10-Q 1 e10-q.txt TELXON CORPORATION FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO __________ COMMISSION FILE NUMBER 0-11402 TELXON CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 74-1666060 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 1000 SUMMIT DRIVE CINCINNATI, OHIO 45150 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (330) 664-1000 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]. No [ ]. At June 30, 2000, there were 17,514,296 outstanding shares of the registrant's Common Stock. This document contains 65 pages. 2 TELXON CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No. -------- Part I. FINANCIAL INFORMATION: Item 1: Condensed Consolidated Financial Statements Condensed Balance Sheets 3 Condensed Statements of Operations 4 Condensed Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-19 Item 2: Management Discussion and Analysis of Financial Condition 20-32 and Results of Operations Item 3: Quantitative and Qualitative Disclosure About Market Risk 33-34 Part II. OTHER INFORMATION: Item 1: Legal Proceedings 35 Item 6: Exhibits and Reports on Form 8-K 35-48
2 3 TELXON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
JUNE 30, MARCH 31, 2000 2000 --------- --------- (UNAUDITED) ASSETS Current assets: Cash (including cash equivalents of $77 and $6,000) $ 5,620 $ 34,197 Accounts receivable, net of allowances for doubtful accounts of $8,329 and $7,116 and sales returns and allowances of $5,255 76,100 70,831 Notes and other accounts receivable 6,268 4,545 Inventories 91,820 81,923 Prepaid expenses and other 30,182 29,615 --------- --------- Total current assets 209,990 221,111 Property and equipment, net 59,205 62,067 Investment in marketable securities 264,807 321,863 Intangibles and other assets, net 29,070 31,249 --------- --------- Total assets $ 563,072 $ 636,290 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Capital lease obligations due within one year $ 251 $ 236 Accounts payable 36,643 30,116 Income taxes payable 4,498 11,039 Accrued liabilities 52,034 53,771 --------- --------- Total current liabilities 93,426 95,162 Capital lease obligations 309 369 Convertible subordinated notes and debentures 106,913 106,913 Deferred income taxes 87,863 109,519 Other long-term liabilities 1,728 2,500 --------- --------- Total liabilities 290,239 314,463 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 shares issued 175 175 Additional paid-in capital 105,639 105,639 Retained earnings 178,807 188,998 Note related to the purchase of stock (3,141) -- Unearned compensation relating to restricted stock awards (29) (75) Accumulated other comprehensive income (loss): Foreign currency translation (6,913) (6,009) Unrealized holding (loss) gain on marketable securities, net of deferred taxes of ($1,192) and $21,060 (1,705) 33,099 --------- --------- Total stockholders' equity 272,833 321,827 --------- --------- Commitments and contingencies -- -- --------- --------- Total liabilities and stockholders' equity $ 563,072 $ 636,290 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 4 TELXON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ----------------------- 2000 1999 -------- -------- Revenues: Product, net $ 65,532 $ 67,916 Customer service, net 20,066 19,909 -------- -------- Total net revenues 85,598 87,825 Cost of revenues: Product 46,961 50,867 Customer service 11,932 12,211 -------- -------- Total cost of revenues 58,893 63,078 Gross profit: Product 18,571 17,049 Customer service 8,134 7,698 -------- -------- Total gross profit 26,705 24,747 Operating expenses: Selling expenses 18,760 18,606 Product development and engineering expenses 6,261 7,150 General & administrative expenses 16,002 11,243 -------- -------- Total operating expenses 41,023 36,999 Loss from operations (14,318) (12,252) Interest income 431 255 Interest expense (1,669) (3,242) -------- -------- Loss before other non-operating income (expense) and income taxes (15,556) (15,239) Other non-operating income (expense) 115 (184) -------- -------- Loss before income taxes (15,441) (15,423) (Benefit) provision for income taxes (5,250) 1,278 -------- -------- Net loss $(10,191) $(16,701) ======== ======== Net loss per share: Basic $ (0.58) $ (1.03) Diluted $ (0.58) $ (1.03) Average number of common shares outstanding: Basic 17,514 16,156 Diluted 17,514 16,156
See accompanying notes to condensed consolidated financial statements. 4 5 TELXON CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, ----------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net loss $(10,191) $(16,701) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 6,851 5,831 Amortization of restricted stock awards, net 46 18 Provision for doubtful accounts 1,157 1,070 Provision for inventory obsolescence 2,131 1,635 Loss on disposal of assets 189 108 Gain on sale of non-marketable investments -- (761) Equity loss in earnings of affiliate -- 184 Loss on carrying value of non-marketable investment -- 1,283 Change in operating assets and liabilities: Accounts and notes receivable (8,157) 3,816 Inventories (11,963) 6,033 Prepaid expenses and other current assets (567) (11) Intangibles and other assets 385 (1,725) Accounts payable and accrued liabilities 4,666 11,619 Income taxes payable (6,541) 2,839 Other long-term liabilities (176) (226) -------- -------- Net cash (used in) provided by operating activities (22,170) 15,012 Cash flows from investing activities: Additions to property and equipment (1,786) (7,255) Software investments (705) (1,005) Proceeds from the sale of non-marketable investments -- 1,523 Impact of Aironet deconsolidation -- (3,986) -------- -------- Net cash (used in) investing activities (2,491) (10,723) Cash flows from financing activities: Notes payable, net -- (5,080) Principal payments on capital leases (46) (223) Note related to the purchase of stock (3,141) -- -------- -------- Net cash used in financing activities (3,187) (5,303) Effect of exchange rate changes on cash (729) (53) -------- -------- Net decrease in cash and cash equivalents (28,577) (1,067) Cash and cash equivalents at beginning of period 34,197 22,459 -------- -------- Cash and cash equivalents at end of period $ 5,620 $ 21,392 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) 1. MANAGEMENT REPRESENTATION The condensed consolidated financial statements of Telxon Corporation ("Telxon") and its subsidiaries (collectively with Telxon, the "Company") have been prepared without audit and in accordance with the instructions to Form 10-Q. In the opinion of the Company, all adjustments, consisting of normal recurring adjustments necessary for a fair statement of results for the interim periods, have been made. The operating results for the three months ended June 30, 2000, are not necessarily indicative of the results that may be achieved for the fiscal year ending March 31, 2001. The statements, including the condensed March 31, 2000 consolidated balance sheet, do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements as contained in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. 2. SUBSEQUENT EVENT On July 25, 2000, Symbol Technologies ("Symbol") announced its intention to acquire the Company for shares of Symbol common stock after receiving approval from Symbol's and the Company's Boards of Directors. According to the terms of the definitive merger agreement, Company shareholders will receive .50 shares of Symbol stock for each share of the Company's common stock. The transaction has a total equity value of approximately $465,000 based upon the closing price of Symbol stock on July 25, 2000 of $49.88 a share. The transaction is expected to be accounted for under the purchase accounting method, and is expected to consummate prior to December 31, 2000. The proposed transaction is pending regulatory and shareholder approval. 3. BASIS OF PRESENTATION 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 a result of this transaction, the Company ceased to consolidate the financial position and results of operations of Aironet and accounted for its investment under the equity method of accounting, in accordance with APB 18 "The Equity Method of Accounting". Additionally, during fiscal 2000, and subsequent to the Aironet IPO discussed above, Cisco Systems ("Cisco") announced that it had entered into a merger agreement providing for its acquisition of Aironet for shares of Cisco common stock. As a result of this transaction, which became effective March 15, 2000, the Company accounted for its investment in Cisco shares under the requirements of Statement of Financial Accounting Standard 115, "Accounting for Certain Investments in Debt and Equity Securities", as "available for sale" marketable equity securities. 6 7 The Company had previously reported its financial position and results of operations at and for the period ending June 30, 1999 on a consolidated basis, which included the results of Aironet. Due to the timing and nature of the events described above, the Company has ceased to consolidate the results, financial position and cash flows of Aironet as of April 1, 1999, the beginning of the Company's 2000 fiscal year. This reclassified presentation reflects the financial position and results of operations and cash flows of the Company on a consistent basis with the period ended June 30, 2000. 4. FINANCIAL RESULTS AND LIQUIDITY The Company incurred a net loss during the first quarter of fiscal 2001 of $10,191 with a decrease in consolidated revenues of $2,227 compared to the first quarter of fiscal 2000. During the quarter ended June 30, 1999, the Company incurred a net loss of $16,701. Cash flows used by operations were $22,170 and cash flows used by investing activities were $2,491 during the first quarter of fiscal 2001. The significant cash used in operating activities reflects the Company's reliance upon internally generated funds to meet its current cash flow requirements rather than utilizing credit facilities. The Company generated cash flows from operating activities of $15,012 for the quarter ended June 30, 1999. The Company stockholders' equity and working capital at June 30, 2000 was $272,833 and $116,564, respectively. The Company's working capital was significantly improved during the fourth quarter of fiscal 2000 when the Company utilized proceeds from its investments in marketable securities to extinguish its notes payable, certain lease liabilities and a significant portion of its accounts payable. The Company's stockholders' equity and working capital at June 30, 1999 were $28 and $15,449, respectively. As mentioned above, the Company is currently meeting cash flow requirements from internally generated cash flows and has successfully managed the payments of vendors and employees without the disruption of the flow of necessary materials, components and services. The Company has obtained additional financing arrangements that may be utilized in the event that internally generated funds are not adequate to cover the costs of operations. 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. 5. EARNINGS PER SHARE Computations of basic and diluted earnings per share of common stock have been made in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 128, "Earnings Per Share". All securities having an anti-dilutive effect on earnings per share have been excluded from such computations. Common stock purchase rights outstanding under the Company's stockholder rights plan, which potentially have a dilutive effect, have been excluded from the weighted common shares computation as preconditions to the exercisability of such rights were not satisfied. 7 8 Reconciliation of Numerators and Denominators Of the Basic and Diluted EPS Computations (In thousands except per share amounts) In the following table, net loss represents the numerator, and the shares represent the denominator, in the earnings per share calculation.
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED JUNE 30, 2000 MARCH 31, 1999 -------------------------------- -------------------------------- NET PER SHARE NET PER SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT -------- ------ --------- -------- ------ --------- BASIC EPS Loss available to common stockholders $(10,191) 17,514 $(.58) $(16,701) 16,156 $(1.03) --------- --------- --------- --------- EFFECT OF DILUTIVE SECURITIES Options -- -- ------ ------ DILUTED EPS Loss available to holders of common shares and common share equivalents $(10,191) 17,514 $(.58) $(16,701) 16,156 $(1.03) ========= ====== ========= ========= ====== =========
Options to purchase 3,480,732 shares of common stock at a weighted average exercise price of $14.14 per share were outstanding at June 30, 2000, but were not included in the computation of diluted earnings per share for the three months then ended because the options would have had an anti-dilutive effect on the net loss for the period. Options to purchase 3,788,385 shares of common stock at a weighted average exercise price of $14.95 per share were outstanding at June 30, 1999, but were not included in the computation of diluted earnings per share for the three months then ended because the options would have had an anti-dilutive effect on the net loss for the period. The shares issuable upon conversion of Telxon's 5-3/4% convertible subordinated notes and 7-1/2% convertible subordinated debentures were omitted from the diluted earnings per share calculations because their inclusion at June 30, 2000 and 1999 would have had an anti-dilutive effect on earnings for the three months then ended. 8 9 6. COMPREHENSIVE INCOME Total comprehensive loss consisted of the following:
Three Months Ended June 30, June 30, 2000 1999 ---------- ---------- Net loss $(10,191) $(16,701) Other comprehensive losses: Unrealized holding loss on marketable securities (34,804) - Foreign currency translation adjustment (904) (255) ---------- ---------- Total comprehensive loss $(45,899) $(16,956) ========== ==========
7. SUPPLEMENTAL CASH FLOW
Three Months Ended June 30, June 30, 2000 1999 -------- -------- Cash paid during the period for: Interest $ 951 $ 2,604 Income taxes $1,625 $ 619
There were no capital lease additions during the three months ended June 30, 2000 or 1999. 8. INVENTORIES
JUNE 30, MARCH 31, 2000 2000 -------- --------- Purchased components $43,607 $46,514 Work-in-process 26,130 21,404 Finished goods 22,083 14,005 -------- --------- $91,820 $81,923 ======== =========
At June 30, 2000, the inventory allowance accounts totaled $34,500 and were composed of manufacturing purchased components of $24,200, customer service spare parts and used equipment of $8,500 and international finished goods inventories of $1,800. In addition to the inventory allowance accounts, the Company has recorded accrued liabilities totaling $2,000 for a loss on an inventory purchase commitment to a vendor. Inventory allowance provisions for the quarter were composed of manufacturing purchased components of $1,500, customer service spare parts and used equipment of $400 and international finished goods inventories of $200. Inventory allowance accounts were reduced by $7,800 for a reduction in the gross inventory value of trade-in product held in inventory charged against the related valuation allowance. Since both the gross inventory 9 10 amount and the decrease to the reserve was the same amount there was no impact on net inventories. Management disposes of excess and obsolete inventory as necessary and as manpower permits, although there are no formal plans to do so. During the first quarter of fiscal 2001, the Company physically disposed of $300 of excess and obsolete material inventories in the Company's international operations. This disposal also contributed to the reduction in the inventory allowance explained above. There were no recoveries related to the disposal of this material. 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 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. 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 June 30, 2000, the Company had approximately $5,700 of finished goods inventory held at distributors and customers and approximately $3,000 of manufacturing components at contract manufacturers. At March 31, 2000, the Company had approximately $6,200 of finished goods inventory held at distributors and customers and approximately $10,100 of manufacturing components at contract manufacturers. The $500 decrease in the amount of finished goods held at distributors and customers is the result of revenue recognized upon installation and customer acceptance of the Company's product. The decrease in the amount of inventory at contract manufacturers was due to the relatively large amount of shipments from those manufacturers during the current quarter. 10 11 9. MARKETABLE SECURITIES AND DERIVATIVES
JUNE 30, MARCH 31, 2000 2000 --------- ---------- Cost basis $ 267,704 $ 267,704 Gross unrealized holding (losses) gains (2,897) 54,159 --------- ---------- Aggregate fair market value $ 264,807 $ 321,863 ========= ==========
During fiscal 2000, Cisco Systems ("Cisco") merged with the Company's Aironet subsidiary 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, and subsequently adjusted this amount at June 30, 2000 to reflect the market value on this date. 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. Similarly, on June 30, 2000 a $57,056 adjustment was recorded to reflect the decrease in market value recognized during the first quarter of fiscal 2001. 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 assuming performance by the counterparty of 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 are 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
11 12 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 June 30, 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. 10. ACCRUED LIABILITIES Accrued liabilities for the three months ended June 30, 2000 and for the year ended March 31, 2000 consisted of the following:
JUNE 30, MARCH 31, 2000 2000 -------- --------- Deferred customer service revenues $10,673 $11,823 Accrued payroll and other employee compensation 7,578 8,624 Accrued taxes other than payroll and income taxes 5,036 4,429 Accrued royalties 3,715 3,651 Provision for loss contract 5,143 3,523 Accrued employee termination benefits 3,520 3,483 Accrued professional fees 2,804 2,947 Accrued losses on inventory purchase commitments and discontinued product costs 2,006 2,751 Accrued facility closing costs 2,162 2,083 Accrued interest 2,543 1,813 Deferred product revenues 565 1,193 Accrued commissions 1,000 1,056 Other accrued liabilities 5,289 6,395 -------- --------- $52,034 $53,771 ======== =========
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 June 30 and March 31, 2000 include costs to terminate 9 and 16 employees, respectively. Costs totaling $20, $7 and $233 were charged to cost of product revenue, cost of customer service revenue and selling expenses during the first quarter of fiscal 2001. This compares to costs totaling $169, $95, $657, $51 and $2,511 which were charged to cost of product revenue, cost of customer service revenue, selling expenses, product development and engineering expenses and general and administrative expenses, respectively, during the fourth quarter of fiscal 2000. 12 13 The Company's domestic accrual for severance costs, including stay on bonuses, decreased from a balance of $3,400 at March 31, 2000 to a balance of $3,300 at June 30, 2000. Severance charges incurred in the first quarter of fiscal 2001 aggregated $1,200, which were offset by payments to previously terminated employees of $1,300. A total of 9 employees were severed during the first quarter of fiscal 2001 compared to 29 employees during the first quarter of fiscal 2000. The areas of the Company affected for both quarters were domestic sales operations, domestic product development, manufacturing operations and corporate administration. 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. 11. LITIGATION AND CONTINGENCIES On September 21, 1993, a derivative Complaint was filed in the Court of Chancery of the State of Delaware, in and for Newcastle County, by an alleged stockholder of the Company derivatively on behalf of Telxon. The named defendants are the Company; Robert F. Meyerson, former Chairman of the Board, Chief Executive Officer and director; Dan R. Wipff, then President, Chief Operating Officer and Chief Financial Officer and director; Robert A. Goodman, Corporate Secretary and outside director; Norton W. Rose, 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. 13 14 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 Court decided the cross motions for summary judgment on July 24, 2000. As a result of that ruling only the plaintiff's claims relating to the directors' fiduciary duty of care continue to be pending. 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 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 which better assure its completion within the projected schedule, the Company's estimate of the total cost is expected to increase to $350. If closure of the remediation is not certified when contemplated by the plan, and the Company were 14 15 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. 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. 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. The court has denied a motion filed by the plaintiffs on November 16, 1999 to lift the discovery stay to allow the Court the serving of discovery requests on a non-party. 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 15 16 production of specified documents and testimony. The Company and its current and former independent accountants have assessed 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 responded to the Commission's Comments and made necessary changes to its fiscal 2000 Annual Report on Form 10-K. On June 29, 2000, as a result of an assessment performed by the Company and its current and former independent accountants, the Company announced that it would restate its results of operations for fiscal years ending March 31, 1999 and 1998. The restatement related to an agreement made during the fourth quarter of fiscal 1998 with a Value-Added Distributor ("VAD") which provided the VAD with rights to return specified goods, and rights to require the company to repurchase or pay the carrying costs of those goods. Because of this agreement, $8.1 million in fiscal 1998 fourth quarter revenues from this VAD and $4.9 million of related cost of product revenues more appropriately should have been recognized on a sell-through basis during fiscal 1999. The related income tax impacts of $1.3 million were recorded in the 1999 and 1998 annual fiscal periods to reflect the income tax consequences of the restatement adjustments described above. 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. 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 Technologies, Inc. to acquire the Company in the Spring of 1998 violated their duties of loyalty, good faith and due care and wasted Company 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 16 17 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 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 that 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. Discovery in the Company's declaratory judgment action is just beginning. The parties to the two declaratory judgment actions have agreed to the consolidation of the cases, and a stipulated consolidation order is before the Court for approval. 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, 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 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. 17 18 12. INCOME TAX An income tax benefit of $5,250 has been recognized for financial reporting purposes for the quarter ending June 30, 2000. The effective income tax rate used to calculate this benefit was calculated as a combined federal and state statutory tax rate adjusted for tax provisions on international subsidiary income. In contrast to the first quarter of fiscal 2000 the Company's current assessment is that it is more likely than not that these deferred tax assets will be benefited through future taxable income or through the implementation of tax planning strategies. The Company's consolidated income tax provision for the quarter ended June 30, 1999 of $1,278 consisted primarily of income taxes related to the Company's operations in foreign tax jurisdictions. No tax benefit was recognized for the U.S. net operating loss for the three months ended June 30, 1999 based on the Company's assessment that it was more likely than not that these deferred tax assets would not be utilized through future taxable income or implementation of tax planning strategies. 13. BUSINESS SEGMENTS 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. 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.
THREE MONTHS ENDING UNITED OTHER ADJUSTMENT & JUNE 30, 2000 STATES EUROPE INTERNATIONAL ELIMINATION CONSOLIDATED -------- -------- ------------- ------------ ------------ Revenues from unaffiliated customers $ 60,862 $ 18,988 $ 5,748 $ -- $ 85,598 Revenues from inter-company sales 15,272 515 719 (16,506) -- -------- -------- -------- -------- -------- Total revenues $ 76,134 $ 19,503 $ 6,467 $(16,506) $ 85,598 ======== ======== ======== ======== ======== (Loss) income before income tax $(14,608) $ 233 $ (584) $ (482) $(15,441) ======== ======== ======== ======== ========
THREE MONTHS ENDING UNITED OTHER ADJUSTMENT & JUNE 30, 2000 STATES EUROPE INTERNATIONAL ELIMINATION CONSOLIDATED -------- -------- ------------- ------------ ------------ Revenues from unaffiliated customers $ 60,466 $ 20,875 $ 6,484 $ -- $ 87,825
18 19 Revenues from inter-company sales 11,054 413 733 (12,200) -- -------- -------- -------- -------- -------- Total revenues $ 71,520 $ 21,288 $ 7,217 $(12,200) $ 87,825 ======== ======== ======== ======== ======== (Loss) income before income tax $(18,187) $ 2,282 $ 1,072 $ (590) $(15,423) ======== ======== ======== ======== ========
14. RECLASSIFICATION Certain items in the fiscal 2000 consolidated financial statements and notes thereto have been reclassified to conform to the fiscal 2001 presentation. 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS REGARDING CERTAIN TRENDS OR OTHER FORWARD-LOOKING INFORMATION CONCERNING THE COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES OR OTHERWISE AFFECTING OR RELATING TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE PROTECTIONS AFFORDED "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS MADE HEREIN AND ELSEWHERE IN THIS FORM 10-Q ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. THE SUMMARY OF CERTAIN OF THE RISKS AND OTHER IMPORTANT FACTORS WHICH MAY AFFECT THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL AND OTHER CONDITION UNDER "FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW SHOULD BE READ IN CONJUNCTION WITH THE MORE COMPLETE DISCUSSION OF THOSE AND OTHER RISKS AND IMPORTANT FACTORS AFFECTING THE BUSINESS, OPERATING RESULTS AND CONDITION OF THE COMPANY UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - FACTORS THAT MAY AFFECT FUTURE RESULTS", AND OTHER CAUTIONARY STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND ELSEWHERE, IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, FOR THE FISCAL YEAR ENDED MARCH 31, 2000. Overview The Company recorded a net loss of $10.2 million or $0.58 per common share (diluted) for the first quarter of fiscal 2001. In comparison, the Company recorded a net loss of $16.7 million or $1.03 per common share (diluted) for the first quarter of fiscal 2000. The Company also recorded a loss from operations of $14.3 million during the current period compared to $12.3 million incurred during the same quarter last year. Consolidated revenues decreased $2.2 million or 2.5% compared to the same quarter in fiscal 2000. Overall, operating expenses increased $4.0 million or 10.9% primarily due to a $3.6 million increase in salary and contract labor expenses related to the duplication of expenses incurred in the transition of the Company's workforce to its new corporate headquarters in Cincinnati and operations in Houston. Additionally, the fiscal 2000 results include a tax benefit of $5.3 million. Recognizing this tax benefit illustrates the Company's assessment that such benefits arising from net operating losses will be benefited in future periods. The Company experienced significant cash flows used by operating activities of $22.2 million during the first quarter of fiscal 2001. This compared to cash provided by operating activities of $15.0 million during the first quarter of fiscal 2000 after reflecting the deconsolidation of Aironet Wireless Communications during the first quarter of fiscal 2000 (refer to Note 3 - Basis of Presentation for further discussion regarding the deconsolidation of Aironet). The significant decrease in cash flows provided by operating activities resulted from the Company's use of on-hand cash to support operating cash requirements rather than utilizing debt. During the quarter ended June 30, 2000, the Company did not have any short term debt outstanding. 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 20 21 the Company's management will identify the risks (especially those newly emerging from time to time) affecting, and their impact on, the Company and its business, that the Company's strategies and plans will take into account all market conditions and changes thereto, or that such strategies and plans will be successfully implemented. Accordingly, neither the historical results presented in the Company's consolidated financial statements and discussed herein, nor any forward-looking statements in this Form 10-Q are necessarily indicative of the Company's future results. See "Factors That May Affect Future Results" for a discussion of risk factors which may affect the Company's future results of operations. Factors That May Affect Future Results The Company's business, operating results and financial and other condition may be affected by a number of risks and other important factors, including, without limitation, the following, some of which are inherently difficult to identify and predict and/or are beyond the Company's control: general and industry-specific economic conditions; the identification and implementation of appropriate cost reduction, efficiency and other operating improvement strategies; the continued adequacy of the Company's internal and external sources of working capital; sales and manufacturing cycles from quarter to quarter and within each quarter; serving markets characterized by increasingly rapid technological change and associated changes in market demand, product obsolescence and price erosion; intense competition; the Company's ability to gain and maintain market acceptance of its products; the levels of customer demand for the Company's products and customers' commitments of resources to information technology investments; concentration of revenues in the retail industry and possible decreases in their purchases from the Company in response to any downturn in general economic prospects or conditions to the extent that reduced levels of new store openings are not offset by their investment in the Company's systems to improve the efficiency of existing stores; ability to penetrate and expand revenues in new and existing markets; risks associated with foreign sales and operations; timely and efficient enhancement of appropriate product offerings through internal development and acquisition of, or investment in, new businesses and technologies; dependence on, and freedom from infringement of, technologies and other proprietary rights of, or by, third parties; government regulation of radio and other products, and product health and safety concerns; dependence on sole source, or a limited number of, suppliers; attracting and retaining qualified employees. In addition to being subject to the foregoing factors and other cautionary statements elsewhere in this Form 10-Q, the Company's conduct of its business, and the results and condition thereof, is also subject to the possible adverse effects of certain pending litigation and other contingencies discussed in Note 11 - Litigation and Contingencies to the accompanying consolidated financial statements included in Item 1 above. The financial results of the Company historically have not been materially adversely impacted as a result of inflation. However, there can be no assurance that inflation will not have a material adverse impact in the future. 21 22 RESULTS OF OPERATIONS Revenues (In thousands)
Three Months Ended June 30, (Decrease) Increase ---------------------- ------------------------- 2000 1999 Dollar Percentage -------- -------- --------- ---------- Product, net $ 65,532 $ 67,916 $ (2,384) (3.5)% Customer service, net 20,066 19,909 157 .1 % -------- -------- --------- Total net revenues $ 85,598 $ 87,825 $ (2,227) (2.5)% ======== ======== =========
During the periods 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. The decrease in consolidated product revenues during the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000 was primarily caused by a decrease in international product revenues of $3.0 million. International product revenues decreased 12% in the first quarter of fiscal 2001 as compared to the same period last year. The current year decrease primarily reflected the absence, during the current period, of a sale made by one of the Company's European subsidiaries to a large customer during fiscal 2000. Partially offsetting this decrease was an increase in North American product revenues of $.6 million. North American product revenues increased 1% in the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000. Changes in foreign exchange rates did not have a material impact on the results of the Company's international operations. Within the Company's North American product revenues offsetting factors led to the relatively small increase in revenues noted above. Increasing the fiscal 2001 first quarter product revenues were increased revenues of $4.0 million related to the rollout of the Company's replacement products for existing Company products from a large domestic retailer. Also increasing product revenues were increased net product revenues recognized in the Company's VAD channel of $4.4 million. The items above increasing fiscal 2001 product revenues relative to that experienced in the prior year were offset by the absence of larger rollouts of the Company's PTC 960 products to the Company's retail customers. The decreases in these larger rollouts aggregated $7.4 million and included a $3.6 million contribution from the Company's remanufactured products. The Company's has since curtailed its remanufactured product offerings. The first quarter of fiscal 2000 included a positive revenue adjustment related to a decrease in the reserve for sales returns and allowances of $3.2 million. There was no such positive adjustment in the current quarter related to the reserve for sales returns and allowances. Aggregate other increases in product revenues were $1.3 million. The Company attributes the declines in revenues to increased competitive pressures in the Company's core markets and product offerings. The 22 23 Company did not experience a significant contribution of revenues from new products during the current fiscal quarter. The increase in the consolidated customer service revenues during the first quarter of fiscal 2001 primarily resulted from increased maintenance contract revenues in the Company's North American operations. The customer service revenues in the North American operations increased $.4 million, or 2.7%, during the first quarter of fiscal 2001 as compared to the same period in the previous fiscal year. Offsetting this increase was a decrease in customer service revenue of $.2 million, or 6%, in the Company's international operations, during the first quarter of fiscal 2001, as compared to the previous fiscal year's period. As noted above, the Company experienced a significant increase in revenues related to a large domestic retailer. The total revenues related to this one customer were $9.3 million for the first quarter of fiscal 2001 as compared to $5.3 million for the comparable period in the prior year. Revenues from this one customer represented 10.9% of consolidated total revenues for the quarter ended June 30, 2000. Revenues related to this same customer were less than 10% of total consolidated revenues for the first quarter of fiscal 2000. The Company's reserve for sales returns and allowances remained constant at a balance of $5.3 million at June 30, 2000 as compared to March 31, 2000. During the first quarter of fiscal 2001, the Company issued credits for sales returns and allowances of $4.9 million. The amount of credits issued directly impacted consolidated revenues since there was no change in the reserve for sales returns and allowances. During the first quarter of fiscal 2000 the Company issued $5.8 million of credits for sales returns and allowances. Additionally, the reserve for sales returns and allowances decreased by $3.2 million for that same period due to decreased exposure for future return of product. Therefore, that quarter's revenues were negatively impacted by the net of credits issued and by a decrease to the reserve for sales returns and allowances of $2.6 million. At June 30, 2000, the Company had $3.7 million of accounts receivable outstanding from VADs and a reserve of $1.9 million against those accounts. This compares with $4.2 million of accounts receivable outstanding at March 31, 2000 and a reserve of $2.4 million related to VAD accounts receivable. Net revenues in the VAD sales channel were $4.9 million for the first quarter of fiscal 2001 as compared with $.6 million for the comparable period in the prior fiscal period. The primary reason for the increase in revenues in the VAD channel was the decrease in the amount of credits issued of $3.5 million for the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000. The moving twelve-month average credit experience rate in the VAD channel decreased to 21.4% for the first quarter of fiscal 2001 as compared to 35.0% for the same period last fiscal year. 23 24 Cost of Revenues (In thousands)
Three months ended June 30, (Decrease) ----------------- ----------------------- 2000 1999 Dollar Percentage ------- ------- -------- ---------- Product $46,961 $50,867 $(3,906) (7.7)% Customer service 11,932 12,211 (279) (2.3)% ------- ------- -------- Total cost of revenues $58,893 $63,078 $(4,185) (6.6)% ======= ======= ======== Cost of product revenues as percentage of product revenues, net 71.7% 74.9% Cost of customer service revenues as a percentage of customer service 59.5% 61.3% revenues, net
The decrease in consolidated cost of product revenues as a percentage of consolidated net product revenues of 3.2% was the result several offsetting factors. Factors decreasing the cost percentage were as follows. Underabsorbed manufacturing costs in the current fiscal quarter decreased $.9 million as compared to the same period last fiscal year. This decreased the cost percentage by approximately 1.4%. The Company also decreased its provisions for royalties by $.8 million due to an adjustment to accrued royalties for excess amounts previously accrued. The adjustment was made based upon a settlement of contended items reached in the current fiscal quarter. Also reducing royalty costs was the elimination of $.3 million of fixed royalties due Aironet due to the merger with Cisco during the fourth quarter of fiscal 2000. The combination of these two items related to royalty costs decreased the cost percentage by 1.7%. Also contributing to the decrease was a reduction of $.9 million in the fees accrued for distribution services provided by the Company's VADs in the first quarter of fiscal 2001 as compared to the same period last year. This was as a result of decreased management emphasis on the indirect sales channel during the prior fiscal year and current quarter. This decrease in VAD distribution fees reduced the cost percentage by approximately 1.3%. Other items decreased the costs by $.7 million, including lower amounts of software amortization due to lower capitalization rates in recent fiscal periods, which reduced the cost percentage by approximately 1.0%. Offsetting the decreases in the cost percentage discussed above was the impact of a sales transaction shipped to a large domestic retail customer that was recorded at a zero gross margin. The product revenues related to this transaction were approximately $5.0 million during the quarter ended June 30, 2000. The product shipments during the current quarter were part of a loss contract entered into during the last quarter of fiscal 2000. The entire loss was recorded, when it was probable and estimable, in accordance with the requirements of Accounting Research Bulletin No. 45, in the last quarter of fiscal 2000. Since the entire loss has previously been recognized, no gross margin was recognized on any shipments under this contract during the current quarter. The lost normalized gross margin dollars of $1.5 million at a 29.0% normalized gross margin would have increased the cost percentage by 2.2%. 24 25 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. At June 30, 2000, the inventory allowance accounts totaled $34.5 million and were composed of manufacturing purchased components of $24.2 million, customer service spare parts and used equipment of $8.5 million and international finished goods inventories of $1.8 million. These amounts compare to March 31, 2000 inventory allowance accounts that totaled $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. Inventory allowance provisions for the quarter were composed of manufacturing purchased components of $1.5 million, customer service spare parts and used equipment of $.4 million and international finished goods inventories of $.2 million. Inventory allowance accounts were reduced by $7.8 million for a reduction in the gross inventory value of trade-in product held in inventory charged against the related valuation allowance. Since both the gross inventory amount and the decrease to the reserve was the same amount there was no impact on net inventories. Management disposes of excess and obsolete inventory as necessary and as manpower permits, although there are no formal plans to do so. During the first quarter of fiscal 2001, the Company physically disposed of $.3 million of excess and obsolete material inventories in the Company's international operations. This disposal also contributed to the reduction in the inventory allowance account discussed above. There were no recoveries related to the disposal of this material. In addition to the inventory allowance accounts, the Company has recorded accrued liabilities totaling $2.0 million for a loss on an inventory purchase commitment to a vendor. At June 30, 2000, the Company had approximately $5.7 million of finished goods inventory held at distributors and customers and approximately $3.0 million of manufacturing components at contract manufacturers. 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 components at contract manufacturers. The $.5 million decrease in the amount of finished goods held at distributors and customers is the result of revenue recognized upon installation and customer acceptance of the Company's product. The decrease in the amount of inventory at contract manufacturers was due to the relatively large amount of shipments from those manufacturers during the current quarter. The Company accrues fees due to its VADs for the distribution services and technical support provided to end users as well as cooperative advertising costs. These fees are generally based upon the sales value of the goods to the end user. The Company did not incur any of these fees during the first quarter of fiscal 2001 as compared to $.9 million in the first quarter of fiscal 2000. The decrease in the customer service cost of revenues as a percentage of customer service revenues during the first quarter of fiscal 2001 from 25 26 comparable fiscal 2000 levels was due primarily to decreased costs in the North American operations. Although North American revenues increased 2.7%, cost of revenues actually decreased 1.5% due primarily to decreased labor and freight costs due in part to the lower costs associated with the Company's operations in Ciudad Juarez, Mexico. Operating Expenses (In thousands)
Three Months Ended June 30, Increase (Decrease) ------------------- ------------------------- 2000 1999 Dollar Percentage ------- -------- ------- ---------- Selling expenses $18,760 $18,606 $ 154 .1 % Product development and engineering expenses 6,261 7,150 (889) (12.4)% General and administrative expenses 16,002 11,243 4,759 42.4 % ------- -------- ------- Total operating expenses $41,023 $36,999 $4,024 10.9 % ======= ======== =======
Consolidated selling expenses, as a percentage of total consolidated revenues remained relatively flat at 21.9% compared to 21.2% for the same period last year. During the first quarter of fiscal 2001, the Company experienced an increase in expense related to sales demonstration equipment sent to customers of $.6 million coinciding with introduction of new products, and an increase in recruitment and relocation costs of $.2 million. These increases were offset by a decrease in expenses related to international sales administration and management of $.7 million. This decrease was the result of the absence of salaries and wage expense in the Company's Belgium subsidiary. The related personnel were terminated in fiscal 2000. Commission expenses recorded during the first quarter of fiscal 2001 of $1.4 million remained consistent with commission expenses recorded during the same period last year. The provisions for past due accounts related to a foreign distributor aggregated $1.1 million for the first quarter of fiscal 2001. This compares with no provision for the comparable period in the prior fiscal year for this foreign distributor. The Company's allowance for doubtful accounts increased from a balance of $7.1 million at March 31, 2000 to a balance of $8.3 million at June 30, 2000. The Company provided for $1.2 million of bad debts and bad debt write-offs totaled $.1 million during the first quarter of fiscal 2000. This consolidated provision remained consistent with the first quarter of last year, however, provisions for specific domestic past due accounts decreased by approximately $.9 million. The Company incurred severance charges of $.2 million during the first quarter of fiscal 2001 related it its' marketing and sales departments. This amount was more than offset by $.3 million in severance payments paid recently terminated sales and marketing personnel. Consolidated product development and engineering expenses as a percentage of total revenues decreased to 7.3% in the first quarter of fiscal 2001 from 8.1% in the first quarter of fiscal 2000. The decrease in consolidated product development and engineering expenses for the first 26 27 quarter of fiscal 2001 resulted primarily from the decreased use of outside design services while developing the Company's products of $1.4 million compared the same period last year. Additionally, engineering overhead costs, primarily composed of depreciation of engineering equipment, decreased $.2 million from the levels experienced in the comparable period of fiscal 2000. However, this decrease was partially offset by an increase in expense related to the amortization of goodwill related to the repurchase of Metanetics shares in the fourth quarter of fiscal 2000 of $1.3 million. Also contributing to the decline in expense were reductions aggregating $.4 million related to decreases in the cost of operating parts and supplies utilized in the development process and engineering scrap. This decrease was primarily due to management focus during later periods of fiscal 2000 and the first quarter of fiscal 2001 on engineering processes and engineering project completion. Engineering and development efforts also decreased at the Company's Metanetics subsidiary by $.1 million from comparable fiscal 2000 levels. During the first quarter of fiscal 2000, the Company capitalized internal software development costs in accordance with the requirements of Statement of Financial Accounting Standard No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" aggregating $.7 million offset by amortization of $1.1 million on previously unamortized software. The Company also incurred severance charges of $.2 million during the first quarter of fiscal 2000 related to its product development and engineering operations. Consolidated general and administrative expenses as a percentage of total revenues were 18.7% and 12.8% for the first quarters of fiscal 2001 and 2000, respectively. Compared to the same period last year consolidated general and administrative expenses increased primarily due to increased labor expenses of $3.6 million. This increase related primarily to additional costs incurred for the transition of the Company's corporate headquarters to Cincinnati, Ohio and to the transition of its administrative operations to Houston, Texas. These costs included provisions of $.9 million related to stay on bonuses and $1.8 million in contract labor related to the aforementioned transition of the Company's data center to Houston, Texas. Also increasing general and administrative expenses were duplicate expenses for rent of $.3 million and telephone of $.4 million related to the Company's facilities in Akron, Ohio. Additionally, the Company incurred increased recruiting and relocation expenses of $.3 million due to the move of its operations as described above. The Company also incurred increased accounting and audit expenses of $.4 million and $.8 million of increased depreciation. The increased depreciation was primarily related to the amortization of its corporate information system, which was not amortized for the full period during fiscal 2000 since all of the related modules were not placed in service until the second quarter of fiscal 2000. Offsetting these increases were reduced contract labor expenses of approximately $1.3 million related to the final implementation phases (including training and data conversion costs) of the Company's corporate information systems during fiscal 2000. The Company's domestic accrual for severance costs, including stay on bonuses, decreased from a balance of $3.4 million at March 31, 2000 to a balance of $3.3 million at June 30, 2000. Severance charges incurred in the first quarter of fiscal 2001 aggregated $1.2 million, which were offset by payments to previously terminated employees of $1.3 million. A total of 9 employees were severed during the first quarter of fiscal 2001 27 28 compared to 29 employees during the first quarter of fiscal 2000. The areas of the Company affected for both quarters were domestic sales operations, domestic product development, manufacturing operations and corporate administration. Interest Income/(Expense) (In thousands)
Three Months Ended June 30, Increase (Decrease) ------------------------- ---------------------------- 2000 1999 Dollar Percentage ------- ------- ------- ---------- Interest income $ 431 $ 255 $ 176 69.1 % Interest expense (1,669) (3,242) (1,573) (48.6)% ------- ------- ------- Net interest expense $(1,238) $(2,987) $(1,749) (58.6)% ======= ======= =======
Net interest expense decreased during the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000, due to the extinguishment in the fourth quarter of fiscal 2000 of the Company's credit facilities. Although the Company has established new lines of credit with its creditors these credit facilities were not utilized during the first quarter of fiscal 2000. Amounts outstanding under the Company's credit facilities were $64.0 million as of June 30, 1999 and the Company incurred a weighted-average rate of 9.87% on this amount. The Company's interest expense for the first quarter of fiscal 2001 consists primarily of interest on the $106.9 million of convertible subordinated debentures recorded on the accompanying consolidated balance sheets. 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 is composed of preferred shares in the development-stage technology company that purchased the Company's Virtual Vision subsidiary. During the first quarter of fiscal 2000, the Company sold an investment in marketable securities for cash proceeds of $1.5 million. As this investment was previously non-marketable, its carrying value was based upon the cost basis and was $.7 million. The Company therefore recorded a pre-tax gain of $.8 million. Income Taxes (In thousands)
Three months ended June 30, Decrease ------------------------ -------------------------- 2000 1999 Dollar Percentage ---------- ---------- --------- ------------- (Restated) Provision for income taxes $ (5,250) $ 1,278 $ 6,528 510.8%
A tax benefit of $5,250 has been recognized for the first quarter of fiscal 2001. The rate used to calculate this benefit was calculated as a combined federal and state statutory tax rate adjusted for tax provisions paid on international subsidiary income. In contrast to the first quarter of fiscal 2000 the Company's current assessment is that it is more likely than not 28 29 that these deferred tax assets will be benefited through future taxable income or through the implementation of tax planning strategies. The Company's consolidated tax provision of $1.3 million charged on a pre-tax loss of $15.4 million, during the first quarter of fiscal 2000, related entirely to taxes charged its foreign subsidiaries for the first quarter of fiscal 2000. No tax benefit was recognized regarding the first quarter fiscal 2000 U.S. operating loss based on the Company's then current assessment that it was more likely than not that a deferred tax assets would not be benefited through future taxable income or implementation of tax planning strategies.
Liquidity (In thousands) Working Capital June 30, March 31, (Decrease) 2000 2000 Increase -------- -------- --------- Cash and cash equivalents $ 5,620 $ 34,197 $(28,577) Accounts and notes receivable 82,368 75,376 6,992 Inventories 91,820 81,923 9,897 Other 30,182 29,615 567 -------- -------- -------- Total current assets $209,990 $221,111 $(11,121) ======== ======== ======== Accounts payable $ 36,643 $ 30,116 $ (6,527) Income taxes payable 4,498 11,039 6,541 Accrued liabilities 52,034 53,771 1,737 Other 251 236 (15) -------- -------- -------- Total current liabilities $ 93,426 $ 95,162 $ 1,736 ======== ======== ======== Working capital (current assets less current liabilities) $116,564 $125,949 $ (9,385) ======== ======== ======== Current ratio (current assets divided by current liabilities) 2.2 to 1 2.3 to 1
The decrease in the Company's consolidated working capital at June 30, 2000, from March 31, 2000, was due primarily to decreases in cash and cash equivalents and an increase in accounts payable offset by increases in accounts receivable and inventories and a decrease in income taxes payable. As discussed below the Company used cash flows of $22.2 million to support operating activities during the quarter. An additional $2.5 million of cash was utilized to support investing activities and $3.2 million was utilized to support financing activities. Since the Company did not utilize its lines of credit the Company's cash balances were its sole source of funding for the quarter. The increase in accounts payable was the result of purchases of manufacturing purchased components late in the quarter as well as the management of cash payments to vendors in order to minimize the needs for the borrowing of any funds to finance current operations. The increase in the accounts receivable balance reflects a decline in cash collections within the Company's domestic and international operations for the quarter ending June 30, 2000. The Company feels a portion of the increase relates to the impact of transitioning collection efforts from its Akron location to its Houston operations. Accordingly, consolidated days sales outstanding increased from 76 days at March 31, 2000 to 81 days at June 30, 2000. 29 30 The increase in the Company's inventories was primarily the result of an increase in the level of purchased manufacturing components (to meet increased expected demand, which did not materialize during the first quarter of fiscal 2001) related to newly introduced products and the increased level of safety stock maintained by the Company. A significant portion of the safety stock purchased was composed of Aironet radios. The Company purchased the present models offered by Aironet based upon uncertainties surrounding the future supply of these radios. The inventory value of purchased manufacturing components increased $6.9 million in anticipation of increased sales during the first quarter of fiscal 2001 compared to the fourth quarter of fiscal 2000. Additionally, customer service spare parts and international finished goods inventory also increased $2.3 and $2.0 million, respectively, compared to the fourth quarter of fiscal 2000. Customer service spare parts inventory increased primarily due to inventory stock purchased to service newer PTC models. These increases in inventory levels were offset by decreases of $.8 and $.3 million of inventory held by distributors and staged to rollout to customers pending the satisfaction of the Company's revenue recognition criteria. Consolidated inventory turns decreased to approximately 2.3 at June 30, 2000, from approximately 3.4 at March 31, 2000. This decrease in inventory turns was primarily caused by the absence of inventory and other cost of revenue charges that occurred during the fourth quarter of fiscal 2000. Accrued liabilities decreased primarily due to the decrease in deferred customer service revenues of $1.2 million as revenue recognition criteria were ratably met during the first quarter of fiscal 2001 on customer service revenue previously deferred. Additionally, accrued payroll and other compensation of $1.1 million decreased as of June 30, 2000 do to the timing of these payments. These decreases were offset by a $1.6 million increase in accrued liabilities related to an increase in payments due a major customer for returned goods of the Company. Income taxes payable also decreased by $6.5 million primarily due to a tax benefit of $5.3 million that was recognized during the first quarter of fiscal 2001. Also contributing the decrease was a $1.3 million in tax payment related to revenue earned in a prior period.
Cash Flows from Operating Activities (In thousands) Three months Increase Ended June 30, (Decrease) -------------------- in Cash 2000 1999 Flow Impact -------- -------- ----------- (Restated) Net loss $(10,191) $(16,701) $ 6,510 Depreciation and amortization 6,851 5,831 1,020 Amortization of restricted stock awards, net 46 18 28 Provision for doubtful accounts 1,157 1,070 87 Provision for inventory obsolescence 2,131 1,635 496 Loss on disposal of assets 189 108 81 Gain on sale of non-marketable investment -- (761) 761 Equity loss in affiliate -- 184 (184) Loss on carrying value of non-marketable -- 1,283 (1,283) Investment Changes in operating assets and liabilities: Accounts and notes receivable (8,157) 3,816 (11,973)
30 31
Inventories (11,963) 6,033 (17,996) Prepaid expenses and other current assets (567) (11) (556) Intangibles and other assets 385 (1,725) 2,110 Accounts payable and accrued liabilities 4,666 11,619 (6,953) Income taxes payable (6,541) 2,839 (9,380) Other long-term liabilities (176) (226) 50 -------- -------- -------- Net cash (used in) provided by operating Activities $(22,170) $ 15,012 $(37,182) ======== ======== ========
The decrease in cash flows from the Company's consolidated operating activities for the first quarter of fiscal 2001 from comparable fiscal 2000 levels was primarily due to the increased cash flow impact of accounts receivable, inventories, accounts payable, accrued liabilities and income taxes payable. These negative cash flow impacts were partially offset by the decrease in the net loss incurred during the first quarter of fiscal 2001 as compared to the same quarter last year.
Cash Flows from Investing Activities (In thousands) Three months Increase ended June 30, (Decrease) -------------------- in Cash 2000 1999 Flow Impact --------- -------- ----------- Additions to property and equipment $ (1,786) (7,255) 5,469 Software improvements (705) (1,005) 300 Proceeds from non-marketable investments -- 1,523 (1,523) Impact of Aironet deconsolidation -- (3,986) 3,986 -------- -------- -------- Net cash used in investing activities $ (2,491) $(10,723) $ 8,232 ======== ======== ========
The decrease in cash flows used in investing activities was primarily due to a decrease in the fixed asset additions for the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000. The decrease in fixed asset additions is primarily attributable to the absence of capitalized project costs related to the Company's corporate-wide information systems project. Aggregated costs capitalized during the first quarter of fiscal 2000 were $5.2 million. Also causing this decrease was the absence of the impact of deconsolidating the results of Aironet, which occurred during fiscal 2000. The absence of similar proceeds from the sale of non-marketable investments as occurred during the first quarter of fiscal 2000 also affected the net decrease in cash flows used in investing activities.
Cash Flows from Financing Activities (In thousands) Three months Increase ended June 30, (Decrease) ------------------- in Cash 2000 1999 Flow Impact -------- -------- ----------- Notes payable, net $ -- $(5,080) $ 5,080 Principal payments on capital leases (46) (223) 177 Note related to purchase of stock (3,141) -- (3,141) ------- ------- ------- Net cash (used for) in financing Activities $(3,187) $(5,303) $ 2,116 ======= ======= =======
For the first quarter of fiscal 2001 cash flows used for financing activities primarily consisted of a $3.1 million note to the Chief Executive Officer, John W. Paxton, the proceeds of which were utilized to purchase stock in the Company pursuant to his employment contract with the Company. The note calls for the repayment of the amount due upon registration of the shares purchased. The decrease in cash flows used for financing activities also resulted from 31 32 decreased borrowings during the first quarter of fiscal 2001. During the fourth quarter of fiscal 2000 the Company extinguished its remaining notes payable. Subsequent to this extinguishment cash flows from operating activities have been utilized to fund the Company's operations as described above. Subsequent Events On July 25, 2000, Symbol Technologies ("Symbol") announced its intention to acquire the Company for shares of Symbol common stock after receiving approval from Symbol's and the Company's Boards of Directors. According to the terms of the definitive merger agreement, Company shareholders will receive .50 shares of Symbol stock for each share of the Company's common stock. The transaction has a total equity value of approximately $465.0 million based upon the closing price of Symbol stock on July 25, 2000 of $49.88 a share. The transaction is expected to be accounted for under the purchase accounting method, and is expected to consummate prior to December 31, 2000. The proposed transaction is pending regulatory and shareholder approval. 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. 32 33 ITEM 3. 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 9 - Marketable Securities and Derivatives, 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-Q, unless otherwise noted, gives effect to the two for one forward split of Cisco's common stock which became effective March 22, 2000). A portion of these shares was sold to satisfy working capital and debt obligations, during fiscal 2000. At June 30, 2000 the Company maintained 4,166,086 shares of Cisco. The market value of the Company's holdings of Cisco at June 30, 2000 was valued at $264.8 million. In relation to the Company's consolidated 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 9 - Marketable Securities and Derivatives, the Company has chosen to mitigate a portion of this risk by purchasing derivative collar contracts, which help to ensure that the Company's potential gain or loss is within reasonable levels. These contracts will expire on March 26, 2001. Although the counter-party to the derivative collar contract is a major financial institution the Company is exposed to market risk loss in the event of nonperformance by this 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. At June 30, 2000, the Company had several forward foreign currency exchange contracts to purchase various foreign currencies aggregating $15.4 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 33 34 debentures. At June 30, 2000, the Company had $106.9 million of convertible subordinated debentures outstanding. 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 June 30, 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. 34 35 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See Note 11 to the consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of the material pending legal proceedings to which the Company is a party, which footnote discussion is incorporated in this Part II by this reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K: 2. Agreement and Plan of Merger, dated as of July 25, 2000, among Symbol Technologies, Inc., TX Acquisition Corporation and Registrant, filed herewith. 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 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. 4.2.1 Form of Rights Certificate (included as Exhibit A to the Rights Agreement included as Exhibit 4.2 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 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. 4.2.2 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 35 36 Agreement included as Exhibit 4.2 above, incorporated herein by reference to Exhibit 4.3.2 to Registrant's Form 10-K for the year ended March 31, 1997. 4.2.3 Amendment to the Rights Agreement included as exhibit 4.2 above, between Registrant and Computershare Investor Services, LLC, incorporated herein by reference to registrant's 8-K dated July 25, 2000. 4.3 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. 4.3.1 Form of Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012 (set forth in the Indenture included as Exhibit 4.3 above). 4.4 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. 4.4.1 Form of Registrant's 5-3/4% Convertible Subordinated Notes due 2003 issued under the Indenture included as Exhibit 4.4 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. 4.4.2 Registration Rights Agreement by and among Registrant and Hambrecht & Quist LLC and Prudential Securities Incorporated, as the Initial Purchasers of Registrant's 5-3/4% Convertible Subordinated Notes due 2003, with respect to the registration of said Notes under applicable securities laws, incorporated herein by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996. 10.1 Compensation and Benefits Plans of Registrant. 10.1.1 Amended and Restated Retirement and Uniform Matching Profit-Sharing Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.1 to Registrant's Form 10-K for the year ended March 31, 1999. 10.1.2 1990 Stock Option Plan for employees of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.2 to Registrant's 36 37 Form 10-Q for the quarter ended September 30, 1997. 10.1.3 1990 Stock Option Plan for Non-Employee Directors of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.3 to Registrant's Form 10-Q for the quarter ended September 30, 1998. 10.1.4 Non-Qualified Stock Option Agreement between Registrant and Raj Reddy, dated as of October 17, 1988, incorporated herein by reference to Exhibit 10.1.4 to Registrant's Form 10-Q for the year ended March 31, 1999. 10.1.4.a Description of amendments extending the term of the Agreement included as Exhibit 10.1.4 above, incorporated herein by reference to Exhibit 10.1.4.a to Registrant's Form 10-Q for the quarter ended September 30, 1998. 10.1.5 1992 Restricted Stock Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.5 to Registrant's Form 10-Q for the quarter ended December 31, 1998. 10.1.6 1995 Employee Stock Purchase Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-Q for the quarter ended September 30, 1995. 10.1.7 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., a subsidiary of Registrant, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-K for the year ended March 31, 1997. 10.1.7.a Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.a to Registrant's Form 10-K for the year ended March 31, 1998. 10.1.7.b First Amendment to Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.b to Registrant's Form 10-K for the year ended March 31, 1999. 10.1.8 1999 Stock Option Plan for Non-Employee Directors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-K for the year ended March 31, 1999. 37 38 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 Registrants 10-Q for the quarter ended December 31, 1999. 10.1.13.a Letter agreement continuing Mr. Biggs' employment with the Registrant, dated June 15, 2000 incorporated by reference to Exhibit 10.13.1.a to Registrant's Form 10-K for the year ended March 31, 2000. 10.1.14 Amended and Restated Employment Agreement 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 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. 38 39 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. 10.1.23 Employment Agreement between Registrant and William J. Murphy, effective as of February 1, 2000, incorporated herein by reference to Exhibit 10.1.23 to Registrant's Form 10-K for the year ended March 31, 2000. 10.2 Material Leases of Registrant. 10.2.1 Lease between Registrant and 3330 W. Market Properties, dated as of December 30, 1986, for premises at 3330 West Market Street, Akron, Ohio, incorporated herein by reference to Exhibit 10.2.1 to Registrant's Form 10-K for the year ended March 31, 1999. 10.2.2 Lease Agreement between The Woodlands Commercial Properties Company, L.P. and Registrant, made and entered into as of January 16, 1998, including Rider No. 1 thereto, for 39 40 premises at 8302 New Trails Drive, The Woodlands, Texas, incorporated herein by reference to Exhibit 10.2.2 to Registrant's Form 10-K for the year ended March 31, 1998. 10.2.3 Standard Office Lease (Modified Net Lease) between Registrant and John D. Dellagnese III, dated as of July 19, 1995, for premises at 3875 Embassy Parkway, Bath, Ohio, including an Addendum thereto, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1996. 10.2.3.a Second Addendum, dated as of October 5, 1995, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.a to Registrant's Form 10-K for the year ended March 31, 1996. 10.2.3.b Third Addendum, dated as of March 1, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.b to Registrant's Form 10-K for the year ended March 31, 1996. 10.2.3.c Fourth Addendum, dated as of April 16, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.c to Registrant's Form 10-Q for the quarter ended June 30, 1997. 10.2.3.d Fifth Addendum, dated as of June 24, 1997, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.d to Registrant's Form 10-Q for the quarter ended June 30, 1997. 10.2.3.e Sixth Addendum, dated as of March, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.e to Registrant's Form 10-Q for the quarter ended September 30, 1998. 10.2.3.f Seventh Addendum, dated as of July 20, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.f to Registrant's Form 10-Q for the quarter ended September 30, 1998. 10.2.3.g Eighth Addendum, dated as of September 8, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to 40 41 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, for premises in Ciudad Juarez, Chihuahua, Mexico, made and entered into as of April 10, 1997, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1998. 10.2.5 Lease between Milford Partners, LLC and Registrant, made as of March 17, 2000 for premises in Ridgewood Corporate Center, 1000 Summit Drive, Milford, Ohio incorporated herein by reference to Exhibit 10.2.5 to Registrant's Form 10-K for the year ended March 31, 2000. 10.2.6 Lease Agreement between the 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, incorporated herein by reference to Exhibit 10.2.6 to Registrant's Form 10-K for the year ended March 31, 2000. 10.3 Credit Agreements of Registrant. 10.3.1 Credit Agreement by and among Registrant, the lenders party thereto from time to time and The Bank of New York, as letter of credit issuer, swing line lender and agent for the lenders, dated as of March 8, 1996, incorporated herein by reference to Exhibit 10.3.2 to Registrant's Form 10-K for the year ended March 31, 1996. 10.3.1.a Amendment No. 1, dated as of August 6, 1996, to the Agreement included 41 42 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, incorporated herein by reference to Exhibit 10.3.1.b to Registrant's Form 8-K dated April 1, 1999. 10.3.1.h Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of The Bank 42 43 of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.h to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.1.i Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1 to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.1.j Pledge Agreement, dated as of March 26, 1999, by Registrant to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.j to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.1.k Third Waiver Extension Agreement and Amendment No. 5, dated as of June 29, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated July 1, 1999. 10.3.2 Business Purpose Revolving Promissory Note (Swing Line) made by Registrant in favor of Bank One, NA, dated August 4, 1998, incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-Q for the quarter ended June 30, 1998. 10.3.2.a Consent, dated as of December 29, 1998, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998. 10.3.2.b Further Consent, dated as of February 12, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998. 43 44 10.3.2.c Second Further Consent and Agreement, dated as of March 26, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.c b to Registrant's Form 8-K dated April 1, 1999. 10.3.2.d Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.d to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.2.e Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.e to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.2.f Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.f to Registrant's Form 10-K for the year ended March 31, 1999. 10.3.2.g Third Further Consent and Note Modification Agreement, dated as of June 29, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.g b to Registrant's Form 8-K dated July 1, 1999. 10.3.3 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 the Registrant's consolidated financial statement 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 44 45 Capital Corporation, as agent for the Lenders from time to time party to the Loan and Security Agreement included in Exhibit 10.3.3 above, pledging among other assets, the stock owned by the Registrant in Aironet Wireless Communications, Inc. and Registrant subsidiaries to Agent as collateral to secure Registrant's obligations under the Loan and Security 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 form time to time party to the Loan and Security Agreement included in Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of the Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in the Registrant's Consolidated Financial Statements including such month), incorporated 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 Statement 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. 45 46 10.3.3.d First Amendment, dated as of November 18, 1999, to the Loan and Security Agreement included as Exhibit 10.3.3 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 System Services Inc., a wholly owned subsidiary of the 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, incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-K for the year ended March 31, 2000. 10.3.5 Promissory Note, dated June 16, 2000, by Registrant with respect to uncommitted swing line for working capital financing available from Firth Third Bank, Northwestern Ohio, incorporated herein by reference to Exhibit 10.3.5 to Registrant's Form 10-K for the year ended March 31, 2000. 10.4 Confirmations of Share Option Transactions of Telxon System Services, Inc., a wholly owned subsidiary of Registrant, with Deutsche Bank AG, London Branch with respect to substantially all of the stock which Telxon System Services continues to hold in Cisco Systems, Inc. dated as of March 23, 2000, incorporated herein by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended March 31, 2000. 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 and Cisco), incorporated herein by reference to Exhibit 10.5.2 to Registrant's Form 10-Q for the quarter ended September 30, 1999. 46 47 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 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. 10.8.1 Escrow Agreement by and among FED Corporation, Registrant and First Union National Bank, with respect to the transactions under the Stock Purchase Agreement included as Exhibit 10.7 above, incorporated herein by reference to Exhibit 10.7.1 to Registrant's Form 10-K for the year ended March 31, 1998. 10.9 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 10.11 below), incorporated herein by reference to Exhibit 10.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999. 10.10 Stock Purchase Agreement, dated as of February 17, 2000, by and between Registrant and named minority stockholders of Registrant's Metanetics Corporation subsidiary, incorporated herein by reference to Exhibit 10.10 to Registrant's Form 10-K for the year ended March 31, 2000. 10.11 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, incorporated herein by reference to Exhibit 10.11 to Registrant's Form 10-K for the year ended March 31, 2000. 10.11.1 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 10.11 above, incorporated herein by reference to Exhibit 10.11.1 to Registrant's Form 10-K for the year ended March 31, 2000. 10.12 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 Communication, 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 47 48 in turn, by and of Telxon System Services, Inc., a wholly owned subsidiary of The Retail Technology Group, incorporated herein by reference to Exhibit 10.12 to Registrant's Form 10-K for the year ended March 31, 2000. 10.13 DFS Vendor Agreement between Registrant and Deutsche Financial Services Corporation, dated as of September 30, 1998, incorporated herein by reference to Exhibit 10.15 to Registrant's Form 10-Q for the quarter ended December 31, 1998. 27. Financial Data Schedule as of June 30, 2000 filed herewith. (b) Reports on Form 8-K During the first quarter of fiscal 2001 to which this Form 10-Q relates, the Registrant filed a Current Report on Form 8-K dated June 30, 2000, which attached the Registrant's press release of that date. This press release announced its restatement of earnings for fiscal years 1999 and 1998, which resulted from an agreement made during the fourth quarter of fiscal 1998 with a value-added distributor on terms making recognition of revenue more appropriate on a sell through basis. The press release also announced the Company's delay in filing its Form 10-K for the year ended March 31, 2000. This delay permitted the Company, and its current and former independent accountants, to examine and incorporate into the financial statements, which were to be included in Form 10-K, the effects of the restatement and the then recent comments received from the Securities and Exchange Commission's Division of Corporate Finance regarding the Registrant's previous filings. Subsequent to the end of the first quarter of fiscal 2001, the Company filed a Current Report on Form 8-K dated July 27, 2000, attaching the Registrant's press release dated July 26, 2000 which announced that on July 25, 2000 the Company entered into a Definitive Agreement and Plan of Merger (the "Merger Agreement") pursuant to which Symbol Technologies Inc. agreed to acquire Telxon. 48 49 TELXON CORPORATION SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this Form 10-Q to be signed and on its behalf by the undersigned thereunto duly authorized. Date: August 11, 2000 TELXON CORPORATION (Registrant) /s/ Woody M. McGee ------------------------- Woody M. McGee, Vice President and Chief Financial Officer 50 TELXON CORPORATION EXHIBITS TO FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2000 51 INDEX TO EXHIBITS Where Filed ** 2. Agreement and Plan of Merger, dated as of July 25, 2000, among Symbol Technologies, Inc., TX Acquisition Corporation and Registrant, filed herewith. * 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 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. * 4.2.1 Form of Rights Certificate (included as Exhibit A to the Rights Agreement included as Exhibit 4.2 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 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. * 4.2.2 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 4.2 above, incorporated herein by reference to Exhibit 4.3.2 to Registrant's Form 10-K for the year ended March 31, 1997. 52 * 4.2.3 Amendment to the Rights Agreement included as exhibit 4.2 above, between Registrant and Computershare Investor Services, LLC, incorporated herein by reference to registrant's 8-K dated July 25, 2000. * 4.3 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. * 4.3.1 Form of Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012 (set forth in the Indenture included as Exhibit 4.3 above). * 4.4 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. * 4.4.1 Form of Registrant's 5-3/4% Convertible Subordinated Notes due 2003 issued under the Indenture included as Exhibit 4.4 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. * 4.4.2 Registration Rights Agreement by and among Registrant and Hambrecht & Quist LLC and Prudential Securities Incorporated, as the Initial Purchasers of Registrant's 5-3/4% Convertible Subordinated Notes due 2003, with respect to the registration of said Notes under applicable securities laws, incorporated herein by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996. * 10.1 Compensation and Benefits Plans of Registrant. * 10.1.1 Amended and Restated Retirement and Uniform Matching Profit-Sharing Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.1 to Registrant's Form 10-K for the year ended March 31, 1999. * 10.1.2 1990 Stock Option Plan for employees of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.2 to Registrant's Form 10-Q for the quarter ended September 30, 1997. * 10.1.3 1990 Stock Option Plan for Non-Employee Directors of Registrant, as amended, 53 incorporated herein by reference to Exhibit 10.1.3 to Registrant's Form 10-Q for the quarter ended September 30, 1998. * 10.1.4 Non-Qualified Stock Option Agreement between Registrant and Raj Reddy, dated as of October 17, 1988, incorporated herein by reference to Exhibit 10.1.4 to Registrant's Form 10-Q for the year ended March 31, 1999. * 10.1.4.a Description of amendments extending the term of the Agreement included as Exhibit 10.1.4 above, incorporated herein by reference to Exhibit 10.1.4.a to Registrant's Form 10-Q for the quarter ended September 30, 1998. * 10.1.5 1992 Restricted Stock Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.5 to Registrant's Form 10-Q for the quarter ended December 31, 1998. * 10.1.6 1995 Employee Stock Purchase Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-Q for the quarter ended September 30, 1995. * 10.1.7 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., a subsidiary of Registrant, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-K for the year ended March 31, 1997. * 10.1.7.a Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.a to Registrant's Form 10-K for the year ended March 31, 1998. * 10.1.7.b First Amendment to Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.b to Registrant's Form 10-K for the year ended March 31, 1999. * 10.1.8 1999 Stock Option Plan for Non-Employee Directors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-K for the year ended March 31, 1999. * 10.1.9 Non-Competition Agreement by and between Registrant and Robert F. Meyerson, effective February 27, 1997, incorporated herein by 54 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 Registrants 10-Q for the quarter ended December 31, 1999. * 10.1.13.a Letter agreement continuing Mr. Biggs' employment with the Registrant, dated June 15, 2000 incorporated by reference to Exhibit 10.13.1.a to Registrant's Form 10-K for the year ended March 31, 2000. * 10.1.14 Amended and Restated Employment Agreement 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 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 55 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. * 10.1.23 Employment Agreement between Registrant and William J. Murphy, effective as of February 1, 2000, incorporated herein by reference to Exhibit 10.1.23 to Registrant's Form 10-K for the year ended March 31, 2000. 10.2 Material Leases of Registrant. * 10.2.1 Lease between Registrant and 3330 W. Market Properties, dated as of December 30, 1986, for premises at 3330 West Market Street, Akron, Ohio, incorporated herein by reference to Exhibit 10.2.1 to Registrant's Form 10-K for the year ended March 31, 1999. * 10.2.2 Lease Agreement between The Woodlands Commercial Properties Company, L.P. and Registrant, made and entered into as of January 16, 1998, including Rider No. 1 thereto, for premises at 8302 New Trails Drive, The Woodlands, Texas, incorporated herein by reference to Exhibit 10.2.2 to Registrant's Form 10-K for the year ended March 31, 1998. 56 * 10.2.3 Standard Office Lease (Modified Net Lease) between Registrant and John D. Dellagnese III, dated as of July 19, 1995, for premises at 3875 Embassy Parkway, Bath, Ohio, including an Addendum thereto, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1996. * 10.2.3.a Second Addendum, dated as of October 5, 1995, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.a to Registrant's Form 10-K for the year ended March 31, 1996. * 10.2.3.b Third Addendum, dated as of March 1, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.b to Registrant's Form 10-K for the year ended March 31, 1996. * 10.2.3.c Fourth Addendum, dated as of April 16, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.c to Registrant's Form 10-Q for the quarter ended June 30, 1997. * 10.2.3.d Fifth Addendum, dated as of June 24, 1997, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.d to Registrant's Form 10-Q for the quarter ended June 30, 1997. * 10.2.3.e Sixth Addendum, dated as of March, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.e to Registrant's Form 10-Q for the quarter ended September 30, 1998. * 10.2.3.f Seventh Addendum, dated as of July 20, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.f to Registrant's Form 10-Q for the quarter ended September 30, 1998. * 10.2.3.g Eighth Addendum, dated as of September 8, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.g to Registrant's Form 10-Q for the quarter ended September 30, 1998. 57 * 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, for premises in Ciudad Juarez, Chihuahua, Mexico, made and entered into as of April 10, 1997, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1998. * 10.2.5 Lease between Milford Partners, LLC and Registrant, made as of March 17, 2000 for premises in Ridgewood Corporate Center, 1000 Summit Drive, Milford, Ohio incorporated herein by reference to Exhibit 10.2.5 to Registrant's Form 10-K for the year ended March 31, 2000. * 10.2.6 Lease Agreement between the 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, incorporated herein by reference to Exhibit 10.2.6 to Registrant's Form 10-K for the year ended March 31, 2000. 10.3 Credit Agreements of Registrant. * 10.3.1 Credit Agreement by and among Registrant, the lenders party thereto from time to time and The Bank of New York, as letter of credit issuer, swing line lender and agent for the lenders, dated as of March 8, 1996, incorporated herein by reference to Exhibit 10.3.2 to Registrant's Form 10-K for the year ended March 31, 1996. * 10.3.1.a Amendment No. 1, dated as of August 6, 1996, to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.2.a to Registrant's Form 8-K dated August 16, 1996. 58 * 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, incorporated herein by reference to Exhibit 10.3.1.b to Registrant's Form 8-K dated April 1, 1999. * 10.3.1.h Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of The Bank of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein 59 by reference to Exhibit 10.3.1.h to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.1.i Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1 to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.1.j Pledge Agreement, dated as of March 26, 1999, by Registrant to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.j to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.1.k Third Waiver Extension Agreement and Amendment No. 5, dated as of June 29, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated July 1, 1999. * 10.3.2 Business Purpose Revolving Promissory Note (Swing Line) made by Registrant in favor of Bank One, NA, dated August 4, 1998, incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-Q for the quarter ended June 30, 1998. * 10.3.2.a Consent, dated as of December 29, 1998, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998. * 10.3.2.b Further Consent, dated as of February 12, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998. * 10.3.2.c Second Further Consent and Agreement, dated as of March 26, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to 60 Exhibit 10.3.4.c b to Registrant's Form 8-K dated April 1, 1999. * 10.3.2.d Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.d to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.2.e Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.e to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.2.f Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to Bank One, NA with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.f to Registrant's Form 10-K for the year ended March 31, 1999. * 10.3.2.g Third Further Consent and Note Modification Agreement, dated as of June 29, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.g b to Registrant's Form 8-K dated July 1, 1999. * 10.3.3 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 the Registrant's consolidated financial statement 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 in Exhibit 10.3.3 above, pledging among other assets, the 61 \ stock owned by the Registrant in Aironet Wireless Communications, Inc. and Registrant subsidiaries to Agent as collateral to secure Registrant's obligations under the Loan and Security 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 form time to time party to the Loan and Security Agreement included in Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of the Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in the Registrant's Consolidated Financial Statements including such month), incorporated 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 Statement 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 above, incorporated herein by reference to Exhibit 62 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 System Services Inc., a wholly owned subsidiary of the 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, incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-K for the year ended March 31, 2000. * 10.3.5 Promissory Note, dated June 16, 2000, by Registrant with respect to uncommitted swing line for working capital financing available from Firth Third Bank, Northwestern Ohio, incorporated herein by reference to Exhibit 10.3.5 to Registrant's Form 10-K for the year ended March 31, 2000. * 10.4 Confirmations of Share Option Transactions of Telxon System Services, Inc., a wholly owned subsidiary of Registrant, with Deutsche Bank AG, London Branch with respect to substantially all of the stock which Telxon System Services continues to hold in Cisco Systems, Inc. dated as of March 23, 2000, incorporated herein by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended March 31, 2000. * 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 and 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 63 Exhibit 2 to Registrant's Form 8-K dated December 31, 1996. * 10.8 Stock Purchase Agreement by and among Registrant and FED Corporation, dated as of March 31, 1998, with respect to FED Corporation's purchase of all of the stock of Virtual Vision, Inc. (fka Vision Newco, Inc.), incorporated herein by reference to Exhibit 10.7 to Registrant's Form 10-K for the year ended March 31, 1998. * 10.8.1 Escrow Agreement by and among FED Corporation, Registrant and First Union National Bank, with respect to the transactions under the Stock Purchase Agreement included as Exhibit 10.7 above, incorporated herein by reference to Exhibit 10.7.1 to Registrant's Form 10-K for the year ended March 31, 1998. * 10.9 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 10.11 below), incorporated herein by reference to Exhibit 10.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999. * 10.10 Stock Purchase Agreement, dated as of February 17, 2000, by and between Registrant and named minority stockholders of Registrant's Metanetics Corporation subsidiary, incorporated herein by reference to Exhibit 10.10 to Registrant's Form 10-K for the year ended March 31, 2000. * 10.11 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, incorporated herein by reference to Exhibit 10.11 to Registrant's Form 10-K for the year ended March 31, 2000. 10.11.1 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 10.11 above, incorporated herein by reference to Exhibit 10.11.1 to Registrant's Form 10-K for the year ended March 31, 2000. * 10.12 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 Communication, 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 System Services, Inc., a wholly owned subsidiary of The Retail Technology Group, incorporated herein by reference to Exhibit 10.12 to Registrant's Form 10-K for the year ended March 31, 2000. 64 * 10.13 DFS Vendor Agreement between Registrant and Deutsche Financial Services Corporation, dated as of September 30, 1998, incorporated herein by reference to Exhibit 10.15 to Registrant's Form 10-Q for the quarter ended December 31, 1998. ** 27. Financial Data Schedule as of June 30, 2000 filed herewith. ---------------------------- * Previously filed ** Filed herewith