process reengineering costs associated with information systems
development to be expensed as incurred. The Company has been involved in a
corporate-wide information systems implementation project that is affected by
this pronouncement. In accordance with this ruling, during fiscal 1998, the
Company recorded a one-time, after-tax, non-cash charge of $1,016 to expense
previously capitalized costs associated with this project. Such costs had
primarily been incurred during the second quarter of fiscal 1998.
New Accounting Standards
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements". This
document expresses the views of the Securities and Exchange Commission in
applying accounting principals generally accepted in the United States while
recognizing revenue. The Company has abided by the guidance contained within
this document when recognizing revenue.
On November 24, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin 100, "Restructuring and Impairment Charges". This
authoritative document expresses the views of the SEC staff regarding the
accounting and disclosure of certain expenses commonly reported in connection
with exit activities and business combinations. The Company has also abided by
the guidance contained within this document in accounting for current exit
costs.
During fiscal 1999, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 provides accounting and reporting standards for derivative
instruments. This standard will require the Company to recognize all derivatives
as either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. The Company is required to adopt the
provisions of SFAS 133 during the first quarter of fiscal 2002 (as delayed by
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 133"). Management is evaluating the impact of this
statement; however at this time, it believes that the adoption of this
pronouncement will not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
50
<PAGE> 52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to market, foreign
currency and interest rate risks. The risks primarily relate to stock price
volatility relating to its marketable securities, the sale of the Company's
products to foreign customers through its foreign subsidiaries and changes in
interest rates on the Company's short-term financing and capital lease
obligations.
Market Risk
As discussed in Note 17 - Divestitures and Subsidiary Stock Transactions, during
fiscal 2000 Cisco acquired the Company's former subsidiary, Aironet Wireless
Communications for shares of Cisco common stock. Subsequent to this transaction
the Company held 6,366,086 shares of Cisco common stock (the Cisco share amount
illustrated here and throughout the Form 10-K, unless otherwise noted, gives
effect to the two for one forward split of Cisco's common stock which became
effective March 22, 2000). Additionally, as discussed in the liquidity section
of Management's Discussion and Analysis, a portion of these shares were sold to
satisfy working capital and debt obligations. At March 31, 2000 the Company
maintained 4,166,086 shares of Cisco. The market value of the Company's holdings
of Cisco at March 31, 2000 was valued at $321.9 million. In relation to the
Company's balance sheet, this is a material holding. As such, the company is
exposed to a significant degree of market risk relating to the price volatility
of Cisco common stock. As discussed in Note 7 - Marketable Securities and
Derivatives, the Company has opted to mitigate a portion of this risk by
purchasing derivative collar contracts, which help to ensure that the Company's
potential loss (gain) is within manageable levels. These contracts will expire
on March 26, 2001. The counter-party to the derivative collar contract is a
major financial institution. However, the Company is exposed to market risk loss
in the event of nonperformance by the financial institution. Management does
monitor the credit rating of the financial institution and considers the risk of
nonperformance to be remote.
Foreign Currency Risk
The financial results of the Company's foreign subsidiaries are measured in
their local currencies. Assets and liabilities are translated into U.S. dollars
at the rates of exchange at the end of each year and revenues and expenses are
reported at average rates of exchange. Resulting translation adjustments are
reported as a component of comprehensive income.
Historically, the Company has not experienced any significant foreign currency
gains or losses involving U.S. Dollars and other currencies. This is primarily
due to natural hedges of revenues and expenses in the functional currencies of
the countries in which subsidiaries are located which assists in managing this
risk. As discussed in Note 14 - Fair Value of Financial Instruments, at March
31, 2000, the Company had several forward foreign currency exchange contracts to
purchase various foreign currencies aggregating $7.5 million in U.S. dollars.
Interest Rate Risk
The Company's convertible subordinated debentures carry fixed rates of interest
and therefore do not pose interest rate risk to the Company. However, interest
rate changes would effect the fair market value of the debentures. At March 31,
2000, the Company had $106.9 million of convertible subordinated debentures
outstanding.
51
<PAGE> 53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (CONTINUED)
Interest rate risk does exist relative to the Company's $236.0 million and $5.0
million lines of credit due to the variable rates of interest charged on these
facilities. The rates charged on these facilities are subject to adjustment by
the lender however, at March 31, 2000 no borrowings were outstanding.
The Company monitors its interest rate risk, but does not engage in any hedging
activities using derivative financial instruments to manage the interest rate
risk.
52
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------------------------------------------
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
------------------------------------------------------------------------------------------------
Page(s)
------------
<S> <C>
Reports of Independent Public Accountants 54 - 55
Consolidated Financial Statements
Consolidated Balance Sheets 56
Consolidated Statements of Operations and Comprehensive Income(Loss) 57
Consolidated Statements of Cash Flows 58
Consolidated Statements of Changes in Stockholders' Equity 59
Notes to Consolidated Financial Statements 60 - 106
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves 122
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is presented in the financial statements or the notes thereto.
53
<PAGE> 55
Reports of Independent Public Accountants
To the Board of Directors and
Stockholders of Telxon Corporation:
We have audited the accompanying consolidated balance sheet of Telxon
Corporation and Subsidiaries (the "Company")(a Delaware corporation) as of March
31, 2000, and the related statements of operations and comprehensive income,
changes in stockholders' equity and cash flows for the year then ended. These
consolidated financial statements and the financial statement schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Telxon
Corporation and Subsidiaries as of March 31, 2000, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II - Valuation and
Qualifying Accounts and Reserves, is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Cleveland, Ohio,
May 18, 2000.
54
<PAGE> 56
Report of Independent Accountants
To the Board of Directors and
Stockholders of Telxon Corporation:
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations and comprehensive income (loss), of cash flows and of
changes in stockholders' equity as of March 31, 1999 and for each of the two
years in the period ended March 31, 1999 present fairly, in all material
respects, the financial position of Telxon Corporation and its Subsidiaries at
March 31, 1999, and the results of their operations and their cash flows for
each of the two years in the period ended March 31, 1999, in conformity with
accounting principles generally accepted in the United States. In addition, in
our opinion, the financial statement schedule for the years ended March 31, 1999
and 1998 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Telxon Corporation and its
Subsidiaries for any period subsequent to March 31, 1999.
As discussed in Note 3 to the consolidated financial statements, the Company
restated its consolidated financial statements for fiscal years 1999 and 1998 to
appropriately reflect revenue recognition related to certain sales to a
value-added distributor.
As discussed in Note 20 to the consolidated financial statements, in fiscal year
1998, the Company changed its method of accounting for business process
reengineering costs.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
June 29, 2000
August 6, 1999, except for Note 3, as to which the date is June 29, 2000
55
<PAGE> 57
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash (including cash equivalents of $6,000 and $--) $ 34,197 $ 22,459
Accounts receivable, net of allowances for doubtful accounts of $7,116 and $11,069
and sales returns and allowances of $5,255 and $15,027 70,831 84,500
Notes and other accounts receivable 4,545 4,015
Inventories 81,923 129,049
Deferred income taxes 25,642 4,305
Prepaid expenses and other 3,973 4,724
--------- ---------
Total current assets 221,111 249,052
Property and equipment, net 62,067 69,557
Investment in marketable securities 321,863 --
Intangibles and other assets, net 31,249 30,235
--------- ---------
Total assets $ 636,290 $ 348,844
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 68,567
Capital lease obligations due within one year 236 525
Accounts payable 30,116 64,966
Income taxes payable 11,039 6,434
Accrued liabilities 53,771 74,285
--------- ---------
Total current liabilities 95,162 214,777
Capital lease obligations 369 1,435
Convertible subordinated notes and debentures 106,913 106,913
Deferred income taxes 109,519 2,856
Other long-term liabilities 2,500 2,590
--------- ---------
Total liabilities 314,463 328,571
Minority interest -- 3,307
Stockholders' equity:
Preferred stock, $1.00 par value per share; 500
shares authorized, none issued -- --
Common stock, $.01 par value per share; 50,000 shares
authorized, 17,514 and 16,234 shares issued 175 162
Additional paid-in capital 105,639 87,029
Retained earnings (deficit) 188,998 (61,977)
Unearned compensation relating to restricted stock awards (75) (82)
Treasury stock; -- and 78 shares of common stock at cost -- (1,423)
Notes related to purchase of subsidiary stock -- (1,279)
Accumulated other comprehensive income (loss):
Foreign currency translation (6,009) (5,464)
Unrealized holding gain on marketable securities, net of deferred taxes of $21,060 33,099 --
--------- ---------
Total stockholders' equity 321,827 16,966
--------- ---------
Commitments and contingencies (Note 19) -- --
--------- ---------
Total liabilities and stockholders' equity $ 636,290 $ 348,844
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE> 58
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenues:
Product, net $ 284,706 $ 313,480 $ 378,310
Customer service, net 81,045 82,914 76,746
--------- --------- ---------
Total net revenues 365,751 396,394 455,056
Cost of revenues:
Product 234,616 246,125 222,990
Customer service 50,266 55,078 48,836
--------- --------- ---------
Total cost of revenues 284,882 301,203 271,826
Gross profit:
Product 50,090 67,355 155,320
Customer service 30,779 27,836 27,910
--------- --------- ---------
Total gross profit 80,869 95,191 183,230
Operating expenses:
Selling expenses 79,237 96,109 82,054
Product development and engineering expenses 28,828 42,986 37,500
General & administrative expenses 63,167 54,923 39,462
Asset impairment charge -- -- 6,069
Unconsummated business combination costs -- 8,070 --
--------- --------- ---------
Total operating expenses 171,232 202,088 165,085
(Loss) income from operations (90,363) (106,897) 18,145
Interest income 652 801 1,573
Interest expense (14,070) (9,872) (7,181)
--------- --------- ---------
(Loss)income before other non-operating income (expense), income taxes,
extraordinary item and cumulative effect of
an accounting change (103,781) (115,968) 12,537
Gain on sale of subsidiary stock 32,025 340 1,637
Gain on marketable securities 396,161 -- --
Other non-operating income (expense) 539 (754) (1,012)
--------- --------- ---------
Income (loss) before income taxes, extraordinary item and
cumulative effect of an accounting change 324,944 (116,382) 13,162
Provision for income taxes 72,833 18,624 5,963
--------- --------- ---------
Income (loss) before extraordinary item and cumulative effect
of an accounting change 252,111 (135,006) 7,199
Extraordinary item for debt extinguishment, net of tax 1,113 -- --
--------- --------- ---------
Income (loss) before cumulative effect of
an accounting change 250,998 (135,006) 7,199
Cumulative effect of an accounting change,
net of tax -- -- 1,016
--------- --------- ---------
Net income (loss) $ 250,998 $(135,006) $ 6,183
========= ========= =========
Income(loss) per common share before extraordinary item and cumulative effect
of an accounting change:
Basic $ 15.41 $ (8.38) $ 0.45
Diluted $ 15.16 $ (8.38) $ 0.44
Extraordinary item:
Basic $ (0.07) $ -- $ --
Diluted $ (0.07) $ -- $ --
Income (loss) per common share before cumulative effect of an accounting change:
Basic $ 15.34 $ (8.38) $ 0.45
Diluted $ 15.09 $ (8.38) $ 0.44
Cumulative effect of an accounting change:
Basic $ -- $ -- $ (0.06)
Diluted $ -- $ -- $ (0.06)
Net income (loss) per share:
Basic $ 15.34 $ (8.38) $ 0.39
Diluted $ 15.09 $ (8.38) $ 0.38
Average number of common shares outstanding:
Basic 16,362 16,108 15,809
Diluted 16,628 16,108 16,317
Other comprehensive income (loss):
Net income (loss) $ 250,998 $(135,006) $ 6,183
Foreign currency translation adjustment (545) (535) (2,286)
Unrealized holding gain on marketable securities 33,099 -- --
--------- --------- ---------
Total comprehensive income (loss) $ 283,552 $(135,541) $ 3,897
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE> 59
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 250,998 $(135,006) $ 6,183
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Cumulative effect of an accounting change -- -- 2,176
Depreciation and amortization 28,583 29,174 26,872
Amortization of restricted stock awards, net 447 152 199
Non-cash stock compensation expense, net of minority
interest impact in 1999 615 2,340 --
Provision for doubtful accounts 5,080 7,752 3,038
Provision for sales returns and allowances 11,097 54,000 13,310
Provision for inventory obsolescence 30,673 37,430 4,999
Deferred income taxes 62,817 9,525 (3,306)
Gain on sale of non-marketable investment (761) -- --
Gain on marketable securities (396,161) -- --
Gain on sale of subsidiary and subsidiary stock (32,025) (1,240) (1,637)
Gain on sale of assets -- (88) (669)
Asset impairment charge 381 -- 6,069
Equity in earnings of affiliate (1,066) -- --
Loss related to carrying value of non-marketable investments 1,558 2,094 --
Loss on disposal of assets 123 -- 800
Minority interest -- (258) 659
Change in operating assets and liabilities:
Accounts and notes receivable (9,617) (24,894) (19,496)
Inventories 5,357 (39,229) (35,694)
Prepaid expenses and other current assets 1,364 2,408 2,094
Intangibles and other assets 347 (833) 1,254
Accounts payable and accrued liabilities (39,534) 29,305 3,333
Income taxes payable 4,645 3,791 (456)
Other long-term liabilities (225) (4,039) (2,913)
--------- --------- ---------
Net cash (used in) provided by operating activities (75,304) (27,616) 6,815
Cash flows from investing activities:
Proceeds from the sale of assets -- -- 5,444
Proceeds from the sale of subsidiary stock, net of cash 17,211 700 3,100
Proceeds from the sale of marketable equity security 149,995 -- --
Additions to property and equipment (13,159) (36,024) (26,490)
Software investments (4,501) (3,781) (6,936)
Purchase of non-marketable investments -- (795) (5,600)
Additions to long-term notes receivable -- -- (580)
Proceeds from the sale of non-marketable investments 3,527 929 1,033
Repurchase of subsidiary stock (3,142) (1,950) --
--------- --------- ---------
Net cash provided by (used in) investing activities 149,931 (40,921) (30,029)
Cash flows from financing activities:
Notes payable, net 26,536 65,567 2,567
Extinguishment of credit facilities, short-term (114,930) -- --
Proceeds from short term bridge loan 20,000 -- --
Extinguishment of credit facility, long-term (10,100) -- --
Proceeds from long-term credit facility 14,394 -- --
Principal payments on long-term credit facility (1,967) -- --
Principal payments on capital leases (2,014) (884) (832)
Debt issue costs and waiver fees paid (2,690) (1,150) (24)
Early debt termination fee paid (1,500) -- --
Proceeds from the sale of common stock 2,616 -- --
Proceeds from the exercise of stock options 7,197 1,397 9,190
Purchase of treasury stock -- (1,202) (5,070)
Payment of cash dividends -- (162) (162)
--------- --------- ---------
Net cash (used in) provided by financing activities (62,458) 63,566 5,669
Effect of exchange rate changes on cash (431) (70) (341)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 11,738 (5,041) (17,886)
Cash and cash equivalents at beginning of year 22,459 27,500 45,386
--------- --------- ---------
Cash and cash equivalents at end of year $ 34,197 $ 22,459 $ 27,500
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 60
TELXON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
UNEARNED NOTES FOREIGN
ADDITIONAL RETAINED COMPENSATION TREASURY RELATED TO CURRENCY UNREALIZED
COMMON PAID-IN EARNINGS RESTRICTED STOCK AT SALE OF TRANSLATION HOLDING
STOCK CAPITAL (DEFICIT) STOCK COST STOCK ADJUSTMENT GAIN
------ ---------- --------- ------------ -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $162 $ 86,810 $ 68,083 $ (210) $ (8,534) $(1,295) $(2,643) $ -
Exercise of non-qualified stock
options, including tax benefit - 370 (813) - 9,634 - - -
Amortization of restricted stock - - - 199 - - - -
Grants of restricted stock - 482 - (482) - - - -
Repurchase of common stock
(294,200 shares) - - - - (5,070) - - -
Reissue of treasury stock under employee
stock purchase plan (57,112 shares) - (173) - - 908 - - -
Notes receivable related to sale of
subsidiary stock - - - - - 16 - -
Currency translation adjustment - - - - - - (2,286) -
Dividends paid ($.01 per common share) - - (162) - - - - -
Net income for 1998 (Restated) - - 6,183 - - - - -
-------- -------- --------- -------- ------ ------- ------- -------
Balance at March 31, 1998 (Restated) 162 87,489 73,291 (493) (3,062) (1,279) (4,929) -
Conversion of debentures - 311 - - - - - -
Exercise of non-qualified stock options,
including tax benefit - (81) (100) - 1,578 - - -
Forfeiture of restricted stock - (259) - 259 - - - -
Amortization of restricted stock - - - 152 - - - -
Retirement of common stock
(63,300 shares) - (113) - - (1,089) - - -
Reissue of treasury stock under
employee stock purchase plan
(52,999 shares) - (318) - - 1,150 - - -
Currency translation adjustment - - - - - - (535) -
Dividends paid ($.01 per
common share) - - (162) - - - - -
Net loss for 1999 (Restated) - - (135,006) - - - - -
-------- -------- ----------- -------- ------ ------- ------- -------
Balance at March 31, 1999 162 87,029 (61,977) (82) (1,423) (1,279) (5,464) -
Exercise of non-qualified stock
options, including tax benefit 4 7,099 (23) - - - - -
Compensation expense related to
vested stock options issued
below fair market value - 278 - - - - - -
Grants of restricted stock 1 480 - (481) - - - -
Forfeiture of restricted stock - (41) - 41 - - - -
Amortization of restricted stock - - - 447 - - - -
Issuance of shares related to
repurchase of subsidiary stock
(477,790 shares), net
of surrendered options 5 8,864 - - - - - -
Notes receivable repayment
related to the sale of subsidiary
stock - - - - - - - -
Issuance of shares to officer
(300,000 shares) 3 2,613 - - - 1,279 - -
Reissue of treasury stock under
employee stock purchase plan
(74,543 shares) - (918) - - - - - -
Issuance of shares for employee
stock purchase plan - 235 - - 1,423 - - -
Unrealized holding gain related to
marketable securities - - - - - - - 33,099
Effect of deconsolidation of Aironet - - - - - - (726) -
Currency translation adjustment - - - - - - 181 -
Net income for 2000 - - 250,998 - - - - -
-------- -------- -------- -------- ------- ------- ------- -------
Balance at March 31, 2000 $175 $105,639 $188,998 $ (75) $ - $ - $(6,009) $33,099
========= ======== ======== ======== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 61
TELXON CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In Thousands (except per share amounts)
(2000, (1999, and 1998 As Restated))
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial statements
of Telxon Corporation and its wholly owned and majority-owned subsidiaries (the
"Company"). All significant intercompany transactions have been eliminated in
consolidation.
As discussed in Note 17 - Divestitures and Subsidiary Stock Transactions,
during fiscal 2000, the Company and its former subsidiary, Aironet Wireless
Communications, Inc. ("Aironet"), sold shares of Aironet's voting common stock
on the NASDAQ National Market in an initial public offering ("IPO"). As a
result of the IPO, the Company's percentage interest in the voting common stock
of Aironet was approximately 35%. As such, the Company has ceased to
consolidate the results of Aironet as of April 1, 1999, the beginning of the
Company's 2000 fiscal year. From that date until the consummation of the
acquisition through merger of Aironet by Cisco Systems Inc. ("Cisco") in March
2000, the Company accounted for the results of Aironet under the equity method
of accounting in accordance with the provisions of Accounting Principles Board
Opinion No. 18 "The Equity Method of Accounting for Investments in Common
Stock" ("APB 18"). The results of Aironet are included in the Company's fiscal
1999 and 1998 consolidated financial statements. Subsequent to the merger of
Aironet and Cisco, the Company's investment in Cisco common stock has been
accounted for at fair value under the guidelines of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115")(See Note 7 - Marketable Securities and
Derivatives).
MINORITY INTERESTS
For purposes of the Consolidated Balance Sheets, minority interests represent
the unaffiliated stockholders' interests in the cumulative earnings of the
subsidiary. For purposes of the Consolidated Statement of Operations, minority
interests are included in other non-operating income (expense).
At March 31, 1999 the Company recorded minority interests of approximately
$5,233 related to Aironet. The consideration received for such common stock, and
the common stock of the Company's Metanetics Corporation ("Metanetics")
subsidiary, a licensor and developer of image processing technology, included
notes receivable. As such, the amount of these notes receivable has been offset
against the minority interests and then recorded as a separate component of
stockholders' equity (where amounts exceeded the minority interests). The
aggregate amount of such notes receivable offset against minority interest was
$1,926 at March 31, 1999. Refer to Note 17 - Divestitures and Subsidiary Stock
Transactions for additional details on sales of Aironet and Metanetics common
stock.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign operations are translated into U.S. dollars
using the local currency as the functional currency in accordance with Statement
of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS
52"). Accordingly, all assets and liabilities are translated at current rates of
exchange, and operating transactions are translated at monthly weighted average
rates during the year. The translation gains and losses are accumulated as a
separate component of stockholders' equity until realized. There were no income
taxes allocated to the translation adjustments or to the transaction gains or
losses in 2000, 1999 and 1998. Net transaction gains or losses are included in
results of operations as general and administrative expenses and were not
material in 2000, 1999 and 1998.
60
<PAGE> 62
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Company may enter into forward foreign currency exchange contracts from time
to time with reputable financial institutions. These contracts generally involve
the exchange of one currency for a second currency at some future date, to hedge
against the impact of changes in foreign currency exchange rates on specific
foreign currency commitments. Losses on foreign currency exchange contracts are
recognized as incurred based upon changes in the fair value of the underlying
contracts where such losses would lead to recognition of losses in later
periods. Refer to Note 14 - Fair Value of Financial Instruments, for additional
details on forward foreign currency exchange contracts.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivative financial instruments in accordance with the
FASB Statement of Financial Accounting Standards No. 80, "Accounting for Future
Contracts"("SFAS 80") and related interpretations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which are both readily
convertible to cash and have an original maturity of three months or less to be
cash equivalents.
ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Accounts receivable are reduced to net realizable value through allowances for
doubtful accounts and sales returns and allowances. Management provides for
doubtful accounts based upon historical bad debt write-off experience and the
Company's average aging of its accounts receivable. Additionally, specific
doubtful accounts are provided for when losses are known. The Company also
provides for general sales returns and allowances based upon historical product
return experience. Specific product returns are provided for when known.
If payment has been received from a customer, but revenue has been
deferred, the net deferred credit is recorded as a current accrued liability on
the consolidated balance sheets under the caption "Accrued Liabilities".
Revenues for which recognition has been deferred further reduce accounts
receivable.
Consolidated net revenues for fiscal 2000 included revenues of $56,800 related
to a large domestic retailer. Revenues related to this one customer accounted
for 15.5% of the Company's consolidated revenues for fiscal 2000. Revenues to
this customer were principally in the U.S. segment. No customer accounted for
10% or more of total revenues in fiscal 1999 or 1998.
The Company sells its products to customers in diversified industries, primarily
in North America and Europe. The Company realizes over one-half of its revenues
from customers in retail industries who are in widely diversified geographic
locations and markets. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have historically been
within management's expectations.
61
<PAGE> 63
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market. Inventories include material, labor and overhead costs for manufactured
products.
The Company's inventories are stated at their net realizable value and are
carried at cost less allowances for excess and obsolete products and allowances
for adjustments related to market values that are below historical inventory
cost. The Company is subject to a high degree of technological change in market
and customer demands. The Company therefore continually monitors its inventories
for excess and obsolete items based upon a combination of historical usage and
forecasted usage of such inventories. Additionally, specific inventory
provisions are made when existing facts and circumstances indicate that the
subject inventory will not be utilized, or its carrying value realized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at historical cost and depreciated over the
estimated useful lives of the assets using the straight-line method for
financial reporting purposes. The ranges of the estimated useful lives are:
buildings, 19-25 years; machinery and equipment, furniture and fixtures, and
transportation equipment, 3-10 years; enterprise-wide business system, 7 years;
marketing and customer service equipment and tooling, 3 years; and the shorter
of the useful life of the asset or the life of the lease for leasehold
improvements. Gains and losses from the sale or retirement and charges related
to the impairment of property and equipment are included in results of
operations.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are recorded at fair market value in
accordance with the SFAS 115. The Company has classified its investment in Cisco
as "available for sale" marketable securities based upon the Company's intent of
not engaging in the frequent buying and selling of the securities or the
generation of profit resulting from short-term differences in price related to
the securities and management's current intent to hold the stock for at least a
year. In accordance with SFAS 115, realized gains and losses are included in the
consolidated statement of operations and unrealized holding gains and losses
related to "available for sale" marketable securities are included in
stockholders' equity and comprehensive income (loss).
SOFTWARE COSTS, INTANGIBLES AND OTHER ASSETS
Software costs are capitalized in accordance with the Statement of Financial
Accounting Standards 86, "Accounting for the Cost of Computer Software to Be
Sold, Leased, or Otherwise Marketed" ("SFAS 86") and are included in intangibles
and other assets in the accompanying consolidated balance sheets. Purchased
computer software is capitalized and amortized for both financial and tax
reporting purposes, using the straight-line method, over the expected useful
life of the software, generally three years. Similarly, internally developed
computer software for sale or lease is capitalized and amortized for financial
reporting purposes using the straight-line method over three years. For tax
purposes, these costs are generally expensed as incurred, although certain of
these costs have been capitalized and will be amortized using the straight-line
method over three years.
The excess of the purchase cost over the fair value of net assets acquired in an
acquisition (goodwill) is included in intangibles and other assets in the
accompanying consolidated balance sheets. Goodwill is amortized on a
straight-line basis over three years. The Company periodically reviews goodwill
to assess
62
<PAGE> 64
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
recoverability by comparing the carrying amount to expected undiscounted future
cash flows. Impairments, if any, would be recognized in results of operations if
a permanent reduction in value were to occur.
Non-compete agreements, deferred financing costs and license agreements have
also been included in intangibles and other assets in the accompanying
consolidated balance sheets. Non-compete and license agreements are amortized on
a straight-line basis over the life of the related contract. Deferred financing
costs are amortized on a straight-line basis over the life of the related debt,
with accelerated amortization recorded on any indebtedness retired prior to its
scheduled maturity. All other assets included in intangible and other assets are
recorded at cost and are amortized on a straight-line basis over their expected
useful lives.
LONG-LIVED ASSETS
The Company reviews all long-lived assets, including property and equipment,
software and intangible and other assets for impairment in accordance with the
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of" ("SFAS 121").
REVENUE RECOGNITION
Revenues from computer hardware sales and software licenses to end-user
customers are generally recognized upon shipment and title transfer. However,
recognition of revenue is delayed until installation and customer acceptance if
one or more of the following conditions exist: 1) the Company provides
professional services to install its products at the customer's site(s), 2) the
Company integrates software with its hardware, or 3) there are substantial
acceptance criteria incorporated in the underlying sales agreement. If the
Company provides professional services to its customers over a period of time
together with its hardware and software, revenue is recognized on the entire
contract using the percentage-of-completion (unit of delivery) method.
The delay in the recognition of revenue in the instances described above is due
to the nature of the Company's product. Hardware, software and professional
services when offered by the Company to its customers in specific transactions
are all essential to the operation of the product and therefore they must all be
present for the earnings process to be complete. Therefore, the Company only
recognizes revenue related to these specific transactions when all of these
elements are completed, delivered to and accepted by the customer.
The Company recognizes product revenue where all of the following criteria of
Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), are met:
1) there is persuasive evidence of an arrangement based upon obtaining the
Company's required written contract with customers prior to shipment 2) delivery
of the Company's product has occurred based upon the Company's required evidence
of shipment or installation (as applicable) of its product 3) the terms of the
Company's arrangement with the customer are fixed and determinable based upon
written specific contract terms and 4) collection of the related accounts
receivable is probable based upon the Company's review of the customers credit
history and financial standing. The Company also provides its customers with
solutions that contain multiple revenue elements, including hardware, software,
customer services and professional services. Each of the elements of such
solutions are priced at fair value as determined by the price of the element as
sold separately.
63
<PAGE> 65
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
The Company provides professional services to its customers. These services
consist of site surveys, project management, installation and training services
related to the delivery of the Company's products and systems to the customer.
Because professional services are an integral component of the Company's
products when the services are provided by the Company to a customer, the
Company only recognizes related revenue in accordance with the criteria stated
above and does not segregate the recognition of professional services from the
other related revenue elements. Professional services account for a relatively
insignificant portion of consolidated revenues.
In instances where the Company recognizes revenue under the units of delivery,
the Company requires formal customer acceptance of the Company's installation of
the product at each customer location, evidenced by signed installation
documentation.
Recognition of revenue is deferred until after shipment and title transfer if
product-financing arrangements exist and the Company continues to have
interests, financial or otherwise, in the goods delivered. Revenue is then
recognized when such interests have expired. The Company recognizes revenue from
transactions where it guarantees customer lease payments to third party leasing
companies as if renting the goods itself directly to the customer under an
operating lease and depreciating the equipment.
Revenues from computer hardware sales and software licenses to Value Added
Distributors ("VADs") and Value Added Resellers ("VARs") are generally
recognized upon shipment and title transfer. Allowances are recorded to provide
for future sales returns, price protection credits and stock balancing credits.
These allowances are based upon historical experience with this class of
customer and specific circumstances surrounding particular transactions.
In accordance with SOP 97-2, revenues from custom application software sales are
recognized using the percentage-of-completion or completed contract method,
whichever is more appropriate.
Revenues from customer service maintenance contracts are recognized on a
straight-line basis over the terms of such contracts.
PRODUCT WARRANTIES
The Company provides end-user customers with warranties of varying terms,
depending upon model types and specific customer arrangements. Warranty periods
generally extend from three months to one year. Estimated warranty obligations
are accrued at the time of sale based upon historical experience by product. The
Company's warranty accrual is classified as a current liability on the
accompanying consolidated balance sheets.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Expenditures for the development and engineering of products are expensed as
incurred in accordance with the requirements of Statement of Financial
Accounting Standards No. 2, "Accounting for Research and Development Costs"
("SFAS 2"). Product development and engineering expenses are expensed as
incurred for both financial and tax-reporting purposes until products reach
technological feasibility under SFAS 86. Included in the product development and
engineering expenses line item in the accompanying consolidated statements of
operations are research and development costs of $25,726, $29,518 and $32,402
for fiscal years 2000, 1999 and 1998, respectively.
64
<PAGE> 66
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
DEFINED CONTRIBUTION PLAN
The Company sponsors a discretionary defined contribution plan. Participation in
the plan is available to all domestic employees of the Company. Company
contributions to the plan are based on a percentage of employee contributions as
per the plan provisions. Company contributions totaled $1,383, $1,626 and $1,633
in fiscal 2000, 1999 and 1998, respectively.
STOCK OPTION AND STOCK PURCHASE PLANS
Stock options, which are granted to employees and non-employee directors at the
quoted closing market price of the Company's common stock as of the last trading
day prior to the grant date, and stock purchased by eligible employees under the
Company's employee stock purchase plan are accounted for under APB Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Employee Stock
Purchase Plan meets the criteria of a non-compensatory plan under APB 25. The
Company has elected the disclosure provisions of the Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") and has reported the fair value of stock-based compensation expense within
a proforma presentation. See Note 11 - Stock Options and Restricted Stock.
EARNINGS PER SHARE
Computations of basic and diluted earnings per share of common stock have been
made in accordance with the Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). 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 exercisablity 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 (loss) represents the numerator, and the
shares represent the denominator, in the earnings per share calculation.
<TABLE>
<CAPTION>
FOR YEAR ENDED FOR YEAR ENDED FOR YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 1998
(RESTATED) (RESTATED)
------------------------------- ---------------------------------- -----------------------------
PER PER PER
NET SHARE NET SHARE NET SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT INCOME SHARES AMOUNT
----------- ------ --------- ------------- ------ ---------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $250,998 $(135,006) $6,183
======== ========= ======
BASIC EPS
Income (loss)available to
common stockholders $250,998 16,362 $15.34 $(135,006) 16,108 $(8.38) $6,183 15,809 $.39
-------- ------ --------- ------ ------ ----
EFFECT OF DILUTIVE SECURITIES
Options 266 -- 508
------ ------ ------
DILUTED EPS
Income(loss) available to
stockholders of common shares
and common share equivalents $250,998 16,628 $15.09 $(135,006) 16,108 $(8.38) $6,183 16,317 $.38
======== ====== ====== ========= ====== ====== ====== ====== ====
</TABLE>
65
<PAGE> 67
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
Options to purchase 1,659,879 shares of common stock at a weighted-average
exercise price of $19.79 per share were outstanding at March 31, 2000, but were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price for the
common shares during the period.
Options to purchase 3,457,625 shares of common stock at a weighted-average
exercise price of $17.12 per share were outstanding at March 31, 1999, but were
not included in the computation of diluted earnings per share because the
options would have had an anti-dilutive effect on the net loss per year.
Options to purchase 958,101 shares of common stock at a weighted-average
exercise price of $23.73 per share were outstanding at March 31, 1998, but were
not included in the computation of diluted earnings per share for the fiscal
year then ended because the options' exercise prices were 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 would have had
an anti-dilutive effect on earnings for the fiscal years ended March 31, 1999
and 1998. For fiscal 2000, a precondition for conversion related to the
debentures was not satisfied; therefore the potential dilutive effect of these
debentures has also been omitted for the diluted earnings per share
calculations.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONTINGENT AND UNUSUAL ITEMS
Contingent and unusual items are expensed as incurred when events giving rise to
such items are probable and the amounts are estimable in accordance with the
requirements of Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies" ("SFAS 5").
During fiscal 2000, the Company recorded an estimated loss of $2,023 on a
product sales contract with a significant domestic retail customer under the
requirements of SFAS 5. The contract will result in a probable aggregate loss
based on the fair value assigned to trade in-units as compared to the product
revenue allowance given. The net realizable value of these units was negatively
impacted by the Company's supply of the traded-in units as compared to demand
for those products. The contract was entered into and structured in order to
meet that customer's demands.
The net product revenues and cost of product revenues recorded on the contract
for fiscal 2000 were $3,142 and $5,165, respectively. In connection with the
recording of the loss on the contract, the accrual for the allowances due of
$3,523 has been recorded as an accrued liability as of March 31, 2000 on the
accompanying Consolidated Balance Sheets. The amount of the accrual noted above
is $1,500 greater than the loss recognized on the contract as of March 31, 2000.
This difference is due to provisions and accruals recorded to offset gross
profit
66
<PAGE> 68
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
earned, excluding allowances given, upon the shipment of products to the
customer during fiscal 2000. The delivery of the Company's product called for in
the contract to the customer will occur over the next two fiscal quarters. Total
net product revenues and costs of product revenues under the contract are
expected to be $15,077 and $17,100, respectively.
RECLASSIFICATIONS
Certain items in the fiscal 1999 and 1998 consolidated financial statements and
notes thereto have been reclassified to conform to the fiscal 2000 presentation.
NOTE 2 - FINANCIAL RESULTS AND LIQUIDITY
The Company incurred net losses from operations in both fiscal 2000 and 1999 of
$90,363 and $106,897. The Company has also experienced decreases in consolidated
revenues of $30,643 and $58,662 in fiscal 2000 and fiscal 1999 as compared to
the prior fiscal periods. Cash flows used in operations were $75,304 and $27,616
for fiscal 2000 and fiscal 1999, respectively. The Company's primary source of
cash flows for fiscal 2000 was the sale of a portion of the Company's holdings
of Cisco common stock for $150,000. The primary source of cash flows for fiscal
1999 was net borrowings under its credit facilities (including product-financing
arrangements) which aggregated $65,567. With the proceeds from the sale of the
Cisco shares in fiscal 2000, the Company extinguished the short-term and
long-term debt outstanding on its credit facility and terminated that credit
agreement. The Company also entered into a new credit and pledge agreement to
replace its former credit facility. This credit and pledge agreement contains
more favorable financial terms for the Company. The maximum borrowing on this
new agreement is $236,000. The Company has no short-term debt outstanding at
March 31, 2000. The Company also paid significant amounts of accounts payable
and accrued liabilities in order to enhance the Company's relations with vendors
and to increase its financial flexibility.
The Company's stockholders' equity and working capital at March 31, 2000 were
$321,827 and $125,949. These amounts compare to stockholders' equity and working
capital at March 31, 1999 of $16,966 and $34,275, respectively. Although the
Company has incurred a loss from operations during fiscal 2000, the Company
recorded significant non-operating gains related to the sale of subsidiary stock
and the merger of its former Aironet subsidiary with Cisco of $32,025 and
$396,161, respectively. At March 31, 2000, the Company holds $321,863 of Cisco
common stock, at fair value. Additionally, at March 31, 2000, these securities
were adjusted to fair market value through equity and comprehensive income by
$54,159, $33,099 after tax.
Management believes that the Company currently has the financial wherewithal and
liquidity to execute its business plan, and if successfully executed, this
business plan can significantly improve the Company's operations and financial
results. The continued support of the Company's vendors, customers, lenders,
stockholders and employees will continue to be key to the Company's future
success.
NOTE 3 - RESTATEMENT
On February 23, 1999, the Company announced that, having completed the review of
certain judgmental accounting matters with the Company's then outside auditors,
it would restate its previously issued financial statements for the fiscal years
1998, 1997 and 1996, and its unaudited interim financial statements for the
first and
67
<PAGE> 69
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
second quarters of fiscal 1999. Additionally, the Company announced on June 16,
1999, that it would further restate its unaudited results for the second quarter
of fiscal 1999. The accompanying consolidated financial statements and the
information shown below as "As Previously Reported" for fiscal 1999 and 1998
reflect those restatements.
On June 29, 2000, the Company announced that it would be further restating its
fiscal 1999 and 1998 financial results. This restatement was based on the
completion of a review of recently uncovered documentary evidence relating to
side agreements made during the fourth quarter of fiscal 1998 with a VAD. These
side agreements provided the VAD with complete rights of return for certain
subject goods, rights to require the repurchase of the subject goods and rights
to require the Company to pay the carrying costs of the subject goods. The
amount of revenues and costs of revenues subject to these side agreements were
$8,100 and $4,860, respectively. As a result of these side agreements, revenue
should more appropriately be recognized on the sell-through basis. The VAD did
not resell all of the subject goods. All of the goods were either sold through
or returned to the Company for credit in the amounts of $4,941 and $3,159 during
the first and second quarters of fiscal 1999, respectively. Since no revenue
reductions should have been recorded in fiscal 1999 related to the subject goods
that were returned, the correction of these revenue transactions increased the
consolidated revenues recorded for that fiscal year. The related income tax
impact of $1,264 has been recorded in each fiscal period to reflect the income
tax consequences of the restatement adjustment described above. Since the
impacts of the adjustments noted above have the effect of decreasing fiscal 1998
net income by $1,976 and increasing fiscal 1999 net income by that same amount,
the March 31, 1999 Consolidated Balance Sheet, including stockholders' equity,
remains unchanged.
A summary of the effects of this restatement of the Company's Consolidated
Statements of Operations for the years ended March 31, 1999 and 1998 follows.
Also presented below is a summary of the effects of the restatement adjustments
on the Consolidated Balance Sheet as of March 31, 1998(in thousands, except per
share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998
------------------------ -----------------------
As As
Previously Previously
Reported Restated Reported Restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues:
Product, net $305,380 $313,480 $386,410 $378,310
Customer service, net 82,914 82,914 76,746 76,746
-------- -------- -------- -------
Total net revenues 388,294 396,394 463,156 455,056
Cost of revenues:
Product 241,265 246,125 227,850 222,990
Customer service 55,078 55,078 48,836 48,836
-------- -------- -------- --------
Total cost of revenues 296,343 301,203 276,686 271,826
-------- -------- -------- --------
Gross profit 91,951 95,191 186,470 183,230
Operating expenses:
Selling expenses 96,109 96,109 82,054 82,054
Product development and
engineering expenses 42,986 42,986 37,500 37,500
General & administrative
expenses 54,923 54,923 39,462 39,462
Asset impairment charge -- -- 6,069 6,069
Unconsummated business
combination costs 8,070 8,070 -- --
-------- -------- -------- --------
</TABLE>
68
<PAGE> 70
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total operating expenses 202,088 202,088 165,085 165,085
(Loss) income from operations (110,137) (106,897) 21,385 18,145
Interest income 801 801 1,573 1,573
Interest expense (9,872) (9,872) (7,181) (7,181)
Gain on sale of subsidiary stock 340 340 1,637 1,637
Other non-operating expense (754) (754) (1,012) (1,012)
------- -------- --------- ---------
(Loss) income before income
taxes (119,622) (116,382) 16,402 13,162
Provision for income taxes 17,360 18,624 7,227 5,963
-------- --------- -------- --------
(Loss) income before
cumulative effect of an
accounting change (136,982) (135,006) 9,175 7,199
Cumulative effect, net of tax -- -- 1,016 1,016
-------- -------- -------- --------
Net (loss) income $(136,982) $(135,006) $ 8,159 $ 6,183
========== ========== ======== ========
(Loss) income per share before cumulative effect
of an accounting change:
Basic $(8.50) $(8.38) $.58 $.45
Diluted $(8.50) $(8.38) $.56 $.44
Cumulative effect:
Basic $-- $-- $(.06) $(.06)
Diluted $-- $-- $(.06) $(.06)
Net income (loss) per share:
Basic $(8.50) $(8.38) $.52 $.39
Diluted $(8.50) $(8.38) $.50 $.38
Average number of common shares outstanding:
Basic 16,108 16,108 15,809 15,809
Diluted 16,108 16,108 16,317 16,317
</TABLE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
--------------------
As
Previously
Reported Restated
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash (including cash equivalents of $6,778
and $6,778) $ 27,500 $ 27,500
Accounts receivable, net 121,932 113,832
Notes and other accounts receivable 15,753 15,753
Inventories 109,935 114,795
Prepaid expenses and other current assets 16,084 16,084
-------- --------
Total current assets 291,204 287,964
Property and equipment, net 53,969 53,969
Intangibles and other assets, net 33,292 33,292
-------- --------
Total assets $378,465 $375,225
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,000 $ 3,000
</TABLE>
69
<PAGE> 71
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
<S> <C> <C>
Capital lease obligations due within one year 968 968
Accounts payable 58,634 58,634
Income taxes payable 3,466 2,202
Accrued liabilities 41,988 41,988
-------- --------
Total current liabilities 108,056 106,792
Capital lease obligations 1,876 1,876
Convertible subordinated notes and debentures 107,224 107,224
Other long-term liabilities 6,867 6,867
-------- --------
Total liabilities 224,023 222,759
Minority interest 1,287 1,287
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 and 16,219 issued 162 162
Additional paid-in capital 87,489 87,489
Retained earnings 75,267 73,291
Equity adjustment for foreign currency
translation (4,929) (4,929)
Unearned compensation relating to restricted stock
awards (493) (493)
Treasury stock; 162 and 162 shares of
common stock at cost (3,062) (3,062)
Notes related to the purchase of subsidiary stock (1,279) (1,279)
--------- --------
Total stockholders' equity 153,155 151,179
-------- --------
Commitments and contingencies -- --
-------- --------
Total liabilities and stockholders' equity $378,465 $375,225
======== ========
</TABLE>
NOTE 4 - INVENTORIES
Inventories at March 31, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Purchased components $46,514 $51,112
Work-in-process 21,404 32,360
Finished goods 14,005 45,577
-------- ---------
$81,923 $129,049
======== =========
</TABLE>
At March 31, 2000, inventory allowance accounts aggregated $40,457 and were
composed of manufactured purchased components of $30,424, customer service spare
parts and used equipment of $8,115 and international finished goods inventories
of $1,918. In addition to the inventory allowance accounts, the Company has
recorded accrued liabilities totaling $150 for purchase commitments to outside
contract manufacturers for discontinued products and $2,600 for a loss on an
inventory purchase commitment to a vendor.
Inventory allowance provisions for fiscal 2000 total $30,673 and were composed
of manufacturing purchased components of $14,643, customer service spare parts
and used equipment of $360, trade-in and remanufacturing inventory of $14,492
and international finished goods inventories of $1,178. The $14,643 provision
for manufacturing purchased components was due to a reduction in shipments and
expected demand for certain of the Company's older product lines and the
Company's reassessment of the methodology which takes into account recent
technological and market conditions including the impact of the introduction of
new products. The $14,492 provision for trade-in and remanufacturing inventory
was primarily due to a
70
<PAGE> 72
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
reduction in the estimated net realizable value of existing inventory. The
provision was the result of the acceptance of quantities in excess of projected
demand of trade-in units of the Company's older products to satisfy a
significant customer's requirements. The $1,178 provision for international
finished goods was due to a write-down of the carrying value on older products.
Management disposes of excess and obsolete inventory as necessary and as
manpower permits, although there are no formal programs to do so. During fiscal
2000, the Company disposed of $24,619 of excess and obsolete material. Of this
amount $21,806 related to manufacturing purchased components, $1,770 related to
the Company's customer service inventories and $1,043 related to the Company's
international operations. There were no material recoveries related to the
disposal of this material.
At March 31, 2000, the Company had $6,236 of finished goods inventory held at
distributors and customers, and $10,107 of manufactured purchased components at
contract manufacturers. At March 31, 1999, the Company had $25,733 of finished
goods inventory held at distributors and customers, and $5,714 of manufactured
purchased components at contract manufacturers. The decrease in the amount of
finished goods held at distributors and customers was the result of revenue
recognized, for previously deferred transactions, upon installation and customer
acceptance of the Company's products. Additionally, the inventory value of
finished goods due back from customers for product returns decreased in
proportion to the decrease in the reserve for sales returns and allowances.
At March 31, 1999, the inventory allowance accounts were primarily composed of
manufactured purchased components of $22,816, customer service spare parts and
used equipment of $4,138 and international finished goods inventories of $1,892.
The overall increase in the allowance accounts was due to provisions related to
the discontinuance of several of the Company's products, including the PTC 1194,
PTC 1124, PTC 1134, and PTC 1184 as well as other products. A number of factors
arose during the later part of the year ended March 31, 1999 that contributed to
management's decision to discontinue these products. These factors included the
extended length of time the development cycle experienced with these products,
customer acceptance issues related to products shipped and more advanced
features contained in competing products. These factors led to a reduction in
customer demand and a related backlog for these products. Additionally, the
effort needed to modify the existing products to meet increased customer demands
for performance features was determined to be cost prohibitive. Prior to the
reduction in demand and the backlog related to these products, the Company
believed that these products could be developed and sold successfully in the
marketplace and pursued activities designed to bring this about. The Company
discontinued the active marketing of these products in March 1999.
During the Company's analysis of these discontinued products, manufactured
components that could be utilized to fulfill specific customer demands were
retained and not provided for. Additionally, the Company continued to accept
returned goods as trade-in units for revenue credit, and continued to sell these
discontinued products as used or remanufactured product.
Provisions were made for manufactured components of $35,125, customer service
spare parts and used equipment of $1,127 and international finished goods of
$1,178. The provisions for remanufacturing obsolescence were made as revenues
related to the Company's remanufacturing operations did not materialize as
anticipated. During the fourth quarter of the fiscal year ended March 31, 1999,
the Company significantly reduced its management emphasis on remanufacturing
operations. Provisions for test
71
<PAGE> 73
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
equipment held by customers were made as such inventory aged and was determined
either not to be salable to such customers or able to be returned and utilized
by the Company. During the year ended March 31, 1999, the Company reduced its
shipments of test equipment to customers as a sales tool.
During fiscal 1999, the following amounts were scrapped: manufactured purchased
components $3,676, international inventories of finished goods $484 and test
equipment held at customers of $3,710. Recoveries that were related to the
disposition of such inventory were immaterial.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
-------- ---------
<S> <C> <C>
Equipment $ 46,970 $ 65,471
Enterprise-wide business system, including
capitalized interest of $2,021 and $1,486,
respectively 33,594 28,122
Tooling 17,273 30,888
Furniture and office equipment 19,023 18,241
Capital lease assets and other 1,707 5,537
Buildings, improvements and leasehold interest 11,827 11,836
Leasehold improvements 8,922 10,028
Land 1,978 1,978
-------- --------
Total cost 141,294 172,101
Less - accumulated depreciation and amortization 79,227 102,544
-------- --------
$ 62,067 $ 69,557
======== ========
</TABLE>
Depreciation expense for fiscal 2000, 1999 and 1998 amounted to $18,211, $19,104
and $15,135, respectively. Fiscal 2000 depreciation includes $321 of accelerated
depreciation related to leasehold improvements located on property currently
leased by the Company's former Aironet subsidiary, and $371 of accelerated
depreciation related to leasehold improvements located at the Company's former
world headquarters in Akron, Ohio. Since the financial position and results of
the Company's former Aironet subsidiary are no longer consolidated, and the
sublease rent paid to the Company by Aironet is less than the Company's lease
cost, capitalization of these leasehold improvements is no longer appropriate
under the provisions of SFAS 121. Additionally, in November 1999, the Company
announced that it would move its executive offices from Akron, Ohio to
Cincinnati, Ohio and relocate substantially all of its remaining Akron
operations to The Woodlands, Texas and Cincinnati, Ohio. Since the Akron, Ohio
location will no longer be utilized after a transition period ending June 30,
2000, depreciation of leasehold improvements at this location has been
accelerated accordingly.
During fiscal 2000, assets with a cost basis of $37,238 and accumulated
depreciation of $37,115 were disposed of; prompting the Company to recognize a
loss on disposals of $123. These amounts included an impairment charge of $381
related to the Company's aircraft hanger, which was due in part to the sale of
the Company's corporate jet during fiscal 2000. Fiscal 1999 included $1,262 of
accelerated depreciation and amortization related to demonstration equipment and
tooling associated with end-of-life products.
72
<PAGE> 74
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
As mentioned above, and as discussed in Note 17 - Divestitures and Subsidiary
Stock Transactions, since the financial position of the Company's former Aironet
subsidiary is no longer consolidated, property and equipment of $6,348 and
accumulated depreciation of $3,968 related to Aironet have been excluded from
the Company's fiscal 2000 consolidated balance sheet.
Net capital lease additions were $660 and $1,698 in fiscal 2000 and 1998,
respectively. There were no additions in fiscal 1999. These additions and
retirements were non-cash transactions and, accordingly, have been excluded from
property and equipment additions in the accompanying consolidated statements of
cash flows. Amortization of capital lease assets has been included in
depreciation expense. Accumulated amortization related to capital lease assets
aggregated $408 and $2,483 in fiscal 2000 and 1999, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS
Net intangible and other assets consisted of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
------- --------
<S> <C> <C>
Investments in closely held companies $ 7,147 $ 11,347
Capitalized software, net of amortization of $20,807
and $19,269 6,631 7,934
Long-term notes receivable - 445
Goodwill relating to acquisitions, net of amortization
of $1,636 and $20,591 14,057 3,977
Deferred financing costs, net of amortization of $3,552
and $2,939 1,616 2,229
Other, net 1,798 4,303
--------- ---------
$ 31,249 $ 30,235
========= =========
</TABLE>
Amortization expense for the years ended March 31, was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ---------
<S> <C> <C> <C>
Capitalized software $ 5,280 $ 7,354 $ 6,433
Goodwill 1,066 1,352 3,500
Deferred financing costs 3,303 708 631
Other 723 656 1,173
----------- ---------- ---------
$ 10,372 $ 10,070 $ 11,737
=========== ========== =========
</TABLE>
The Company assesses the carrying value of non-marketable securities at each
balance sheet date using all available information including internal and
external audited financial statements of investees, investee transactions with
third parties and convertibility into marketable equity securities. The Company
carries all of its investments in non-marketable securities under the cost
method as no investment represents more than 20% of the voting interest in any
investee and the Company cannot otherwise exert significant influence over such
investee. If a permanent decline in the value below cost is indicated based upon
information obtained, the carrying value of the investment is adjusted to such
value.
73
<PAGE> 75
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
During fiscal 2000 and 1999, the Company recorded an impairment charge of $1,283
and $1,725 against its investment in the third party that acquired the Company's
Virtual Vision subsidiary, respectively. The Company had received 750,000 shares
of the purchaser's Series F preferred shares, with a value of $4,500, as payment
for the stock of the Company's Virtual Vision subsidiary. The impairment charge
reflects the dilution of the Company's investment in the purchaser resulting
from the purchaser's subsequent issuance of a series of preferred shares with
superior rights over the preferred shares owned by the Company.
During fiscal 2000, the third party that acquired Virtual Vision made several
changes in its capital structure, including the merger into a SEC registrant. As
a result of this restructuring, the Company holds 683,818 restricted common
shares in the restructured SEC registrant. The closing price per share of this
SEC registrant at March 31, 2000 was $20.81. The Company is subject to a lock up
period of two years that substantially restricts the Company's ability to sell
these common shares. As a result of the lock up period the Company has continued
to carry this investment at cost, which amounted to $1,492 and $2,775 at March
31, 2000 and 1999, respectively, and has been included in intangible and other
assets in the accompanying consolidated balance sheets as detailed above.
During fiscal 2000, the Company recorded a gain of $761 from the sale of stock
in a development stage technology company. The proceeds of the sale were $1,523.
During fiscal 2000 and 1999, the Company repurchased 1,905,930 and 400,000
shares, respectively, of the voting common stock of Metanetics from third
parties at an average price of $6.58 and $4.88 per share, respectively. At March
31, 2000 the Company owned 100% of Metanetics. Since Metanetics was already
included in the Company's consolidated results as a majority-owned subsidiary,
due to the Company's 100% funding of the Metanetics operations, these
repurchases of shares reflected an additional investment which has been recorded
as goodwill. This additional investment is being amortized over a useful life of
three years. During fiscal 2000 and 1999, the Company recorded $1,066 and $570,
respectively, of amortization related to this additional investment, which was
characterized as goodwill amortization expense in the above table. Refer to Note
17 - Divestitures and Subsidiary Stock Transactions for additional details on
the repurchase of Metanetics stock.
During fiscal 1998, impairment charges of $1,100 and $1,434 were recorded
against the Company's investments in two unrelated third parties. These
investments were fully impaired due to poor historical financial performance,
inability to repay amounts owed to the Company and lack of evidence that would
indicate a future ability of these entities to support the carrying value of the
Company's investments.
During fiscal 1998, the Company recorded a charge of $3,535 to fully impair the
long-term notes receivable due from the purchaser of the assets of certain of
the Company's retail application software operations for its purchase of those
assets. These long-term notes receivable were fully impaired due to the
purchaser's inability to make its scheduled payments against the promissory
notes and the lack of persuasive evidence indicating its ability to make such
payments in the future.
Additionally, in connection with the impairment of the promissory notes
receivable related to the Company's divestiture of retail software operations
74
<PAGE> 76
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
during fiscal 1998, the Company continued to amortize the underlying software
associated with the divested asset and recorded $932 of amortization in fiscal
1998.
NOTE 7 - MARKETABLE SECURITIES AND DERIVATIVES
SECURITIES AVAILABLE FOR SALE AS OF MARCH 31,:
2000
-----------------------------
Cost basis $ 267,704
Gross unrealized holding gains 54,159
-----------------------------
Aggregate fair market value $ 321,863
=============================
As described in Note 17 - Divestitures and Subsidiary Stock Transactions, Cisco
acquired the Company's former Aironet subsidiary by merger in exchange for
shares of Cisco common stock. At March 15, 2000, the consummation date of the
merger, the Company owned 6,366,086 shares of Cisco, and the closing price on
that date was $64.32 per share (as adjusted for the two for one stock split that
occurred on March 23, 2000). The Company has treated the exchange of its Aironet
shares for Cisco shares under the requirements of APB 29 "Accounting for
Non-monetary Transactions" thus recognizing a non-operating gain upon the
exchange of shares. Subsequent to the Cisco/Aironet merger, the Company
accounted for the investment retained in Cisco shares in accordance with the
requirements of SFAS 115 based upon the Company's intent to hold the securities
for an extended length of time and to not engage in frequent buying and selling
of the securities. That statement requires investments in marketable equity
securities to be accounted for as either "trading" or "available for sale"
securities. The Company has recorded its investment in Cisco shares as
"available for sale" securities. The Company has recorded a cost basis for these
securities equivalent to the securities fair market value as of the
Cisco/Aironet merger consummation. On March 31, 2000, a $54,159 unrealized
holding gain was recorded to reflect an increase in market value of the
Company's investment in Cisco, in accordance with the requirements of SFAS 115.
GROSS SALES OF MARKETABLE SECURITIES AS OF MARCH 31,:
2000
-----------------------------
Cost basis $ 141,488
Aggregate market value of sale 149,995
-----------------------------
Gross realized gains $ 8,507
=============================
During fiscal 2000, the Company sold a portion of its marketable securities
(1,100,000 shares (prior to the two for one stock split) at an average selling
price of $136.36) in Cisco to satisfy various debt and working capital
obligations. Upon the sale of these marketable securities the Company realized a
gain on marketable securities of $8,507, in accordance with the provisions of
SFAS 115. This realized non-operating gain was calculated as the difference
between the market value in Cisco shares as of the consummation date of the
merger, March 15, 2000 (the Company's basis date), and the market value of the
shares sold to an
75
<PAGE> 77
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
unrelated party on the date of sale, March 22, 2000. Due to the highly liquid
nature of the Company's investment, specific identification of share price was
utilized in determining share value and related gains.
The Company has reduced the related market risk in its investment of Cisco
securities by entering into two derivative financial instruments (referred to
collectively herein as (the "Collar")), on March 23, 2000. The Collar
essentially hedges the Company's risk of loss on the marketable securities by
utilizing put options. Conversely, the Collar arrangement also limits the
Company's potential gain by employing call options. By employing a hedging
alternative such as the Collar, the Company can be assured that its gains and
losses will reside within the range created by the Collar. This range is set in
such a way that the Black Scholes value of the call is equivalent to the Black
Scholes value of the put; therefore, utilizing this means of hedging is cost
effective for the Company since the premiums and costs related to the two
opposing features effectively netted.
Information regarding the Collar is illustrated in the table below.
OPTION STRIKE NUMBER OF NUMBER OF
TYPE PRICE OPTIONS SHARES HEDGED
------------------ --------------------- ------------------ -----------------
Call $ 106.99 20,800 2,080,000
Put $ 59.33 20,800 2,080,000
Call $ 94.25 20,800 2,080,000
Put $ 66.75 20,800 2,080,000
The effect of the Collar is to hedge 4,160,000 shares, or 99.9%, of the
Company's remaining investment in Cisco. The Collar limits the Company's loss by
placing a floor on the value the shares may be potentially sold at of, on
average, $63.04 per share. Conversely, the Collar also limits the Company's gain
by creating a ceiling on the value the shares may be potentially sold at of, on
average, $100.62 per share. Therefore, the Company's maximum potential gain or
(loss) realized from the sale of its marketable securities at March 31, 2000 is
on average $151,487 or ($5,074), respectively. This potential gain or loss was
calculated by utilizing the average strike prices from above, and the Company's
original cost basis in its investment in Cisco at March 31, 2000 of $267,704.
However, the options contained within the Collar agreement have an expiration
date of March 26, 2001 and may only be exercised on this date. For each collar,
the election of a third party to exercise the call feature, or the Company's
option to exercise the put feature, will automatically terminate the opposing
component of the Collar agreement, and the owner of such option agreement will
have no further rights or obligations under the agreement once this occurs.
NOTE 8 - SHORT-TERM FINANCING
During fiscal 2000, the Company entered into a loan and pledge agreement
arranged with a lending institution to provide the Company with an open line of
credit not to exceed $236,000 collateralized by the Company's investment in
marketable securities. The maximum availability of $236,000 is based on 90.0% of
the floor value of the Collar as described in Note 7 - Marketable Securities and
Derivatives. The line of credit, which carries a borrowing rate of LIBOR plus
thirty basis points, has no fees associated with it. The one-month LIBOR rate at
March 31, 2000 was 6.13%. There are no borrowings against this line of credit as
of March 31, 2000. The purpose of the
76
<PAGE> 78
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
facility is to ensure that the Company meets its short-term working capital
requirements.
During fiscal 2000, the Company also entered into an unsecured revolving
promissory note with a bank for $5,000. The note matures April 30, 2001.
Interest on advances is at the bank's prime rate plus 2.00%. There are no
borrowings against this note as of March 31, 2000.
During fiscal 2000, the Company had a weighted-average of $66,357 outstanding
under its secured credit facility, revolving credit agreement and revolving
promissory note with a weighted-average interest rate of 10.20% per annum.
During fiscal 1999, the Company had a weighted average of $49,700 outstanding
under its revolving credit agreement, revolving promissory note and product
financing arrangement with a weighted average interest rate of 9.03% per annum.
On August 30, 1999, the Company entered into a loan and security agreement
whereby Telxon obtained a $100,000 senior secured credit facility as a
replacement for the Company's existing revolving credit agreement and business
purpose promissory note. The facility consisted of both term and revolving
credit arrangements. On November 18, 1999, the Company entered into an amendment
of this security agreement whereby additional borrowings of $20,000 were
provided. The amendment also extended the maturity date of the $30,000 term loan
(which represents a portion of the $100,000 senior secured credit facility) to
March 31, 2000. Amounts due under this facility were repaid on March 23, 2000 as
set forth below.
Borrowings under the revolving loan provisions of such facility were subject to
availability on qualifying accounts receivable and inventory, reduced by amounts
borrowed and outstanding under the facility's term loan features and letters of
credit.
The secured credit facility had four term loan features, each feature having
specific limitations and requirements. Two of the term loans were limited by the
market value of Aironet capital stock owned by the Company. The amounts ranged
from $6,000 to $30,000. The interest rate charged on the revolving loan, and two
of the term loans was 0.5% above the financial institution's prime lending rate.
The other two term loans were fixed at 12.5%. Two of the term loans had the
ability to be converted to Euro-rate loans at the option of the Company;
converted loans would be charged a rate of 2.75% plus the Eurodollar rate. The
$100,000 credit facility was collateralized by essentially all of the Company's
assets and the credit facility required the maintenance of various financial and
non-financial covenants. During the year, the Company's lenders modified certain
of these debt covenants. Due to this modification, the Company was in compliance
with all financial covenants.
On March 23, 2000, the Company, with funds received from the sale of
approximately $150,000 of the Company's investment in marketable securities,
extinguished the principal balance outstanding of $76,632 on the secured credit
facility including accrued and unpaid interest, expenses and an early
termination premium of $1,500. The payment of this termination fee plus the
unamortized debt issuance costs of $324 were charged against income, net of
taxes of $711, as an extraordinary item in accordance with Statement of
Financial Accounting Standards No.4, "Reporting Gains and Losses from
Extinguishment of Debt"("SFAS 4").
During fiscal 1999, the Company capitalized $1,148 in waiver fees for the
aforementioned waivers. The capitalized waiver fees, which were amortized over
the respective periods, were included in the prepaid expenses and other current
assets
77
<PAGE> 79
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
line item of the accompanying Consolidated Balance Sheet. At March 31, 1999, the
Company had $432 in unamortized waiver fees.
As of March 31, 2000 and 1999 the Company had a note payable of $- and $7,097,
respectively, outstanding and recorded on its Consolidated Balance Sheet related
to a product financing arrangement. This product financing arrangement charged
interest at a rate of 10.25% and called for the payment of various
administrative and advance fees.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities at March 31, consisted of the following:
2000 1999
------- -------
Deferred customer service revenues $11,823 $15,351
Accrued payroll and other employee compensation 8,624 9,624
Accrued taxes other than payroll and income taxes 4,429 1,132
Accrued royalties 3,651 3,466
Provision for loss contract 3,523 --
Accrued employee termination benefits 3,483 3,610
Accrued professional fees 2,947 4,263
Accrued losses on inventory purchase commitments and
discontinued product costs 2,751 12,422
Accrued facility closing costs 2,083 --
Accrued interest 1,813 1,929
Deferred product revenues 1,193 14,168
Accrued commissions 1,056 2,025
Other accrued liabilities 6,395 6,295
------- -------
$53,771 $74,285
======= =======
Pursuant to Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for
Cost to Exit an Activity (Including Certain Costs Incurred in a Restructuring)",
accrued employee termination benefits at March 31, 2000 include costs to
terminate 14 employees. It is expected that there will be an additional 115
employees terminated in the next fiscal year. Costs totaling $169, $95, $657,
$51 and $2,511 were charged to cost of product revenues, cost of customer
service revenues, selling expenses, product development and engineering expenses
and general and administrative expenses, respectively. All employee termination
benefits are expected to be paid in cash during the next fiscal year.
The Company's domestic accrual for employee termination benefits decreased from
a balance of $3,381 at March 31, 1999 to a balance of $1,786 at March 31, 2000.
This decrease was caused by severance charges of $1,871 during fiscal 2000,
which were more than offset by severance payments of $3,466 to terminated
employees. A total of 47 domestic employees were terminated during fiscal 2000.
The areas of the Company affected were domestic sales operations, domestic
product development, manufacturing operations and corporate administration. In
addition to the domestic severance activity, 4 employees were terminated in the
Company's international sales operations during fiscal 2000. The severance
recorded related to these employees was $1,200. At March 31, 2000, $100 was
accrued related to international operations; $1,100 of the amount accrued of
this severance has been paid.
The Company incurred several charges related to the relocation of its operations
in Akron, Ohio to Cincinnati, Ohio and The Woodlands, Texas. The Company
recorded $1,597 in stay-on bonuses, healthcare and outplacement benefits for 103
employees
78
<PAGE> 80
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
in Akron who elected not to relocate and stayed through the transition process.
All of these accruals were based on the amount of stay-on bonuses earned during
the transition period ending June 30, 2000. At March 31, 2000, there is a
balance of $3,383 of accrued employee termination benefits that are expected to
be paid in cash in the next fiscal year related to severance charges for
terminated employees and stay-on bonuses related to Akron personnel.
At March 31, 2000 and 1999, the Company accrued $- and $9,370 related to
non-cancelable purchase commitments to an outside vendor and processor related
to discontinued products. The Company commits to purchase finished products
related to goods held in processor's inventory as those goods are acquired.
During fiscal 2000, the Company recorded an estimated loss of $2,600 related to
a non-cancelable purchase commitment with a bar code scanner supplier. The
commitment calls for the purchase of specified products offered by the supplier
over a specified time period. The Company had received a portion of the product
during fiscal 2000. However, the Company has returned the goods to the supplier
based upon significant questions raised as to the products salability and is
negotiating with the supplier regarding its commitment. There are no assurances
that these negotiations will relieve the Company of any liability under the
commitment. The amount of the estimated loss was determined based upon quoted
market prices from the supplier's distributors of those products.
NOTE 10 - INCOME TAXES
Components of income (loss) before taxes:
2000 1999 1998
--------- ----------- ---------
(Restated) (Restated)
Domestic operations $319,737 $(127,643) $4,802
International operations 5,207 11,261 8,360
--------- ----------- ---------
$324,944 $(116,382) $13,162
========= =========== =========
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the tax rates and laws that are currently in effect.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Components of the provision for income taxes by taxing jurisdiction are as
follows:
Current: 2000 1999 1998
--------- ------- --------
(Restated) (Restated)
U.S. $ 7,085 $4,246 $ 5,301
State and local 250 30 498
Foreign 2,681 4,823 3,470
--------- ------- --------
Subtotal $10,016 9,099 9,269
Deferred:
U.S. 56,625 9,297 (3,130)
State and local 6,192 (99) (46)
Foreign -- 327 (130)
--------- ------- --------
79
<PAGE> 81
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
Subtotal 62,817 9,525 (3,306)
-------- -------- --------
Provision for income taxes $72,833 $18,624 $ 5,963
======== ======== ========
The reconciliation between the reported total income tax expense (benefit) and
the amount computed by multiplying income (loss) before income taxes by the U.S.
federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C>
U.S. federal, statutory tax rate 35.0% (35.0)% 35.0%
State and local income taxes 3.2 (.1) 2.8
Net taxes on repatriated foreign earnings -- .2 --
Foreign tax rate differential .3 .7 1.9
Research and development
credits -- -- (1.6)
Goodwill .1 .4 9.1
Foreign sales corporation tax benefit -- -- (2.2)
Change in valuation allowance (14.8) 45.7 --
Tax refund claims, audit issues and other matters (1.3) 2.4 2.6
Other (0.1) 1.7 (2.3)
--------- ----------- -----------
Consolidated effective tax rate 22.4% 16.0% 45.3%
========= =========== ===========
</TABLE>
The reconciliation between the reported total income tax expense (benefit) and
the amount computed by multiplying income (loss) before income taxes by the U.S.
statutory tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ----------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
U.S. federal, statutory tax rate $113,730 $(40,734) $ 4,607
State and local income taxes 10,283 (58) 368
Net taxes on repatriated foreign earnings -- 181 --
Foreign tax rate differential 857 816 249
Research and development credits 65 (37) (207)
Goodwill 373 501 1,202
Foreign sales corporation tax benefit -- -- (291)
Change in valuation allowance (48,186) 53,154 --
Tax refund claims, audit issues and other matters (4,051) 2,787 336
Other (238) 2,014 (301)
--------- ----------- ----------
Consolidated provision for income tax $ 72,833 $ 18,624 $ 5,963
========= =========== ==========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at March 31, are presented below:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
Deferred tax assets:
<S> <C> <C>
Foreign tax credit carryover 730 $1,289
Allowance for doubtful accounts 2,461 2,966
Sales returns and allowance 3,976 3,092
Inventory obsolescence and capitalization 14,748 13,411
Net operating loss and research and development
and alternative minimum tax credit carryovers 21,385 35,040
Employee benefits and compensation 1,409 1,581
Other non-deductible reserves 11,546 4,516
--------- ---------
Total gross deferred tax assets 56,255 61,895
Less valuation allowance (8,887) (57,073)
--------- ---------
Total deferred tax assets 47,368 4,822
--------- ---------
Deferred tax liabilities:
Depreciation and amortization (5,876) (5,854)
Investment in Cisco stock 124,313) --
</TABLE>
80
<PAGE> 82
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
<S> <C> <C>
Other (1,056) 2,481
----------- --------
Total deferred tax liabilities (131,245) 3,373)
----------- --------
Net deferred tax (liability) asset ($83,877) $1,449
=========== ========
</TABLE>
The $48,186 decrease in the valuation allowance for year ended March 31, 2000
was based on the Company's assessment that it is more likely than not that the
net deferred tax asset will be realized through future taxable earnings or
implementation of tax planning strategies. Accordingly, the valuation allowance
was reduced in the current year in accordance with provisions of SFAS 109. Prior
to the consummation of the Cisco/Aironet merger, in March 2000, the Company's
deferred tax assets were essentially fully reserved through a valuation
allowance as the Company believed it was more likely than not that such assets
would not be realized at that time.
A provision for U.S. income taxes has not been provided on the $15,229 balance
of undistributed earnings at March 31, 2000 since the amounts are indefinitely
reinvested. The determination of the amount of the unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries is not practicable.
Income taxes paid in fiscal 2000, 1999, and 1998 were $4,837, $2,667 and $9,428,
respectively. Income tax refunds received in fiscal 1999 and 1998 aggregated
$1,077 and $473, respectively.
As of March 31, 2000, the Company has foreign operating loss carryovers of $129
for both tax and financial reporting purposes. This foreign loss carryover
period is indefinite. The Company has a total of $27,030 in U.S. net operating
loss carryovers and an additional $11,340 loss carryover, which relates to the
Company's Metanetics subsidiary. The net operating loss for Metanetics is fully
reserved. These net operating loss carryovers begin to expire in fiscal 2011
through fiscal 2019.
As a result of acquisitions in prior years, the Company has domestic research
and development credit carryovers for tax and financial reporting purposes in
the amount of $1,045 and $209, respectively, which are subject to separate
limitations of the acquired company. These credit carryovers are fully reserved.
These carryovers expire beginning in fiscal 2009 through fiscal 2019.
As of March 31, 2000, the Company has domestic alternative minimum tax credit
carryovers of $5,374, of which $2,687 has been reserved. The domestic
alternative minimum tax credit carryforward period is indefinite. There can be
no assurance that foreign and domestic tax carryovers will be utilized.
As of March 31, 2000, the Company has foreign tax credit carryovers of $730,
which are fully reserved. The original carryforward period is five years and
expires in fiscal 2002.
NOTE 11 - STOCK OPTIONS AND RESTRICTED STOCK
The Company account for stock based compensation issued to its employees and
non-employee directors in accordance with APB 25 and has elected to adopt the
"disclosure-only" provisions of SFAS 123.
During the periods shown below, the officers and other key employees of the
Company received and held stock options under the Telxon Corporation 1990 Stock
Option Plan (the "1990 Plan"). The persons to whom options are granted, the
number of shares granted to each, the period over which the options become
exercisable (generally in
81
<PAGE> 83
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
equal installments over a three-year period on the first three anniversaries of
the date of grant) and the maximum term of the options (generally eight years
after the date of grant) are determined by the Option and Stock Committee of the
Board of Directors ("the Committee"). The exercise price is equal to the closing
market price for the Company's Common Stock as of the last trading day prior to
the grant date. During fiscal 1998, the Company's stockholders approved an
amendment to the 1990 Plan that increased the number of shares authorized for
issuance under the Plan by 750,000 shares, to a total of 4,100,000 shares.
Options available to be granted under the 1990 Plan at March 31, 2000, were
14,552.
The following is a summary of the activity in the Company's 1990 employee stock
option plan during fiscal 2000, 1999 and 1998:
STOCK OPTIONS
-------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
------------------------- -----------------------
March 31, 1997 3,114,622 $15.23
Granted 727,475 $23.19
Exercised (745,358) $13.28
Returned to pool due to
employee terminations (151,154) $19.19
-------------------------
March 31, 1998 2,945,585 $17.59
Granted 345,000 $11.24
Exercised (110,177) $14.89
Returned to pool due to
employee terminations (74,350) $20.05
-------------------------
March 31, 1999 3,106,058 $16.92
Granted 1,323,100 $12.38
Exercised (412,008) $14.98
Cancelled (240,000) $20.13
Returned to pool due to
employee terminations (1,059,602) $17.93
-------------------------
March 31, 2000 2,717,548 $14.33
=========================
At March 31, 2000, 1999 and 1998 1,158,953, 2,253,613 and 1,644,852 options
outstanding under the 1990 Plan, respectively, were exercisable. The options
outstanding at March 31, 2000 were granted at exercise prices ranging from $7.97
to $29.63 per share and had a remaining weighted-average contractual life of
6.31 years.
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE
AT MARCH 31, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
$7.970-$11.375 1,151,836 6.80 $ 9.19 239,336 10.24
$12.250-$14.500 374,790 5.43 13.06 281,690 13.33
$15.250-$17.625 583,490 6.24 16.50 313,990 16.14
$18.063-$19.625 124,500 7.23 18.36 13,666 19.43
$20.750-$22.375 177,809 5.81 21.93 80,584 21.70
$23.375-$29.625 305,123 5.56 25.03 229,687 24.62
----------------------------------------------------------- ---------------------------------------
2,717,548 6.31 $ 14.33 1,158,953 16.35
=========================================================== =======================================
</TABLE>
82
<PAGE> 84
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
The Company also has in effect a stock option plan for non-employee directors
(the "Director Plan"). Under the Director Plan, each non-employee director is
granted 25,000 options upon first being elected to the Board of Directors and
10,000 additional options each year thereafter. Additionally, the Director Plan
also permits the making of discretionary option grants to non-employee
directors. Each non-employee director's initial grant becomes exercisable in
equal thirds on each of the first three anniversaries of the grant date, while
each subsequent grant becomes exercisable in full on the third anniversary of
its grant date. Each option granted under the Director Plan has a seven year
term, which may be extended to up to ten years and an option exercise price
equal to the closing market price for the Company's Common Stock as of the last
trading day prior to the grant date. During fiscal 1996, the Company's
stockholders approved an amendment to the Director Plan that increased the
number of shares authorized for issuance under the Director Plan by 150,000
shares, to a total of 400,000 shares. At March 31, 2000, there were no options
available to be granted under the Director Plan.
The following is a summary of the activity in the Company's non-employee
directors stock option plan during fiscal 2000, 1999 and 1998:
STOCK OPTIONS
------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
--------------- --------------------------
March 31, 1997 260,000 $16.10
Granted 105,000 $23.62
Exercised (25,000) $ 9.88
---------------
March 31, 1998 340,000 $18.88
Granted 11,567 $19.44
Exercised -- --
---------------
March 31, 1999 351,567 $18.90
Granted -- --
Exercised (20,000) $11.31
---------------
March 31, 2000 331,567 $19.36
===============
At March 31, 2000, 1999 and 1998 301,567, 251,567 and 186,667 options
outstanding under the Director Plan, respectively, were exercisable. The options
outstanding under the Director Plan at March 31, 2000 were granted at exercise
prices ranging from $9.125 to $25.25 per share and had a weighted-average
contractual life of 3.05 years.
<TABLE>
<CAPTION>
OUTSTANDING AND EXERCISABLE
AT MARCH 31, 2000
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
-------------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9.125-$11.125 40,000 1.94 $10.28 40,000 $10.28
$11.500-$14.750 50,000 2.29 13.98 50,000 13.98
$15.750-$16.063 20,000 2.62 15.91 20,000 15.91
$19.375-$20.125 46,567 3.06 19.79 46,567 19.79
$21.250-$23.250 90,000 2.90 22.72 60,000 22.58
$23.375-$25.250 85,000 4.29 23.79 85,000 23.79
----------------------------------------------------------- ---------------------------------------
331,567 3.05 $19.35 301,567 $18.99
=========================================================== =======================================
</TABLE>
83
<PAGE> 85
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
At March 31, 2000, 1999 and 1998 there were 6,000 options outstanding and
exercisable at $14.63 per share which were granted to a non-employee director
prior to the adoption of the Director Plan. Additionally, during fiscal 2000,
25,000 options at $15.06 per share were issued to an employee outside of the
1990 Plan. These options have a five-year life and are immediately exercisable.
During fiscal 1993, the Company adopted a Restricted Stock Plan (the "Restricted
Stock Plan"), under which 250,000 shares may be issued. The Committee determines
the persons to whom restricted stock is granted, the number of shares granted to
each person, the time periods during which the stock is exercisable and the
criteria upon which the restricted stock is subject to forfeiture (generally,
the forfeiture restrictions lapse in equal installments of each grant over a
five-year period on the first five anniversaries of the date of grant, provided
that the grantee then continues in the Company's employ). During fiscal 2000,
23,200 shares were granted under the Restricted Stock Plan and 33,473 restricted
shares were granted outside the Restricted Stock Plan at a combined weighted
grant date fair value of $8.48 per share. There were no shares granted under the
Restricted Stock Plan during fiscal 1999. During fiscal 1998, 19,000 shares were
granted under the Restricted Stock Plan at a weighted-average grant date fair
value of $25.35 per share. At March 31, 2000, 237,000 and 23,374 restricted
shares that were granted under the Restricted Stock Plan and outside of the
Restricted Stock Plan had vested, respectively. At March 31, 2000, 13,000 shares
under the Restricted Stock Plan were outstanding subject to forfeiture, and
10,099 restricted shares granted outside the Restricted Stock Plan were
outstanding subject to forfeiture. There were no shares available to be granted
under the Restricted Stock Plan at March 31, 2000. Expense related to restricted
stock amortization totaled $447, $152 and $199 in 2000, 1999 and 1998,
respectively.
During fiscal 1996, the Company's stockholders approved the 1995 Employee Stock
Purchase Plan (the "1995 Stock Purchase Plan"), under which 500,000 shares of
common stock were authorized for sale to eligible employees at a 15% discount
from market value. During fiscal 2000, 1999 and 1998 the Company re-issued
74,543, 52,999 and 57,112 shares of its treasury stock at a weighted-average
price of $18.25, $19.34 and $15.15 per share, respectively, in satisfaction of
purchases made under the 1995 Stock Purchase Plan. At March 31, 2000, a total of
300,495 shares had been issued and purchased under the 1995 Stock Purchase Plan
since its inception, and 199,505 shares remained available for future purchases.
During fiscal 1998, the Company's subsidiary, PenRight! Corporation adopted the
PenRight! Corporation 1997 Stock Option Plan (the "PenRight! Plan"). The
PenRight! Plan provides for the granting of options to key employees, directors
and outside advisors in order to promote the retention of valued human capital.
The total number of shares for which PenRight! may grant options may not exceed
300,000 shares of common stock. Options are awarded at a price not less than the
fair market value on the date the option is granted. If a fair market value can
not be readily attained on the date of grant the Company, and PenRight's board
of directors, will determine an equitable value for the options granted. Each
option shall have a term of ten years and shall vest based upon the options
grant date in the following manner: a) for options granted prior to fiscal 2000
fifty percent of options granted will vest on the grant date and the remaining
fifty percent will vest over a three year period (on the anniversary of the date
of grant) in 17% increments, b) for options that were granted during fiscal 2000
twenty-five percent of options granted will vest on the grant date and the
remaining seventy-five percent will vest over a three year period (on the
anniversary date of grant) in twenty-five percent increments. The options will
become exercisable when either of the following two events occur: a) a change in
control (as defined by the PenRight! Plan to mean when any person becomes a
84
<PAGE> 86
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
beneficial owner (as defined by the Securities and Exchange Act of 1934) of
securities of the PenRight! representing fifty percent or more of the combined
voting power of the PenRight's then outstanding securities or when any person
becomes a beneficial owner of securities representing a 15% or more of the
combined voting power of Telxon Corporation's then outstanding securities), or
b) an initial public offering of PenRight! securities.
The following is a summary of the activity in PenRight!'s 1997 Stock Option Plan
during fiscal years 2000, 1999 and 1998:
STOCK OPTIONS
--------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
------------------------- ------------------------
March 31, 1997 -- --
Granted 15,000 $.18
Exercised -- --
Returned to pool due to
employee terminations -- --
-------------------------
March 31, 1998 15,000 .18
Granted 10,000 .18
Exercised -- --
Returned to pool due to
employee terminations -- --
-------------------------
March 31, 1999 25,000 .18
Granted 155,000 .25
Exercised -- --
Returned to pool due to
employee terminations -- --
-------------------------
March 31, 2000 180,000 .24
=========================
Effective March 22, 1999, the Company entered into a letter agreement with John
W. Paxton to serve as Chairman, Chief Executive Officer and President of the
Company. The letter summarized the principal elements of Mr. Paxton's employment
obligations and compensation package to be included in a definitive agreement,
and specified, among other things, term of employment, salary, bonus
compensation, stock-based compensation and termination benefits. The letter
obligated Mr. Paxton to purchase 300,000 shares of the Company's common stock at
$8.72 per share, which represented the fair market value of the Company's common
stock at the date the agreement was executed. The letter also granted Mr. Paxton
options with a ten year term (unless otherwise indicated) to purchase 700,000
shares of the Company's common stock, with vesting provisions as follows: a)
300,000 shares with an eight year term which vest in equal annual installments
over three years; b) 200,000 shares to vest at the earlier of six years or when
the Company's common stock price reaches $14.00 per share; c) 100,000 shares to
vest at the earlier of six years or when the Company's common stock price
reaches $22.00 per share; and d) 100,000 shares to vest at the earlier of six
years or when the Company's common stock price reaches $27.00 per share.
Included in the options to purchase 700,000 shares of the Company's common stock
were 300,000 stock options granted to Mr. Paxton during fiscal 1999 under the
1990 Plan. No compensation expense was recorded during fiscal 1999 related to
the stock-based compensation outlined in the letter agreement between the
Company and Mr. Paxton in accordance with the provisions of APB No. 25.
During Fiscal 2000, Aironet Wireless Communications, a former subsidiary of the
Company, sold shares of its voting common stock on the NASDAQ National Market in
an initial public offering. Subsequent to this sale Aironet was acquired by
Cisco Systems. As a result of these events Aironet's results of operations are
no longer consolidated
85
<PAGE> 87
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
within the operating results of the Company for fiscal 2000, except for the
Company's equity share of Aironet's net income which is recorded as other
non-operating income. However, the results of Aironet's operations are included
within the Company results of operations for fiscal years 1999 and 1998.
Accordingly, historical information pertaining to option activity related to
Aironet is included below for these periods only.
In July 1996, Aironet established the Aironet Wireless Communications, Inc. 1996
Stock Option Plan which was amended and restated on March 30, 1998 ("1996
Amended Plan"). The 1996 Amended Plan provides for the granting of options to
key Aironet employees and to certain employees of the Company and outside
Aironet directors. The total number of shares for which Aironet may grant
options under the 1996 Amended Plan cannot exceed 2,150,500. Options were
awarded at a price not less than the fair market value on the date the option
was granted. Options granted prior to March 30, 1998, had a term of ten years
and generally vested one-third on the date granted and one-third on each of the
two successive anniversary dates therefrom. Options granted on or after March
30, 1998, had the same terms except an option could only be exercised after the
earlier of a change in control or an initial public offering, as defined in the
1996 Amended Plan, and vest in one-third increments on each of the three
successive anniversary dates from the date of grant.
Effective March 31, 1999, Aironet's Board of Directors and Stockholders approved
an additional amendment to the 1996 Amended Plan that permits vested options
granted under the 1996 Amended Plan to be exercised at any time after the
earlier of an initial public offering, change in control, as defined, or March
31, 2001. In addition, Aironet's Board of Directors accelerated the vesting of
certain options held by persons not employed by Aironet. As a result of this
amendment to the 1996 Amended Plan and immediate vesting of certain outstanding
options on March 31, 1999, Aironet recorded non-cash compensation expense
related to employees of $933 and non-cash compensation expense related to
non-employees of $943.
The following is a summary of the activity in Aironet's 1996 Amended Plan during
fiscal years 1999 and 1998:
STOCK OPTIONS
--------------------------------------------------
WEIGHTED AVERAGE
SHARES PRICE PER SHARE
------------------------- ------------------------
March 31, 1997 1,257,000 $1.86
Granted 500,000 $3.50
Exercised (270,000) $1.86
Returned to pool due to
employee terminations (6,500) $1.86
-------------------------
March 31, 1998 1,480,500 $2.41
Granted 105,000 $3.50
Exercised (5,833) $3.50
Returned to pool due to
employee terminations (36,667) $3.09
-------------------------
March 31, 1999 1,543,000 $2.47
=========================
At March 31, 1999, options to purchase 1,543,000 shares were outstanding under
the 1996 Amended Plan of which 784,012 were exercisable at a weighted-average
price per share of $1.86. In February 1998, an Aironet employee exercised
200,000 options with a grant price and fair value of $1.86 per share. At the
date of grant, Aironet provided the employee a non-recourse loan of $372, which
was applied towards the
86
<PAGE> 88
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
payment of the exercise price of the options. The terms of the note did not
extend the original option period. The note bears non-recourse interest at 6%
per annum on amounts outstanding through maturity, October 31, 2002, and at a
prime rate plus 4% per annum thereafter until paid. All unpaid principal and all
accrued interest is due in full on October 31, 2002. The 200,000 shares issued
(or approved replacement collateral of equal value at the employee's discretion)
collateralize the note. Any amounts paid on the note shall be applied first to
accrued but unpaid interest and then to unpaid principal. The employee may, at
any time, prepay the note without premium or penalty in amounts of at least $25.
Pursuant to Emerging Issues Task Force ("EITF") Issue No. 85-1, "Classifying
Notes Received for Capital Stock" ("EITF 85-1") the note has been recorded as a
reduction of Aironet's additional paid-in capital rather than an asset. In
addition, pursuant to EITF No. 95-16, "Accounting for Stock Compensation
Arrangements with Employee Loan Features Under APB Opinion No. 25," Aironet has
accounted for the options as variable plan options from the note issuance date
until the note is settled or otherwise amended resulting in a $325 and $1,078
non-cash charge recorded for the years ended March 31, 1998 and 1999,
respectively.
On February 16, 1999, Aironet's Board of Directors had approved, subject to
stockholder approval (which was determined to be perfunctory), the to be adopted
Aironet Wireless Communications, Inc. 1999 Omnibus Stock Incentive Plan (the
"1999 Plan") and granted options to acquire 400,000 shares at $9.00 under such
plan. The 1999 Plan provides for the granting of options, stock appreciation
rights ("SARs"), restricted stock and performance units, as defined, to certain
officers and other key employees of the Company. The total number of shares
Aironet may grant under the 1999 Plan cannot exceed 1,765,817. Options granted
under the 1999 Plan have a ten-year term and must have an exercise price equal
to or greater than the fair market value of Aironet's common stock on the date
of grant. Options granted generally vest over a three-year period on the first
three anniversary dates after the date of grant. Aironet's Board of Directors
formally adopted and approved the 1999 Plan on April 12, 1999, and Aironet's
stockholders formally adopted and approved the 1999 Plan on May 7, 1999.
At March 31, 1999, there were options outstanding under the 1999 Plan to
purchase 400,000 shares of Aironet common stock, none of which are currently
exercisable, at a weighted-average price per share of $9.00.
Aironet's compensation expense related to all Aironet options granted to Aironet
employees for the fiscal years ended March 31, 1999 and 1998 was $2,010 and
$325, respectively. Aironet's compensation expense related to all Aironet
options granted to Company employees and Aironet's outside directors, for the
fiscal years ended March 31, 1999 and 1998 was $994 and $80, respectively.
For SFAS 123 purposes, the fair value of each option granted under the Company's
1990 and Director Plans is estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for stock options granted in fiscal 2000, 1999 and 1998,
respectively: expected volatility of 71.07%, 51.57% and 44.66%, risk-free
interest rates of 6.16%, 5.29% and 5.88%, and an expected life of five years for
grants. A weighted-average dividend yield of .069% and .038% was utilized in the
Black-Scholes option-pricing model for 1999 and 1998, respectively. Since the
Company has opted to discontinue the payment of dividends to its shareholders a
dividend yield was not utilized as an assumption in calculating the fiscal 2000
option compensation expense.
Additionally, the fair value of each right to purchase stock under the Company's
1995 Stock Purchase Plan for SFAS 123 purposes is estimated as of the first day
of each
87
<PAGE> 89
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
six-month payment period (during which payroll deductions for purchases are
made) using the Black-Scholes option pricing model with the following
weighted-average assumptions used in fiscal 2000, 1999 and 1998, respectively:
dividend yield of .00%, .069% and 0.38% expected volatility of 81.15%, 53.13%
and 44.66%, risk-free interest rates of 4.89%, 5.18% and 5.29%, and an expected
life of six months.
The fair value of each PenRight! option was calculated utilizing the minimum
value method of valuing employee stock options of nonpublic subsidiaries, in
accordance with the provisions of SFAS 123. The applicable weighted-average risk
free rate of interest utilized in this calculation was 6.59%.
The fair value of Mr. Paxton's options to purchase 400,000 shares of the
Company's common stock upon the stock's attainment of certain per share prices
as identified above, was estimated for SFAS 123 purposes for fiscal 1999
compensation expense, as of the date of grant using a path dependent model with
the following assumptions: a dividend yield of .069%, an expected volatility of
53.13% and a risk-free interest rate of 5.25%. The expected term of these
options is determined by the path dependent model.
For SFAS 123 purposes, the fair value of each option granted under Aironet's
1996 Amended Plan and 1999 Plan were estimated as of the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for stock options granted in fiscal 1999 and 1998,
respectively: dividend yield of 0%, expected volatility of 51.57% and 56.00%,
risk-free interest rates of 5.14% and 5.72%, and an expected life of five years.
The weighted-average fair value on the date of grant for options granted during
fiscal years 1999 and 1998 were $8.43 and $3.50, respectively.
If the Company had elected to recognize the compensation cost of its stock
option and stock purchase plans, certain portions of Mr. Paxton's stock-based
compensation and Aironet's stock option plans based on the fair value of the
awards under those plans and letter agreement in accordance with SFAS 123, net
income (loss) and earnings (loss) per share would have been reduced (increased)
to the pro forma amounts below:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ----------- ----------
(Restated) (Restated)
<S> <C> <C> <C>
Net income (loss):
As reported $250,998 $(135,006) $6,183
Pro forma 246,075 (141,035) (1,455)
Earnings (loss) per share:
Basic As reported $ 15.34 $ (8.38) $ .39
Pro forma 15.04 (8.76) (0.09)
Diluted As reported $ 15.09 $ (8.38) $ .38
Pro forma 14.80 (8.76) (0.09)
</TABLE>
NOTE 12 - LEASES
The Company leases certain equipment under capital leases generally for terms of
five years or less with renewal and purchase options. The present value of
future minimum lease payments for these capital lease obligations is reflected
in the consolidated balance sheets as current and non-current capital lease
obligations. In addition,
88
<PAGE> 90
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
the Company leases office facilities, customer service locations and certain
equipment under non-cancelable operating leases.
Future minimum lease payments for the fiscal years ending March 31 are as
follows:
CAPITAL OPERATING
LEASES LEASES
------------------ ------------------
2001 $ 275 $ 11,102
2002 275 6,663
2003 117 4,264
2004 6 3,685
2005 -- 2,123
2006 and thereafter -- 1,611
------------------ ------------------
Subtotal 673 $ 29,448
==================
Amount representing interest (68)
------------------
Present value of minimum lease payments $ 605
==================
Current portion $ 236
Long-term portion $ 369
During fiscal 2000, the Company purchased its corporate jet by buying out its
operating lease commitment. The corporate jet was immediately sold to a third
party upon the buyout of this operating lease. The buyout had the effect of
reducing the Company's minimum lease commitment by $708 per year through fiscal
2005 and by $2,186 thereafter. This transaction has been treated as a non-cash
transaction in the accompanying Consolidated Statements of Cash Flows.
As discussed in Note 5 - Property and Equipment, in November 1999 the Company
announced that it would move its executive offices from Akron, Ohio to
Cincinnati, Ohio and would relocate substantially all of its remaining Akron
operations to The Woodlands, Texas. Since the Akron Ohio location will no longer
be utilized, after a transition period ending June 30, 2000, it is no longer
appropriate to include the present value of the operating lease commitment for
each of the lease renewal periods relating to the leased Akron, Ohio offices
above. The removal of these renewal period lease payments had the effect of
reducing the Company's minimum lease commitment by $1,766 per year.
The Company has an option to purchase the 100,000 square foot facility currently
occupied by its corporate offices. The purchase option is exercisable prior to
September 1, 2001 for a price equal to the fair market value of the premises as
determined by an independent appraisal.
Rent expense, net of subleases rental income, for fiscal 2000, 1999 and 1998
amounted to $14,182, $13,057 and $10,820, respectively. Fiscal 2000 rent expense
includes an abandonment charge of $1,495 related to office space located at the
Company's former world headquarters in Akron, Ohio. This charge was recorded
during fiscal 2000 to accrue for the expected cost of the abandonment of the
Summit Park building as of June 30, 2000. Also during fiscal 2000, the Company
recorded an impairment charge related to a building leased to the Company's
former subsidiary, Aironet Wireless Communications. This charge of $134 is also
included in rental expense for fiscal 2000.
The Company subleases certain of its leased office facilities to third parties.
Sublease rental income is recorded as a reduction in the Company's rent expense
in the accompanying consolidated statements of operations.
89
<PAGE> 91
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
Future expected minimum sublease payment for the fiscal years ending March 31
are as follows:
OPERATING
LEASES
----------
2001 $ 1,233
2002 285
2003 48
2004 48
2005 48
2006 and thereafter 48
----------
$ 1,710
==========
Sublease rental income for fiscal 2000, 1999 and 1998 amounted to $1,389 $1,092
and $337, respectively.
NOTE 13 - CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES
Convertible subordinated notes and debentures consisted of $82,500 of 5-3/4%
Convertible Subordinated Notes (the "5-3/4% Notes") and $24,413 of 7-1/2%
Convertible Subordinated Debentures (the "7-1/2% Debentures") at March 31, 2000
and 1999.
The 5-3/4% Notes, issued December 12, 1995, are due January 1, 2003. The
conversion price for the 5-3/4% Notes is $27.50 per common share and is subject
to adjustment in certain events. Interest is payable on January 1 and July 1 in
each year, and commenced July 1, 1996. On or after January 5, 1999, the 5-3/4%
Notes are redeemable at any time at the option of the Company, in whole or in
part, at the following prices for the following calendar years: 2000, 102.464%;
2001, 101.643% and 2002, 100.821%.
The 7-1/2% Debentures, issued June 1, 1987, are due June 1, 2012. The conversion
price for the 7-1/2% Debentures of $26.75 per common share is subject to
adjustment in certain events. Interest is payable on June 1 and December 1 in
each year, and commenced December 1, 1987. On and after June 1, 1997, the
Debentures are redeemable at par. The sinking fund requires mandatory annual
payments of 5% of the original $46,000 principal amount commencing June 1, 1997,
calculated to retire 75% of the issue prior to maturity. During fiscal 1991, the
Company purchased and retired debentures with a principal face amount
aggregating $21,266, which is being applied to the earliest of the Company's
sinking fund payment obligations.
During fiscal 1999, $311 in aggregate principal amount of the Company's 7-1/2%
Convertible Subordinated Debentures were surrendered for conversion into 11,626
shares of the Company's common stock. During fiscal 1997, $10 in aggregate
principal amount of the Company's 7-1/2% Convertible Subordinated Debentures
were surrendered for conversion into 373 shares of the Company's common stock.
The surrendered Convertible Subordinated Debentures have been canceled effective
as of their conversion into common stock.
Total interest paid by the Company in fiscal 2000, 1999 and 1998 (including but
not limited to the interest on the Convertible Subordinated Notes and
Debentures) was $13,987, $10,852 and $7,417, respectively.
90
<PAGE> 92
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
The combined annual aggregate amount of maturities and sinking fund requirements
are as follows:
2001 $ --
2002 --
2003 82,500
2004 --
2005 --
Thereafter 24,413
-----------
$ 106,913
===========
These notes and debentures contain various non-financial covenants. The Company
was in compliance with these covenants at March 31, 2000.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value Financial Instruments" ("SFAS 107"), requires that the Company disclose
the fair value of its financial instruments, where practical.
The following methods and assumptions were used by the Company in estimating the
fair value of the following financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents approximate fair value due to the
short-term nature of these instruments.
5-3/4% Notes
The fair value of the Company's 5-3/4% Notes is based on discounted
cash flow analysis, as there is no regular public trading market for
the 5-3/4% notes. Refer to Note 13 - Convertible Subordinated Notes and
Debentures for additional information concerning the 5-3/4% Notes.
7-1/2% Debentures
The fair value of the Company's 7-1/2% Debentures is based on quoted
market prices. Refer to Note 13 - Convertible Subordinated Notes and
Debentures for additional information concerning the 7-1/2% Debentures.
<TABLE>
<CAPTION>
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents $34,197 $34,197 $22,459 $22,459
5-3/4% Notes 82,500 83,439 82,500 86,484
7-1/2% Debentures 24,413 23,131 24,413 15,106
</TABLE>
Forward Foreign Currency Exchange Contracts
The fair value of forward foreign currency exchange contracts is
estimated based on quotes from currency brokers. At March 31, 2000, the
Company had several forward foreign currency exchange contracts to
purchase various foreign currencies as presented in the table below.
These contracts matured in April 2000.
91
<PAGE> 93
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
The Company had no forward foreign currency exchange contracts at
March 31, 1999.
<TABLE>
<CAPTION>
2000
----
Notional Notional Fair
Currency Value (1) Value (2) Value (3)
--------- --------- ---------
<S> <C> <C> <C>
Australian Dollar 500 498 2
Euro Dollar 7,000 6,983 17
------ ------ ----
Total $7,500 $7,481 $ 19
====== ====== ====
</TABLE>
(1) Represents US Dollar equivalent based on contractual exchange rate.
(2) Represents US Dollar equivalent based on March 31, 2000 exchange rate.
(3) Represents difference between value at contractual exchange rate and
March 31, 2000 exchange rate.
Cisco Collar
The fair value of the Cisco Collar at March 31, 2000 approximates zero,
which was the fair value at March 22, 2000, the date of its execution.
Investments in Non-traded Companies
It was not practicable for the Company to estimate the fair value of
its investments in non-traded, closely held companies because of the
lack of quoted market prices for those investments and the inability to
estimate fair values without incurring excessive costs. These
investments, which the Company holds for purposes other than trading,
amounted to $7,147 and $11,347 at March 31, 2000 and 1999,
respectively, and are carried at cost in intangible and other assets in
the accompanying consolidated balance sheets. However, during fiscal
2000 and fiscal 1999, the Company recorded impairment charges of $1,283
and $1,725, respectively, against its investment in the third party
that acquired the Company's Virtual Vision subsidiary. The impairment
charges reflect the dilution of the Company's investment resulting from
this third party's issuance of a series of preferred shares with
superior rights over the preferred shares owned by the Company.
Additionally, during fiscal 2000, the Company recorded an impairment
charge of $150 against its investment in a separate third party. This
investment was considered fully impaired due to poor historical
financial performance and lack of evidence that would indicate a future
ability of this entity to support the carrying value of the Company's
investment. Refer to Note 6 - Intangible and Other Assets, for
additional information concerning the Company's investments in
non-traded companies.
Long-term Notes Receivable
It was not practicable for the Company to estimate the fair value of
certain of its long-term notes receivable due from non-traded, closely
held companies because of the lack of quoted market prices for similar
financial instruments and the inability to estimate fair values without
incurring excessive costs. The long-term notes receivable, which were
repaid during fiscal 2000, earned interest at a fixed rate of 6% and
had an original maturity of three years. The long-term notes
receivable, which total $445 at March 31, 1999, are carried at cost in
intangible and other assets in the accompanying fiscal 1999
consolidated balance sheet. Refer to Note 6 - Intangible and Other
Assets for additional information concerning long-term notes
receivable.
92
<PAGE> 94
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
NOTE 15 - STOCKHOLDERS' EQUITY
The exercise of non-qualified stock options results in state and federal income
tax benefits to the Company based on the difference between the market price of
the common stock at the date of exercise and the option price. During fiscal
2000, 1999 and 1998 $740, $(411) and $1,970, respectively of state and federal
income tax effects were credited (debited) to additional paid-in capital as a
result of such option exercises.
NOTE 16 - BUSINESS SEGMENTS
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires additional financial disclosure of
segment information in the manner in which management organizes the segments
within the enterprise for making operating decisions and assessing performance.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate
and their major customers.
The Company designs, develops, manufactures, markets and services mobile and
wireless transaction systems and solutions for vertical markets. The Company's
business consists of three geographic operating segments: a) sales and
distribution of all of its product lines in the United States; b) sales and
distribution of all of its product lines in Europe and c) sales and distribution
of all of its product lines in international locations outside of Europe.
In fiscal 1999, the Company reported results for a fourth operating segment the
Company's former Aironet subsidiary. Aironet designs, develops, markets, and
services high-speed standards-based wireless local area networking solutions.
Aironet is presented below for the fiscal years ended 1999 and 1998 as a
separate segment. As described in Note 17 - Divestitures and Subsidiary Stock
Transactions, the Company has ceased consolidating the results of Aironet as of
April 1, 1999 as such, Aironet is not included in the fiscal 2000 business
segment information presented below. The gain recognized from the sale of
Aironet stock in Aironet's initial public offering of $32,025 has been included
within the U.S. operating segment for the fiscal year ended March 31, 2000.
The Company has operations in the United States, Europe, Canada, and other
international locations including Mexico, Australia and Asia.
Intercompany sales were at cost plus a negotiated mark-up. During fiscal 2000,
the Company increased its transfer price to more currently reflect costs
incurred in the United States related to sales to its international
subsidiaries.
Assets of geographic areas are identified with the operations of each area.
<TABLE>
<CAPTION>
FISCAL 2000 UNITED OTHER ADJUSTMENT &
STATES EUROPE INTERNATIONAL ELIMINATION CONSOLIDATED
---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues from
unaffiliated customers $261,246 $80,665 $23,840 -- $365,751
Revenues from inter-company
sales 47,570 720 2,803 (51,093) --
---------- -------- ----------- ----------- -----------
Total revenues $308,816 $81,385 $26,643 $(51,093) $ 365,751
========== ======== =========== =========== ===========
(Loss) income from
operations $(93,200) $ 3,542 $ 1,691 $ (2,396) $ (90,363)
</TABLE>
93
<PAGE> 95
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest income 521 102 29 -- 652
Interest expense (14,066) (2) -- (2) (14,070)
Gain on sale of subsidiary
stock 32,025 -- -- -- 32,025
Gain on sale of marketable
securities 397,810 -- -- (1,649) 396,161
Other non-operating income 539 -- -- -- 539
-------------- ------------- ---------------------- -------------------- -------------------
Income before income taxes
and extraordinary item 323,629 3,642 1,720 (4,047) 324,944
Provision for income taxes 70,744 1,357 732 -- 72,833
-------------- ------------- ---------------------- -------------------- -------------------
Income before extraordinary
item 252,885 2,285 988 (4,047) 252,111
Extraordinary item,
net of tax 1,113 -- -- -- 1,113
-------------- ------------- ---------------------- -------------------- -------------------
Net income $251,772 $2,285 $988 $(4,047) $250,998
============== ============= ====================== ==================== ===================
Depreciation and
amortization $27,058 $1,239 $286 $-- $28,583
Unusual items:
Provision for inventory $29,495 $605 $573 $-- $30,673
Provision for bad debts $4,747 $191 $142 $-- $5,080
Aironet equity income $1,066 $-- $-- $-- $1,066
Identifiable assets at
March 31, 2000 $583,655 $38,064 $14,571 $-- $636,290
FISCAL 1999 UNITED CONSOL. OTHER ADJ. &
STATES AIRONET EUROPE INT'L ELIM CONSOL.
---------------- -------------- -------------- ------------- -------------- -----------------
(Restated) (Restated)
Revenues from
unaffiliated customers $265,327 $28,413 $76,902 $25,752 $-- $396,394
Revenues from inter-company
sales 45,163 16,840 564 2,434 (65,001) --
---------------- -------------- -------------- ------------- -------------- -----------------
Total revenues $310,490 $45,253 $77,466 $28,186 $(65,001) $396,394
================ ============== ============== ============= ============== =================
(Loss) income from
operations $(116,033) $(1,038) $7,647 $3,669 $(1,142) $(106,897)
Interest income 483 157 128 33 -- 801
Interest expense (9,702) (130) (39) -- (1) (9,872)
Gain on sale of subsidiary
stock 340 -- -- -- -- 340
Other non-operating expense (754) -- -- -- -- (754)
---------------- -------------- -------------- ------------- -------------- -----------------
(Loss) income before income
taxes (125,666) (1,011) 7,736 3,702 (1,143) (116,382)
Provision for income taxes 13,650 391 3,175 1,408 -- 18,624
---------------- -------------- -------------- ------------- -------------- -----------------
Net (loss) income $(139,316) $(1,402) $4,561 $2,294 $(1,143) $(135,006)
================ ============== ============== ============= ============== =================
Depreciation and
amortization $24,973 $2,468 $1,461 $272 $-- $29,174
Unusual items:
Provision for inventory $35,797 $454 $628 $551 $-- $37,430
Provision for bad debts $6,936 $308 $310 $198 $-- $7,752
Identifiable assets at
March 31, 1999 $282,246 $13,804(1) $37,180 $15,614 $-- $348,844
</TABLE>
(1) Includes assets from non-US locations of $2,768.
94
<PAGE> 96
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1998 UNITED CONSOL. OTHER ADJ. &
STATES AIRONET EUROPE INT'L ELIM CONSOL.
----------------- -------------- ------------- ------------- --------------- -----------------
(Restated) (Restated)
Revenues from
unaffiliated customers $337,189 $20,404(1) $71,834 $25,629 $ -- $455,056
Revenues from inter-company
Sales 13,062 51,149 567 1,889 (66,667) --
----------------- --------------- ------------ ------------- --------------- -----------------
Total revenues $350,251 $ 71,553 $72,401 $27,518 $(66,667) $455,056
================= =============== ============ ============= =============== =================
Income from operations $ 12,958 $ 4,794 $ 5,509 $ 3,480 $ (8,596) $ 18,145
Interest income 1,334 67 120 52 -- 1,573
Interest expense (7,268) (5) (27) -- 119 (7,181)
Gain on sale of subsidiary
stock 1,637 -- -- -- -- 1,637
Other non-operating expense (907) -- -- -- (105) (1,012)
Income before income taxes
and cumulative effect of
an accounting change 7,754 4,856 5,602 3,532 (8,582) 13,162
----------------- --------------- ------------ ------------- --------------- -----------------
Provision for income taxes 888 1,964 1,938 1,173 -- 5,963
Income before cumulative
effect of an accounting
change $ 6,866 $ 2,892 $ 3,664 $ 2,359 $ (8,582) $ 7,199
---------------- --------------- ------------- ------------- --------------- -----------------
Cumulative effect of an
accounting change, net
of tax 1,016 -- -- -- -- 1,016
---------------- --------------- ------------- ------------- --------------- -----------------
Net income $ 5,850 $ 2,892 $ 3,664 $ 2,359 $ (8,582) $ 6,183
================ =============== ============= ============= =============== =================
Depreciation and
Amortization $ 22,977 $ 2,239 $ 1,352 $ 304 $ -- $ 26,872
Unusual items:
Provision for bad debts $ 2,347 $ 373 $ 256 $ 62 $ -- $ 3,038
</TABLE>
(1) Includes external revenues and assets from non-US locations of $5,630 and
$7,553, respectively.
NOTE 17 - DIVESTITURES AND SUBSIDIARY STOCK TRANSACTIONS
During fiscal 2000, Cisco announced that it had entered into a merger agreement
(the "Agreement") providing for its acquisition of Aironet, an affiliate of the
Company, for shares of Cisco common stock (the "Cisco/Aironet Transaction"). As
a result of the Cisco/Aironet Transaction, which became effective March 15,
2000, Aironet common stockholders received .6373 shares of Cisco for each common
share of Aironet owned. (This merger exchange ratio and all Cisco share amounts
and prices stated in this footnote are stated prior to giving effect to the two
for one forward split of Cisco's common stock which became effective March 22,
2000; Aironet stockholders received the benefit of the Cisco stock split.)
Immediately prior to the Cisco/Aironet Transaction the Company owned 4,994,262
shares of Aironet. Aironet had been organized as a subsidiary by the Company in
1993, and had effected its initial public offering in July 1999. Upon
consummation of the Cisco/Aironet
95
<PAGE> 97
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
Transaction the Company owned 3,183,043 shares of Cisco common stock. The shares
of Cisco owned by the Company were valued at $409,419 based on a market price of
$128.63 per Cisco share on March 15, 2000. Prior to consummation of the
Cisco/Aironet Transaction the Company owned approximately 35% of Aironet, and
had accounted for its investment in Aironet under the equity method of
accounting, in accordance with Accounting Principles Board 18, "The Equity
Method of Accounting for Investments in Common Stock" ("APB 18"). The Company's
carrying value of its investment balance in Aironet prior to the Cisco/Aironet
Transaction was $21,765. As a result of the Cisco/Aironet Transaction, the
Company will account for the investment retained in Cisco shares in accordance
with the requirements of SFAS 115. That statement requires investments in
marketable equity securities to be recorded at fair value. Accordingly, the
difference between the carrying value of the Company's investment prior to
Cisco/Aironet Transaction and the fair value on the date of the transaction has
been recorded as a non-operating pre-tax gain of $387,654 in the accompanying
fiscal 2000 Consolidated Statements of Operations.
Subsequent to the Cisco/Aironet Transaction, the Company sold approximately
$150,000 of its holdings in Cisco shares in market transactions. The proceeds
were subsequently utilized to retire amounts outstanding under the Company's
senior credit facility and other identified liabilities. The sale of these
Cisco shares resulted in a non-operating pre-tax gain of $8,507 in the
accompanying fiscal 2000 Consolidated Statements of Operations.
The $396,161 non-operating pre-tax gain on the sale of marketable securities
included in the fiscal 2000 Statement of Operations is composed of the
Cisco/Aironet gains related to the transaction and the sale of shares as
discussed above.
During fiscal 2000, Aironet and the Company sold 6,919,434 shares of Aironet's
voting common stock in an initial public offering on the NASDAQ National Market
at an offering price of $11.00 per share. Of the total number of shares
offered, Aironet sold 4,637,196 shares and the Company sold 2,282,238 shares.
The aggregate proceeds, net of underwriting discounts and commissions, were
approximately $47,400 to Aironet and $23,300 to the Company. Subsequent to this
transaction, the Company's remaining interest in Aironet was approximately 35%.
Prior to the sale of these shares, the Company's interest in Aironet was
approximately 76%. As a result of this transaction, the Company recorded a
non-operating gain of $32,025, net of additional transaction costs of $1,500.
Also as a result of this transaction, the Company ceased consolidation of
Aironet effective April 1, 1999. The Company accounted for its investment under
the equity method of accounting. Investment income of $1,066 was recorded for
the Company's interest in the earnings of Aironet for fiscal 2000.
During fiscal 2000, the Company acquired the remaining 1,370,930 shares of
voting common stock of Metanetics, a development stage subsidiary that develops
image processing technology, from corporations owned by Mr. Meyerson, former
Chairman and Chief Executive Officer of the Company, and his wife. The
Metanetics shares were acquired in exchange for 477,790 voting common shares of
the Company and the cancellation of certain debt and accrued interest amounting
to $1,558. On the closing date of the transaction, the closing price per share
of the voting common shares of the Company was $22.63. In addition to the
Metanetics shares, Mr. Meyerson surrendered stock options for the purchase
240,000 shares of the Company's stock in connection with the Metanetics
transaction. These stock options had a fair value of $1,941 on the closing
date of the transaction. Giving effect to the share acquisition, the Company's
interest in the voting common stock of Metanetics was 100%. Prior to the
acquisition of these shares, the Company's interest in the voting common stock
of Metanetics was 71%. In connection with the acquisition of the Metanetics
shares, the Company also made
96
<PAGE> 98
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
payments for compensation amounting to $3,105 to certain Metanetics employees
and a consultant. The amount of the compensation was determined based upon the
implicit value of the Metanetics stock options that were previously granted and
subsequently canceled. These payments were charged to expense in fiscal 2000.
During fiscal 2000, the Company repurchased 475,000 shares of the voting common
stock of Metanetics from current and former key employees, at a price of $6.73
per share. Giving effect to the share repurchase, the Company's interest in the
voting common stock of Metanetics was 71%. Prior to the repurchase of these
shares, the Company's interest in the voting common stock of Metanetics was 62%.
The fair value paid for the Metanetics fiscal 2000 stock repurchases in excess
of identifiable assets was approximately $13,743. This premium has been
classified as goodwill and is being amortized over a useful life of three years.
During fiscal 2000, the Company repurchased 60,000 shares of the voting common
stock of Metanetics from former key employees, at a price of $2.00 per share.
Giving effect to the share repurchase, the Company's interest in the voting
common stock of Metanetics was 62%. Prior to the repurchase of these shares, the
Company's interest in the voting common stock of Metanetics was 60%.
During 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. Proceeds from this
sale of stock were $778. The resulting pre-tax net gain of $340 was recorded as
a gain on sale of subsidiary stock in the accompanying fiscal 1999 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 had been deferred until the
warrants are exercised or lapse. Prior to Aironet's fiscal 1999 stock sales, the
Company's interest in the voting common stock of Aironet was 78%. Subsequent to
these sales and as of March 31, 1999, the Company's interest in the voting
common stock of Aironet was 76%.
During fiscal 1999, the Company entered into a series of transactions with a
business partner relating to Metanetics. 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 has capitalized this
additional investment as goodwill to be amortized over a useful life of three
years. Giving effect to the share repurchase, the Company's interest in the
voting common stock of Metanetics was 60%. Prior to the repurchase of these
shares, the Company's interest in the voting common stock of Metanetics was 52%.
During fiscal 1998, the Company sold the stock of its Virtual Vision subsidiary
to a third party in exchange for $500 in cash and 750,000 shares of the
acquirer's Series F Preferred Stock valued at $6.00 per share or $4,500. As all
of the conditions of the sale were not satisfied as of March 31, 1998, the
related gain of $900 was deferred. During fiscal 1999, all conditions of the
sale were satisfied, and the $900 gain was recognized as non-operating income in
the accompanying Fiscal 1999 Consolidated Statement of Operations.
During fiscal 1998, Aironet sold 984,126 shares of its voting common stock to
various third party investors at a price of $3.50 per share. Proceeds from the
sale of stock totaled $3,444. The resulting pre-tax gain of $402, net of related
transaction costs, was recorded as a gain on sale of subsidiary stock in the
accompanying fiscal
97
<PAGE> 99
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
1998 consolidated statement of operations. Prior to Aironet's fiscal 1998 stock
sales, the Company's interest in the voting common stock of Aironet was 87%.
Subsequent to these sales the Company's remaining interest in the voting common
stock of Aironet was 78%. In addition to the sale of the shares of stock,
395,237 warrants for the purchase of Aironet voting common stock were issued. A
gain of $251 relating to these warrants had been deferred until the warrants are
exercised or lapse.
During fiscal 1998, options to purchase 270,000 shares of Aironet voting common
stock at $1.86 per share were exercised. The pre-tax gain of $241 was recorded
as a gain on sale of subsidiary stock in the accompanying fiscal 1998
Consolidated Statement of Operations. Prior to the option exercises, the
Company's interest in the voting common stock of Aironet was 90%. The Company's
remaining interest subsequent to these purchases was 87%.
During fiscal 1998, the Company repurchased 100,000 shares of the voting common
stock of Metanetics from former employees, at a price of $1.04 per share. Giving
effect to the share repurchase, the Company's interest in the voting common
stock of Metanetics was 52% at March 31, 1998. Prior to the repurchase of these
shares, the Company's interest in the voting common stock of Metanetics was 50%.
NOTE 18 - TREASURY STOCK TRANSACTIONS
During fiscal 2000, the Company re-issued 74,543 shares of its treasury stock at
a weighted-average price of $18.25 per share to satisfy purchases made by
employees through the Company's 1995 Stock Purchase Plan, and 3,941 shares at a
weighted-average price of $15.77 per share to satisfy stock options exercised
under the Company's stock options plans. The re-issuances of treasury stock in
satisfaction of purchases made through the 1995 Stock Purchase Plan and
exercises of stock options under the Company's stock option plans have been
excluded from the accompanying Consolidated Statements of Cash Flows as non-cash
transactions.
During 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. The Company also re-issued 52,999 shares of its treasury
stock during the year at a weighted-average price of $19.34 per share to satisfy
purchases made by employees through its 1995 Stock Purchase Plan, and 94,234
shares at a weighted-average price of $21.82 per share to satisfy stock options
exercised under the Company's stock options plans. The 78,484 shares of treasury
stock remaining at March 31, 1999 have been accounted for at cost plus brokerage
fees under the caption of treasury stock in the accompanying consolidated
financial statements. The re-issuances of treasury stock in satisfaction of
purchases made through the 1995 Stock Purchase Plan and exercises of stock
options under the Company's stock option plans have been excluded from the
accompanying Consolidated Statements of Cash Flows as non-cash transactions.
NOTE 19 - COMMITMENTS 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, then an outside director; and Dr. Raj Reddy,
outside
98
<PAGE> 100
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
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, the plaintiff seeks
no monetary relief from the Company.
On November 12, 1993, Telxon and the individual director defendants filed a
Motion to Dismiss. The plaintiff filed its brief in opposition to the Motion on
May 2, 1994, and the defendants filed a final responsive brief. The Motion was
argued before the Court on March 29, 1995, and on July 18, 1995, the Court
issued its ruling. The Court dismissed all of the claims relating to the
plaintiff's allegations of corporate waste; however, the claims relating to
breach of fiduciary duty survived the Motion to Dismiss.
On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in the
derivative action on behalf of a new plaintiff stockholder. As part of the
Motion to Intervene, the intervening plaintiff asked that the Court designate as
operative for the action the intervening plaintiff's proposed Complaint, which
alleges that a series of transactions in which the Company acquired technology
from a corporation affiliated with Mr. Meyerson was wrongful in that Telxon
already owned the technology by means of a pre-existing consulting agreement
with another affiliate of Mr. Meyerson; the intervenor's complaint also names
Raymond D. Meyo, President, Chief Executive Officer and director at the time of
the first acquisition transaction, as a new defendant. The defendants opposed
the Motion on grounds that the new claim alleged in the proposed Complaint and
the addition of Mr. Meyo were time-barred by the statute of limitations and the
intervening plaintiff did not satisfy the standards for intervention. After
taking legal briefs, the Court ruled on June 13, 1997, to permit the
intervention. On March 18, 1998, defendant Meyo filed a Motion for Judgement on
the Pleadings (as to himself), in response to which Plaintiff filed its Answer
and Brief in Opposition. The Motion was argued before the Court on November 4,
1998, and was granted from the bench, dismissing Meyo as a defendant in the
case.
The defendants filed a Motion for Summary Judgment on November 15, 1999, and the
plaintiff filed a cross Motion for Summary Judgment on December 7,1999. The
Motions were argued before the Court in February 2000. Following the hearing,
the parties submitted supplemental briefs, the last of which was filed on March
6, 2000. The parties are awaiting the Court's decision on the cross motions for
summary judgment. No trial date has been set.
The defendants believe that the post-intervention claims lack merit, and they
intend to continue vigorously defending this action. While the ultimate outcome
of this action cannot presently be determined, the Company does not anticipate
that this matter will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows and
accordingly has not made provisions for any loss or related insurance recovery
in its financial statements.
On February 7, 1998, a complaint was filed against the Company in the District
Court of Harris County, Texas, by Southwest Business Properties, the landlord of
the Company's former Wynnwood Lane facility in Houston, Texas, alleging counts
for breach of contract and temporary and permanent injunctive relief, all
related to alleged environmental contamination at the Wynnwood property, and
seeking specific performance, unspecified monetary damages for all injuries
suffered by plaintiff, payment of pre-judgement interest, attorneys' fees and
costs and other unspecified
99
<PAGE> 101
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
relief. In December 1999, the case was settled by the parties, and the $500 cost
of the initial settlement, $275 of which has been covered by the Company's
insurer, was recorded in the Company's financial statements; additional amounts
of up to $100 are required to be paid as part of the settlement in the event
that the remediation described below is not timely completed.
While the litigation with the landlord was pending, Telxon and the landlord
filed on July 7, 1999 a joint application with the Texas Natural Resource
Conservation Commission for approval of a proposed Response Action Work Plan
for the property pursuant to the Commission's Voluntary Cleanup Program. The
plan, which was approved by the Commission in August 1999, projects completion
of remediation and issuance of a closure certificate in 2002, for which the
Company had at March 31, 2000 accrued the then estimated costs of $250. As the
result of changes to the remediation plan made after March 31, 2000 to better
assure its completion within the projected schedule, the Company has increased
its estimate of the total expected remediation cost to $350. If closure of the
remediation is not certified when contemplated by the plan, and the Company
were ultimately to become responsible for the alleged contamination, the
associated loss could have a material adverse effect on results of operations
for one or more quarters in which the associated charge(s) would be taken.
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.
Named as defendants were 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 alleged 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 alleged that Telxon
has certain anti-takeover devices in place purportedly designed to thwart
hostile bids for the Company. Plaintiffs charged the Director defendants with
breach of fiduciary duty and claimed that they entrenched themselves in office.
On February 10, 2000, the plaintiffs filed a notice for the dismissal of the
action without prejudice, which was approved by the Court on February 17, 2000.
From December 1998 through March 1999, a total of 27 class actions were filed in
the United States District Court, Northern District of Ohio, by certain alleged
stockholders of the Company on behalf of themselves and purported classes
consisting of Telxon stockholders, other than the defendants and their
affiliates, who purchased stock during the period, from May 21, 1996 through
February 23, 1999 or various portions thereof, alleging claims for "fraud on the
market" arising from alleged misrepresentations and omissions with respect to
the Company's financial performance and prospects and an alleged violation of
generally accepted accounting principles by improperly recognizing revenues. The
named defendants are the Company, former President and Chief Executive Officer
Frank E. Brick and former Senior Vice President and Chief Financial Officer
Kenneth W. Haver. The actions were referred to a single judge. On February 9,
1999, the plaintiffs filed a Motion to consolidate all of the actions and the
Court heard motions on naming class representatives and lead class counsel on
April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their counsel,
ordered the filing of an Amended Complaint, and dismissed 26 of the 27 class
action suits without prejudice and consolidated those 26 cases into the first
filed action. The appointed lead plaintiffs appointed by the Court filed an
Amended Class Action Complaint on September 30, 1999. The Amended Complaint
alleges that the defendants engaged in a scheme to defraud investors through
improper revenue recognition practices and concealment of material adverse
conditions in Telxon's business and finances. The Amended Complaint seeks
certification of the identified class, unspecified compensatory and punitive
damages, pre- and post-judgment interest, and attorneys' fees and costs. Various
appeals and writs challenging the District Court's August 25, 1999 rulings were
filed by two of the unsuccessful plaintiffs but have all been denied by the
Court of Appeals.
100
<PAGE> 102
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
On November 8, 1999, the defendants jointly moved to dismiss the Amended
Complaint. The Court held a case management conference on November 16, 1999 at
which it set a conditional schedule. Briefing of the defendants' motion to
dismiss and the plaintiffs' opposition thereto was completed January 18, 2000.
The motion to dismiss remains pending, and all discovery remains stayed pending
the Court's ruling on the motion. A motion filed by the plaintiffs on November
16, 1999 to lift the discovery stay to allow the serving of discovery requests
on a non-party has been denied by the Court. The defendants believe that these
claims lack merit, and they intend to vigorously defend the consolidated action.
By letter dated December 18, 1998, the Staff of the Division of Enforcement of
the Securities and Exchange Commission (the "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. On January 20, 1999, the
Commission issued a formal Order Directing Private Investigation And Designating
Officers To Take Testimony with respect to the referenced trading and specified
accounting matters, pursuant to which subpoenas have been served requiring the
production of specified documents and testimony. The Company and its current and
former independent accountants are also currently assessing the effects of
recent comments issued to the Company by the Commission's Division of
Corporation Finance as part of its ongoing review of various accounting matters
in the Company's previous filings with the Commission, including, but not
limited to, the recognition of revenues from the Company's indirect sales
channel and the timing of charges which the Company recorded during fiscal 1999,
1998 and 1997 for inventory obsolescence, severance and asset impairment. The
Company has cooperated, and intends to continue cooperating fully with, the
Commission Staff. The Company has not accrued for any fines or penalties under
SFAS 5 because it has no basis to conclude that it is probable that at the
conclusion of the investigation the Commission will seek a fine or penalty, and
because the amount of any such fine or penalty is not estimable.
101
<PAGE> 103
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
On December 30, 1999, 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; the then directors of the Company, Richard J. Bogomolny, John H. Cribb,
Robert A. Goodman, Raj Reddy, Frank Brick and Norton Rose; Robert F. Meyerson,
former Chairman of the Board, Chief Executive Officer and director; and Telantis
Venture Partners V Inc., an affiliate of Robert F. Meyerson. The Complaint
alleges that Telxon's sale of stock in its then Aironet Wireless Communications,
Inc. subsidiary to Meyerson interests constitutes a waste and gift of Telxon
assets in breach of the defendant directors' duties of care and to act in good
faith. The Complaint also alleges that the defendant directors' opposition of an
alleged offer by Symbol to acquire the Company in the Spring of 1998 violated
their duties of loyalty, good faith and due care and wasted Company's assets.
The Complaint seeks an order rescinding the Aironet stock transactions (or in
the event such relief cannot be granted, recissory damages), requiring the
defendants other than the Company to account for Telxon's losses in connection
with the alleged wrongs (including the funds spent resisting the alleged Symbol
bid) and awarding plaintiff its attorneys' fees and expenses. While the Company
is nominally a defendant in this derivative action, the plaintiff seeks no
monetary relief from the Company.
On March 8, 2000, all defendants except Messrs. Goodman and Meyerson answered
the complaint and moved for judgment on the pleadings. Messrs. Goodman and
Meyerson have filed motions to dismiss. In addition, all defendants have moved
to stay discovery. All of these motions are currently being briefed, and no
hearing date has been scheduled for any of the motions.
The defendants believe that these derivative claims lack merit and intend to
vigorously defend 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.
The Company has received a number of letters from its customers requesting
Telxon to indemnify them with respect to their defense of demands which have
been made on them by the Lemelson Medical, Education & Research Foundation
Limited Partnership for the payment of a license fee for the alleged
infringement of the Foundation's so-called "bar-code" patents by the customers'
systems utilizing automatic identification technology, portions of which have
been supplied by the Company. On October 27, 1999, the Foundation also sent a
letter directly to the Company similarly demanding that the Company purchase a
license with respect to "Telxon's use of machine vision and bar coding
technology." On April 14, 2000 the Foundation filed five lawsuits against a
total of approximately 430 end users, including a number of the Company's
customers, whom the Foundation alleges use automatic identification technology
which infringes the Foundation's patents; the Company is not named as a
defendant in any of these lawsuits. The Company continues to receive requests
for indemnity from customers with regard to claims being informally asserted
against them by the Foundation as well as from customers who have been formally
sued by the Foundation.
The Company believes that the patents so being asserted against it and its
customers are invalid, unenforceable and not infringed and on April 24, 2000
filed a federal court action against the Foundation seeking a declaratory
judgment to that effect. The Company's declaratory judgment action is
substantially similar to the federal court action jointly filed by seven other
companies in the automatic identification industry, including the Company's
principal competitors, in July 1999 seeking like declaratory relief against the
Foundation. On May 30, 2000 the Foundation filed an answer and counterclaim
against the Company in response to its declaratory judgment action denying the
invalidity of its patents are invalid, unenforceable or not infringed by the
Company or its customers and counter-claiming that the Company likely induces or
contributes to the direct infringement of unspecified claims of the Foundation's
patents. The Foundation's counterclaim against the Company is the same as the
one which has been asserted by the Foundation against the companies which filed
the other declaratory judgment action. Discovery in the Company's declaratory
judgment action is just beginning. The Company believes that the Foundation's
counterclaim is without merit and intends to vigorously defend against it.
Except as otherwise specified, in the event that any of the foregoing litigation
ultimately results in a money judgment against the Company or is otherwise
determined adversely to the Company by a court of competent jurisdiction, such
102
<PAGE> 104
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
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, lessors of equipment to the
Company and existing and potential business and development partners. The
Company is vigorously defending all such claims which do not lack merit. While
the ultimate outcome of such matters cannot presently be determined, the Company
does not anticipate that these matters 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 losses or related
insurance recoveries in its financial statements.
NOTE 20 - CHANGE IN ACCOUNTING PRINCIPLE
On November 20, 1997, the FASB's Emerging Issues Task Force issued a new
consensus ruling, "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation" ("EITF 97-13"). EITF 97-13 requires
business process reengineering costs associated with information systems
development to be expensed as incurred. The Company has been involved in a
corporate-wide information systems implementation project that is affected by
this pronouncement. In accordance with this ruling, during fiscal 1998, the
Company recorded a one-time, after-tax, non-cash charge of $1,016 to expense
previously capitalized costs associated with this project. Such costs had
primarily been incurred during the second quarter of fiscal 1998.
NOTE 21 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). This Staff Accounting Bulletin expresses the views of the Securities and
Exchange Commission in applying accounting principals generally accepted in the
United States while recognizing revenue. The Company adopted the provisions of
this bulletin when recognizing revenue.
On November 24, 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 100 "Restructuring and Impairment Charges". This Staff
Accounting Bulletin expresses the views of the SEC staff regarding the
accounting and disclosure of certain expenses commonly reported in connection
with exit activities and business combinations. The Company has also abided by
the guidance contained within this document in accounting for current exit
costs.
During fiscal 1999, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 provides accounting and reporting standards for derivative
instruments. This standard will require the Company to recognize all derivatives
as either assets or liabilities in the statement of financial position and to
measure those instruments at fair value. The Company is required to adopt the
provisions of SFAS 133 during the first quarter of fiscal 2002 (as delayed by
Statement of Financial Accounting Standards No. 137 - "Deferral of the Effective
Date of FASB Statement No. 133"). Management is evaluating the impact of this
statement; however, at this
103
<PAGE> 105
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
time it believes that the adoption of this pronouncement will not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
NOTE 22 - SUBSEQUENT EVENT
Subsequent to March 31, 2000, the Company loaned John W. Paxton, the Chief
Executive Officer of the Company, $3,100 in connection with the prior
acquisition of the Company's common stock. It is anticipated that this loan will
be repaid during the second quarter of the next fiscal year once those shares
are registered, as will facilitate his refinancing of the loan through a third
party lender.
NOTE 23 - QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
-------
2000 First Second(a) Third Fourth (b) Year(c)
---- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 87,825 $96,295 $ 96,234 $ 85,397 $365,751
Gross profit 24,745 26,789 27,832 1,503 80,869
Net (loss) income $(16,701) $14,960 $(14,772) $267,511 $250,998
Net (loss) income per share:
Basic $ (1.03) $ .92 $ (.91) $ 15.99 $ 15.34
Diluted $ (1.03) $ .92 $ (.91) $ 15.35 $ 15.09
</TABLE>
(a) During the second quarter of fiscal 2000, the Company recorded a $32,025
gain related to the IPO of Aironet.
(b) During the fourth quarter of fiscal 2000, the Company recorded a gain on
marketable securities of $396,161 and charges of $8,315 and $9,267 related
to obsolescence for manufacturing and customer service and revaluation of
used equipment inventories, respectively. The Company also recorded a
provision of $3,523 for the probable loss on a customer contract that will
be completed in fiscal 2001. Charges were recorded for doubtful accounts of
$3,380 and transition costs of $4,029, including provisions for stay-on
bonuses, employee termination benefits, and lease abandonment, to reflect
the expenses of closing the Akron, Ohio facility. In conjunction with the
repurchase of Metanetics stock held by minority shareholders, payments for
compensation were made to Metanetics employees aggregating $3,105 and the
March 2000 goodwill amortization on the Metanetics stock repurchased was
$378. In addition, a probable loss on manufacturing inventory purchase
commitments of $2,600, adjustments to accrued taxes other than income taxes
for $1,222, professional fees and consulting charges of $1,829, and
incentive compensation to retain key sales personnel of $1,023 were
recorded.
(c) The net (loss) income per share for the quarters does not equal net income
per share for the year due to differentials in the impact of quarterly and
annual weighted new stock issuances on the weighted-average number of
shares outstanding for each respective period.
On February 23, 1999, the Company announced that, having completed a review of
certain judgmental accounting matters with the Company's then independent
accountants it would restate its previously issued audited financial statements
for fiscal years 1998, 1997 and 1996 and its unaudited interim financial
statements for the first, second and third quarters of fiscal years 1999, 1998
and 1997. Additionally, the Company announced on June 16, 1999, that it would
restate its unaudited results for the second quarter of fiscal 1999.
104
<PAGE> 106
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
As discussed in Note 3 - Restatement, on June 29, 2000 the Company announced
that it would further restate its audited results for the fiscal years ended
March 31, 1999 and 1998 and its unaudited results for the fourth quarter of
fiscal 1998 as well as the first, second and fourth quarters of fiscal 1999. The
results of this restatement are reflected in the "Restated" quarterly results
provided below. The effects of the prior restatements discussed above have been
previously reported and as such are included in the "As Previously Presented"
quarterly results below.
<TABLE>
<CAPTION>
As Restated
-----------
Quarter
-------
1999 First Second Third Fourth(a) Year(b)
---- ----- ------ ----- --------- -------
(Restated) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenues $118,503 $106,800 $ 96,408 $ 74,683 $ 396,394
Gross profit (loss) 46,799 38,653 24,915 (15,176) 95,191
Net income (loss) $ 1,691 $ (5,543) $(45,856) $(85,298) $(135,006)
Net income (loss) per share:
Basic $ 0.11 $ (.34) $ (2.86) $ (5.30) $ (8.38)
Diluted $ 0.10 $ (.34) $ (2.86) $ (5.30) $ (8.38)
As Previously Reported
----------------------
Quarter
-------
1999 First Second Third Fourth(a) Year(b)
---- ----- ------ ----- --------- -------
Revenues $111,162 $103,641 $ 96,408 $ 77,083 $ 388,294
Gross profit(loss) 43,863 37,389 24,915 (14,216) 91,951
Net loss $ (100) $ (6,314) $(45,856) $(84,712) $(136,982)
Net loss per share:
Basic $ (.01) $ (.39) $ (2.86) $ (5.27) $ (8.50)
Diluted $ (.01) $ (.39) $ (2.86) $ (5.27) $ (8.50)
</TABLE>
(a) During the fourth quarter of fiscal 1999, the Company recorded charges
of $23,626 related to the discontinuance of certain of its products and
$7,278 for excess and obsolete inventories. The fourth quarter results
of operations also include severance charges of $3,534, bad debt
provisions of $3,695, non-cash compensation related to stock options in
its Aironet subsidiary of $3,409 and charges related to the carrying
value of investments of $2,094. The aggregate impact to fourth quarter
earnings per share was $2.72 per share (diluted).
(b) The net loss per share for the quarters does not equal net income per
share for the year due to differentials in the impact of quarterly and
annual weighted new stock issuances on the weighted-average number of
shares outstanding for each respective period.
<TABLE>
<CAPTION>
Restated
--------
Quarter
-------
1999 First Second Third Fourth(a) Year(b)
---- ----- ------ ----- --------- -------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Revenues $104,222 $110,129 $117,416 $123,289 $455,056
Gross profit 40,999 43,272 48,101 50,858 183,230
Income before
cumulative effect of
an accounting change 126 2,138 2,486 2,449 7,199
Net income $ 126 $ 2,138 $ 1,246 $ 2,673 $ 6,183
Income per share
</TABLE>
105
<PAGE> 107
TELXON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS (CONTINUED)
<TABLE>
before cumulative effect
of an accounting change:
<S> <C> <C> <C> <C> <C>
Basic $ .01 $ .14 $ .16 $ .16 $ .45
Diluted $ .01 $ .13 $ .15 $ .15 $ .44
Net income per share:
Basic $ .01 $ .14 $ .08 $ .17 $ .39
Diluted $ .01 $ .13 $ .08 $ .16 $ .38
As Previously Reported
----------------------
Quarter
-------
1998 First Second Third Fourth(a) Year(b)
---- ----- ------ ----- --------- -------
Revenues $104,222 $110,129 $117,416 $131,389 $463,156
Gross profit 40,999 43,272 48,101 54,098 186,470
Income before
cumulative effect of
an accounting change 126 2,138 2,486 4,425 9,175
Net income $ 126 $ 2,138 $ 1,246 $ 4,649 $ 8,159
Income per share
before cumulative effect
of an accounting change:
Basic $ .01 $ .14 $ .16 $ .28 $ .58
Diluted $ .01 $ .13 $ .15 $ .27 $ .56
Net income per share:
Basic $ .01 $ .14 $ .08 $ .30 $ .52
Diluted $ .01 $ .13 $ .08 $ .29 $ .50
</TABLE>
(a) During the fourth quarter of fiscal 1998, the Company recorded a true
up of capitalized software costs, net of amortization of $1,722. After
the related income tax impact, the aggregate impact on fourth quarter
earnings was $1,119 or $.05 per share (diluted). The impact of such
adjustment on the reported earnings during the first three quarters of
fiscal 1998 was not material. In addition, during the fourth quarter
the Company recorded a $1,637 gain on the sale of voting common stock
of its Aironet subsidiary.
(b) The net income per share for the quarters does not equal net income per
share for the year due to differentials in the impact of quarterly and
annual weighted new stock issuances on the weighted-average number of
shares outstanding for each respective period.
106
<PAGE> 108
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
As previously reported, the Company engaged its current independent accountants,
Arthur Andersen LLP, on July 19, 1999 to audit the Company's consolidated
financial statements for fiscal 2000. The Company's former independent
accountants, PricewaterhouseCoopers LLP, were accordingly dismissed upon the
completion of the audit of and their report on the Company's consolidated
financial statements for fiscal 1999. Subsequent to the change in independent
accountants and as reported in the Company's Current Report on Form 8-K dated
June 29, 2000 and filed June 30, 2000, the Company, in consultation with its
current and former accountants, determined to further restate its fiscal 1999
and 1998 financial results as discussed in Note 3 - Restatement to the
consolidated financial statements included in Item 8 above. The further
restatement constitutes a "reportable event" within the meaning of Item
304(a)(1)(v) of Regulation S-K, but since the change in independent accountants,
the Company has not had any "disagreements" with its independent accountants
within the meaning of that regulation.
PART III
Except for certain information relating to the Company's executive officers
included in Part I of this Form 10-K, the information called for by this Part
III is not set forth herein but is incorporated by reference from the definitive
proxy statement which the Company intends to file with the Securities and
Exchange Commission within 120 days of the close of its fiscal year ended March
31, 2000, with respect to the 2000 Annual Meeting of the Company's stockholders
scheduled to be held on September 15, 2000 or will otherwise be timely filed.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) List of documents filed as part of this Annual Report on Form 10-K:
(1) Consolidated Financial Statements: Reference is made to the Index
on page 53 of this Annual Report on Form 10-K.
(2) Financial Statement Schedule: Reference is made to the Index on
page 53 of this Annual Report on Form 10-K. All other schedules are
omitted because they are not applicable or the required information is
shown in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K:
3.1 Restated Certificate of Incorporation of Registrant,
incorporated herein by reference to Exhibit No. 2(b)
to Registrant's Registration Statement on Form 8-A
with respect to its Common Stock filed pursuant to
Section 12(g) of the Securities Exchange Act, as
amended by Amendment No. 1 thereto filed under cover
of a Form 8 and Amendment No. 2 thereto filed on Form
8-A/A.
3.2 Amended and Restated By-Laws of Registrant,
incorporated herein by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended March 31,
1999.
4.1 Portions of the Restated Certificate of Incorporation
of Registrant pertaining to the rights of holders of
Registrant's Common Stock, par value $.01 per share,
incorporated herein by reference to Exhibit No. 2(b)
to Registrant's Registration Statement on Form 8-A
with respect to its Common Stock filed pursuant to
Section 12(g) of the Securities Exchange Act, as
amended by Amendment No. 1 thereto filed under cover
of a Form 8 and Amendment No. 2 thereto filed on Form
8-A/A.
4.2 Text of form of Certificate for Registrant's Common
Stock, par value $.01 per share, and description of
graphic and image material appearing thereon,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended June 30,
1995.
107
<PAGE> 109
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
4.3 Rights Agreement between Registrant and KeyBank
National Association, as Rights Agent, dated as of
August 25, 1987, as amended and restated as of July
31, 1996, incorporated herein by reference to Exhibit
4 to Registrant's Form 8-K dated August 5, 1996.
4.3.1 Form of Rights Certificate (included as
Exhibit A to the Rights Agreement included
as Exhibit 4.3 above). Until the
Distribution Date (as defined in the Rights
Agreement), the Rights Agreement provides
that the common stock purchase rights
created thereunder are evidenced by the
certificates for Registrant's Common Stock
(the text of which and description thereof
is included as Exhibit 4.2 above, which
stock certificates are deemed also to be
certificates for such common stock purchase
rights) and not by separate Rights
Certificates; as soon as practicable after
the Distribution Date, Rights Certificates
will be mailed to each holder of
Registrant's Common Stock as of the close of
business on the Distribution Date.
4.3.2 Letter agreement among Registrant, KeyBank
National Association and Harris Trust and
Savings Bank, dated June 11, 1997, with
respect to the appointment of Harris Trust
and Savings Bank as successor Rights Agent
under the Rights Agreement included as
Exhibit 4.3 above, incorporated herein by
reference to Exhibit 4.3.2 to Registrant's
Form 10-K for the year ended March 31, 1997.
4.4 Indenture by and between Registrant and AmeriTrust
Company National Association, as Trustee, dated as of
June 1, 1987, regarding Registrant's 7-1/2%
Convertible Subordinated Debentures Due 2012,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-14348, filed May 18, 1987.
4.4.1 Form of Registrant's 7-1/2% Convertible
Subordinated Debentures Due 2012 (set forth
in the Indenture included as Exhibit 4.4
above).
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
108
<PAGE> 110
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
Registrant and Hambrecht & Quist LLC and
Prudential Securities Incorporated, as the
Initial Purchasers of Registrant's 5-3/4%
Convertible Subordinated Notes due 2003,
with respect to the registration of said
Notes under applicable securities laws,
incorporated herein by reference to Exhibit
4.3 to Registrant's Registration Statement
on Form S-3, Registration No. 333-1189,
filed February 23, 1996.
10.1 Compensation and Benefits Plans of Registrant.
10.1.1 Amended and Restated Retirement and Uniform
Matching Profit-Sharing Plan of Registrant,
as amended, incorporated herein by reference
to Exhibit 10.1.1 to Registrant's Form 10-K
for the year ended March 31, 1999.
10.1.2 1990 Stock Option Plan for employees of
Registrant, as amended, incorporated herein
by reference to Exhibit 10.1.2 to
Registrant's Form 10-Q for the quarter ended
December 31, 1999.
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 December 31, 1999.
10.1.4 Non-Qualified Stock Option Agreement between
Registrant and Raj Reddy, dated as of
October 17, 1988, incorporated herein by
reference to Exhibit 10.1.4 to Registrant's
Form 10-Q for the year ended March 31, 1999.
10.1.4.a Description of amendments
extending the term of the
Agreement included as
Exhibit 10.1.4 above,
incorporated herein by
reference to Exhibit 10.1.4.a to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
10.1.5 1992 Restricted Stock Plan of Registrant, as
amended, incorporated herein by reference to
Exhibit 10.1.5 to Registrant's Form 10-Q for
the quarter ended December 31, 1998.
10.1.6 1995 Employee Stock Purchase Plan of
Registrant, as amended, incorporated herein
by reference to Exhibit 10.1.7 to
Registrant's Form 10-Q for the quarter ended
September 30, 1995.
10.1.7 1996 Stock Option Plan for employees,
directors and advisors of Aironet Wireless
Communications, Inc., a subsidiary of
Registrant, incorporated herein by reference
to Exhibit 10.1.7 to Registrant's Form 10-K
for the year ended March 31, 1997.
10.1.7.a Amended and Restated 1996
Stock Option Plan for employees,
109
<PAGE> 111
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
directors and advisors of Aironet
Wireless Communications, Inc.,
incorporated herein by reference
to Exhibit 10.1.7.a to
Registrant's Form 10-K for the
year ended March 31, 1998.
10.1.7.b First Amendment to Amended and
Restated 1996 Stock Option Plan
for employees, directors and
advisors of Aironet Wireless
Communications, Inc. herein by
reference to Exhibit 10.1.7.b to
Registrant's Form 10-K for the
year ended March 31, 1999.
10.1.8 1999 Stock Option Plan for Non-Employee
Directors of Aironet Wireless
Communications, Inc., incorporated herein by
reference to Exhibit 10.1.8 to Registrant's
Form 10-Q for the quarter ended
September 30, 1999.
10.1.9 Non-Competition Agreement by and between
Registrant and Robert F. Meyerson, effective
February 27, 1997, incorporated herein by
reference to Exhibit 10.1.8 to Registrant's
Form 10-K for the year ended March 31, 1997.
10.1.10 Employment Agreement between Registrant and
John W. Paxton, Sr., effective as of March
22, 1999, incorporated herein by reference
to Exhibit 10.1.10 to Registrant's Form 10-K
for the year ended March 31, 1999.
10.1.11 Employment Agreement between Registrant and
Kenneth A. Cassady, effective as of June 7,
1999, incorporated herein by reference to
Exhibit 10.1.11 to Registrant's Form 10-K
for the year ended March 31, 1999.
10.1.12 Employment Agreement between Registrant and
Woody M. McGee, effective as of June 1,
1999, incorporated herein by reference to
Exhibit 10.1.12 to Registrant's Form 10-K
for the year ended March 31, 1999.
10.1.13 Employment Agreement between Registrant and
David M. Biggs, effective as of June 7,
1999, incorporated herein by reference to
Exhibit 10.1.13 to Registrant's Form 10-Q
for the quarter ended December 31, 1999.
10.1.14 Offer and acceptance of employment between
Registrant and Gene Harmegnies, effective as
of January 31, 2000, incorporated herein by
reference to Exhibit 10.1.14 to Registrant's
Form 10-Q for the quarter ended December 31,
1999.
10.1.15 Description of Key Employee Retention
Program, incorporated herein by reference to
Exhibit 10.1.15 to Registrant's Form 10-K
for the year ended March 31, 1998.
10.1.15.a Form of letter agreement made
110
<PAGE> 112
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
with key employees selected under
the retention program described
in Exhibit 10.1.15 above,
incorporated herein by reference
to Exhibit 10.1.15.a to
Registrant's Form 10-K for the
year ended March 31, 1998.
10.1.16 Employment Agreement, effective as of April
1, 1997, between Registrant and Frank E.
Brick, a former executive officer,
incorporated herein by reference to Exhibit
10.1.9 to Registrant's Form 10-K for the
year ended March 31, 1998.
10.1.17 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and James G. Cleveland, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.10 to Registrant's
Form 10-K for the year ended March 31, 1998.
10.1.18 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and Kenneth W. Haver, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.11 to Registrant's
Form 10-K for the year ended March 31, 1998.
10.1.19 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and David W. Porter, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.13 to Registrant's
Form 10-K for the year ended March 31, 1998.
10.1.20 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and Danny R. Wipff, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.14 to Registrant's
Form 10-K for the year ended March 31, 1998.
10.1.21 Letter agreement of Registrant with Robert
A. Goodman, dated as of December 29, 1997
and executed and delivered January 20, 1998,
for continued consulting services following
certain changes in his law practice,
incorporated herein by reference to Exhibit
10.1.17 to Registrant's Form 10-K for the
year ended March 31, 1998.
10.1.22 Letter agreement of Registrant with R. Dave
Garwood, dated August 30, 1999, for MRP-II
consulting services, incorporated herein by
reference to Exhibit 1.1.20 to Registrant's
Form 10-Q for the quarter ended September
30, 1999.
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
111
<PAGE> 113
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
Form 10-K for the year ended March 31, 1999.
10.2.2 Lease Agreement between The Woodlands
Commercial Properties Company, L.P. and
Registrant, made and entered into as of
January 16, 1998, including Rider No. 1
thereto, for premises at 8302 New Trails
Drive, The Woodlands, Texas, incorporated
herein by reference to Exhibit 10.2.2 to
Registrant's Form 10-K for the year ended
March 31, 1998.
10.2.3 Standard Office Lease (Modified Net Lease)
between Registrant and John D. Dellagnese
III, dated as of July 19, 1995, for premises
at 3875 Embassy Parkway, Bath, Ohio,
including an Addendum thereto, incorporated
herein by reference to Exhibit 10.2.4 to
Registrant's Form 10-K for the year ended
March 31, 1996.
10.2.3.a Second Addendum, dated as of
October 5, 1995, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.4.a to
Registrant's Form 10-K for the
year ended March 31, 1996.
10.2.3.b Third Addendum, dated as of March
1, 1996, to the Lease included as
Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.4.b to
Registrant's Form 10-K for the
year ended March 31, 1996.
10.2.3.c Fourth Addendum, dated as of
April 16, 1996, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by 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
112
<PAGE> 114
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10.2.3.g Eighth Addendum, dated as of
September 8, 1998, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.3.g to
Registrant's Form 10-Q for the
quarter ended September 30, 1998.
10.2.3.h Sublease Agreement, dated as of
September 1, 1998, between
Registrant and Aironet Wireless
Communications, Inc. for the
premises subject to the Lease
included as Exhibit 10.2.3 above,
as amended through the Eighth
Addendum thereto included as
Exhibit 10.2.3.g above,
incorporated herein by reference
to Exhibit 10.2.3.h to
Registrant's Form 10-K for the
year ended March 31, 1999.
10.2.3.i Renewal, dated June 16, 1999,
with respect to the Sublease
Agreement included as Exhibit
10.2.3.h above, incorporated
herein by reference to Exhibit
10.2.3.i to Registrant's Form
10-K for the year ended March 31,
1999.
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, made and
entered into as of April 10, 1997, for
premises in Ciudad Juarez, Chihuahua,
Mexico, incorporated herein by reference
to Exhibit 10.2.4 to Registrant's Form 10-K
for the year ended March 31, 1998.
10.2.5 Lease between Milford Partners, LLC and
Registrant, made as of March 17, 2000 for
premises in Ridgewood Corporate Center, 1000
Summit Drive, Milford, Ohio, filed herewith.
10.2.6 Lease Agreement between Woodlands Office
Equities-'95 Limited and Registrant,
effective January 20, 2000, for premises at
8701 New Trails Drive, The Woodlands, Texas,
including an Expansion, Modification and
Ratification thereof dated May 1, 2000,
filed herewith.
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
(refinanced and replaced by the Loan and
Security Agreement included as Exhibit
10.3.3 below), incorporated herein by
113
<PAGE> 115
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
reference to Exhibit 10.3.2 to Registrant's
Form 10-K for the year ended March 31, 1996.
10.3.1.a Amendment No. 1, dated as of
August 6, 1996, to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.2.a to
Registrant's Form 8-K dated
August 16, 1996.
10.3.1.b Amendment No. 2, dated as of
December 16, 1996, to the
Agreement included as Exhibit
10.3.1 above, incorporated herein
by reference to Exhibit 10.3.2.c
to Registrant's Form 8-K dated
December 16, 1996.
10.3.1.c Amendment No. 3, dated as of
December 12, 1997, to the
Agreement included as Exhibit
10.3.1 above, included herein by
reference to Exhibit 10.3.1.d to
Registrant's Form 10-K for the
year ended March 31, 1998.
10.3.1.d Waiver and Agreement, dated as of
December 29, 1998, with respect
to the Agreement included as
Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.1.e to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
10.3.1.e Waiver Extension and Agreement,
dated as of February 12, 1999,
with respect to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.1.f to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
10.3.1.f Second Waiver Extension Agreement
and Amendment No. 4, dated as of
March 26, 1999, with respect to
the Agreement included as Exhibit
10.3.1 above , incorporated
herein by reference to Exhibit
10.3.1.a to Registrant's Form
8-K dated April 1, 1999.
10.3.1.g Amended and Restated Security
Agreement, dated as of March 26,
1999, by and among Registrant and
The Bank of New York, as Agent
for the Lenders from time to time
party to the Agreement included
as Exhibit 10.3.1 above
(terminated in connection with
the refinancing obtained pursuant
to the Loan and Security
Agreement included as Exhibit
10.3.3 below), incorporated
114
<PAGE> 116
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
herein by reference to Exhibit
10.3.1.b to Registrant's Form 8-K
dated April 1, 1999.
10.3.1.h Deed of Trust, Assignment of
Leases and Rents, Security
Agreement, Fixture Filing and
Financing Statement, dated as of
March 26, 1999, by Registrant to
First American Title Insurance
Company as Trustee for the
benefit of The Bank of New York,
as Agent for the Lenders from
time to time party to the
Agreement included as Exhibit
10.3.1 above (terminated in
connection with the refinancing
obtained pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1.h to
Registrant's Form 10-K for the
year ended March 31, 1999.
10.3.1.i Patent and Trademark Security
Agreement, dated as of March 26,
1999, by Registrant and certain
of its subsidiaries to The Bank
of New York, as Agent for the
benefit of the Lenders from time
to time party to the Agreement
included as Exhibit 10.3.1
above, (terminated in connection
with the refinancing obtained
pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1 to
Registrant's Form 10-K for the
year ended March 31, 1999.
10.3.1.j Pledge Agreement, dated as of
March 26, 1999, by Registrant to
The Bank of New York, as Agent
for the benefit of the Lenders
from time to time party to the
Agreement included as Exhibit
10.3.1 above (terminated in
connection with the refinancing
obtained pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1.j to
Registrant's Form 10-K for the
year ended March 31, 1999.
10.3.1.k Third Waiver Extension Agreement
and Amendment No. 5, dated as of
June 29, 1999, with respect to
the Agreement included as Exhibit
10.3.1 above, incorporated herein
by reference to Exhibit 10.3.1.a
to Registrant's Form 8-K dated
115
<PAGE> 117
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
July 1, 1999.
10.3.2 Business Purpose Revolving Promissory Note
(Swing Line) made by Registrant in favor of
Bank One, NA, dated August 4, 1998
(refinanced and replaced by the Loan and
Security Agreement included as Exhibit
10.3.3 below), incorporated herein by
reference to Exhibit 10.3.4 to Registrant's
Form 10-Q for the quarter ended June 30,
1998.
10.3.2.a Consent, dated as of December 29,
1998, with respect to the Note
included as Exhibit 10.3.2 above,
incorporated herein by reference
to Exhibit 10.3.4.a to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
10.3.2.b Further Consent, dated as of
February 12, 1999, with respect
to the Note included as Exhibit
10.3.2 above, incorporated herein
by reference to Exhibit 10.3.4.a
to Registrant's Form 10-Q for the
quarter ended December 31, 1998.
10.3.2.c Second Further Consent and
Agreement, dated as of March 26,
1999, with respect to the Note
included as Exhibit 10.3.2 above,
incorporated herein by reference
to Exhibit 10.3.4.c b to
Registrant's Form 8-K dated April
1, 1999.
10.3.2.d Amended and Restated Security
Agreement, dated as of March 26,
1999, by and among Registrant and
Bank One, NA with respect to the
Note included as Exhibit 10.3.2
above (terminated in connection
with the refinancing obtained
pursuant to the Loan and Security
Agreement included as Exhibit
10.3.3 below), incorporated
herein by reference to Exhibit
10.3.2.d to Registrant's Form
10-K for the year ended March 31,
1999.
10.3.2.e Deed of Trust, Assignment of
Leases and Rents, Security
Agreement, Fixture Filing
and Financing Statement,
dated as of March 26, 1999,
by Registrant to First
American Title Insurance
Company as Trustee for the
benefit of Bank One, NA with
respect to the Note included
as Exhibit 10.3.2 above
(terminated in connection
with the refinancing
obtained pursuant to the
116
<PAGE> 118
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
Loan and Security Agreement
included as Exhibit 10.3.3
below), incorporated herein
by reference to Exhibit
10.3.2.e to Registrant's
Form 10-K for the year ended
March 31, 1999.
10.3.2.f Patent and Trademark
Security Agreement, dated as
of March 26, 1999, by
Registrant and certain of
its subsidiaries to Bank
One, NA with respect to the
Note included as Exhibit
10.3.2 above (terminated in
connection with the
refinancing obtained
pursuant to the Loan and
Security Agreement included
as Exhibit 10.3.3 below),
incorporated herein by
reference to Exhibit
10.3.2.f to Registrant's
Form 10-K for the year ended
March 31, 1999.
10.3.2.g Third Further Consent and
Note Modification Agreement,
dated as of June 29, 1999,
with respect to the Note
included as Exhibit 10.3.2
above, incorporated herein
by reference to Exhibit
10.3.2.g b to Registrant's
Form 8-K dated July 1, 1999.
10.3.3 Loan and Security Agreement, dated as
of August 26, 1999, by and between the
Registrant, the Lenders party thereto,
and Foothill Capital Corporation, as
Agent (repaid and retired in full
during March 2000 as described in
Registrant's consolidated financial
statements including such month),
incorporated by reference to Exhibit
10.3.3 to Registrant's Form 8-K dated
August 30, 1999.
10.3.3.a Pledge Agreement, dated as
of August 26, 1999, between
Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above,
pledging, among other
assets, the stock owned by
Registrant in Aironet
Wireless Communications,
Inc. and Registrant
subsidiaries to Agent as
collateral to secure
Registrant's obligations
under the Loan and Security
117
<PAGE> 119
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
Agreement (terminated in
connection with the repayment
and retirement of Registrant's
indebtedness under the Loan and
Security Agreement during March
2000 as described in
Registrant's Consolidated
Financial Statements including
such month), incorporated
herein by reference to
Exhibit 10.3.3.a to
Registrant's Form 10-Q for
the quarter ended September
30, 1999.
10.3.3.b Real Property Deed of Trust
(Harris County, Texas), made
as of August 26, 1999 by
Registrant unto Joseph C.
Mathews as trustee for the
benefit of Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above
(terminated in connection with
the repayment and retirement of
Registrant's indebtedness under
the Loan and Security Agreement
during March 2000 as described
in Registrant's Consolidated
Financial Statements including
such month), incorporated herein
by reference to Exhibit
10.3.3.b to Registrant's
Form 10-Q for the quarter
ended September 30, 1999.
10.3.3.c Patent, Trademark, Copyright
and License Mortgage, made
as of August 26, 1999, by
Registrant in favor of
Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above
(terminated in connection with
the repayment and retirement of
Registrant's indebtedness under
the Loan and Security Agreement
during March 2000 as described
in Registrant's Consolidated
Financial Statements including
such month), incorporated herein
by reference to Exhibit
10.3.3.c to Registrant's
Form 10-Q for the quarter
ended September 30, 1999.
10.3.3.d First Amendment, dated as of
November 18, 1999, to the
Loan and Security Agreement
included as Exhibit 10.3.3
118
<PAGE> 120
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
above, incorporated herein by
reference to Exhibit 10.3.3.d to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
10.3.3.e Second Amendment, dated as
of February 11, 2000, to the
Loan and Security Agreement
included as Exhibit 10.3.3
above, incorporated herein by
reference to Exhibit 10.3.3.e to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
10.3.4 Loan and Pledge Agreement, dated as
of March 15, 2000, by and among Deutsche
Bank AG, London Branch, with Deutsche Bank
Securities, Inc., as agent, and Telxon
Systems Services Inc., a wholly owned
subsidiary of Registrant (secured by the
Cisco Systems, Inc. stock subject to the
options transactions effected pursuant to
the Confirmations included as Exhibit 10.4
below) and letter confirming determination
of interest applicable to borrowings
thereunder, filed herewith.
10.3.5 Promissory Note, dated June 16, 2000, by
Registrant with respect to uncommitted
swing line for working capital
financing available from Fifth Third
Bank, Northeastern Ohio, filed
herewith.
10.4 Confirmations of Share Option Transactions of Telxon
Systems Services, Inc., a wholly owned subsidiary of
Registrant, with Deutche Bank AG, London Branch with
respect to substantially all of the stock which
Telxon Systems Services continues to hold in Cisco
Systems, Inc., dated as of March 23, 2000, filed
herewith.
10.5 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.
10.6 Agreement, dated as of November 8, 1999, by and
among Registrant, Cisco Systems, Inc. and Aironet
Wireless Communications, Inc. (the forms of the
Purchase Agreement and License Agreement included as
Exhibits A and B, respectively, thereto became
effective upon the March 15, 2000 consummation of the
acquisition through Merger of Aironet by Cisco),
incorporated herein by reference to Exhibit 10.5.2 to
Registrant's Form 10-Q for the quarter ended
September 30, 1999.
10.7 Asset Purchase Agreement by and among Dynatech
Corporation, IAQ Corporation, Registrant and Itronix
Corporation, then a subsidiary of Registrant, dated
as of December 28, 1996, incorporated herein by
reference to Exhibit 2 to Registrant's Form 8-K dated
December 31, 1996.
10.8 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.
119
<PAGE> 121
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(CONTINUED)
-----------
10.9 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.
10.9.1 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 10.9
above, incorporated herein by reference
to Exhibit 10.7.1 to Registrant's Form
10-K for the year ended March 31, 1998.
10.10 Stock Purchase Agreement, dated as of January
19, 2000, between Registrant, Accipiter Corporation
and Accipiter II, Inc. (superseded by the Agreement
and Plan of Merger included as Exhibit 10.12 below),
incorporated herein by reference to Exhibit 10.13 to
Registrant's Form 10-Q for the quarter ended December
31, 1999.
10.11 Stock Purchase Agreement, dated as of February 17,
2000, by and between Registrant and named then
minority stockholders of Registrant's Metanetics
Corporation subsidiary, filed herewith.
10.12 Plan and Agreement of Merger, dated as of
February 22, 2000, among Registrant, its wholly owned
Meta Technologies Corporation subsidiary and its
Metanetics Corporation subsidiary, filed herewith.
10.12.1 Investment and Registration Rights
Agreement, dated as of February 22,
2000, by and among Accipiter
Corporation, Accipiter II, Inc.,
Registrant and Registrant's wholly
owned Meta Technologies Corporation
subsidiary made pursuant to the Plan
and Agreement of Merger included as
Exhibit 10.12 above, filed herewith.
10.13 Stockholder Agreement, made as of November 8, 1999
between Cisco Systems, Inc., Osprey Acquisition
Corporation and Registrant, and related Irrevocable
Proxy, executed by Registrant as a stockholder of
Aironet Wireless Communications, Inc. as an
inducement toward the entry by Cisco Systems, Inc.
and Osprey Acquisition Corporation into an Agreement
and Plan of Merger and Reorganization dated of even
date providing for the acquisition of Aironet by
Cisco, and Joinders thereto by, and related
Irrevocable Proxy of, The Retail Technology Group,
Inc., a wholly owned subsidiary of Registrant, and,
in turn, by and of Telxon Systems Services, Inc., a
wholly owned subsidiary of The Retail Technology
Group, filed herewith.
10.14 DFS Vendor Agreement between Registrant and Deutsche
Financial Services Corporation, dated as of September
30, 1998, incorporated herein by reference to Exhibit
10.15 to Registrant's Form 10-Q for the quarter ended
December 31, 1998.
120
<PAGE> 122
21. Subsidiaries of Registrant, filed herewith.
23.1 Consent of Arthur Andersen LLP, filed herewith.
23.2 Consent of PricewaterhouseCoopers LLP, filed
herewith.
24. Power Attorney executed by the members of
Registrant's Board of Directors, filed herewith.
27.1 Financial Data Schedule as of March 31, 2000,
filed herewith.
27.2 Restated Financial Data Schedule as of March 31,
1999, filed herewith (1).
27.3 Restated Financial Data Schedule as of March 31,
1998, filed herewith (1).
----------
(1) Included for convenience of reference with respect to the
identified prior period affected by the June 29, 2000 further
restatement of the Registrant's results of operations for
fiscal years 1999 and 1998 as discussed in Note 3 -
Restatement to the consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K. The restated
financial results reflected in the consolidated financial
statements are included herein in lieu of Registrant
separately filing amendments to its Form 10-K and 10-Q filings
for the affected periods.
(b) Reports on Form 8-K
During the last quarter of the fiscal annual period covered by this Annual
Report on Form 10-K, Registrant filed a Current Report on Form 8-K, dated
March 15, 2000 and filed March 30, 2000, presenting the pro forma effects
on the Registrant of the consummation on March 15, 2000 of the acquisition
through merger by Cisco Systems, Inc. of the Registrant's former Aironet
Wireless Communications, Inc. subsidiary and the resulting conversion of
the Registrant's stockholdings in Aironet into Cisco common stock and the
Registrant's use of proceeds from its disposition of a portion of those
Cisco shares.
Subsequent to the end of the fiscal annual period covered by this Annual
Report on Form 10-K, Registrant filed a Current Report on Form 8-K, dated
June 29, 2000 and filed June 30, 2000, attaching Registrant's press release
of June 29, 2000, which announced a restatement of the Registrant's results
of operations for fiscal years 1999 and 1998 resulting from an agreement
made during the fourth quarter of fiscal 1998 with a value-added
distributor and a delay in the filing of this Annual Report on Form 10-K to
permit the incorporation into the financial statements included herein of
the restatement and of recent comments received from the Securities and
Exchange Commission's Division of Corporation Finance regarding the
Registrant's previous filings.
121
<PAGE> 123
<TABLE>
<CAPTION>
TELXON CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
DOLLARS IN THOUSANDS
--------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------ -------- ---------- -----------
Valuation account for accounts receivable:
<S> <C> <C> <C> <C>
Year ended March 31, 2000: $11,069 $5,080 $9,033 (a) $7,116
Year ended March 31, 1999: $4,749 $7,752 $1,432 (a) $11,069
Year ended March 31, 1998: $2,528 $3,038 $ 817 (a) $ 4,749
Valuation account for sales returns and allowances:
Year ended March 31, 2000: $15,027 $11,097 $20,869(b) $5,255
Year ended March 31, 1999: $3,270 $54,000 $42,243(b) $15,027
Year ended March 31, 1998: $4,762 $13,310 $14,802(b) $ 3,270
Valuation account for inventories:
Year ended March 31, 2000: $28,846 $30,673 $19,062 (c) $40,457
Year ended March 31, 1999: $11,709 $37,430 $20,293 (c) $28,846
Year ended March 31, 1998: $15,262 $ 4,999 $ 8,552 (c) $11,709
Reserve for warranty costs:
Year ended March 31, 2000: $1,605 $5,111 $4,564 (d) $2,152
Year ended March 31, 1999: $926 $3,067 $2,388 (d) $1,605
Year ended March 31, 1998: $468 $1,772 $1,314 (d) $926
(a) Doubtful accounts charged off, net of recoveries
(b) Sales return credits issued
(c) The fiscal 2000 amount includes the write-off and disposal of excess and/or obsolete material of $24,619 net of
a reclassification of amounts previously accrued in accrued liabilities for non-cancelable purchase commitments
for obsolete components of $6,114. The fiscal 2000 amount also includes the removal of the valuation account
related to Aironet of $557 since that subsidiary is no longer consolidated with the Company. The fiscal 1999
amount included deductions of $12,422 for provisions that related to non-cancelable purchase commitments. Since
no inventory subject to noncancelable purchase commitments was on-hand at March 31, 1999, this amount was
reclassified to accrued liabilities and not reflected in the inventory valuation accounts.
(d) Warranty costs incurred and/or lapse of warranty coverage
</TABLE>
122
<PAGE> 124
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELXON CORPORATION
Date: July 7, 2000 By: /s/ John W. Paxton
John W. Paxton, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. This report may be
signed in multiple counterparts, all of which taken together shall constitute a
single document.
<TABLE>
<S> <C> <C>
/s/ John W. Paxton Chairman, Chief
John W. Paxton Executive Officer and Director July 7, 2000
(principal executive officer)
/s/ Woody M. McGee Vice President and July 7, 2000
Woody M. McGee Chief Financial Officer
(principal financial officer)
/s/ Gary L. Grand Corporate Controller July 7, 2000
Gary L. Grand (principal accounting officer)
* John H. Cribb Vice Chairman of the Board July 7, 2000
John H. Cribb and Director
* J. James Gallagher Director July 7, 2000
J. James Gallagher
* R. Dave Garwood Director July 7, 2000
R. Dave Garwood
* Robert A. Goodman Director July 7, 2000
Robert A. Goodman
* L. Michael Hone Director July 7, 2000
L. Michael Hone
* Dennis J. Lehr Director July 7, 2000
Dennis J. Lehr
* Dr. Raj Reddy Director July 7, 2000
Dr. Raj Reddy
</TABLE>
- The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K pursuant to the Power of Attorney filed with the
Securities and Exchange Commission as Exhibit 24 hereto on behalf of the
Directors named therein unless otherwise indicated by manual signature on
this Annual Report on Form 10-K.
Date: July 7, 2000 By: /s/ Woody M. McGee
Woody M. McGee, Attorney-in-fact
123
<PAGE> 125
TELXON CORPORATION
EXHIBITS
TO
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
<PAGE> 126
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,
incorporated herein by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended March 31,
1999.
* 4.1 Portions of the Restated Certificate of Incorporation
of Registrant pertaining to the rights of holders of
Registrant's Common Stock, par value $.01 per share,
incorporated herein by reference to Exhibit No. 2(b)
to Registrant's Registration Statement on Form 8-A
with respect to its Common Stock filed pursuant to
Section 12(g) of the Securities Exchange Act, as
amended by Amendment No. 1 thereto filed under cover
of a Form 8 and Amendment No. 2 thereto filed on Form
8-A/A.
* 4.2 Text of form of Certificate for Registrant's Common
Stock, par value $.01 per share, and description of
graphic and image material appearing thereon,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended June 30,
1995.
<PAGE> 127
INDEX TO EXHIBITS
WHERE
FILED
-----
* 4.3 Rights Agreement between Registrant and KeyBank
National Association, as Rights Agent, dated as of
August 25, 1987, as amended and restated as of July
31, 1996, incorporated herein by reference to Exhibit
4 to Registrant's Form 8-K dated August 5, 1996.
* 4.3.1 Form of Rights Certificate (included as
Exhibit A to the Rights Agreement included
as Exhibit 4.3 above). Until the
Distribution Date (as defined in the Rights
Agreement), the Rights Agreement provides
that the common stock purchase rights
created thereunder are evidenced by the
certificates for Registrant's Common Stock
(the text of which and description thereof
is included as Exhibit 4.2 above, which
stock certificates are deemed also to be
certificates for such common stock purchase
rights) and not by separate Rights
Certificates; as soon as practicable after
the Distribution Date, Rights Certificates
will be mailed to each holder of
Registrant's Common Stock as of the close of
business on the Distribution Date.
* 4.3.2 Letter agreement among Registrant, KeyBank
National Association and Harris Trust and
Savings Bank, dated June 11, 1997, with
respect to the appointment of Harris Trust
and Savings Bank as successor Rights Agent
under the Rights Agreement included as
Exhibit 4.3 above, incorporated herein by
reference to Exhibit 4.3.2 to Registrant's
Form 10-K for the year ended March 31, 1997.
* 4.4 Indenture by and between Registrant and AmeriTrust
Company National Association, as Trustee, dated as of
June 1, 1987, regarding Registrant's 7-1/2%
Convertible Subordinated Debentures Due 2012,
incorporated herein by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-14348, filed May 18, 1987.
* 4.4.1 Form of Registrant's 7-1/2% Convertible
Subordinated Debentures Due 2012 (set forth
in the Indenture included as Exhibit 4.4
above).
* 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
<PAGE> 128
INDEX TO EXHIBITS
WHERE
FILED
-----
Registrant and Hambrecht & Quist LLC and
Prudential Securities Incorporated, as the
Initial Purchasers of Registrant's 5-3/4%
Convertible Subordinated Notes due 2003,
with respect to the registration of said
Notes under applicable securities laws,
incorporated herein by reference to Exhibit
4.3 to Registrant's Registration Statement
on Form S-3, Registration No. 333-1189,
filed February 23, 1996.
10.1 Compensation and Benefits Plans of Registrant.
* 10.1.1 Amended and Restated Retirement and Uniform
Matching Profit-Sharing Plan of Registrant,
as amended, incorporated herein by reference
to Exhibit 10.1.1 to Registrant's Form 10-K
for the year ended March 31, 1999.
* 10.1.2 1990 Stock Option Plan for employees of
Registrant, as amended, incorporated herein
by reference to Exhibit 10.1.2 to
Registrant's Form 10-Q for the quarter ended
December 31, 1999.
* 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 December 31, 1999.
* 10.1.4 Non-Qualified Stock Option Agreement between
Registrant and Raj Reddy, dated as of
October 17, 1988, incorporated herein by
reference to Exhibit 10.1.4 to Registrant's
Form 10-Q for the year ended March 31, 1999.
* 10.1.4.a Description of amendments
extending the term of the
Agreement included as
Exhibit 10.1.4 above,
incorporated herein by
reference to Exhibit 10.1.4.a to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
* 10.1.5 1992 Restricted Stock Plan of Registrant, as
amended, incorporated herein by reference to
Exhibit 10.1.5 to Registrant's Form 10-Q for
the quarter ended December 31, 1998.
* 10.1.6 1995 Employee Stock Purchase Plan of
Registrant, as amended, incorporated herein
by reference to Exhibit 10.1.7 to
Registrant's Form 10-Q for the quarter ended
September 30, 1995.
* 10.1.7 1996 Stock Option Plan for employees,
directors and advisors of Aironet Wireless
Communications, Inc., a subsidiary of
Registrant, incorporated herein by reference
to Exhibit 10.1.7 to Registrant's Form 10-K
for the year ended March 31, 1997.
* 10.1.7.a Amended and Restated 1996
Stock Option Plan for employees,
<PAGE> 129
INDEX TO EXHIBITS
WHERE
FILED
-----
directors and advisors of Aironet
Wireless Communications, Inc.,
incorporated herein by reference
to Exhibit 10.1.7.a to
Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.7.b First Amendment to Amended and
Restated 1996 Stock Option Plan
for employees, directors and
advisors of Aironet Wireless
Communications, Inc. herein by
reference to Exhibit 10.1.7.b to
Registrant's Form 10-K for the
year ended March 31, 1999.
* 10.1.8 1999 Stock Option Plan for Non-Employee
Directors of Aironet Wireless
Communications, Inc., incorporated herein by
reference to Exhibit 10.1.8 to Registrant's
Form 10-Q for the quarter ended
September 30, 1999.
* 10.1.9 Non-Competition Agreement by and between
Registrant and Robert F. Meyerson, effective
February 27, 1997, incorporated herein by
reference to Exhibit 10.1.8 to Registrant's
Form 10-K for the year ended March 31, 1997.
* 10.1.10 Employment Agreement between Registrant and
John W. Paxton, Sr., effective as of March
22, 1999, incorporated herein by reference
to Exhibit 10.1.10 to Registrant's Form 10-K
for the year ended March 31, 1999.
* 10.1.11 Employment Agreement between Registrant and
Kenneth A. Cassady, effective as of June 7,
1999, incorporated herein by reference to
Exhibit 10.1.11 to Registrant's Form 10-K
for the year ended March 31, 1999.
* 10.1.12 Employment Agreement between Registrant and
Woody M. McGee, effective as of June 1,
1999, incorporated herein by reference to
Exhibit 10.1.12 to Registrant's Form 10-K
for the year ended March 31, 1999.
* 10.1.13 Employment Agreement between Registrant and
David M. Biggs, effective as of June 7,
1999, incorporated herein by reference to
Exhibit 10.1.13 to Registrant's Form 10-Q
for the quarter ended December 31, 1999.
* 10.1.14 Offer and acceptance of employment between
Registrant and Gene Harmegnies, effective as
of January 31, 2000, incorporated herein by
reference to Exhibit 10.1.14 to Registrant's
Form 10-Q for the quarter ended December 31,
1999.
* 10.1.15 Description of Key Employee Retention
Program, incorporated herein by reference to
Exhibit 10.1.15 to Registrant's Form 10-K
for the year ended March 31, 1998.
* 10.1.15.a Form of letter agreement made
<PAGE> 130
INDEX TO EXHIBITS
WHERE
FILED
-----
with key employees selected under
the retention program described
in Exhibit 10.1.15 above,
incorporated herein by reference
to Exhibit 10.1.15.a to
Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.16 Employment Agreement, effective as of April
1, 1997, between Registrant and Frank E.
Brick, a former executive officer,
incorporated herein by reference to Exhibit
10.1.9 to Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.17 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and James G. Cleveland, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.10 to Registrant's
Form 10-K for the year ended March 31, 1998.
* 10.1.18 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and Kenneth W. Haver, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.11 to Registrant's
Form 10-K for the year ended March 31, 1998.
* 10.1.19 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and David W. Porter, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.13 to Registrant's
Form 10-K for the year ended March 31, 1998.
* 10.1.20 Amended and Restated Employment Agreement,
effective as of April 1, 1997, between
Registrant and Danny R. Wipff, a former
executive officer, incorporated herein by
reference to Exhibit 10.1.14 to Registrant's
Form 10-K for the year ended March 31, 1998.
* 10.1.21 Letter agreement of Registrant with Robert
A. Goodman, dated as of December 29, 1997
and executed and delivered January 20, 1998,
for continued consulting services following
certain changes in his law practice,
incorporated herein by reference to Exhibit
10.1.17 to Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.1.22 Letter agreement of Registrant with R. Dave
Garwood, dated August 30, 1999, for MRP-II
consulting services, incorporated herein by
reference to Exhibit 1.1.20 to Registrant's
Form 10-Q for the quarter ended September
30, 1999.
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
<PAGE> 131
INDEX TO EXHIBITS
WHERE
FILED
-----
Form 10-K for the year ended March 31, 1999.
* 10.2.2 Lease Agreement between The Woodlands
Commercial Properties Company, L.P. and
Registrant, made and entered into as of
January 16, 1998, including Rider No. 1
thereto, for premises at 8302 New Trails
Drive, The Woodlands, Texas, incorporated
herein by reference to Exhibit 10.2.2 to
Registrant's Form 10-K for the year ended
March 31, 1998.
* 10.2.3 Standard Office Lease (Modified Net Lease)
between Registrant and John D. Dellagnese
III, dated as of July 19, 1995, for premises
at 3875 Embassy Parkway, Bath, Ohio,
including an Addendum thereto, incorporated
herein by reference to Exhibit 10.2.4 to
Registrant's Form 10-K for the year ended
March 31, 1996.
* 10.2.3.a Second Addendum, dated as of
October 5, 1995, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.4.a to
Registrant's Form 10-K for the
year ended March 31, 1996.
* 10.2.3.b Third Addendum, dated as of March
1, 1996, to the Lease included as
Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.4.b to
Registrant's Form 10-K for the
year ended March 31, 1996.
* 10.2.3.c Fourth Addendum, dated as of
April 16, 1996, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by 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
<PAGE> 132
INDEX TO EXHIBITS
WHERE
FILED
-----
Registrant's Form 10-Q for the
quarter ended September 30, 1998.
* 10.2.3.g Eighth Addendum, dated as of
September 8, 1998, to the Lease
included as Exhibit 10.2.3 above,
incorporated herein by reference
to Exhibit 10.2.3.g to
Registrant's Form 10-Q for the
quarter ended September 30, 1998.
* 10.2.3.h Sublease Agreement, dated as of
September 1, 1998, between
Registrant and Aironet Wireless
Communications, Inc. for the
premises subject to the Lease
included as Exhibit 10.2.3 above,
as amended through the Eighth
Addendum thereto included as
Exhibit 10.2.3.g above,
incorporated herein by reference
to Exhibit 10.2.3.h to
Registrant's Form 10-K for the
year ended March 31, 1999.
* 10.2.3.i Renewal, dated June 16, 1999,
with respect to the Sublease
Agreement included as Exhibit
10.2.3.h above, incorporated
herein by reference to Exhibit
10.2.3.i to Registrant's Form
10-K for the year ended March 31,
1999.
* 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, made and
entered into as of April 10, 1997, for
premises in Ciudad Juarez, Chihuahua,
Mexico, incorporated herein by reference
to Exhibit 10.2.4 to Registrant's Form 10-K
for the year ended March 31, 1998.
** 10.2.5 Lease between Milford Partners, LLC and
Registrant, made as of March 17, 2000 for
premises in Ridgewood Corporate Center, 1000
Summit Drive, Milford, Ohio, filed herewith.
** 10.2.6 Lease Agreement between Woodlands Office
Equities-'95 Limited and Registrant,
effective January 20, 2000, for premises at
8701 New Trails Drive, The Woodlands, Texas,
including an Expansion, Modification and
Ratification thereof dated May 1, 2000,
filed herewith.
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
(refinanced and replaced by the Loan and
Security Agreement included as Exhibit
10.3.3 below), incorporated herein by
<PAGE> 133
INDEX TO EXHIBITS
WHERE
FILED
-----
reference to Exhibit 10.3.2 to Registrant's
Form 10-K for the year ended March 31, 1996.
* 10.3.1.a Amendment No. 1, dated as of
August 6, 1996, to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.2.a to
Registrant's Form 8-K dated
August 16, 1996.
* 10.3.1.b Amendment No. 2, dated as of
December 16, 1996, to the
Agreement included as Exhibit
10.3.1 above, incorporated herein
by reference to Exhibit 10.3.2.c
to Registrant's Form 8-K dated
December 16, 1996.
* 10.3.1.c Amendment No. 3, dated as of
December 12, 1997, to the
Agreement included as Exhibit
10.3.1 above, included herein by
reference to Exhibit 10.3.1.d to
Registrant's Form 10-K for the
year ended March 31, 1998.
* 10.3.1.d Waiver and Agreement, dated as of
December 29, 1998, with respect
to the Agreement included as
Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.1.e to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
* 10.3.1.e Waiver Extension and Agreement,
dated as of February 12, 1999,
with respect to the Agreement
included as Exhibit 10.3.1 above,
incorporated herein by reference
to Exhibit 10.3.1.f to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
* 10.3.1.f Second Waiver Extension Agreement
and Amendment No. 4, dated as of
March 26, 1999, with respect to
the Agreement included as Exhibit
10.3.1 above , incorporated
herein by reference to Exhibit
10.3.1.a to Registrant's Form
8-K dated April 1, 1999.
* 10.3.1.g Amended and Restated Security
Agreement, dated as of March 26,
1999, by and among Registrant and
The Bank of New York, as Agent
for the Lenders from time to time
party to the Agreement included
as Exhibit 10.3.1 above
(terminated in connection with
the refinancing obtained pursuant
to the Loan and Security
Agreement included as Exhibit
10.3.3 below), incorporated
<PAGE> 134
INDEX TO EXHIBITS
WHERE
FILED
-----
herein by reference to Exhibit
10.3.1.b to Registrant's Form 8-K
dated April 1, 1999.
* 10.3.1.h Deed of Trust, Assignment of
Leases and Rents, Security
Agreement, Fixture Filing and
Financing Statement, dated as of
March 26, 1999, by Registrant to
First American Title Insurance
Company as Trustee for the
benefit of The Bank of New York,
as Agent for the Lenders from
time to time party to the
Agreement included as Exhibit
10.3.1 above (terminated in
connection with the refinancing
obtained pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1.h to
Registrant's Form 10-K for the
year ended March 31, 1999.
* 10.3.1.i Patent and Trademark Security
Agreement, dated as of March 26,
1999, by Registrant and certain
of its subsidiaries to The Bank
of New York, as Agent for the
benefit of the Lenders from time
to time party to the Agreement
included as Exhibit 10.3.1
above, (terminated in connection
with the refinancing obtained
pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1 to
Registrant's Form 10-K for the
year ended March 31, 1999.
* 10.3.1.j Pledge Agreement, dated as of
March 26, 1999, by Registrant to
The Bank of New York, as Agent
for the benefit of the Lenders
from time to time party to the
Agreement included as Exhibit
10.3.1 above (terminated in
connection with the refinancing
obtained pursuant to the Loan and
Security Agreement included as
Exhibit 10.3.3 below),
incorporated herein by reference
to Exhibit 10.3.1.j to
Registrant's Form 10-K for the
year ended March 31, 1999.
* 10.3.1.k Third Waiver Extension Agreement
and Amendment No. 5, dated as of
June 29, 1999, with respect to
the Agreement included as Exhibit
10.3.1 above, incorporated herein
by reference to Exhibit 10.3.1.a
to Registrant's Form 8-K dated
<PAGE> 135
INDEX TO EXHIBITS
WHERE
FILED
-----
July 1, 1999.
* 10.3.2 Business Purpose Revolving Promissory Note
(Swing Line) made by Registrant in favor of
Bank One, NA, dated August 4, 1998
(refinanced and replaced by the Loan and
Security Agreement included as Exhibit
10.3.3 below), incorporated herein by
reference to Exhibit 10.3.4 to Registrant's
Form 10-Q for the quarter ended June 30,
1998.
* 10.3.2.a Consent, dated as of December 29,
1998, with respect to the Note
included as Exhibit 10.3.2 above,
incorporated herein by reference
to Exhibit 10.3.4.a to
Registrant's Form 10-Q for the
quarter ended December 31, 1998.
* 10.3.2.b Further Consent, dated as of
February 12, 1999, with respect
to the Note included as Exhibit
10.3.2 above, incorporated herein
by reference to Exhibit 10.3.4.a
to Registrant's Form 10-Q for the
quarter ended December 31, 1998.
* 10.3.2.c Second Further Consent and
Agreement, dated as of March 26,
1999, with respect to the Note
included as Exhibit 10.3.2 above,
incorporated herein by reference
to Exhibit 10.3.4.c b to
Registrant's Form 8-K dated April
1, 1999.
* 10.3.2.d Amended and Restated Security
Agreement, dated as of March 26,
1999, by and among Registrant and
Bank One, NA with respect to the
Note included as Exhibit 10.3.2
above (terminated in connection
with the refinancing obtained
pursuant to the Loan and Security
Agreement included as Exhibit
10.3.3 below), incorporated
herein by reference to Exhibit
10.3.2.d to Registrant's Form
10-K for the year ended March 31,
1999.
* 10.3.2.e Deed of Trust, Assignment of
Leases and Rents, Security
Agreement, Fixture Filing
and Financing Statement,
dated as of March 26, 1999,
by Registrant to First
American Title Insurance
Company as Trustee for the
benefit of Bank One, NA with
respect to the Note included
as Exhibit 10.3.2 above
(terminated in connection
with the refinancing
obtained pursuant to the
<PAGE> 136
INDEX TO EXHIBITS
WHERE
FILED
-----
Loan and Security Agreement
included as Exhibit 10.3.3
below), incorporated herein
by reference to Exhibit
10.3.2.e to Registrant's
Form 10-K for the year ended
March 31, 1999.
* 10.3.2.f Patent and Trademark
Security Agreement, dated as
of March 26, 1999, by
Registrant and certain of
its subsidiaries to Bank
One, NA with respect to the
Note included as Exhibit
10.3.2 above (terminated in
connection with the
refinancing obtained
pursuant to the Loan and
Security Agreement included
as Exhibit 10.3.3 below),
incorporated herein by
reference to Exhibit
10.3.2.f to Registrant's
Form 10-K for the year ended
March 31, 1999.
* 10.3.2.g Third Further Consent and
Note Modification Agreement,
dated as of June 29, 1999,
with respect to the Note
included as Exhibit 10.3.2
above, incorporated herein
by reference to Exhibit
10.3.2.g b to Registrant's
Form 8-K dated July 1, 1999.
* 10.3.3 Loan and Security Agreement, dated as
of August 26, 1999, by and between the
Registrant, the Lenders party thereto,
and Foothill Capital Corporation, as
Agent (repaid and retired in full
during March 2000 as described in
Registrant's consolidated financial
statements including such month),
incorporated by reference to Exhibit
10.3.3 to Registrant's Form 8-K dated
August 30, 1999.
* 10.3.3.a Pledge Agreement, dated as
of August 26, 1999, between
Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above,
pledging, among other
assets, the stock owned by
Registrant in Aironet
Wireless Communications,
Inc. and Registrant
subsidiaries to Agent as
collateral to secure
Registrant's obligations
under the Loan and Security
<PAGE> 137
INDEX TO EXHIBITS
WHERE
FILED
-----
Agreement (terminated in
connection with the repayment
and retirement of Registrant's
indebtedness under the Loan and
Security Agreement during March
2000 as described in
Registrant's Consolidated
Financial Statements including
such month), incorporated
herein by reference to
Exhibit 10.3.3.a to
Registrant's Form 10-Q for
the quarter ended September
30, 1999.
* 10.3.3.b Real Property Deed of Trust
(Harris County, Texas), made
as of August 26, 1999 by
Registrant unto Joseph C.
Mathews as trustee for the
benefit of Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above
(terminated in connection with
the repayment and retirement of
Registrant's indebtedness under
the Loan and Security Agreement
during March 2000 as described
in Registrant's Consolidated
Financial Statements including
such month), incorporated herein
by reference to Exhibit
10.3.3.b to Registrant's
Form 10-Q for the quarter
ended September 30, 1999.
* 10.3.3.c Patent, Trademark, Copyright
and License Mortgage, made
as of August 26, 1999, by
Registrant in favor of
Foothill Capital
Corporation, as Agent for
the Lenders from time to
time party to the Loan and
Security Agreement included
as Exhibit 10.3.3 above
(terminated in connection with
the repayment and retirement of
Registrant's indebtedness under
the Loan and Security Agreement
during March 2000 as described
in Registrant's Consolidated
Financial Statements including
such month), incorporated herein
by reference to Exhibit
10.3.3.c to Registrant's
Form 10-Q for the quarter
ended September 30, 1999.
* 10.3.3.d First Amendment, dated as of
November 18, 1999, to the
Loan and Security Agreement
included as Exhibit 10.3.3
<PAGE> 138
INDEX TO EXHIBITS
WHERE
FILED
-----
above, incorporated herein by
reference to Exhibit 10.3.3.d to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
* 10.3.3.e Second Amendment, dated as
of February 11, 2000, to the
Loan and Security Agreement
included as Exhibit 10.3.3
above, incorporated herein by
reference to Exhibit 10.3.3.e to
Registrant's Form 10-Q for the
quarter ended December 31, 1999.
** 10.3.4 Loan and Pledge Agreement, dated as
of March 15, 2000, by and among Deutsche
Bank AG, London Branch, with Deutsche Bank
Securities, Inc., as agent, and Telxon
Systems Services Inc., a wholly owned
subsidiary of Registrant (secured by the
Cisco Systems, Inc. stock subject to the
options transactions effected pursuant to
the Confirmations included as Exhibit 10.4
below) and letter confirming determination
of interest applicable to borrowings
thereunder, filed herewith.
** 10.3.5 Promissory Note, dated June 16, 2000, by
Registrant with respect to uncommitted
swing line for working capital
financing available from Fifth Third
Bank, Northeastern Ohio, filed
herewith.
** 10.4 Confirmations of Share Option Transactions of Telxon
Systems Services, Inc., a wholly owned subsidiary of
Registrant, with Deutche Bank AG, London Branch with
respect to substantially all of the stock which
Telxon Systems Services continues to hold in Cisco
Systems, Inc., dated as of March 23, 2000, filed
herewith.
* 10.5 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.
* 10.6 Agreement, dated as of November 8, 1999, by and
among Registrant, Cisco Systems, Inc. and Aironet
Wireless Communications, Inc. (the forms of the
Purchase Agreement and License Agreement included as
Exhibits A and B, respectively, thereto became
effective upon the March 15, 2000 consummation of the
acquisition through Merger of Aironet by Cisco),
incorporated herein by reference to Exhibit 10.5.2 to
Registrant's Form 10-Q for the quarter ended
September 30, 1999.
* 10.7 Asset Purchase Agreement by and among Dynatech
Corporation, IAQ Corporation, Registrant and Itronix
Corporation, then a subsidiary of Registrant, dated
as of December 28, 1996, incorporated herein by
reference to Exhibit 2 to Registrant's Form 8-K dated
December 31, 1996.
* 10.8 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.
<PAGE> 139
INDEX TO EXHIBITS
WHERE
FILED
-----
* 10.9 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.
* 10.9.1 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 10.9
above, incorporated herein by reference
to Exhibit 10.7.1 to Registrant's Form
10-K for the year ended March 31, 1998.
* 10.10 Stock Purchase Agreement, dated as of January
19, 2000, between Registrant, Accipiter Corporation
and Accipiter II, Inc. (superseded by the Agreement
and Plan of Merger included as Exhibit 10.12 below),
incorporated herein by reference to Exhibit 10.13 to
Registrant's Form 10-Q for the quarter ended December
31, 1999.
** 10.11 Stock Purchase Agreement, dated as of February 17,
2000, by and between Registrant and named then
minority stockholders of Registrant's Metanetics
Corporation subsidiary, filed herewith.
** 10.12 Plan and Agreement of Merger, dated as of
February 22, 2000, among Registrant, its wholly owned
Meta Technologies Corporation subsidiary and its
Metanetics Corporation subsidiary, filed herewith.
** 10.12.1 Investment and Registration Rights
Agreement, dated as of February 22,
2000, by and among Accipiter
Corporation, Accipiter II, Inc.,
Registrant and Registrant's wholly
owned Meta Technologies Corporation
subsidiary made pursuant to the Plan
and Agreement of Merger included as
Exhibit 10.12 above, filed herewith.
** 10.13 Stockholder Agreement, made as of November 8, 1999
between Cisco Systems, Inc., Osprey Acquisition
Corporation and Registrant, and related Irrevocable
Proxy, executed by Registrant as a stockholder of
Aironet Wireless Communications, Inc. as an
inducement toward the entry by Cisco Systems, Inc.
and Osprey Acquisition Corporation into an Agreement
and Plan of Merger and Reorganization dated of even
date providing for the acquisition of Aironet by
Cisco, and Joinders thereto by, and related
Irrevocable Proxy of, The Retail Technology Group,
Inc., a wholly owned subsidiary of Registrant, and,
in turn, by and of Telxon Systems Services, Inc., a
wholly owned subsidiary of The Retail Technology
Group, filed herewith.
* 10.14 DFS Vendor Agreement between Registrant and Deutsche
Financial Services Corporation, dated as of September
30, 1998, incorporated herein by reference to Exhibit
10.15 to Registrant's Form 10-Q for the quarter ended
December 31, 1998.
** 21. Subsidiaries of Registrant, filed herewith.
** 23.1 Consent of Arthur Andersen LLP, filed herewith.
** 23.2 Consent of PricewaterhouseCoopers LLP, filed
herewith.
** 24. Power Attorney executed by the members of
Registrant's Board of Directors, filed herewith.
** 27.1 Financial Data Schedule as of March 31, 2000,
filed herewith.
** 27.2 Restated Financial Data Schedule as of March 31,
1999, filed herewith.
** 27.3 Restated Financial Data Schedule as of March 31,
1998, filed herewith.
-----------
* Previously filed
** Filed herewith
