ITEM 1. BUSINESS (CONTINUED) -------------------
All component parts in the Company's products are purchased from outside sources. Packaging, custom-integrated circuits, keyboards and printed circuit boards are produced to the Company's specifications. A number of peripheral products, including wands, laser scanners, controllers and receivers, are purchased as completed assemblies and attached to and staged with Telxon's own products before delivery. Outside contract manufacturers produce some of the Company's products.
Telxon's International Procurement Office ("IPO"), located in Singapore, provides the Company with an opportunity to procure materials from lower cost, Far East suppliers. As the IPO staff procures more commodities, continued cost savings are expected. The Company has not to date experienced any adverse effects from its Singapore procurement operations as the result of the economic difficulties experienced in Southeast Asia, though there can be no assurance that future events, including government economic regulation, civil unrest or otherwise, will not materially adversely affect the Singapore operations and, in turn, the operations and financial results of the Company.
The Company has in the past encountered, and may in the future encounter, shortages of supplies and delays in deliveries of necessary components. While such shortages and delays could have a material adverse effect on the Company's ability to ship products, the Company has not suffered any such effects as the result of past shortages and delays. Additionally, the Company does not believe that the loss of any one supplier or subassembly manufacturer would have a material, long-term, adverse effect on its business, although set-up costs and delays could occur if the Company changed any single source supplier.
Product Maintenance Operations
The Company currently provides maintenance and repair services for Telxon customers from its 36,000 square foot National Service Center in Houston, Texas. The Company also services various third party products, including personal computers, printers and communication devices. The Company has serviced its high volume, low-end products at a newly constructed 50,000 square foot leased facility built for the Company in Ciudad Juarez, Mexico in 1997. In late June 2000, the Company determined to transfer to the Ciudad Juarez facility, during the second and third quarters of the current fiscal year, all of the National Service Center repair and maintenance operations (except for that of new products generally within the first year of their release, which will be relocated to space within the Company's Houston manufacturing building). The Company also maintains a number of customer specific service depots to provide service to users with large concentrations of Telxon products.
The Company offers a broad array of repair services and maintenance agreements ranging from time and material charges to sophisticated plans, such as the "just in time" program that offers spare Telxon equipment supplied on-site to the customer, virtually eliminating any system downtime.
PRODUCTS AND SYSTEMS
Handhelds, Workslates and Other Mobile Computing Devices
The Company has developed a broad line of handheld devices, which range from low-end batch terminals to highly integrated mobile computers incorporating advanced data capture technologies and spread spectrum radios, including a variety of pen-based and touch-screen workslate devices.
Wireless Data Communication Products, Network Systems and Software
Telxon provides wireless data communication solutions for mobile information systems through handheld or mountable devices equipped with radios to transfer information to and from other computers or peripheral devices while remaining mobile. The four types of available radios are (1) spread spectrum (both direct sequence and frequency hopping), (2) wide area, (3) micro, and (4) narrow band FM. The Company uses industry standard "open" system protocols to provide seamless connectivity across a wide range of host computer systems, including SNA and TCP/IP and other manufacturers' communication networks.
Through its prior affiliation with its former Aironet subsidiary, the Company has developed a series of spread spectrum radios, access points, repeaters, routers and bridges. Certain of these products are manufactured by Telxon under a license agreement with Aironet, while others are
ITEM 1. BUSINESS (CONTINUED) -------------------
procured directly from Aironet, which is now part of Cisco Systems, Inc. The current products use the 900 MHz or 2.4 GHz frequency bands, available utilizing either direct sequence or frequency hopping technology, at data rates ranging up to 11 Mbps. These radio products are integrated with Telxon's AirAWARE(TM) family of enterprise software for mobile information solutions and Telxon's Microcellular Architecture ("TMA") software to build wireless networks.
Telxon's Air-I/O(TM) System utilizes 900 MHz and 2.4 GHz spread spectrum radio technology for fast, robust, wireless, data communications by using spread spectrum technology and the Company's Gateway Connectivity System(TM) ("GCS") to create a wireless interface between Telxon mobile devices and customers' host computers.
The Air-I/O System creates one or more radio cells, with each cell supporting an area of coverage. TMA allows mobile devices to move from cell to cell while maintaining a wireless connection to the host computer. Implementations of the system have included an installation providing coverage for over 4 million square feet.
Third party wide area network radios are integrated with the Company's mobile computing devices for access to wireless wide area packet data networks such as ARDIS(R), RAM(R) or CDPD.
"Micro radios" are small, low-power FM radios designed and manufactured by the Company and integrated into Telxon mobile devices and peripherals to provide cable-free data communications between system components.
Telxon has provided narrow band FM radios from major manufacturers since 1984. These radios operate in the 450 MHz band and require FCC site licensing.
In June, 1998, the Company announced ShopKeeper(TM), a low cost wireless solution that will enable retail chains with small store formats to link their in-store processors, POS systems and wireless mobile computers together on the same network. ShopKeeper is based on the Company's new MiniNet(TM) 2.4 GHz radio and new, low cost Connection Manager(TM), which combine with AirAWARE to create a single cell wireless network supporting up to eight Telxon wireless mobile computers for a single site retail environment.
Peripherals
The Company integrates a variety of peripheral products into or with its regular product line, including laser bar code readers (internal and external), modular printers, chargers, cradles, modems and communication interfaces. Many of these products or components are purchased from outside vendors.
Software Operating Systems, Languages and Applications
The Company is transitioning to a new generation of modularly designed mobile computers, which embrace industry standard, open systems architectures in order to offer its customers access to a multitude of operating systems, including Windows(R) NT, Windows CE, Windows 98 and Windows 95.
The Company develops, through its PenRight! and Metanetics subsidiaries, advanced character recognition software, advanced digital image processing and 2D bar code encoding and auto discriminating decode software.
- ----------------
- - Air-I/O, AirAWARE, Gateway Connectivity System and GCS are trademarks of Telxon Corporation.
- - ARDIS is a registered trademark of IBM Corporation and Motorola Corporation.
- - RAM is a registered trademark of RAM Mobile Data, Inc.
- - ShopKeeper and MiniNet are trademarks of Telxon Corporation.
- - Windows is a registered trademark of Microsoft Corporation.
ITEM 1. BUSINESS (CONTINUED) -------------------
INTELLECTUAL PROPERTY
The Company regards certain of its hardware and software products as proprietary and relies on a combination of United States and foreign patent, copyright, trademark and trade secret laws and licenses and other contractual confidentiality provisions to protect its proprietary rights. In addition, the Company's products also utilize hardware and software technologies licensed from third parties. Given the rapidly changing nature of the industry's technology, the competence and creative ability of the Company's development, engineering, programming, marketing and service personnel may be as or more important to its competitive position as the legal protections and rights afforded by patent and other owned or licensed intellectual property rights. The Company believes that its products and trademarks do not infringe on the rights of third parties, but there can be no assurance that third parties will not assert infringement claims.
GOVERNMENT REGULATION
The Company believes that its products are in material compliance with current government regulations; however, regulatory changes may require modifications to Company products in order for the Company to continue to be able to manufacture and market these products. There can be no assurance that more stringent regulations will not be issued in the future which could have an adverse effect on the business of the Company. In addition, sales of the Company's products could be adversely affected if customers adopt more stringent safety standards.
Certain Company products intentionally transmit radio signals as part of their normal operation. These products are subject to regulatory approval by the FCC and corresponding authorities in each country in which they are marketed. Such approvals are typically valid for the life of the product unless and until the circuitry of the product is altered in material respects, in which case a new approval may be required.
BACKLOG
Backlog at any particular date is dependent on timing of receipt of orders and, therefore, is not a reliable indicator of future sales over an extended period of time.
Historically, shipments made by the Company during any particular quarter have generally represented orders received either during that quarter or shortly before the beginning of that quarter, and shipments for orders received in a fiscal quarter have generally been filled from products manufactured in that quarter. The Company maintains significant levels of raw materials to facilitate meeting delivery requirements of its customers, but there can be no assurance that during any given quarter, the Company has or can procure the appropriate mix of raw materials in order to accommodate such orders. Therefore, the Company's financial performance in any quarter has generally been dependent to a significant degree upon obtaining orders in that quarter which can be manufactured and delivered to its customers in that quarter.
COMPETITION
The computer industry, of which Telxon's mobile computing systems are a part, is highly competitive and characterized by advances in technology which frequently result in the introduction of new products with improved performance characteristics. Failure to keep pace with product and technological advances could negatively affect the Company's competitive position and prospects for growth and, in turn, its business, results of operations and financial condition.
The Company competes directly and indirectly with a number of companies in its market segments. Frequent competitors include Symbol Technologies, Inc., Holtsville, New York, and
ITEM 1. BUSINESS (CONTINUED) -------------------
the Intermec and Norand divisions of UNOVA, Inc., Woodland Hills, California. In addition, companies that are participants in the broader computer industry are potential competitors. Some of the Company's competitors and potential competitors have substantially greater financial, technical, intellectual property, marketing and human resources than the Company.
EMPLOYEES
As of May 31, 2000, the Company employed approximately 1,549 full-time personnel. The Company also employs temporary production and other personnel.
ITEM 2.
ITEM 2. PROPERTIES ----------
In April 2000 the Company opened its new executive offices in the eastern Cincinnati, Ohio suburb of Milford. Occupying 22,000 square feet of a 195,000 square foot two-story office building of masonry construction built on a wooded campus in 1992, the facility includes a state-of-the-art Product Demonstration Suite in support of the Company's sales operations, geographically complementing the similar Demonstration Center at its World Technology Center in The Woodlands, Texas, a suburb north of Houston.
The establishment of the new headquarters is part of the initiative announced by the Company in November 1999 to substantially curtail its Akron, Ohio operations. As of June 30, 2000 the Company had substantially completed the transition of its remaining corporate office functions from Akron to The Woodlands, with its continuing, reduced Akron operations consisting principally of its Advanced Technical Consulting, Project Management, and Quality Assurance groups, as well as selected Software Development groups and a regional sales office. The Company intends to relocate its continuing Akron operations to a smaller leased facility in that area and is in the process of seeking, but has not yet secured, a replacement tenant for its 100,000 square foot former headquarters facility, which is under lease through December 31, 2001. The lease provides the Company with an option, exercisable on September 1, 2001, to purchase the office building and the land on which it is situated for its then current fair market value. The Company also has a lease obligation through February 28, 2001 for approximately 34,000 square feet of office space within a three-mile radius of its former Akron corporate offices. That second Akron facility is subleased to the Company's former Aironet Wireless Communications, Inc. subsidiary (acquired in March 2000 by Cisco Systems, Inc.), to which the Company also leases for a coterminous period the one-story, 32,500 square foot facility owned by the Company within approximately one mile from its former corporate offices.
The Company's World Technology Center in The Woodlands, opened in May 1998, is a one-story, 70,000 square foot leased building of concrete and glazed curtain wall construction, which was designed and constructed specifically to support the Company's Engineering, Research, Software and Product Development functions and supporting administration, which had also previously been conducted in Akron. The World Technology Center also houses a Customer Support Call Center, the Company's Industry and Product Marketing operations and a Customer Conferencing and Executive Briefing Center. Expiring in May 2008, the lease for the World Technology Center includes a renewal option for an additional ten-year term. In order to accommodate the corporate office administrative and accounting functions which have relocated to The Woodlands from Akron, the Company has leased through August 2001 an additional 36,000 square feet in a one-story, 42,000 square foot office building built of like construction in 1994 within three-quarters of a mile of the World Technology Center.
The Company owns two buildings in Houston, Texas of concrete tilt-wall construction, located on a 15-acre site. The first building is an 116,000 square foot manufacturing facility, which was completed in April 1994. That building houses all domestic Telxon manufacturing operations, as well as warehousing operations and administrative and manufacturing engineering offices. The second building is the Company's 36,000 square foot National Service Center, completed in November 1993, which has housed its product repair and
ITEM 2. PROPERTIES (CONTINUED) ----------------------
maintenance operations. The Company maintains an additional 12,000 square feet of warehouse space at a nearby Houston location leased through May 31, 2001.
As of the end of the second quarter of fiscal 1998, the Company relocated over 50% of its product repair and maintenance operations to a new 50,000 square foot facility of masonry construction in Ciudad Juarez, Chihuahua, Mexico. The facility is leased for an initial term that expires in April 2004, with two five-year renewal options, and the Company has an option to purchase the facility at the end of the initial term or any renewal term for its then current fair market value. In late June 2000, the Company determined to transfer to the Ciudad Juarez facility, during the second and third quarters of the current fiscal year, all of the remaining product repair and maintenance operations at its Houston National Service Center (except for that of new products generally within the first year of their release, which will be relocated to space within the Company's Houston manufacturing building). The Company is evaluating possible alternatives for the disposition of the National Service Center facility. The Company currently leases 20,000 square feet of warehouse space in El Paso, Texas as a companion receiving, staging and parts-stocking facility for the Mexican operations for an initial term of five years, with two five-year renewal options, and is in negotiations with its current landlord toward the substitution of 50,000 square feet of leased space in El Paso for the current El Paso facility to support the planned expansion of the Mexican operations.
In addition to these principal locations, the Company maintains 53 locations in the United States, Canada, Western Europe, Australia, Japan and Southeast Asia which are used principally for sales and customer service offices, as well as for executive, engineering and procurement offices for certain of its domestic and international subsidiaries. These locations are generally leased for terms ranging from one to three years.
The Company believes that its existing facilities will be adequate for its reasonably foreseeable level of operations, though the Company regularly reviews its facilities usage as part of its continuing efforts to improve the efficiency of its operations and believes that alternate or additional leased space is generally available at acceptable cost to satisfy any new facilities requirements that may be so identified. Should the operations of the Company's principal corporate offices, engineering and research and development, manufacturing, or repair and maintenance facilities be lost or disrupted by natural disaster, fire or other cause, the Company's operations would be materially adversely affected until replacement operations could be established.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
On September 21, 1993, a derivative Complaint was filed in the Court of Chancery of the State of Delaware, in and for Newcastle County, by an alleged stockholder of the Company derivatively on behalf of Telxon. The named defendants are the Company; Robert F. Meyerson, former Chairman of the Board, Chief Executive Officer and director; Dan R. Wipff, then President, Chief Operating Officer and Chief Financial Officer and director; Robert A. Goodman, Corporate Secretary and outside director; Norton W. Rose, then an outside director; and Dr. Raj Reddy, outside director. The Complaint alleges breach of fiduciary duty to the Company and waste of the Company's assets in connection with certain transactions entered into by Telxon and compensation amounts paid by the Company. The Complaint seeks an accounting, injunction, rescission, attorney's fees and costs. While the Company is nominally a defendant in this derivative action, the plaintiff seeks no monetary relief from the Company.
On November 12, 1993, Telxon and the individual director defendants filed a Motion to Dismiss. The plaintiff filed its brief in opposition to the Motion on May 2, 1994, and the defendants filed a final responsive brief. The Motion was argued before the Court on March 29, 1995, and on July 18, 1995, the Court issued its ruling. The Court dismissed all of the claims relating to the plaintiff's allegations of corporate waste; however, the claims relating to breach of fiduciary duty survived the Motion to Dismiss.
On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in the derivative action on behalf of a new plaintiff stockholder. As part of the Motion to Intervene, the intervening plaintiff asked that the Court designate as operative for the action the intervening plaintiff's proposed Complaint, which alleges that a series of transactions in which the Company acquired technology from a corporation affiliated with Mr. Meyerson was wrongful in that Telxon already owned the technology by means of a pre-existing consulting agreement with another affiliate of Mr. Meyerson; the intervenor's complaint also names Raymond D. Meyo, President, Chief Executive Officer and director at the time of the first acquisition transaction, as a new defendant. The defendants opposed the Motion on grounds that the new claim alleged in the proposed Complaint and the addition
ITEM 3. LEGAL PROCEEDINGS (CONTINUED) -----------------------------
of Mr. Meyo were time-barred by the statute of limitations and the intervening plaintiff did not satisfy the standards for intervention. After taking legal briefs, the Court ruled on June 13, 1997, to permit the intervention. On March 18, 1998, defendant Meyo filed a Motion for Judgement on the Pleadings (as to himself), in response to which Plaintiff filed its Answer and Brief in Opposition. The Motion was argued before the Court on November 4, 1998, and was granted from the bench, dismissing Meyo as a defendant in the case.
The defendants filed a Motion for Summary Judgment on November 15, 1999, and the plaintiff filed a cross Motion for Summary Judgment on December 7,1999. The Motions were argued before the Court in February 2000. Following the hearing, the parties submitted supplemental briefs, the last of which was filed on March 6, 2000. The parties are awaiting the Court's decision on the cross motions for summary judgment. No trial date has been set.
The defendants believe that the post-intervention claims lack merit, and they intend to continue vigorously defending this action. While the ultimate outcome of this action cannot presently be determined, the Company does not anticipate that this matter will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any loss or related insurance recovery in its financial statements.
On February 7, 1998, a complaint was filed against the Company in the District Court of Harris County, Texas, by Southwest Business Properties, the landlord of the Company's former Wynnwood Lane facility in Houston, Texas, alleging counts for breach of contract and temporary and permanent injunctive relief, all related to alleged environmental contamination at the Wynnwood property, and seeking specific performance, unspecified monetary damages for all injuries suffered by plaintiff, payment of pre-judgement interest, attorneys' fees and costs and other unspecified relief. In December 1999, the case was settled by the parties, and the $500,000 cost of the initial settlement, $275,000 of which has been covered by the Company's insurer, was recorded in the Company's financial statements; additional amounts of up to $100,000 are required to be paid as part of the settlement in the event that the remediation described below is not timely completed.
While the litigation with the landlord was pending, Telxon and the landlord filed on July 7, 1999 a joint application with the Texas Natural Resource Conservation Commission for approval of a proposed Response Action Work Plan for the property pursuant to the Commission's Voluntary Cleanup Program. The plan, which was approved by the Commission in August 1999, projects completion of remediation and issuance of a closure certificate in 2002, for which the Company had at March 31, 2000 accrued the then estimated costs of $250,000. As the result of changes to the remediation plan made after March 31, 2000 to better assure its completion within the projected schedule, the Company has increased its estimate of the total expected remediation cost to $350,000. If closure of the remediation is not certified when contemplated by the plan, and the Company were ultimately to become responsible for the alleged contamination, the associated loss could have a material adverse effect on results of operations for one or more quarters in which the associated charge(s) would be taken.
On May 8, 1998, two class action suits were filed in the Court of Chancery of the State of Delaware, in and for the County of New Castle, by certain alleged stockholders of Telxon on behalf of themselves and purported classes consisting of Telxon stockholders, other than defendants and their affiliates, relating to an alleged offer by Symbol Technologies, Inc. ("Symbol") to acquire the Company. Named as defendants were Telxon and its Directors at the time, namely, Frank E. Brick, Robert A. Goodman, Dr. Raj Reddy, John H. Cribb, Richard J. Bogomolny, and Norton W. Rose. The plaintiffs alleged that on April 21, 1998, Symbol made an offer to purchase Telxon for $38.00 per share in cash and that on May 8, 1998, Telxon rejected Symbol's proposal. Plaintiffs further alleged that Telxon has certain anti-takeover devices in place purportedly designed to thwart hostile bids for the Company. Plaintiffs charged the Director defendants with breach of fiduciary duty and claimed that they entrenched themselves in office. On February 10, 2000, the plaintiffs filed a notice for the dismissal of the action without prejudice, which was approved by the Court on February 17, 2000.
From December 1998 through March 1999, a total of 27 class actions were filed in the United States District Court, Northern District of Ohio, by certain alleged stockholders of the Company on behalf of themselves and purported classes consisting of Telxon stockholders, other than the defendants and their affiliates, who purchased stock during the period, from May 21, 1996 through February 23, 1999 or various portions thereof, alleging claims for "fraud on the market" arising from alleged misrepresentations and omissions with respect to the Company's financial performance and prospects and an alleged violation of generally accepted accounting principles by improperly recognizing revenues. The named defendants are the Company, former President and Chief Executive Officer Frank E. Brick and former Senior Vice President and Chief Financial Officer Kenneth W. Haver. The actions were referred to a single judge. On February 9, 1999, the plaintiffs filed a Motion to consolidate all of the actions and the Court heard motions on naming class representatives and lead class counsel on April 26, 1999.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED) -----------------------------
On August 25, 1999, the Court appointed lead plaintiffs and their counsel, ordered the filing of an Amended Complaint, and dismissed 26 of the 27 class action suits without prejudice and consolidated those 26 cases into the first filed action. The appointed lead plaintiffs appointed by the Court filed an Amended Class Action Complaint on September 30, 1999. The Amended Complaint alleges that the defendants engaged in a scheme to defraud investors through improper revenue recognition practices and concealment of material adverse conditions in Telxon's business and finances. The Amended Complaint seeks certification of the identified class, unspecified compensatory and punitive damages, pre- and post-judgment interest, and attorneys' fees and costs. Various appeals and writs challenging the District Court's August 25, 1999 rulings were filed by two of the unsuccessful plaintiffs but have all been denied by the Court of Appeals.
On November 8, 1999, the defendants jointly moved to dismiss the Amended Complaint. The Court held a case management conference on November 16, 1999 at which it set a conditional schedule. Briefing of the defendants' motion to dismiss and the plaintiffs' opposition thereto was completed January 18, 2000. The motion to dismiss remains pending, and all discovery remains stayed pending the Court's ruling on the motion. A motion filed by the plaintiffs on November 16, 1999 to lift the discovery stay to allow the serving of discovery requests on a non-party has been denied by the Court. The defendants believe that these claims lack merit, and they intend to vigorously defend the consolidated action.
By letter dated December 18, 1998, the Staff of the Division of Enforcement of the Securities and Exchange Commission (the "Commission") advised the Company that it was conducting a preliminary, informal inquiry into trading of the securities of the Company at or about the time of the Company's December 11, 1998 press release announcing that the Company would be restating the revenues for its second fiscal quarter ended September 30, 1998. On January 20, 1999, the Commission issued a formal Order Directing Private Investigation And Designating Officers To Take Testimony with respect to the referenced trading and specified accounting matters, pursuant to which subpoenas have been served requiring the production of specified documents and testimony. The Company and its current and former independent accountants are also currently assessing the effects of recent comments issued to the Company by the Commission's Division of Corporation Finance as part of its ongoing review of various accounting matters in the Company's previous filings with the Commission, including, but not limited to, the recognition of revenues from the Company's indirect sales channel and the timing of charges which the Company recorded during fiscal 1999, 1998 and 1997 for inventory obsolescence, severance and asset impairment. The Company has cooperated, and intends to continue cooperating fully with, the Commission Staff. The Company has not accrued for any fines or penalties under SFAS 5 because it has no basis to conclude that it is probable that at the conclusion of the investigation the Commission will seek a fine or penalty, and because the amount of any such fine or penalty is not estimable.
ITEM 3. LEGAL PROCEEDINGS (CONTINUED) -----------------------------
On December 30, 1999, a Derivative Complaint was filed in the Court of Chancery of the State of Delaware, in and for Newcastle County, by an alleged stockholder of the Company derivatively on behalf of Telxon. The named defendants are the Company; the then directors of the Company, Richard J. Bogomolny, John H. Cribb, Robert A. Goodman, Raj Reddy, Frank Brick and Norton Rose; Robert F. Meyerson, former Chairman of the Board, Chief Executive Officer and director; and Telantis Venture Partners V Inc., an affiliate of Robert F. Meyerson. The Complaint alleges that Telxon's sale of stock in its then Aironet Wireless Communications, Inc. subsidiary to Meyerson interests constitutes a waste and gift of Telxon assets in breach of the defendant directors' duties of care and to act in good faith. The Complaint also alleges that the defendant directors' opposition of an alleged offer by Symbol to acquire the Company in the Spring of 1998 violated their duties of loyalty, good faith and due care and wasted Company's assets. The Complaint seeks an order rescinding the Aironet stock transactions (or in the event such relief cannot be granted, recissory damages), requiring the defendants other than the Company to account for Telxon's losses in connection with the alleged wrongs (including the funds spent resisting the alleged Symbol bid) and awarding plaintiff its attorneys' fees and expenses. While the Company is nominally a defendant in this derivative action, the plaintiff seeks no monetary relief from the Company.
On March 8, 2000, all defendants except Messrs. Goodman and Meyerson answered the complaint and moved for judgment on the pleadings. Messrs. Goodman and Meyerson have filed motions to dismiss. In addition, all defendants have moved to stay discovery. All of these motions are currently being briefed, and no hearing date has been scheduled for any of the motions.
The defendants believe that these derivative claims lack merit and intend to vigorously defend this action. While the ultimate outcome of this action cannot presently be determined, the Company does not anticipate that this matter will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any loss or related insurance recovery in its financial statements.
The Company has received a number of letters from its customers requesting Telxon to indemnify them with respect to their defense of demands which have been made on them by the Lemelson Medical, Education & Research Foundation Limited Partnership for the payment of a license fee for the alleged infringement of the Foundation's so-called "bar-code" patents by the customers' systems utilizing automatic identification technology, portions of which have been supplied by the Company. On October 27, 1999, the Foundation also sent a letter directly to the Company similarly demanding that the Company purchase a license with respect to "Telxon's use of machine vision and bar coding technology." On April 14, 2000 the Foundation filed five lawsuits against a total of approximately 430 end users, including a number of the Company's customers, whom the Foundation alleges use automatic identification technology which infringes the Foundation's patents; the Company is not named as a defendant in any of these lawsuits. The Company continues to receive requests for indemnity from customers with regard to claims being informally asserted against them by the Foundation as well as from customers who have been formally sued by the Foundation.
The Company believes that the patents so being asserted against it and its customers are invalid, unenforceable and not infringed and on April 24, 2000 filed a federal court action against the Foundation seeking a declaratory judgment to that effect. The Company's declaratory judgment action is substantially similar to the federal court action jointly filed by seven other companies in the automatic identification industry, including the Company's principal competitors, in July 1999 seeking like declaratory relief against the Foundation. On May 30, 2000 the Foundation filed an answer and counterclaim against the Company in response to its declaratory judgment action denying the invalidity of its patents are invalid, unenforceable or not infringed by the Company or its customers and counter-claiming that the Company likely induces or contributes to the direct infringement of unspecified claims of the Foundation's patents. The Foundation's counterclaim against the Company is the same as the one which has been asserted by the Foundation against the companies which filed the other declaratory judgement action. Discovery in the Company's declaratory judgment action is just beginning. The Company believes that the Foundation's counterclaim is without merit and intends to vigorously defend against it.
Except as otherwise specified, in the event that any of the foregoing litigation ultimately results in a money judgment against the Company or is otherwise determined adversely to the Company by a court of competent jurisdiction, such determination could,
ITEM 3. LEGAL PROCEEDINGS (CONTINUED) -----------------------------
depending on the particular circumstances, adversely affect the Company's conduct of its business and the results and condition thereof.
In the normal course of its operations, the Company is subject to performance under contracts and assertions that technologies it utilizes may infringe third party intellectual properties, and is also subject to various pending legal actions and contingencies, which may include matters involving suppliers, customers, lessors of Company products to customers, lessors of equipment to the Company and existing and potential business and development partners. The Company is vigorously defending all such claims that do not lack merit. While the ultimate outcome of such matters cannot presently be determined, the Company does not anticipate that these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any losses or related insurance recoveries in its financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
There were no matters submitted to a vote of security holders during the year ended March 31, 2000.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------
The following are the executive officers of the Company, who have been either elected by the Board of Directors of the Company or appointed by the Chief Executive Officer and ratified and approved by the Board of Directors:
John W. Paxton, Sr., age 63, has been Chairman of the Board of Directors and CEO since June 1999. Mr. Paxton was Chairman, President and CEO from March 1999 to June 1999. He has been a director of the Company since he joined it in March 1999. From December 1998 until March 1999, Mr. Paxton was Chairman of Odyssey Industrial Technologies L.L.C., a joint venture with Odyssey Investment Partners, a private equity fund. From March 1997 until November 1998, Mr. Paxton was Executive Vice President of Paxar Corporation and, upon its formation in June 1998, President of Paxar's Printing Solutions Group. He was President and Chief Executive Officer of Monarch Marking Systems, Inc. from October 1995 until Paxar combined newly acquired operations with its existing Monarch operations to form the Paxar Printing Solutions Group. From March 1994 until October 1995, Mr. Paxton was Corporate Executive Vice President and Chief Operating Officer of The Industrial Automation Systems Group of Western Atlas Inc. Mr. Paxton is a member of the Board of Directors of TransDigm, Inc. (supplier of highly engineered commercial and military aircraft parts).
Kenneth A. Cassady, age 46, has been President and Chief Operating Officer since joining the Company in June 1999. From March 1996 to June 1999, Mr. Cassady was President of Monarch Marking Systems, a manufacturer and distributor of bar code printing and price marking systems, and a subsidiary of Paxar Corporation. From September 1995 to March 1996, Mr. Cassady was Vice President, Business Operations for the Environmental Group of Lockheed Martin Corporation. He was Vice President of Mergers and Acquisitions for Lockheed from March 1995 to September 1995 and served as Vice President, Business Operations for Lockheed's Information Group from May 1993 to March 1995.
Woody M. McGee, age 48, has been Vice President and Chief Financial Officer since joining the Company in June 1999. From March 1997 to May 1999, Mr. McGee was Senior Vice President, General Manager of HK Systems, a supplier of material handling systems (which was purchased from Western Atlas in 1996). From September 1996 to March 1997, Mr. McGee was Vice President, CFO/Treasurer of Mosler, Inc., a supplier of currency handling systems and security products (to the gaming, financial, commercial and government communities). From May 1995 to September 1996, Mr. McGee was Vice President of Sales for the Material Handling Systems Division (MHSD) of Western Atlas. He was Vice President of Operations and CFO for the MHSD of Western
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) ---------------------------------------------------------------
Atlas and President and Chief Operating Officer of its Installation Division, from January 1991 to May 1995.
David H. Biggs, age 54, has been Vice President and Chief Technology Officer since joining the Company in June 1999. From June 1997 to June 1999, Mr. Biggs was Vice President of RD Garwood, Inc., a consulting and educational firm specializing in business process improvements. From December 1996 to May 1997, Mr. Biggs was a Senior Vice President of Bently Nevada Corporation (machinery vibration instrumentation). From March 1988 to December 1996, Mr. Biggs was Senior Vice President of Operations and Product Development for Bently. He was Vice President of Product Development for Bently from June 1985 to March 1988, and its Vice President of Manufacturing from January 1981 to June 1985.
William J. Murphy, age 66, has been Executive Vice President, Americas of the Company since January 2000. He has served the Company in various executive sales capacities since his tenure as the Company's President and Chief Operating Officer from January 1995 to June 1996, including as Senior Executive Vice President, Global Sales from June 1996 to February 1997, Senior Vice President, Divisional Sales from February 1997 to July 1998, and Regional Vice President from July 1998 to January 2000. Mr. Murphy had previously served the Company as Executive Vice President, North American Operations from January 1993 to January 1995; Area Vice President, East from November 1992 to January 1993; a District Manager from September 1989 to November 1992; and Area Vice President, North Eastern Region from May 1989 to August 1989. From January 1995 to June 1996, he was a member of the Company's Board of Directors.
Peter A. Lomax, age 48, has been Executive Vice President, Europe/Middle East/Africa of the Company since June 1999. He has also served the Company as Executive Vice President, International Operations from June 1998 to June 1999; and was head of the Company's International Business Development Group from June 1997 to June 1998. Mr. Lomax joined the Company from Sunguard Business Systems, where he had served as European Sales Director from January 1993 to April 1997.
Gene S. Harmegnies, age 48, joined the Company as Vice President, Consulting and Systems Integration in January 2000. He had previously been with Intermec Technologies Corporation, where he was Director, Worldwide Support Services from January 1997 to May 1999; Director, North American Service Operations from March 1992 to January 1997; and National Service Manager from June 1985 to March 1992.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER ---------------------------------------------------------------- MATTERS -------
The Company's common stock has been publicly traded since July 21, 1983, in the over-the-counter market under the symbol TLXN. The principal trading market for the Company's Common Stock is The NASDAQ stock market National Market ("NNM"). The following table sets forth, with respect to the past two fiscal years of the Company, the range of high and low closing prices as reported in the NNM and cash dividends paid. During fiscal 2000, the Company's Board of Directors elected to discontinue the payment of dividends to its shareholders. Prior to fiscal 2000, the Company had not paid other than nominal dividends. The Company intends to follow a policy of retaining earnings in order to finance the continued growth and development of its business. Payment of dividends has been within the discretion of the Company's Board of Directors. Prospective changes in the Company's dividend policy will depend on, among other factors, earnings, capital requirements and the operating and financial condition of the Company.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER ---------------------------------------------------------------- MATTERS (CONTINUED) ------------------
As of May 31, 2000, there were approximately 774 holders of record of the Company's Common Stock.
Historically, variations in the Company's actual or expected results of operations, changes in analysts' earnings estimates and investment recommendations and rumors of or publicly disclosed proposals for business combination transactions involving the Company have resulted in significant changes in the market price of the Company's common stock. As a result, the market price of the Company's common stock, like that of other technology companies, has been subject to significant volatility. The Company's stock may also be affected by broader market trends unrelated to the Company's own performance that involve the Company's competitors, technology stocks in general or the economy as a whole.
While the Company does, from time to time, communicate with securities analysts, any opinions, projections and forecasts contained in reports issued by securities analysts have been prepared by each analyst based on his or her own judgment and research and are not the responsibility of the Company. It should not be assumed that the Company agrees with any report issued by any analyst.
The Company effected the following issuances of unregistered shares of its common stock during fiscal 2000:
Pursuant to an agreement made by the Company with R. Dave Garwood, prior to his election as one the Company's current Directors, for his rendering of employee training and consulting services relating to the Company's adoption and implementation of an MRP-II material resource planning process, the Company issued him an aggregate of 20,197 shares of common stock subject to vesting and forfeiture conditions based on his completion of the subject services. As of March 31, 2000, 10,098 of the subject shares had vested and were no longer subject to forfeiture, and all the remaining shares vested and were freed of the forfeiture condition upon the completion of the subject services in June 2000. The shares constitute Mr. Garwood's remuneration for the subject services, and the issuance thereof did not otherwise result in any proceeds to the Company.
Pursuant to an agreement made by the Company with a consulting firm, not otherwise affiliated with the Company, for strategic product consulting services, the Company has issued the consultant an aggregate of 1,476 shares of common stock subject to vesting and forfeiture conditions based on his completion of the subject services. As of March 31, 2000, all of the subject shares had vested and were no longer subject to forfeiture. As part (in addition to cash fees) of the consultant's remuneration for the subject services, this issuance did not otherwise result in any proceeds to the Company.
Pursuant to the Company's employment agreement with David H. Biggs, the Company's Vice President and Chief Technology Officer, the Company has issued him an aggregate of 35,000 shares of common stock (23,200 of which were issued under the Company's Restricted Stock Plan, the shares awarded under which are registered on Form S-8) subject to vesting and forfeiture conditions based on his completion of the subject services and to a deferred compensation election. As of March 31, 2000, 25,000 of the subject shares (including all 11,800 of the unregistered shares awarded him outside of the Restricted Stock Plan) had vested and were no longer subject to forfeiture. The shares constitute Mr. Biggs' remuneration for his services, and the issuance thereof did not otherwise result in any proceeds to the Company.
During the fourth quarter of fiscal 2000, John W. Paxton, Sr., the Company's Chairman of the Board and Chief Executive Officer, completed his purchase of 300,000 shares of common stock provided for in his employment agreement with the Company. The purchase was made at the price established therefor in the employment agreement, and the proceeds were used by the Company for general working capital purposes. See Note 11 - Stock Options and Restricted Stock and Note 22 - Subsequent Event to the consolidated financial statements included in this Annual Report on Form 10-K for further information relating to Mr. Paxton's stock purchase.
Also during the fourth quarter of fiscal 2000, the Company issued 477,790 shares of common stock in exchange for the approximately 29% common stock ownership interest of the last remaining minority stockholders in the Company's Metanetics Corporation subsidiary pursuant to the Plan and Agreement of Merger, dated as of February 22, 2000, among the Company, its wholly owned Meta Technologies Corporation subsidiary and Metanetics included as Exhibit 10.12 to this Annual Report on Form 10-K.
Each of the above sales of securities was pursuant to privately negotiated transactions between the Company and the recipient of the respective recipients of the subject shares deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) of such Act, as constituting transactions by an issuer not involving a public offering. Each of the recipients of shares in these transactions made written representations to the Company in connection with such issuances confirming their intention to acquire the securities for investment only and not with a view to, or for sale in connection with, any distribution thereof, and appropriate legends were affixed to the share certificates issued in such transactions. All of the recipients also confirmed that they had access to their satisfaction, through the Company's public securities filings and their respective relationships with the Company, to information concerning the Company and its financial and business affairs.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
Set forth below are selected financial data for the five years ended March 31, 2000, which have been derived from the Company's audited consolidated financial statements for the periods indicated. The selected financial data should be read in conjunction with the consolidated financial statements, including the notes thereto, for the three years ended March 31, 2000, 1999 and 1998, as included in Item 8 herein. The fiscal 1999 and 1998 accounts have been restated as described in Note 3 - Restatement to the consolidated financial statements.
(in thousands, except per share data)
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED) -----------------------------------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION -------------------
Summary
The following table sets forth for the periods indicated (1) certain expense and income items expressed as a percentage of total revenues, and (2) the percentage increase or decrease of such items as compared to the corresponding prior period. This table and the textual discussion and analysis which follows should be read in conjunction with the accompanying consolidated financial statements, including the notes thereto, for each of the three years in the period ended March 31, 2000, as included in Item 8 herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
IN ADDITION TO DISCUSSING AND ANALYZING THE COMPANY'S RECENT HISTORICAL FINANCIAL RESULTS AND CONDITION, THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES STATEMENTS REGARDING CERTAIN TRENDS OR OTHER FORWARD-LOOKING INFORMATION CONCERNING THE COMPANY'S ANTICIPATED REVENUES, COSTS, FINANCIAL RESOURCES AFFECTING OR RELATING TO THE COMPANY WHICH ARE INTENDED TO QUALIFY FOR THE PROTECTIONS AFFORDED "FORWARD-LOOKING STATEMENTS" UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, PUBLIC LAW 104-67. THE FORWARD-LOOKING STATEMENTS MADE HEREIN AND ELSEWHERE IN THIS FORM 10-K ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS. SEE "FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW AND OTHER CAUTIONARY STATEMENTS APPEARING UNDER "ITEM 1. BUSINESS" AND ELSEWHERE, IN THIS FORM 10-K FOR A DISCUSSION OF THE IMPORTANT FACTORS AFFECTING THE REALIZATION OF THOSE RESULTS.
Overview
In fiscal 2000, the Company recorded net income of $251.0 million or $15.09 per common share (diluted) as compared to net loss of $135.0 million or $8.38 per common share (diluted) recorded in fiscal 1999. Consolidated revenues decreased $30.6 million or 8% from fiscal 1999 levels to $365.8 million. The Company recorded a loss from operations of $90.4 million for fiscal 2000 compared to $106.9 million incurred in fiscal 1999. The fiscal 2000 operating results included significant inventory and bad debt charges aggregating $30.7 million and $5.1 million, respectively. Furthermore, the Company's results included significant charges related to the transition of its headquarters from Akron to Cincinnati, to the repurchase of the minority interests of Metanetics Corporation ("Metanetics"), a subsidiary and a licensor and developer of image processing technology, and to a loss on a sales contract with a major domestic retailer of $4.0 million, $3.1 million and $2.0 million, respectively. The fiscal 1999 operating results included $8.1 million of costs incurred in response to takeover and proxy contest proposals as well as terminated discussions of proposed business combination transactions.
During fiscal 2000, the Company recorded two significant transactions related to its former Aironet subsidiary. During July 1999, Aironet became publicly traded through a public offering producing proceeds, net of cash given of $6.1 million, to the Company of $17.2 million and a non-operating gain on sale of subsidiary stock of $32.0 million. As a result of this transaction, the Company ceased consolidation of Aironet effective April 1, 1999. During March 2000, the merger of Aironet with Cicso Systems, Inc. ("Cisco") was consummated. The Company recorded the increase in the carrying value of Aironet common stock held to the fair value of the Cisco stock held upon consummation, which resulted in a net pre-tax gain of $396.2 million. Shortly after the consummation of the merger noted above, the Company sold $150.0 million of its Cisco holdings, extinguished its existing bank debt of $76.6 million and paid off a significant portion of its current obligations. At March 31, 2000, the Company held $321.9 million of Cisco shares which it held at fair value. As a result of the events described above, the Company's liquidity has improved markedly between fiscal 2000 and fiscal 1999. The Company's working capital has increased to $126.0 million at March 31, 2000 as compared to $34.3 million at March 31, 1999. Additionally, the Company's investments in accounts receivable and inventories decreased $60.8 million between fiscal 2000 and fiscal 1999. The Company's stockholders' equity increased to $321.8 million for fiscal 2000 as compared to $17.0 million for fiscal 1999. Refer to Note 17 - Divestitures and Subsidiary Stock Transactions for a discussion of these transactions.
Additionally, the Company's results include a tax provision of $72.8 million, excluding extraordinary items, on pre-tax income of $324.9 million. The Company reestablished net deferred tax assets based on the Company's current assessment
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
regarding the utilization of such assets which took into account the gains noted above and related tax planning strategies. At March 31, 2000 the Company had net deferred tax assets of $25.6 million and net deferred tax liabilities of $109.5 million.
The Company anticipates that it will incur an operating loss in the first three quarters subsequent to March 31, 2000 as the Company's management continues to review all aspects of operations in order to improve profitability. Management actions taken to increase the efficiency of the Company's operations may result in one-time charges during the upcoming fiscal year.
The Company operates in a rapidly changing and dynamic market, and the Company's strategies and plans are designed to adapt to changing market conditions where and when possible. However, there can be no assurance that the Company's management will identify the risks (especially those newly emerging from time to time) affecting, and their impact on, the Company and its business. Further, there is no assurance that the Company's strategies and plans will take into account all market conditions and changes thereto or that such strategies and plans will be successfully implemented. Accordingly, neither the historical results presented in the Company's consolidated financial statements and discussed herein, nor any forward-looking statements in this Form 10-K, are necessarily indicative of the Company's future results. See "Factors That May Affect Future Results" for a discussion of risk factors which may affect the Company's future results of operations.
Factors That May Affect Future Results
The risks and other important factors which may affect the Company's business, operating results, and financial and other conditions include, without limitation, the following:
The Company's results of operations are affected by a variety of factors, including economic conditions generally (both domestic and foreign) as well as those specific to the industry in which it competes, decreases in average selling price over the life of any particular product, the timing, manufacturing complexity and expense of new product introductions (both by the Company and its competitors), the timely implementation of new manufacturing technologies, the ability to safeguard patents and other intellectual property in a rapidly evolving market, the rapid increase in demand for some products and the rapid decline in demand for others and the Company's ability to anticipate and plan for that changing market demand. Certain of these factors are beyond the Company's control.
Historically, the Company's shipments during any particular quarter generally represent orders received either during that quarter or shortly before the beginning of that quarter. The Company endeavors to maintain sufficient levels of purchased components to meet the delivery requirements of its customers, but there can be no assurance that during any given quarter, the Company has or can procure the appropriate mix of purchased components to accommodate such orders. Therefore, the Company's financial performance in any quarter is dependent to a significant degree upon obtaining orders which can be manufactured and delivered to its customers in that quarter. As a result, financial performance for any given quarter cannot be known or fully assessed until near the end of that quarter.
The Company has also historically recognized a substantial portion of its product revenues in the last month of each quarter. A significant portion of the Company's expenses are relatively fixed, and timing of increases in such expenses is based in large part on the Company's forecast of future revenues. As a result, if revenues do not meet expectations, the Company may be unable to quickly adjust expenses to levels appropriate to actual revenues, which could have a materially adverse effect on the Company's results of operations.
The Company's sales efforts have increasingly been focused on sales, both by the Company directly and through OEMs, VARs, ISVs and other indirect sales channels, of complete data transaction systems rather than on sales of handheld computer products alone. System sales tend to be more costly and, therefore, require a longer selling cycle, longer payment terms and more complex integration and installation services.
The markets in which the Company competes are intensely competitive and characterized by increasingly rapid technological change, introduction of new products with improved performance characteristics, product obsolescence and price erosion. Failure to keep pace with product and technological advances could negatively affect the Company's competitive position and prospects for growth. Customers' anticipation of new or enhanced product offerings by the Company or a competitor may lead them to defer purchases of the Company's existing products. In addition, companies that are participants in the broader computer industry are potential competitors. Some of the Company's competitors and potential competitors have substantially greater financial, technical, intellectual property, marketing and human resources than the Company.
The Company's future success depends on its ability to develop and rapidly bring to market technologically advanced products. From time to time the Company invests in development stage and other entities who possess or who could potentially possess strategically important technologies. Due to the nature of these entities and their operations, there can be no assurance that these investments will be realizable or will result in marketable and/or successful products. There can be no assurance that the Company's research and development activities will lead to the commercially successful introduction of new or improved products or that the Company will not encounter delays or problems in connection with those products. The cost of perfecting new and improved technologies to satisfy customer quality and delivery expectations as they are brought to market cannot always be fully anticipated and may adversely affect Company operating profits during such introductions. In addition, the average selling prices for computer products generally decrease over the products' lives. To mitigate such decreases, the Company seeks to reduce manufacturing costs of existing products and to introduce new products, functions and other price/performance-enhancing features. To the extent that these product enhancements do not occur on a timely basis or do not result in a sufficient increase in sales prices to end users, the Company's operating results could be materially adversely affected.
To date, the Company's revenues have been concentrated in the retail industry, historically representing over 50% of its total revenues. Among other factors, the economic condition and prospects of current and prospective customers in the markets which the Company serves may affect the Company's own financial results. The Company's future growth depends, in part, on its ability to successfully penetrate and expand its revenues in new markets as well as increased penetration in the retail market. There can be no assurance that penetration and expansion into new and existing markets can be profitably achieved.
The Company believes its future success is also dependent, in part, upon its ability to continue to enhance its product offerings through internal development and the acquisition of new businesses and technologies, but there can be no assurance that the Company will be able to identify, acquire or profitably operate new businesses or otherwise implement its growth strategy successfully. For the Company to manage its growth and integrate any newly acquired entities, it must continue to improve operations and financial and management information systems and effectively motivate and manage employees. If the Company is unable to successfully pursue and manage such growth, its business and results of operations could be adversely affected.
The Company regards certain of its hardware and software technologies as proprietary and relies on a combination of United States and foreign patent, copyright, trademark and trade secret laws, as well as license and other contractual confidentiality provisions, to protect its proprietary rights. Despite the Company's efforts to safeguard its proprietary rights, there can be no assurance that the Company will be successful in doing so or that the Company's competitors will not independently develop or patent technologies that are substantially equivalent or superior to or otherwise circumvent the Company's technologies and proprietary rights.
The Company's products utilize hardware and software technologies licensed from third parties. There can be no assurance that the Company will be able to license needed technology in the future. An early termination of certain of these license agreements (including patent rights licensed from Symbol Technologies, Inc., one of its principal competitors, necessary for the Company's manufacture and sale of its integrated laser scanning terminals which account for a material portion of the Company's current sales) could have a materially adverse effect on the Company's ability to market certain of its products and, hence, on its business, results of operations and financial condition. The Company believes that its products, processes and trademarks do not infringe on the rights of third parties, but third parties have asserted, and there can be no assurance that they will not in the future assert, infringement or other related claims against the Company or its licensors. Any infringement claim or related litigation against the Company, or any challenge to the validity of the Company's own intellectual property rights, and the expense of defending the same could materially adversely effect the Company's ability to market its products and, hence, its business, results of operations and financial condition.
Certain of the Company's products, sub-assemblies and components are procured from single source suppliers, and others are procured from only a limited number of suppliers. The Company has in the past encountered, and may in the future encounter, shortages of supplies and delays in deliveries of product, sub-assemblies and components from its third party suppliers; shortages in supplies may also be accompanied by increased prices for the limited quantities that are available. Such shortages and delays, or should any third party supplier become unable or unwilling to supply such items to the Company consistent with the Company's volume and quality requirements, could have a material adverse effect on the Company's ability to ship products, and in turn, its business and results of operations could be materially adversely affected.
As a substantial portion of the Company's total revenues, ranging from approximately 25%-30% in recent years, is from customers located outside of the United States, the Company's results could be negatively affected by global and regional economic conditions, changes in foreign currency exchange rates, trade protection measures, regulatory acceptance of the Company's products in foreign countries, longer accounts receivable collection patterns and other considerations peculiar to the conduct of international business. Additionally, the Company is subject to similar risks in its procurement of certain of its products, components and sub-assemblies outside the United States. Economic difficulties experienced in one or more foreign countries can have an adverse impact on business activities elsewhere in the world, which could materially adversely affect the Company's results of operations.
Certain of the Company's products intentionally transmit radio signals as part of their normal operation. These products are subject to regulatory approval, restrictions on the use of certain frequencies and the creation of interference, and other requirements by the Federal Communications Commission and corresponding authorities in each country in which they are marketed. Regulatory changes could significantly impact the Company's operations by restricting the Company's development efforts, making current products obsolete or increasing the opportunity for additional competition. The intentional emission of electromagnetic radiation has also been the subject of recent public concern regarding possible health and safety risks, and though the Company believes that the low power output and the distance typically maintained between a product and the user means that its products do not pose material safety concerns, there can be no assurance that such safety issues will not arise in the future and will not have a materially adverse effect on the Company's business.
The Company's management team continues to work on the implementation of the "design-to-cost" program, MRP-II material resource planning process and other business process improvement initiatives begun during fiscal 2000 to foster future, profitable growth. Though management believes that those initiatives are the best means for improving the Company's business operations, financial results and future prospects, there can be no assurance that management will be able to obtain and successfully deploy the necessary technical, production, financial, human and other resources and otherwise implement the initiatives or that their business improvement strategy will achieve the desired results. If management is unable to successfully achieve and manage the desired growth, its business and results of operations could be adversely affected
Among other things, the Company's future success depends in large part on the continued service of its key technical, marketing and management personnel and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and the development of products and processes. The competition for such personnel is intense, and the loss of key employees could have a materially adverse effect on the Company's business, financial condition and results of operations.
In addition to the factors discussed above and elsewhere in this Annual Report on Form 10-K which may adversely affect the Company's conduct of its business and the results thereof, the Company's financial condition is also subject to the possible adverse effects of certain pending litigation and other contingencies discussed above under "Item 3. LEGAL PROCEEDINGS" and in Note 19 - Commitments and Contingencies to the consolidated financial statements included below in Item 8.
Readiness for the Year 2000
As the end of the twentieth century neared, there was worldwide concern regarding the use by many computer programs of only the last two digits rather than four to identify the year in a date field and the potential that that programming convention could cause system failures and miscalculations disruptive of business operations when processing dates in the twenty-first century. The Company, like many others, took precautionary measures to protect against such difficulties as previously reported in the Company's filings. As there discussed, the Company's new corporate-wide information systems installation, substantially completed during the Company's second quarter of fiscal 2000, was undertaken as a strategic business initiative independent of Year 2000 considerations, that project was also designed to make the Company's information systems Year 2000 ready; for cost and other additional information regarding the information systems installation project, see "Operating Expenses" and "Cash Flows from Investing Activities" below. Since the turn of the millennium, the Company has not encountered any material Year 2000 readiness issues that have had or may have a material effect on the Company's business, financial condition or results of operations.
The Company's consolidated revenues for fiscal 1999 included revenues from Aironet related to outside customers of $28.4 million. Due to the deconsolidation of Aironet as noted above, the Company experienced a decrease in revenues since it did not include these Aironet revenues in its fiscal 2000 results.
During the fiscal years presented, product revenues include the sale of portable tele-transaction computers ("PTCs") including rugged, wireless, mobile computers and pen-based, touch-screen workslates; telephony products; hardware accessories; wireless data communication products; custom application software and software licenses; and a variety of professional services, including system integration and project management.
Consolidated product revenues decreased during fiscal 2000 as compared to fiscal 1999 levels after removing the impact of deferred revenue at March 31, 1999. The changes to consolidated product revenue as described herein include the effect of the restatement of $8.1 million of revenue from fiscal 1998 to fiscal 1999 (refer to Note 3 - Restatement for further detail regarding the restatement). Demand for the Company's products was lower as compared with fiscal 1999, particularly in the Company's North American operations where the Company's legacy products continue to experience competitive pressures. Overall, both quantities shipped and average selling prices per unit decreased. The Company's revenues during fiscal 2000 also contained a relatively high proportion of batch products. This product mixture, as well as a general decrease in selling prices per PTC unit, served to reduce the average selling price of the Company's products.
Product revenues for fiscal 2000 included revenues of $44.7 million related to the rollout of Company products to a large domestic retailer. Revenues related to this one customer accounted for 16% of the Company's consolidated product revenues for fiscal 2000. Product revenues related to this customer were $21.7 million in fiscal 1999. Revenues related to this customer are earned primarily from high volume-low margin business of the Company's PTC 960 product. Therefore, the relatively high volume of business with this customer contributed to the lowered average selling price of the Company's products as described above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
Deferred revenues at March 31, 2000, including reductions to accounts receivable and deferred hardware revenue liabilities, decreased significantly to $3.5 million from $27.7 million at March 31, 1999. Of this decrease, $21.8 million represents revenue recognized in fiscal 2000 related to products that were shipped but deferred in fiscal 1999, pending the satisfaction of the Company's revenue recognition criteria. The primary reasons for the deferral of these revenues, during fiscal 1999, included the shipment of products prior to installation by the Company, the products not conforming to customer specifications or the treatment of transactions as operating leases due to the Company's guarantee of customers' lease payments. During fiscal 2000, revenues previously deferred under operating lease accounting of $6.9 million were re-characterized as a liability due to a financial institution under the related guarantee of the Customer's lease payments. The primary cause of deferrals of revenues at March 31, 2000 related to the shipment of the Company's products to customers that did not meet the Company's revenue recognition criteria regarding customer acceptance.
The volume of net revenues from the Company's Value-Added Distributor ("VAD") channel, excluding the impact of changes to the reserve for sales returns and allowances, decreased approximately $59.2 million for fiscal 2000 as compared to fiscal 1999. This decrease was caused by new management's emphasis on the Company's direct sales channel. Revenues related to Value-Added Distributors now represent less than 10% of product revenues. This decrease is included in the discussion of revenue increases and decreases above.
The Company anticipates that product revenues will increase during the next twelve months to over $300.0 million. The Company also anticipates that product revenues from a single domestic retail customer will remain a significant portion of the Company's product revenues, but will diminish as a percentage of product revenues due to growth in other areas. Should these revenues not materialize as anticipated, or should unforeseen circumstances prevent the introduction or market acceptance of these products, product revenues could be negatively affected.
Consolidated customer service revenues decreased $1.9 million or 2% for fiscal 2000 as compared to fiscal 1999. The majority of the decrease in customer service revenues was caused by a decrease in spare parts, time and material repairs and upgrade revenues. These decreases were offset by increases in contract revenues during fiscal 2000 of approximately 6% as compared to fiscal 1999. The decrease in customer service revenue also reflects the impact of decreased product revenues over the past four quarters. Additionally, a portion of the decrease was caused by the absence of Aironet's customer service revenues of $.8 million.
The Company anticipates an increase of approximately 5% in customer service revenues for fiscal 2001 as compared to fiscal 2000.
Revenues from the Company's international operations including distributors and Canada, aggregated $127.6 million for fiscal 2000 and decreased $3.1 million or 2% during fiscal 2000 as compared to fiscal 1999. The results of the Company's international operations were negatively impacted by approximately $4.6 million due to changes in foreign currency exchange rates during fiscal 2000. The decrease in the Company's international revenues for the year was the result of decreased revenues from shipments to the Company's international distributors, particularly in Latin America, of $4.4 million, as well as, decreased revenues in the Company's Canadian subsidiary of $3.5 million. These decreases were partially offset by increased revenues from the Company's European subsidiaries of $3.1 million and revenues from the Pacific Rim region of $1.7 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The Company's reserve for sales returns and allowances decreased from a balance at March 31, 1999 of $15.0 million to $5.3 million at March 31, 2000. During fiscal 2000, the Company issued credits for sales returns and allowances of $20.9 million as compared to $42.2 million issued during fiscal 1999. The total impact of credits issued, and changes to the reserve for sales returns and allowances on product revenues, for fiscal 2000 was $11.1 million compared to $54.0 million for fiscal 1999. The overall decrease in the reserve for sales returns and allowances was caused by fewer sales and corresponding outstanding accounts receivable from the Company's Value Added Distributors ("VADs") and by reduced rates of return and cash collections in the Company's direct sales channel. At March 31, 2000 the Company had $4.2 million outstanding accounts receivable from VADs and a reserve of $2.4 million against those accounts. This compares to outstanding accounts receivable of $21.4 million and a reserve of $9.0 million at March 31, 1999. Sales credit, returns and allowance rates for the VAD channel for fiscal 2000 increased to 36% from a rate of 20% experienced in fiscal 1999. The sales credit, returns and allowance rates for the Company's other sales channels, predominantly direct sales to customers, decreased to 5% in fiscal 2000 as compared to 8% experienced in fiscal 1999. This decrease was the primary cause for the decrease in the reserve for sales returns and allowance for customers other than VADs to $2.9 million at March 31, 2000, down from $6.0 million at March 31, 1999. The secondary cause of this decrease was the decrease in the outstanding accounts receivable base for customers other than VADs.
Consolidated product revenues decreased $64.8 million or 17% during fiscal 1999 as compared to fiscal 1998. These changes include the restatement of $8.1 million of revenues from fiscal 1998 to 1999 (Refer to Note 3 - Restatement for further detail regarding the restatement). Product revenues were negatively impacted by the absence, during fiscal 1999, of a sale of approximately $30.0 million to a major domestic retail customer recorded in the third quarter of fiscal 1998. Additionally, fiscal 1999 revenues were negatively impacted by the cancellation, during the third quarter of fiscal 1999, of a $13.0 million order to a large domestic logistics company. Fiscal 1999 product revenues were further negatively impacted by a delay in the recognition of revenue from extended rollouts of Company products to customer sites of $12.5 million. An additional $10.4 million in revenue related to goods shipped to customers was delayed due to customer acceptance and product non-conformance issues. The Company's product nonconformance issues and the timing of revenue transactions where the Company provides professional services on extended product rollouts were the primary causes of the increase in the amount of revenues deferred between fiscal years 1999 and 1998. There were a few transactions of relatively large size that gave rise to these deferrals. The extended product rollouts involved new customers where the Company's products would be installed at all of the customers store sites over periods ranging from one month to almost one year. The product nonconformance issues experienced by the Company occurred with a large domestic retailer and
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
involved one of the Company's new wireless product configurations. This one transaction accounted for $8.5 million of the deferred product revenue. Revenue for goods shipped of $8.0 million was deferred due to the Company's guarantee of lease payments to third-party lessors of Company products. The increase in the Company's reserve for sales returns and allowances of $11.8 million contributed to the decrease in consolidated revenue. The increase in sales returns and allowances was due to several factors. The average sales returns were higher during fiscal 1999 as compared to fiscal 1998. The amount of sales returns which reduced consolidated product revenues recorded during fiscal 1999 were $54.0 million as compared to $13.3 million during fiscal 1998, an increase of $40.7 million. The amount of credits issued also increased to $42.2 million, up from $14.8 million issued in fiscal 1998. The significant increase in the domestic sales returns was partially caused by increased returns of direct product revenues whose average credits as a percentage of gross revenues increased from 4% during fiscal 1998 to 8% during fiscal 1999. The increase in revenue credits granted was primarily the result of product quality issues with the Company's pen-based product offerings, as well as, weakening demand for those products during the later half of the fiscal year. The Company's newer more sophisticated pen-based products and the multiple configurations of those products, along with newer more complex installations, caused product quality issues while attempting to meet customer performance demands and specifications. The Company also experienced significant sales returns within the Company's Value-Added Distributor ("VAD") sales channel. Product quality issues, price protection adjustments and distributor stock balancing returns increased the return rate for the VAD sales channel as the Company tried to better manage this relatively new sales channel. Additionally, lower revenue levels due to decreased management emphasis on the indirect sales channel during the year further increased the average credits as a percentage of gross revenues.
The $6.2 million or 8% increase in consolidated customer service revenue during fiscal 1999 as compared to fiscal 1998 was primarily due to the continued increase in the installed base of the Company's products, which in turn generated increased maintenance and "time and material" billings. Consolidated customer service revenues, as a percentage of total revenues, increased to 21% in fiscal 1999 from 17% in fiscal 1998. This increase was primarily due to a decrease in product revenues for the reasons described above. The product revenue issues described above did not have an immediate impact on the levels of customer service revenues recorded in fiscal 1999, but may limit service revenue growth in future years.
The Company's international operations (including Canada and international distributors) provided revenues of $130.7 million and $133.7 million in fiscal 1999 and 1998, respectively. This decrease was primarily due to the relocation of the Company's Aironet Wireless Communication, Inc. ("Aironet") subsidiary, a developer, manufacturer, and marketer of wireless LAN systems, Canadian operations to Akron, Ohio during the second and third quarters of fiscal 1998. This decrease of $6.5 million was offset by a $2.4 million increase in revenue reported by other foreign Company subsidiaries as well as increased sales to foreign distributors. The strength of the United States dollar against the local, functional currencies of certain of the Company's foreign subsidiaries negatively impacted international revenues by $1.5 million or 1.5% during fiscal 1999 as compared to the $6.2 million or 6.3% foreign currency impact in fiscal 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The Company's consolidated cost of revenues for fiscal 1999 included costs of revenues related to Aironet's outside customers of $18.7 million. Due to the deconsolidation of Aironet as noted above, the Company experienced a decrease in cost of revenues since it did not include Aironet's costs of revenues in its fiscal 2000 results.
The increase of 4% in the consolidated cost of product revenues as a percentage of consolidated product revenues during fiscal 2000 as compared to fiscal 1999 was primarily the result of several offsetting factors as follows. As mentioned above, the cost percentage increased due to the deconsolidation of the results of Aironet for fiscal 2000. The intercompany profit benefit related to Aironet products used as components of the Company's product was reduced for fiscal 2000 by $9.2 million as compared to fiscal 1999. The Company recorded a loss on a large retail contract and a loss of normal gross margin for products shipped under this contract in fiscal 2000 of $3.5 million. Additionally, the Company experienced greater purchase price variances of $3.3 million compared to the prior year. For fiscal 2000, increased fixed royalty costs related to a supply agreement with Aironet were $3.0 million. Additionally, the Company recorded a charge of $2.6 million related to losses on inventory purchase commitments. Finally, during fiscal 2000, warranty accruals were increased $.6 million due to specific warranty concessions granted to selected customers, and additional provisions of $.7 million were recorded for increased taxes, other than income taxes, related to manufacturing operations.
These increases to the cost percentage were partially offset by the following decreases to the cost percentage. The provisions for inventory obsolescence decreased $6.8 million in fiscal 2000 as compared to fiscal 1999. The cost percentage was also favorably impacted by lower provisions for fulfillment fees payable to the Company's VADs of $2.4 million, due to the lower volume of goods sold through that distribution channel. Lower amounts of amortization of capitalized software costs of $1.5 million and decreased provisions for losses and obsolescence related to test equipment held by customers of $1.3 million also caused a decrease in the cost percentage. The decrease in amortization of capitalized software was due to lower amounts capitalized in prior years. The decrease in the provisions related to test equipment was a result of improved procedures at customer sites. Increased gross margins from the Company's international and North American operations also contributed to the favorable decrease in the cost percentage of approximately .5%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The Company is subject to a high degree of technological change in market and customer demands. The Company therefore continually monitors its inventories for excess and obsolete items based upon a combination of historical usage and forecasted usage of such inventories. Additionally, discrete provisions are made when existing facts and circumstances indicate that the subject inventory will not be utilized.
Management disposes of excess and obsolete inventory as necessary and as manpower permits although there are no formal plans in place to do so. During fiscal 2000, the Company disposed of $24.6 million of excess and obsolete material. Of this amount $16.3 million related to manufacturing purchased components, $1.8 million related to the Company's customer service inventories and $1.0 million related to the Company's international operations. There were no material recoveries related to the disposal of this material. Based upon facts and circumstances that occurred in the fourth quarter of fiscal 2000 there was an $.8 million recovery of the $37.4 million provision made in fiscal 1999 for excess and obsolete inventory. This recovery related to $10.2 million of inventory purchased by an outsourced manufacturer to build products for the Company that were identified as obsolete in fiscal 1999. The outsourced manufacturer utilized $.8 million of this obsolete inventory for certain of their other customers. The Company previously agreed to reimburse the outsourced manufacturer for this $10.2 million of inventory that they purchased based on projected orders from the Company that did not materialize. The $.8 million recovery reduced the outstanding obligation due to this outsourced manufacturer.
Inventory allowance provisions for fiscal 2000 were composed of manufacturing purchased components of $14.6 million, customer service spare parts and used equipment of $.4 million, trade-in and remanufacturing inventory of $14.5 million and international finished goods inventories of $1.2 million. The $14.6 million provision for manufacturing purchased components was due to a reduction in shipments and expected demand for certain of the Company's older product lines and the Company's refinement of the product life cycle which takes into account technological and market conditions including the impact of the introduction of new products. The $14.5 million provision for trade-in and remanufacturing inventory was primarily due to a net realizable value charge on existing inventory which came about due to the impact of the acceptance of large quantities of trade-ins of the Company's older products to satisfy a major customer's requirements. The $1.2 million provision for international finished goods was due to a write-down of the carrying value on older products.
At March 31, 2000, inventory allowance accounts aggregated $40.5 million and were composed of manufacturing purchased components of $30.5 million, customer service spare parts and used equipment of $8.1 million and international finished goods inventories of $1.9 million. In addition to the inventory allowance accounts, the Company has recorded accrued liabilities totaling $.2 million for purchase commitments to outside contract manufacturers for discontinued products and $2.6 million for a loss on an inventory purchase commitment to a vendor.
At March 31, 2000, the Company had approximately $6.2 million of finished goods inventory held at distributors and customers, and approximately $10.1 million of manufacturing purchased components at contract manufacturers. At March 31, 1999, the Company had approximately $25.7 million of finished goods inventory held at distributors and customers, and approximately $5.7 million of manufacturing purchased components at contract manufacturers. The decrease in the amount of finished goods held at distributors and customers was the result of revenue recognized, for previously deferred transactions, upon installation and customer
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
acceptance of the Company's products. Additionally, the inventory value of finished goods due back from customers for product returns decreased in proportion to the decrease in the reserve for sales returns and allowances.
The Company accrues fees due its VADs for the distribution services and technical support provided to end users, as well as, cooperative advertising costs. The Company accrues for these distributor fees as goods are shipped to VADs and the related revenues are recognized, in order to match revenues and related costs. Cooperative advertising costs and technical support are accrued throughout the fiscal year based upon the prior year's experience levels and current agreements with VADs. During fiscal 2000, the Company incurred $1.4 million of these fees.
The decrease in the customer service cost of revenues as a percentage of customer service revenues during fiscal 2000 resulted primarily from cost containment efforts and lower cost benefits derived from the Company's service repair operations in Ciudad Juarez, Mexico.
The Company believes it will realize improvements in the consolidated gross margin percentage during the next fiscal year as compared to fiscal 2000. These improvements are anticipated primarily due to the expected absence of unusual charges that were experienced in fiscal 2000.
The consolidated cost of product revenues increased $23.1 million or 10% during fiscal 1999 as compared to fiscal 1998. Cost of product revenues increased despite the overall decrease in product revenues in fiscal 1999 of $64.8 million as compared to fiscal 1998. In addition to the total excess and obsolete inventory provisions of $37.4 million as discussed below, the Company incurred increased costs related to underabsorbed manufacturing overhead costs due to decreased volumes and manufacturing inefficiencies of $9.8 million and material rework and repair costs of $3.0 million. The underabsorbed manufacturing overhead costs were primarily caused by decreased and below normal production volumes during the third and fourth quarters of fiscal 1999. The unfavorable volume variances within the underabsorbed manufacturing overhead rates were not capitalized within ending inventory. The manufacturing inefficiencies incurred at the manufacturing plant were due to small sales order quantities, unplanned sales order changes and sales order cancellations. These actions caused excess and lost labor costs, overhead costs, purchase order changes, purchase order cancellations, cancellation fees and restocking charges. The Company also incurred severance charges related to
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
terminated manufacturing personnel of $.7 million, increased provisions for warranties related to the Company's international operations of $.3 million, and provisions for disputed royalties and vendor charges of $.7 million.
Consolidated inventory allowance accounts increased to $28.8 million at March 31, 1999, from $11.7 million at March 31, 1998. In addition to the inventory allowance accounts, accrued liabilities totaling $12.4 million were provided for purchase commitments to outside contract manufacturers for discontinued products.
At March 31, 1999, the inventory allowance accounts were primarily composed of manufactured purchased components of $22.9 million, customer service spare parts and used equipment of $4.0 million and international finished goods inventories of $1.9 million. The overall increase in the allowance accounts was due to provisions related to the discontinuance of several of the Company's products, including the PTC 1194, PTC 1124, PTC 1134 and PTC 1184 as well as other products. The total charges that were related to the discontinuance of these products were $23.6 million. These charges included costs for the net realizable value of related tooling of $.8 million, reserves for related test and demonstration equipment of $1.1 million and vendor contract cancellation costs of $.8 million. A number of factors arose during the later part of the fiscal year that contributed to management's decision to discontinue these products. These factors included the extended length of time the development cycle experienced with these products, customer acceptance issues related to products shipped and more advanced features contained in competing products. These factors led to a reduction in customer demand and a related backlog for these products. Additionally, the effort required to modify the existing products to meet increased customer demands for performance features was determined to be cost prohibitive.
Provisions were made for manufactured components of $35.1 million customer service spare parts and used equipment of $1.1 million and international finished goods of $1.2 million. The provisions for remanufacturing obsolescence were made as revenues related to the Company's remanufacturing operations did not materialize as anticipated. During the fourth quarter of the fiscal year ended March 31, 1999, the Company significantly reduced its management emphasis on remanufacturing operations. Provisions for test equipment held by customers were made as such inventory aged and was determined either not to be salable to such customers or able to be returned and utilized by the Company. During the year ended March 31, 1999, the Company reduced its shipments of test equipment to customers as a sales tool.
During fiscal 1999, the following amounts were scrapped: manufactured purchased components $3.7 million international inventories of finished goods $.5 million and test equipment held at customers $3.7 million. Recoveries that were related to the disposition of such inventory were immaterial.
At March 31, 1999, the Company had approximately $25.7 million of finished goods inventory held at customers and distributors and approximately $5.7 million of manufacturing components at contract manufacturers. At March 31, 1998, the Company had approximately $12.5 million of finished goods inventory held at distributors and customers and approximately $2.0 million of manufacturing components at contract manufacturers. The increase in the inventories held by distributors and customers directly corresponds to the deferral of revenue on transactions that occurred late in fiscal 1999. Revenues related to these transactions were deferred due to product quality and related customer acceptance issues and future performance obligations of the Company such as professional services on extended product rollouts. The Company did not have these issues due to timing considerations at March 31, 1998; therefore, no corresponding balance existed in
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
fiscal 1998. The increase in the reserve for sales returns and allowances was also a factor in the increase in inventory held by distributors and customers since the salvage value of product returns was included in this inventory. The salvage value of inventory related to returned goods increased $4.7 million between years. This increase was partially offset by a decrease in the amount of test equipment held by customers.
The Company accrues fees due its VADs for distribution services and technical support provided to end users, as well as, cooperative advertising costs. The Company accrues for these distributor fees as goods are shipped to VADs and the related revenues are recognized, in order to match revenues and related costs. Cooperative advertising costs and technical support are accrued throughout the fiscal year based upon the prior year's experience levels and current agreements with VADs. During fiscal 1999, the Company incurred $2.4 million of these fees.
The increase in the fiscal 1999 consolidated customer service cost percentage was primarily due to increased internal and contract labor and parts costs associated with repair work performed on the Company's more sophisticated products. It is estimated that these greater direct costs and excess repair costs for warranty repairs was approximately $2.0 million. In addition to these costs the Company also incurred severance charges related to terminated domestic customer service personnel of $.3 million.
The Company's consolidated selling expenses for fiscal 1999 included selling expenses related to Aironet of $6.7 million. Due to the deconsolidation of Aironet as noted above, the Company experienced a decrease in selling expenses since it did not include the selling expenses related to Aironet in its fiscal 2000 results.
Consolidated selling expenses, as a percentage of revenues, decreased for fiscal 2000 as compared to fiscal 1999 from 24% to 22%. Contributing to the overall dollar decrease in selling expenses was a decrease in U.S. commissions of $1.0 million for fiscal 2000 as compared to fiscal 1999. The decrease in commission expense was primarily due to the decreased gross margin base on which commissions were paid and fewer layers of sales management personnel earning commissions. The domestic provision for bad debts decreased for fiscal 2000 by $2.3 million. This decrease is primarily the result of net recoveries for doubtful accounts related to a foreign distributor for fiscal 2000 of $.1 million as compared to provisions of $3.6 million for fiscal 1999. This resulted in a reduction to fiscal 2000 provisions of $3.7 million as compared to fiscal 1999 as the foreign distributor's financial condition and payment history improved. This decrease to the provisions
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
for doubtful accounts was partially offset by increased provisions of approximately $1.0 million in the U.S. for small account balances that have aged substantially and have not been collected. Management has turned these accounts over to collection agencies and reserved for estimated losses. Also contributing to the decrease in selling expenses were cost containment efforts in the Company's North American sales operations, whose expenses decreased $7.7 million for fiscal 2000 as compared to fiscal 1999. These decreases were composed primarily of lower salaries and wages, sales expediting costs, advertising, sales events and recruiting. These decreases were offset by incentive compensation for the retention of key sales personnel of $1.0 million and severance charges of $.6 million for 3 sales management personnel that were terminated. Additionally, selling expenses for fiscal 2000 related to the Company's international operations decreased by $.4 million and was the result of the elimination of sales administration costs in the Company's Belgian international headquarters of $1.6 million offset by severance charges related to the Company's international sales operations of $1.2 million. Finally, selling expenses for the Company's Metanetics subsidiary decreased $.4 million.
The Company's allowance for doubtful accounts decreased from a balance of $11.1 million at March 31, 1999 to a balance of $7.1 million at March 31, 2000. The Company provided for $5.1 million of bad debts, and bad debt write-offs totaled $9.0 million. These bad debt write-offs were primarily related to accounts receivable from the foreign distributor referenced above.
Consolidated product development and engineering expenses as a percentage of revenues decreased to 8% for fiscal 2000 as compared to 11% for fiscal 1999. Product development and engineering expenses related to Aironet were $6.6 million for fiscal 1999. Approximately 46% of the decrease in product development and engineering expenses was the result of the deconsolidation of Aironet in fiscal 2000. The overall dollar decreases in product development and engineering expenses were due to current management efforts to perform more engineering tasks with Company personnel rather than with more expensive contract engineering firms. These actions have reduced expenses related to contract labor and outside engineering services by $3.6 million for fiscal 2000 as compared to fiscal 1999. Additionally, increased management focus on engineering processes and job completion has resulted in reduced rework costs and engineering scrap of $4.4 million. Engineering component parts usage also decreased by $1.2 million in fiscal 2000 as compared to fiscal 1999. Indirect engineering costs decreased due to cost containment efforts as employee relocation expenses, rent and travel decreased by $1.6 million. Additionally, the Company reduced its prototype costs by approximately $.8 million and increased the capitalization of software costs which reduced gross expenses by approximately $1.3 million. These decreases to engineering expenses were partially offset by increased salaries and wages of $.2 million and increased patent amortization costs of $1.6 million for fiscal 2000 as compared to fiscal 1999. The Company also incurred a nonrecurring compensation charge of $3.1 million for certain key employees concurrently with the repurchase of Metanetics subsidiary stock, which resulted in compensation to certain key employees and former option holders of Metanetics. The Company incurred third party development charges of $.6 million during the third and fourth quarters of fiscal 2000. The Company also incurred severance charges of $.2 million during fiscal 2000 related to personnel changes in its product development and engineering operations.
During fiscal 2000, the Company capitalized software development costs in accordance with the requirements of Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
Marketed" ("SFAS 86") of $3.6 million. These capitalized costs effectively represent reductions to engineering expenses.
Consolidated general and administrative expenses as a percentage of revenues increased to 17% for fiscal 2000 compared to 14% for fiscal 1999. The increase in general and administrative expenses for fiscal 2000 was primarily due to a $8.6 million increase in expenses related to the Company's corporate information systems project. Included in this increase was amortization of costs related to installed modules of $3.3 million as well as other costs which may not be capitalized such as training and debugging costs of $5.3 million. Additionally, the Company incurred greater bank fees of $2.2 million for fiscal 2000 related to its credit facilities as compared to fiscal 1999. The Company also incurred increased professional fees of $1.0 million predominantly related to SEC, audit and accounting as well as litigation matters. The Company accrued $.9 million for net the present value of consulting fees payable under a letter arrangement dated December 27, 1997, to Director and Secretary, Robert A. Goodman upon his retirement from the Goodman Weiss Miller law firm, in fiscal 2000. This agreement calls for payments aggregating $1.5 million, payable in equal monthly installments over a ten-year period. The Company also incurred several charges related to the relocation of its operations in Akron, Ohio to Cincinnati, Ohio and The Woodlands, Texas. In accordance with the requirements of Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Cost to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3") and Staff Accounting Bulletin No. 100 "Restructuring and Impairment Charges" ("SAB 100"), the Company accrued $1.6 million for stay-on bonuses, healthcare and outplacement benefits for employees in Akron who elected not to relocate and stayed through the transition process. All of these accruals were made based upon specific employee termination contracts and provisions were made based upon the amount of stay-on bonuses earned during the transition period ending June 30, 2000. Additionally, the Company incurred duplicate salaries related to the transition aggregating $.5 million. The Company also incurred excess contract labor costs of $1.4 million to complete the transition of its new information management systems. Recruiting and relocation expenses also increased by $.6 million due to the transition. The Company also incurred lease abandonment charges, accelerated depreciation of leasehold improvements and contract cancellation charges related to its Akron, Ohio offices of $1.5 million, $.4 million and $.2 million respectively. The Company also accrued $.5 million in incentive compensation for its management group. No such accrual was made in fiscal 1999. During fiscal 2000, the Company incurred $.4 million in asset impairment charges related to the cessation of the Company's corporate jet operations, and severance charges aggregating $.2 million.
These increases during fiscal 2000 were offset by a decrease in expenses due to the absence of the $1.3 million charge related to start-up costs of a joint venture in the People's Republic of China by the Company's Metanetics subsidiary incurred during the third quarter of fiscal 1999. Additionally, the cessation of the Company's corporate jet operations reduced operating expenses by $.9 million. General and administrative expenses decreased as the result of the absence of a $1.3 million charge in fiscal 1999 related to the discontinuation of consulting contracts between the Company and the Company's former Chairman and CEO, Robert F. Meyerson. Also, the Company incurred $1.7 million in fiscal 1999 related to the termination of its then CEO and CFO, Frank E. Brick and Kenneth W. Haver, respectively. No such charges took place in fiscal 2000. Finally, travel expenses were reduced by $.6 million for fiscal 2000 compared to fiscal 1999.
General and administrative expenses related to Aironet were $6.3 million during fiscal 1999. These expenses included a $3.4 million stock based compensation
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
charge due to variable plan accounting and changes to the vesting provisions of the underlying plan. Due to the removal of Aironet from the consolidated financial statements of the Company, the Company incurred a charge of $.5 million to reflect the sublease loss and impaired value of leasehold improvements on property leased by the Company and subleased to Aironet in Akron, Ohio.
The Company's domestic accrual for severance costs decreased from a balance of $3.4 million at March 31, 1999 to a balance of $1.8 million at March 31, 2000. This decrease was caused by severance charges of $1.9 million during fiscal 2000, which were more than offset by severance payments of $3.5 million to terminated employees. A total of 47 domestic employees were terminated during fiscal 2000. The areas of the Company affected were domestic sales operations, domestic product development, manufacturing operations and corporate administration. In addition to the domestic severance activity, 4 employees were terminated in the Company's international sales operations during fiscal 2000. The severance recorded related to these employees was $1.2 million. At March 31, 2000, $.1 million was accrued related to international operations; $1.1 million of the amount accrued of this severance has been paid. As discussed above, the Company recorded $1.6 million in stay-on bonuses, healthcare and outplacement benefits for 103 employees in Akron who elected not to relocate and stayed through the transition process.
Fiscal 2000 operating expenses were favorably impacted by the absence of costs incurred in response to an unsolicited takeover proposal and to a proxy contest during fiscal 1999 of $8.1 million.
On November 10, 1999, the Company announced that it intended to relocate approximately 170 employees located at its Akron, Ohio headquarters. The Company anticipated that the relocation would entail moving 30 to 40 positions to a new facility in Cincinnati, Ohio and approximately 75 positions to its World Technology Center in The Woodlands, Texas. Approximately 35 employees in the Company's software development, advanced consulting, Akron sales and project management groups are being relocated to a smaller, more cost efficient facility in the Akron area. The Company anticipates that the additional net costs of relocation over the next three quarters will be approximately $2.0 million. The Company's Board of Directors approved the relocation plans for this action on November 1, 1999. Although the Company did have plans to carryout the relocation and these plans were approved by the appropriate level of management the documentation was not sufficient under the requirements of SAB 100 to warrant the accrual of these costs as restructuring charges as of the date of commitment. However, as noted above, the Company has recorded charges based upon individual employee termination contracts, the physical abandonment of leased office space and reassessed the remaining useful lives of affected assets as appropriate under the guidelines established by EITF 94-3 and SAB 100.
The Company believes it will reduce operating expenses during the next fiscal year both in absolute dollars and as a percentage of revenues. The Company anticipates that total operating expenses will be in the range of 36% to 38% of revenues, absent any unusual non-recurring charge.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
Consolidated selling expenses as a percentage of total revenues were 24% and 18% in fiscal 1999 and 1998, respectively. The primary reasons for these increases were as follows. Bad debt provisions related to specific customer accounts increased substantially during fiscal 1999. Provisions that related to these accounts aggregated $4.3 million. Also contributing to the increased selling expenses were increases in the Company's international infrastructure of $2.9 million and approximately $.3 million of severance charges related to the Company's international operations. Selling and marketing expenses increased $2.2 million at Aironet as it increased its selling and marketing efforts in order to expand its outside customer base and promote separate name recognition. Domestic marketing expense increased $1.8 million due to the inclusion in fiscal 1999 results of a full year of expenditures related to a new marketing group created during fiscal 1998. Domestic advertising expenses increased $.7 million in fiscal 1999. Increased provisions for past due accounts receivable related to a foreign distributor of $.7 million also increased overall selling expenses. Total provisions related to this one distributor were $3.6 million in fiscal 1999.
Consolidated product development and engineering expenses as a percentage of total revenues were 11% and 8% in fiscal 1999 and 1998, respectively. The increase in product development and engineering expenses was primarily related to the decreased amount of capitalization of internal software development costs of $4.5 million as the result of a shift in the nature of those development efforts and the inability to qualify for capitalization under accounting principles generally accepted in the United States. Additionally, overall expense levels increased in the Company's engineering and product development functions due to large amounts of open design projects associated with the Company's pen-based products and new products. Direct expenses such as labor, contract labor, outside design services and operating parts and supplies increased $6.1 million in fiscal 1999 as compared to fiscal 1998 levels. Engineering expenses were also increased by greater spending at the Company's Metanetics subsidiary of $.6 million related to the development of its optical scanning product line and at Aironet of $.9 million related to the continued development of wireless network products. During fiscal 1999, amortization of goodwill of $.5 million resulting from the repurchase of Metanetics common stock was recorded as engineering expense. As part of the management change and related workforce reductions during the fourth quarter of fiscal 1999, severance charges of $.3 million were incurred. These increases were offset by the absence of $2.4 million of expenses incurred in fiscal 1998 to relocate certain of the Company's engineering and product development operations from Akron, Ohio to The Woodlands, Texas. Additionally, product development and engineering expenses were decreased by the absence of $2.6 million of development expenses related to
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
the Company's Virtual Vision subsidiary, which was divested in April 1998. Also, engineering expenses were decreased by the absence of amortization of goodwill related to the acquisition of Teletransaction of $1.3 million, since that asset had become fully amortized during fiscal 1998.
During fiscal 1999, the Company continued to capitalize internal software development costs in accordance with the requirements of SFAS 86 aggregating $3.3 million. Amortization related to capitalized internal software development costs was $7.2 million. During the year, the Company provided for accelerated amortization of $.7 million under the requirements of SFAS 86 as the subject software was either replaced with newer versions or the related hardware products were discontinued.
General and administrative expenses as a percentage of total revenues were 14% and 9% in fiscal 1999 and 1998, respectively. The increase in general and administrative expenses was primarily related to the following items. The Company experienced increased non-capitalizable expenses related to its corporate information systems project of $3.4 million. Stock based compensation related to Aironet of $3.4 million was recorded due to the impact of variable plan accounting and changes to the vesting provisions of the underlying plan. As part of the management change and related workforce reductions and discontinuation during the fourth quarter of fiscal 1999, severance charges of $2.0 million were incurred. The change in the Company's management also led to the discontinuation of consulting contracts with Robert F. Meyerson, the Company's former Chairman and CEO, as these services will no longer be utilized. The discontinuation of such contracts resulted in a charge of $1.3 million. The Company also incurred start-up costs related to a joint venture entered into by Metanetics of $1.3 million. These start-up costs were paid to Robert F. Meyerson for services performed on behalf of the Company. Also contributing to the increase in general and administrative expenses was increased legal and accounting fees related to the Company's announced restatement of earnings, related shareholders suits and regulatory investigations of approximately $1.2 million. Depreciation and computer hardware and software maintenance primarily related to the Company's on-going information systems integration increased $.8 million and $1.2 million, respectively, in fiscal 1999 as compared to fiscal 1998. Additionally, rent allocated to general and administrative functions increased $.6 million in fiscal 1999 due to the move of the Company's engineering functions in fiscal 1998. The Company also incurred $.5 million of bank waiver fees related to its violation of its credit facility covenants.
As discussed above, the Company incurred significant severance charges due to its management changes, which included related charges for the CEO, CFO and CTO of the Company as well as other members of senior executive management, and a general workforce reduction that took place during the fourth quarter of fiscal 1999. The areas of the Company effected were executive management, domestic sales operations, domestic product development, customer service and manufacturing operations. A total of 53 employees were terminated. Of this number, 5 employees were given a short-term stay notice. All other employees were terminated prior to March 31, 1999. The remaining employees were terminated subsequent to March 31, 1999. There have been no material changes to the amounts accrued.
During fiscal 1999, the Company incurred charges aggregating $8.1 million as follows: unsolicited takeover bid, $3.2 million; proxy contest and settlement with shareholder, $.4 million; two unconsummated business combination transaction of $2.9 million and $1.6 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
Net interest expense as a percentage of total revenues increased to 4% in fiscal 2000 as compared to 2% in fiscal 1999. This increase was primarily due to the increased borrowings and interest charged under the Company's credit facilities. The weighted-average of the amounts borrowed under the credit facility increased $16.7 million from that experienced in fiscal 1999 to $66.4 million in fiscal 2000. The increased expense was also the result of a higher cost of funds in fiscal 2000 compared to fiscal 1999. The weighted-average interest rate on borrowings during fiscal 2000 was 10% compared to 9% in fiscal 1999.
The Company does not anticipate the continued need for significant additional borrowings during the next fiscal year. However, the Company has made arrangements with a lender to ensure that any future working capital requirements are met. Therefore, the Company believes that interest expense will decrease during the next fiscal year as compared with fiscal 2000.
Net interest expense as a percentage of total revenues increased to 2% in fiscal 1999 as compared to 1% in fiscal 1998. This increase was primarily due to the increase in the fiscal 1999 weighted-average borrowings under the Company's credit agreements and product financing arrangements of $49.7 million as compared to $3.5 million in fiscal 1998. The impact of this increase was partially offset by the increased capitalization of interest costs related to the Company's corporate information systems project. The increased capitalization of these costs reduced interest expense by $1.2 million in fiscal 1999 as compared to $.3 million in fiscal 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
As described in Note 17 - Divestitures and Subsidiary Stock Transactions, the Company's former Aironet subsidiary was acquired by Cisco Systems, Inc. ("Cisco") through a merger in which Aironet stockholders received shares of Cisco common stock. Subsequent to the Cisco/Aironet merger, the Company accounted for the investment retained in Cisco shares as "available for sale" securities in accordance with the requirements of SFAS 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") based upon the Company's intent to hold the securities for an extended length of time and to not engage in the frequent buying and selling of the securities. SFAS 115 requires investments in marketable equity securities to be recorded at fair value. Accordingly, the difference between the carrying value of the Company's investment under the equity method of accounting in Aironet prior to the Cisco/Aironet merger, $21.8 million, and the fair value on the date of the transaction, $409.4 million, has been recorded as a non-operating pre-tax gain of $387.6 million. Once the merger between Aironet and Cisco was consummated the Company sold a portion of its marketable securities of Cisco to satisfy various debt and working capital obligations. Upon the sale of these marketable securities the Company realized an additional gain on marketable securities of $8.5 million in accordance with the provisions of SFAS 115. This realized non-operating gain was calculated as the difference between the Company's basis in Cisco shares, calculated as of the consummation date, March 15, 2000, and the market value of the shares sold to a third party on the date of sale, March 22, 2000.
During the second quarter of fiscal 2000, Aironet and the Company sold 6,919,434 shares of Aironet's voting common stock in an initial public offering on the NASDAQ National Market at an offering price of $11.00 per share. Of the total number of shares offered, Aironet sold 4,637,196 shares, and the Company sold 2,282,238 shares. The aggregate proceeds, net of underwriting discounts and commissions, were $47.4 million to Aironet and $23.3 million to Telxon. Subsequent to this transaction, the Company's remaining interest in Aironet was approximately 35%. As a result of this transaction, the Company recorded a non-operating gain of approximately $32.0 million, net of transaction costs of $1.5 million. Also as a result of this transaction, the Company ceased consolidation of Aironet effective April 1, 1999. The Company then accounted for its investment in Aironet under the equity method of accounting. Equity income of $1.1 million was recorded related to the Company's interest in the earnings of Aironet from the date of this transaction until the consummation of the Aironet/Cisco merger described above.
During the second quarter of fiscal 2000, the Company entered into a set of transactions whereby the Company repurchased its corporate jet which was previously sold and leased-back, and resold the corporate jet to a third party. As a result of these transactions, the Company retained net cash proceeds of $.3 million. This was recorded as a non-operating gain.
During the first quarter of fiscal 2000, the Company recorded $1.3 million of non-operating expense related to the reduction in carrying value of an investment in non-marketable securities. The Company's estimate of the reduction was based upon the market value of subsequent equity transactions of the investee with third parties. The investment consists of stock in the development-stage technology company that purchased the Company's Virtual Vision subsidiary. Also, during the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
first quarter of fiscal 2000, the Company sold an investment in marketable securities of another development stage technology company for cash proceeds of $1.5 million. As this investment was previously non-marketable, its carrying value was based upon the cost basis, and was $.7 million. The Company therefore recorded a pre-tax gain of $.8 million.
In fiscal 1999, the Company recorded minority interest of $.3 million as other non-operating income due to its minority interest share of Aironet's losses.
During the fourth quarter of fiscal 1999, the Company reduced the carrying value of a $4.5 million investment in non-marketable securities by $1.7 million. The Company's estimate of the decrease in the carrying value was based upon subsequent equity transactions of the investee with third parties. This investment is composed of preferred shares in the development-stage technology company that purchased the Company's Virtual Vision subsidiary.
The Company also reduced the carrying value of certain notes receivable from third-parties totaling $.4 million based upon subsequent settlements of amounts due, during the fourth quarter of fiscal 1999.
During the first quarter of fiscal 1999, a transaction to sell the stock of the Company's Virtual Vision subsidiary was consummated, resulting in a $.9 million gain. Subsequent to the consummation of the transaction, positive adjustments to such gain totaling $.2 million were recorded. These adjustments related to changes in key employee retention rates subsequent to the transaction.
During the first quarter of fiscal 1999, Aironet sold 222,222 shares of its voting common stock to various third party investors at a price of $3.50 per share. Proceeds from this sale of stock totaled $.8 million in cash and notes receivable. The resulting pre-tax gain of $.3 million was recorded as a gain on sale of subsidiary stock in the accompanying Consolidated Statement of Operations. In addition to the sale of the shares of stock, 66,667 warrants at $3.50 per share for the purchase of Aironet voting common stock were issued. A gain of approximately $.05 million relating to these warrants has been deferred until the warrants are exercised or lapse. The Company's remaining interest in the voting stock of Aironet at March 31, 1999 was 76%, as compared to 78% at March 31, 1998.
During the fourth quarter of fiscal 1998, the Company recorded non-operating expense of $.4 million related to the minority interest in the income of Aironet, $1.2 million of non-operating expense related to the revaluation of certain non-marketable investments and approximately $1.0 million of non-operating income related to the sale of its investment in a start-up wireless technology entity. During the third quarter 1998, the Company recorded a non-operating loss of $.4 million related to a
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
discrete litigation settlement caused by the divestiture of Itronix, a former subsidiary of the Company.
During fiscal 1998, the Company sold 984,126 shares of voting common stock of Aironet to third party investors at a price of $3.50 per share. Proceeds from this sale of stock totaled $3.4 million in cash. The resulting pre-tax gain of $.4 million, net of related transaction costs, was recorded as a gain on sale of subsidiary stock in the accompanying Consolidated Statement of Operations. The Company's remaining interest in the voting common stock of Aironet at March 31, 1998, was 78%.
During fiscal 1998, certain employees of Aironet exercised 270,000 options to purchase Aironet voting common stock at $1.86 per share. The pre-tax gain of $.2 million was recorded as a gain on sale of subsidiary stock in the accompanying Consolidated Statements of Operations.
During fiscal 1997, the Company sold 808,500 shares of Aironet stock in a transaction which, resulted in a $1.0 million deferred gain at March 31, 1997 since the criteria for the recognition of gain on the sale of subsidiary stock had not been met. During fiscal 1998, the criteria for the recognition of a gain on the sale of subsidiary stock were fulfilled, and accordingly, the deferred gain was recorded as a gain on sale of subsidiary stock.
The Company's consolidated fiscal 2000 effective tax rate of 22.4% reflected U.S. federal income tax increased by provisions for state and local income taxes, net of federal benefit, and decreased by the utilization of the U.S. net operating losses and a decrease in the valuation allowance for deferred tax assets.
The Company provided $10.3 million for state and local income taxes that increased the Company's effective income tax rate by 3.2%.
The decrease in the valuation allowance of $48.2 million reflected the Company's reassessment of the valuation allowance established against the net deferred tax assets during fiscal 1999 to fully reserve the deferred tax assets of the Company excluding those related to Aironet. This full valuation allowance was based on the Company's assessment at that time that it was more likely than not that these deferred tax assets would not be utilized through future taxable income or implementation of tax planning strategies. Based on the tax impact of the merger transaction between Aironet and Cisco during fiscal 2000 and the subsequent sale of $150.0 million of the Company's holdings of Cisco common stock, the Company reassessed that position. The Company concluded that it was more likely than not that these deferred tax assets would be utilized through future taxable income or tax planning strategies made available by the Aironet/Cisco transaction. Therefore, the valuation allowance was significantly reduced. The reassessment of the valuation allowance decreased the Company's effective income tax rate by 14.8%.
At March 31, 2000 the Company had substantial deferred income tax assets and liabilities recorded on the consolidated balance sheet. These deferred tax assets
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
and liabilities included net current deferred tax assets aggregating $25.6 million and long-term deferred tax liabilities aggregating $109.5 million.
The Company's consolidated fiscal 1999 tax provision reflected a valuation allowance of $10.1 million established against the net deferred tax asset at the beginning of fiscal 1999 and foreign income taxes of $5.2 million. No tax benefit was recognized for the fiscal 1999 net operating loss based on the Company's assessment at March 31, 1999, that it was more likely than not that these deferred tax assets would not be utilized through future taxable income or implementation of tax planning strategies.
The increase in the Company's working capital at March 31, 2000 from March 31, 1999 was primarily due to the extinguishment of the Company's notes payable, repayment of accounts payable and accrued liabilities aided by increases in cash and deferred income taxes. These increases in working capital were partially offset by reductions in accounts and notes receivable, inventories and an increase in income taxes payable.
During March 2000, the Company sold approximately $150.0 million of its holdings of Cisco common shares. The proceeds from this sale were utilized to extinguish amounts outstanding under the Company's senior secured credit facility of approximately $76.6 million (including repayment of the long-term portion of $10.1 million and accrued interest of $.5 million), pay the related prepayment penalty of
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
$1.5 million, repay structured notes and to pay accounts payable with outside processors of approximately $13.2 million. The proceeds noted above were also utilized to repay a financial institution for amounts owed under a guarantee of a customer's lease payments of $3.0 million, repay accelerated lease obligations of $1.3 million and to repay a note to a professional services provider of $1.2 million. The remaining proceeds were used to pay critical vendor accounts payable of $12.0 million, past due accounts payable to other vendors of $13.5 million and to increase the Company's cash and short-term investments position by $27.1 million.
The Company reestablished, and therefore increased, its current net deferred tax assets by $21.3 million based upon its assessment that it is more likely than not that these deferred tax assets will be utilized through future taxable income realized through the implementation of tax planning strategies.
The decrease in accounts receivable reflects improved cash collections in the Company's domestic operations. Accordingly, consolidated sales outstanding decreased from 98 days at March 31, 1999 to 76 days at March 31, 2000. Gross accounts receivable decreased $27.4 million for fiscal 2000 as compared to fiscal 1999. Of this decrease, $22.1 million was from the Company's domestic operations, $4.6 million reflects the absence of Aironet accounts receivable from outside customers that were present at March 31, 1999 and $.5 million relates to a decrease in the Company's international operations. The majority of the decrease in gross accounts receivable resulted from a decrease in accounts receivable related to the Company's VAD distribution channel of $17.2 million. Partially offsetting these decreases were reduced reserves for doubtful accounts and sales returns and allowances of $4.0 million and $9.8 million, respectively. Virtually all of these reductions to reserves and allowances occurred in the Company's domestic operations since the Company's bad debt experience with a foreign distributor and sales return experience improved. A reduction in the Company's reserve for sales returns and allowances related to VADs accounted for $6.7 million of the overall decrease in that reserve. Overall VAD volumes have decreased considerably in fiscal 2000 as current management has focused on the direct sales channel.
The Company's inventories decreased primarily as a result of a decrease of $19.1 million in the Company's finished goods held at customers and distributors due to customer acceptance of these goods after March 31, 1999. At March 31, 2000, the amount of deferred revenues was significantly decreased as a result of installations of equipment for customer rollouts, customer acceptance of amounts deferred in fiscal 1999 and a reduction in extended rollouts of customer products in fiscal 2000. Also, $3.9 million of the decrease in inventory held by distributors and customers is directly attributable to the decrease in the inventory value of the reserve for sales returns and allowances. Additionally, inventories staged to rollout to customer sites decreased $5.5 million. Inventories were also reduced as the Company increased its valuation reserves for its customer service spare parts and used components by $4.0 million. Also causing the decrease in inventories was the absence of Aironet's net manufacturing inventories of $4.6 million. A net decrease in raw material and work-in-process inventories of $10.6 million was the result of management's efforts to decrease inventory levels, as well as, increased reserves for excess and obsolete purchased components. The Company's product line continues to experience competitive pressures in the marketplace and new products have been introduced. Management has estimated that these factors will increase provisions for excess and obsolete inventories in the near-term and the Company's reserve methodology has taken these factors and other quantitative and qualitative factors into account. Additionally, decreased inventory levels can also be attributed to the Company providing an
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
aggregate of $30.7 million, including amounts noted above, for excess and obsolete inventory during fiscal 2000. These provisions were in excess of the amount of inventories disposed of approximating $24.6 million. Consolidated inventory turns increased to 3.4 at March 31, 2000 compared to 2.3 at March 31, 1999.
The following contributed significantly to the decrease in accrued liabilities; the recognition of $13.5 million of hardware revenues previously deferred and the payment of a $9.3 million accrued liability to an outside processor of the Company's products. Additionally, decreases were caused by the payment of $5.3 million to a financial institution related to the guarantee of a customer's lease payments, the payment of $2.6 in professional fees for unconsummated business combinations and a $3.5 million decrease in deferred customer service revenues. Furthermore, these decreases included a $1.6 million dollar decrease in accrued severance, a $1.2 million decrease to accrued employee compensation expense and a $1.0 million decrease to accrued sales commissions.
These decreases in accrued liabilities were partially offset by an increase in accruals for sales and property taxes of $3.6 million, provisions for a loss on a customer contract of $3.5 million and a provision for a loss on purchase commitments for manufacturing components of $2.6 million. Additionally, amounts were accrued for the lease abandonment of the Company's Akron, Ohio offices, related contract cancellations of $1.7 million, and for stay-on bonuses and related healthcare and outplacement benefits for Akron employees who elected not to relocate with the Company of $1.6 million. Accruals were also made for consulting fees of $.9 million, incremental product royalties of $.6 million, professional fees of $.5 million, joint marketing and product development fees of $.4 million, incremental product warranties of $.3 million and miscellaneous accruals of $.7 million. The Company also accrued incentive compensation for executives and compensation for the retention of key sales personnel aggregating $1.1 million.
During fiscal 2000, the Company entered into a loan and pledge agreement arranged with a lending institution to provide the Company with an open line of credit not to exceed $236 million collateralized by the Company's investment in marketable securities. The maximum availability of $236 million is based on 90% of the floor value of two derivative financial instruments or "Collar" as described in Note 7 - Marketable Securities and Derivatives. The collateral for the loan is the Company's investment in Cisco common stock, which is also described in Note 17 - Divestitures and Subsidiary Stock Transactions. The options contained within the Collar agreement have an expiration date of March 26, 2001, and may only be exercised on this date. The line of credit, which carries a borrowing rate of LIBOR plus thirty basis points, has no fees associated with it. The one-month LIBOR rate at March 31, 2000 was 6.13%. There are no borrowings against this line of credit as of March 31, 2000. The purpose of the facility is to ensure that the Company meets its working capital requirements.
During fiscal 2000, the Company also entered into an unsecured revolving promissory note with a bank for $5.0 million. The note matures April 30, 2001. Interest on advances is at the bank's prime rate plus 2.00%. There are no borrowings against this note as of March 31, 2000.
The Company believes that its existing resources, including cash and cash equivalents, short-term investments and credit facilities will be sufficient to meet working capital requirements for the next twelve months.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The decrease in the Company's working capital at March 31, 1999, from March 31, 1998, was primarily attributable to the increase in notes payable, accrued liabilities and accounts payable, supplemented by a decrease in accounts receivable and partially offset by an increase in inventories. The increase in notes payable was due to increased financing needs as a result of the net loss incurred during the last half of fiscal 1999, high levels of inventory purchases, and capital expenditures of $36.0 million, including expenditures related to the Company's corporate information systems project. The increase in accrued liabilities and accounts payable was primarily due to amounts recorded for deferred product revenues of $14.2 million and for costs related to the purchase of components related to discontinued products of $12.4 million, as well as, decreased payments to vendors. Inventories increased during fiscal 1999 primarily due to a $13.2 million increase of finished goods inventory held by customers and distributors. The increase in the amount of inventory held at customers and distributors was due primarily to an increase in inventory shipped to customers where revenue was not recognized since installation of the product or ultimate customer acceptance of the product did not occur. Consolidated inventory turns increased to 2.3 as of March 31, 1999 from 2.1 at March 31, 1998.
Accounts receivable decreased between fiscal years primarily due to decreased revenues during the last quarter of fiscal 1999 as compared to fiscal 1998. The overall increases of accounts receivable allowance accounts for bad debts of $6.3 million and sales returns and allowances of $11.8 million also contributed to the decrease in accounts receivable. Additionally, the reclassification of $4.5 million of proceeds in the form of shares related to the sale of Virtual Vision from other accounts receivable into long-term assets when such proceeds were released from escrow added to the decrease in accounts receivable. Days sales outstanding increased from 84 days at March 31, 1998 to 98 days at March 31, 1999 as revenues for the last quarter of fiscal 1999, relative to those recorded in the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
last quarter of fiscal 1998, decreased at a faster rate than the net accounts receivable balance. Other decreases of $10.4 million included other accounts receivable and prepaid assets. Other decreases in prepaid assets were in part due to decreased deferred income tax assets, which were subject to a substantial valuation allowance during fiscal 1999.
The Company incurred a net loss in fiscal 1999 of $135.0 million with a decrease in consolidated revenues of $58.6 million as compared to fiscal 1998. Cash flows used by operations were $27.6 million, and cash flows used in investing activities were $40.9 million. The primary source of cash flows for fiscal 1999 were net borrowings under the Company's credit facilities including product financing arrangements, which aggregated $65.6 million. The Company was in violation of debt covenants related to certain of these credit facilities and was unable to borrow additional funds against these facilities. Waivers for non-compliance had been received through August 30, 1999. The Company's stockholders' equity and working capital at March 31, 1999 were $17.0 million and $34.3 million, respectively.
The net cash used in operating activities of $75.3 million for fiscal 2000 resulted primarily from the operating loss of $90.4 million and the payment of $39.5 million of accounts payable and accrued liabilities, offset by non-cash charges impacting current assets and liabilities of $76.0 million and changes in current assets and liabilities increasing cash flows by $1.7 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The increase in the Company's cash flows used in operating activities was primarily the result of the payment of accounts payable and accrued liabilities as cash became available from the sale of $150.0 million of Cisco common stock late in the fiscal year. Due to the financial condition of the Company at March 31, 1999, the Company was actively managing its cash position and was delaying payment of non-critical vendors that lead to an increase in the accounts payable and accrued liabilities as of that date. The cash flow impact of accounts and notes receivable also decreased due to the significant decrease of accounts receivable in the prior year. These decreases were partially offset by an increase in the cash flow impact of inventories. For fiscal 1999, the Company used significant amounts of cash to purchase manufacturing inventory components and had a significant amount of finished goods remaining in inventory at customer sites. During fiscal 2000, the Company had managed the purchasing of inventory more effectively and significantly decreased inventory levels of finished goods at customer sites which was also in part due to the recognition of revenues and costs that were previously deferred.
The decrease in the Company's cash flows from operating activities was primarily the result of a decrease in cash flows resulting from a change in net income from $6.2 million in fiscal 1998 to a net loss of $135.0 million in fiscal 1999. This negative cash flow impact was partially offset by positive cash flow impacts related to increased provisions for inventory obsolescence, sales returns and allowances, the net change in accounts payable and accrued liabilities and the cash flow impact of deferred income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
Fiscal 2000 cash flows from investing activities were positively impacted by the cash received from the sale of Cisco common stock of $150.0 million that occurred in the fourth quarter of the fiscal year. Also positively impacting cash flows from investing activities was the net cash received from the sale of Aironet common stock during its initial public offering of $17.2 million. Additionally, the Company's investments in property and equipment were reduced by $22.8 million. The decrease in additions to property and equipment was primarily due to the Company's completion of its corporate information systems project and related computer hardware and capitalized interest costs. Capitalized outside professional costs and internal costs caused the majority of the reduction and decreased $14.0 million for fiscal 2000 as compared to fiscal 1999.
Fiscal 1999 cash flows from investing activities were negatively impacted by the increase in additions to property and equipment, the cash paid for the repurchase of subsidiary stock and decreases in proceeds from asset and subsidiary stock sales. These decreases were partially offset by a positive cash flow impact due to reduced software investments and the absence of further purchases of non-marketable investments. The increase in additions to property and equipment was primarily due to the Company's increased investment in its corporate information systems project and related computer hardware and capitalized interest costs.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
The Company's cash flows from financing activities decreased for fiscal 2000 as a result of the net repayment of the Company's short-term borrowings of $68.3 million as compared to increased borrowing during fiscal 1999 under the Company's credit facilities. This borrowing was necessitated by the Company's net loss for the year as well as investments in inventories and a cash outlay related to the Company's corporate information systems project during fiscal 1999. The Company was able to repay the amounts owed under the credit facilities and certain capital lease obligations of $2.0 million due to the sale of $150.0 million of Cisco common stock noted above. Proceeds from the exercise of employee stock options increased by $5.8 million due to the increase in the price of the Company's common stock and employee terminations whereby options are forfeited if not exercised within 30 days of termination. The Company also recorded proceeds from the sale of its common stock of $2.6 million to John W. Paxton, the Company's Chief Executive Officer.
The Company's cash flows from financing activities increased during fiscal 1999 as a result of increased borrowing under the Company's credit facilities. This borrowing was necessitated by the Company's net loss for the year as well as investments in inventories and a cash outlay related to the Company's corporate information systems project. Also increasing the cash provided by financing
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND ----------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) -------------------------------
activities was a reduction in the Company's common stock repurchase activity during fiscal 1999 (63,300 shares during fiscal 1999 at a weighted-average price of $17.19 per share vs. 294,200 shares during fiscal 1998 at a weighted-average price of $17.23 per share). These increases in cash flows from financing activities were partially offset by reduced cash proceeds from exercises of stock options due to a decrease in the market value of the Company's common stock, during the last half of fiscal 1999.
Accounting Change
On November 20, 1997, the FASB's Emerging Issues Task Force issued a new consensus ruling, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation" ("EITF 97-13"). EITF 97-13 requires business process reengineering costs associated with information systems development to be expensed as incurred. The Company has been involved in a corporate-wide information systems implementation project that is affected by this pronouncement. In accordance with this ruling, during fiscal 1998, the Company recorded a one-time, after-tax, non-cash charge of $1,016 to expense previously capitalized costs associated with this project. Such costs had primarily been incurred during the second quarter of fiscal 1998.
New Accounting Standards
On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements". This document expresses the views of the Securities and Exchange Commission in applying accounting principals generally accepted in the United States while recognizing revenue. The Company has abided by the guidance contained within this document when recognizing revenue.
On November 24, 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin 100, "Restructuring and Impairment Charges". This authoritative document expresses the views of the SEC staff regarding the accounting and disclosure of certain expenses commonly reported in connection with exit activities and business combinations. The Company has also abided by the guidance contained within this document in accounting for current exit costs.
During fiscal 1999, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 provides accounting and reporting standards for derivative instruments. This standard will require the Company to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. The Company is required to adopt the provisions of SFAS 133 during the first quarter of fiscal 2002 (as delayed by Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of FASB Statement No. 133"). Management is evaluating the impact of this statement; however at this time, it believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to market, foreign currency and interest rate risks. The risks primarily relate to stock price volatility relating to its marketable securities, the sale of the Company's products to foreign customers through its foreign subsidiaries and changes in interest rates on the Company's short-term financing and capital lease obligations.
Market Risk
As discussed in Note 17 - Divestitures and Subsidiary Stock Transactions, during fiscal 2000 Cisco acquired the Company's former subsidiary, Aironet Wireless Communications for shares of Cisco common stock. Subsequent to this transaction the Company held 6,366,086 shares of Cisco common stock (the Cisco share amount illustrated here and throughout the Form 10-K, unless otherwise noted, gives effect to the two for one forward split of Cisco's common stock which became effective March 22, 2000). Additionally, as discussed in the liquidity section of Management's Discussion and Analysis, a portion of these shares were sold to satisfy working capital and debt obligations. At March 31, 2000 the Company maintained 4,166,086 shares of Cisco. The market value of the Company's holdings of Cisco at March 31, 2000 was valued at $321.9 million. In relation to the Company's balance sheet, this is a material holding. As such, the company is exposed to a significant degree of market risk relating to the price volatility of Cisco common stock. As discussed in Note 7 - Marketable Securities and Derivatives, the Company has opted to mitigate a portion of this risk by purchasing derivative collar contracts, which help to ensure that the Company's potential loss (gain) is within manageable levels. These contracts will expire on March 26, 2001. The counter-party to the derivative collar contract is a major financial institution. However, the Company is exposed to market risk loss in the event of nonperformance by the financial institution. Management does monitor the credit rating of the financial institution and considers the risk of nonperformance to be remote.
Foreign Currency Risk
The financial results of the Company's foreign subsidiaries are measured in their local currencies. Assets and liabilities are translated into U.S. dollars at the rates of exchange at the end of each year and revenues and expenses are reported at average rates of exchange. Resulting translation adjustments are reported as a component of comprehensive income.
Historically, the Company has not experienced any significant foreign currency gains or losses involving U.S. Dollars and other currencies. This is primarily due to natural hedges of revenues and expenses in the functional currencies of the countries in which subsidiaries are located which assists in managing this risk. As discussed in Note 14 - Fair Value of Financial Instruments, at March 31, 2000, the Company had several forward foreign currency exchange contracts to purchase various foreign currencies aggregating $7.5 million in U.S. dollars.
Interest Rate Risk
The Company's convertible subordinated debentures carry fixed rates of interest and therefore do not pose interest rate risk to the Company. However, interest rate changes would effect the fair market value of the debentures. At March 31, 2000, the Company had $106.9 million of convertible subordinated debentures outstanding.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (CONTINUED)
Interest rate risk does exist relative to the Company's $236.0 million and $5.0 million lines of credit due to the variable rates of interest charged on these facilities. The rates charged on these facilities are subject to adjustment by the lender however, at March 31, 2000 no borrowings were outstanding.
The Company monitors its interest rate risk, but does not engage in any hedging activities using derivative financial instruments to manage the interest rate risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------
All other schedules are omitted because they are not applicable or the required information is presented in the financial statements or the notes thereto.
Reports of Independent Public Accountants
To the Board of Directors and Stockholders of Telxon Corporation:
We have audited the accompanying consolidated balance sheet of Telxon Corporation and Subsidiaries (the "Company")(a Delaware corporation) as of March 31, 2000, and the related statements of operations and comprehensive income, changes in stockholders' equity and cash flows for the year then ended. These consolidated financial statements and the financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telxon Corporation and Subsidiaries as of March 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Schedule II - Valuation and Qualifying Accounts and Reserves, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP Cleveland, Ohio, May 18, 2000.
Report of Independent Accountants
To the Board of Directors and Stockholders of Telxon Corporation:
In our opinion, the consolidated balance sheet and the related consolidated statements of operations and comprehensive income (loss), of cash flows and of changes in stockholders' equity as of March 31, 1999 and for each of the two years in the period ended March 31, 1999 present fairly, in all material respects, the financial position of Telxon Corporation and its Subsidiaries at March 31, 1999, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule for the years ended March 31, 1999 and 1998 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Telxon Corporation and its Subsidiaries for any period subsequent to March 31, 1999.
As discussed in Note 3 to the consolidated financial statements, the Company restated its consolidated financial statements for fiscal years 1999 and 1998 to appropriately reflect revenue recognition related to certain sales to a value-added distributor.
As discussed in Note 20 to the consolidated financial statements, in fiscal year 1998, the Company changed its method of accounting for business process reengineering costs.
/s/ PricewaterhouseCoopers LLP Cleveland, Ohio June 29, 2000 August 6, 1999, except for Note 3, as to which the date is June 29, 2000
TELXON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except per share amounts)
See accompanying notes to consolidated financial statements.
TELXON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (In thousands except per share amounts)
See accompanying notes to consolidated financial statements.
TELXON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements.
TELXON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands except share and per share amounts)
See accompanying notes to consolidated financial statements.
TELXON CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements In Thousands (except per share amounts) (2000, (1999, and 1998 As Restated))
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the financial statements of Telxon Corporation and its wholly owned and majority-owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in consolidation.
As discussed in Note 17 - Divestitures and Subsidiary Stock Transactions, during fiscal 2000, the Company and its former subsidiary, Aironet Wireless Communications, Inc. ("Aironet"), sold shares of Aironet's voting common stock on the NASDAQ National Market in an initial public offering ("IPO"). As a result of the IPO, the Company's percentage interest in the voting common stock of Aironet was approximately 35%. As such, the Company has ceased to consolidate the results of Aironet as of April 1, 1999, the beginning of the Company's 2000 fiscal year. From that date until the consummation of the acquisition through merger of Aironet by Cisco Systems Inc. ("Cisco") in March 2000, the Company accounted for the results of Aironet under the equity method of accounting in accordance with the provisions of Accounting Principles Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). The results of Aironet are included in the Company's fiscal 1999 and 1998 consolidated financial statements. Subsequent to the merger of Aironet and Cisco, the Company's investment in Cisco common stock has been accounted for at fair value under the guidelines of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115")(See Note 7 - Marketable Securities and Derivatives).
MINORITY INTERESTS
For purposes of the Consolidated Balance Sheets, minority interests represent the unaffiliated stockholders' interests in the cumulative earnings of the subsidiary. For purposes of the Consolidated Statement of Operations, minority interests are included in other non-operating income (expense).
At March 31, 1999 the Company recorded minority interests of approximately $5,233 related to Aironet. The consideration received for such common stock, and the common stock of the Company's Metanetics Corporation ("Metanetics") subsidiary, a licensor and developer of image processing technology, included notes receivable. As such, the amount of these notes receivable has been offset against the minority interests and then recorded as a separate component of stockholders' equity (where amounts exceeded the minority interests). The aggregate amount of such notes receivable offset against minority interest was $1,926 at March 31, 1999. Refer to Note 17 - Divestitures and Subsidiary Stock Transactions for additional details on sales of Aironet and Metanetics common stock.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign operations are translated into U.S. dollars using the local currency as the functional currency in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52"). Accordingly, all assets and liabilities are translated at current rates of exchange, and operating transactions are translated at monthly weighted average rates during the year. The translation gains and losses are accumulated as a separate component of stockholders' equity until realized. There were no income taxes allocated to the translation adjustments or to the transaction gains or losses in 2000, 1999 and 1998. Net transaction gains or losses are included in results of operations as general and administrative expenses and were not material in 2000, 1999 and 1998.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Company may enter into forward foreign currency exchange contracts from time to time with reputable financial institutions. These contracts generally involve the exchange of one currency for a second currency at some future date, to hedge against the impact of changes in foreign currency exchange rates on specific foreign currency commitments. Losses on foreign currency exchange contracts are recognized as incurred based upon changes in the fair value of the underlying contracts where such losses would lead to recognition of losses in later periods. Refer to Note 14 - Fair Value of Financial Instruments, for additional details on forward foreign currency exchange contracts.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivative financial instruments in accordance with the FASB Statement of Financial Accounting Standards No. 80, "Accounting for Future Contracts"("SFAS 80") and related interpretations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, which are both readily convertible to cash and have an original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Accounts receivable are reduced to net realizable value through allowances for doubtful accounts and sales returns and allowances. Management provides for doubtful accounts based upon historical bad debt write-off experience and the Company's average aging of its accounts receivable. Additionally, specific doubtful accounts are provided for when losses are known. The Company also provides for general sales returns and allowances based upon historical product return experience. Specific product returns are provided for when known.
If payment has been received from a customer, but revenue has been deferred, the net deferred credit is recorded as a current accrued liability on the consolidated balance sheets under the caption "Accrued Liabilities". Revenues for which recognition has been deferred further reduce accounts receivable.
Consolidated net revenues for fiscal 2000 included revenues of $56,800 related to a large domestic retailer. Revenues related to this one customer accounted for 15.5% of the Company's consolidated revenues for fiscal 2000. Revenues to this customer were principally in the U.S. segment. No customer accounted for 10% or more of total revenues in fiscal 1999 or 1998.
The Company sells its products to customers in diversified industries, primarily in North America and Europe. The Company realizes over one-half of its revenues from customers in retail industries who are in widely diversified geographic locations and markets. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses, and such losses have historically been within management's expectations.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out) cost or market. Inventories include material, labor and overhead costs for manufactured products.
The Company's inventories are stated at their net realizable value and are carried at cost less allowances for excess and obsolete products and allowances for adjustments related to market values that are below historical inventory cost. The Company is subject to a high degree of technological change in market and customer demands. The Company therefore continually monitors its inventories for excess and obsolete items based upon a combination of historical usage and forecasted usage of such inventories. Additionally, specific inventory provisions are made when existing facts and circumstances indicate that the subject inventory will not be utilized, or its carrying value realized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at historical cost and depreciated over the estimated useful lives of the assets using the straight-line method for financial reporting purposes. The ranges of the estimated useful lives are: buildings, 19-25 years; machinery and equipment, furniture and fixtures, and transportation equipment, 3-10 years; enterprise-wide business system, 7 years; marketing and customer service equipment and tooling, 3 years; and the shorter of the useful life of the asset or the life of the lease for leasehold improvements. Gains and losses from the sale or retirement and charges related to the impairment of property and equipment are included in results of operations.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities are recorded at fair market value in accordance with the SFAS 115. The Company has classified its investment in Cisco as "available for sale" marketable securities based upon the Company's intent of not engaging in the frequent buying and selling of the securities or the generation of profit resulting from short-term differences in price related to the securities and management's current intent to hold the stock for at least a year. In accordance with SFAS 115, realized gains and losses are included in the consolidated statement of operations and unrealized holding gains and losses related to "available for sale" marketable securities are included in stockholders' equity and comprehensive income (loss).
SOFTWARE COSTS, INTANGIBLES AND OTHER ASSETS
Software costs are capitalized in accordance with the Statement of Financial Accounting Standards 86, "Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86") and are included in intangibles and other assets in the accompanying consolidated balance sheets. Purchased computer software is capitalized and amortized for both financial and tax reporting purposes, using the straight-line method, over the expected useful life of the software, generally three years. Similarly, internally developed computer software for sale or lease is capitalized and amortized for financial reporting purposes using the straight-line method over three years. For tax purposes, these costs are generally expensed as incurred, although certain of these costs have been capitalized and will be amortized using the straight-line method over three years.
The excess of the purchase cost over the fair value of net assets acquired in an acquisition (goodwill) is included in intangibles and other assets in the accompanying consolidated balance sheets. Goodwill is amortized on a straight-line basis over three years. The Company periodically reviews goodwill to assess
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
recoverability by comparing the carrying amount to expected undiscounted future cash flows. Impairments, if any, would be recognized in results of operations if a permanent reduction in value were to occur.
Non-compete agreements, deferred financing costs and license agreements have also been included in intangibles and other assets in the accompanying consolidated balance sheets. Non-compete and license agreements are amortized on a straight-line basis over the life of the related contract. Deferred financing costs are amortized on a straight-line basis over the life of the related debt, with accelerated amortization recorded on any indebtedness retired prior to its scheduled maturity. All other assets included in intangible and other assets are recorded at cost and are amortized on a straight-line basis over their expected useful lives.
LONG-LIVED ASSETS
The Company reviews all long-lived assets, including property and equipment, software and intangible and other assets for impairment in accordance with the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" ("SFAS 121").
REVENUE RECOGNITION
Revenues from computer hardware sales and software licenses to end-user customers are generally recognized upon shipment and title transfer. However, recognition of revenue is delayed until installation and customer acceptance if one or more of the following conditions exist: 1) the Company provides professional services to install its products at the customer's site(s), 2) the Company integrates software with its hardware, or 3) there are substantial acceptance criteria incorporated in the underlying sales agreement. If the Company provides professional services to its customers over a period of time together with its hardware and software, revenue is recognized on the entire contract using the percentage-of-completion (unit of delivery) method.
The delay in the recognition of revenue in the instances described above is due to the nature of the Company's product. Hardware, software and professional services when offered by the Company to its customers in specific transactions are all essential to the operation of the product and therefore they must all be present for the earnings process to be complete. Therefore, the Company only recognizes revenue related to these specific transactions when all of these elements are completed, delivered to and accepted by the customer.
The Company recognizes product revenue where all of the following criteria of Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), are met: 1) there is persuasive evidence of an arrangement based upon obtaining the Company's required written contract with customers prior to shipment 2) delivery of the Company's product has occurred based upon the Company's required evidence of shipment or installation (as applicable) of its product 3) the terms of the Company's arrangement with the customer are fixed and determinable based upon written specific contract terms and 4) collection of the related accounts receivable is probable based upon the Company's review of the customers credit history and financial standing. The Company also provides its customers with solutions that contain multiple revenue elements, including hardware, software, customer services and professional services. Each of the elements of such solutions are priced at fair value as determined by the price of the element as sold separately.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
The Company provides professional services to its customers. These services consist of site surveys, project management, installation and training services related to the delivery of the Company's products and systems to the customer. Because professional services are an integral component of the Company's products when the services are provided by the Company to a customer, the Company only recognizes related revenue in accordance with the criteria stated above and does not segregate the recognition of professional services from the other related revenue elements. Professional services account for a relatively insignificant portion of consolidated revenues.
In instances where the Company recognizes revenue under the units of delivery, the Company requires formal customer acceptance of the Company's installation of the product at each customer location, evidenced by signed installation documentation.
Recognition of revenue is deferred until after shipment and title transfer if product-financing arrangements exist and the Company continues to have interests, financial or otherwise, in the goods delivered. Revenue is then recognized when such interests have expired. The Company recognizes revenue from transactions where it guarantees customer lease payments to third party leasing companies as if renting the goods itself directly to the customer under an operating lease and depreciating the equipment.
Revenues from computer hardware sales and software licenses to Value Added Distributors ("VADs") and Value Added Resellers ("VARs") are generally recognized upon shipment and title transfer. Allowances are recorded to provide for future sales returns, price protection credits and stock balancing credits. These allowances are based upon historical experience with this class of customer and specific circumstances surrounding particular transactions.
In accordance with SOP 97-2, revenues from custom application software sales are recognized using the percentage-of-completion or completed contract method, whichever is more appropriate.
Revenues from customer service maintenance contracts are recognized on a straight-line basis over the terms of such contracts.
PRODUCT WARRANTIES
The Company provides end-user customers with warranties of varying terms, depending upon model types and specific customer arrangements. Warranty periods generally extend from three months to one year. Estimated warranty obligations are accrued at the time of sale based upon historical experience by product. The Company's warranty accrual is classified as a current liability on the accompanying consolidated balance sheets.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Expenditures for the development and engineering of products are expensed as incurred in accordance with the requirements of Statement of Financial Accounting Standards No. 2, "Accounting for Research and Development Costs" ("SFAS 2"). Product development and engineering expenses are expensed as incurred for both financial and tax-reporting purposes until products reach technological feasibility under SFAS 86. Included in the product development and engineering expenses line item in the accompanying consolidated statements of operations are research and development costs of $25,726, $29,518 and $32,402 for fiscal years 2000, 1999 and 1998, respectively.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
DEFINED CONTRIBUTION PLAN
The Company sponsors a discretionary defined contribution plan. Participation in the plan is available to all domestic employees of the Company. Company contributions to the plan are based on a percentage of employee contributions as per the plan provisions. Company contributions totaled $1,383, $1,626 and $1,633 in fiscal 2000, 1999 and 1998, respectively.
STOCK OPTION AND STOCK PURCHASE PLANS
Stock options, which are granted to employees and non-employee directors at the quoted closing market price of the Company's common stock as of the last trading day prior to the grant date, and stock purchased by eligible employees under the Company's employee stock purchase plan are accounted for under APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Employee Stock Purchase Plan meets the criteria of a non-compensatory plan under APB 25. The Company has elected the disclosure provisions of the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and has reported the fair value of stock-based compensation expense within a proforma presentation. See Note 11 - Stock Options and Restricted Stock.
EARNINGS PER SHARE
Computations of basic and diluted earnings per share of common stock have been made in accordance with the Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All securities having an anti-dilutive effect on earnings per share have been excluded from such computations. Common stock purchase rights outstanding under the Company's stockholder rights plan, which potentially have a dilutive effect, have been excluded from the weighted common shares computation as preconditions to the exercisablity of such rights were not satisfied.
Reconciliation of Numerators and Denominators of the Basic and Diluted EPS Computations (In thousands except per share amounts)
In the following table, net income (loss) represents the numerator, and the shares represent the denominator, in the earnings per share calculation.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
Options to purchase 1,659,879 shares of common stock at a weighted-average exercise price of $19.79 per share were outstanding at March 31, 2000, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price for the common shares during the period.
Options to purchase 3,457,625 shares of common stock at a weighted-average exercise price of $17.12 per share were outstanding at March 31, 1999, but were not included in the computation of diluted earnings per share because the options would have had an anti-dilutive effect on the net loss per year.
Options to purchase 958,101 shares of common stock at a weighted-average exercise price of $23.73 per share were outstanding at March 31, 1998, but were not included in the computation of diluted earnings per share for the fiscal year then ended because the options' exercise prices were greater than the average market price for the common shares during the period.
The shares issuable upon conversion of Telxon's 5-3/4% Convertible Subordinated Notes and 7-1/2% Convertible Subordinated Debentures were omitted from the diluted earnings per share calculations because their inclusion would have had an anti-dilutive effect on earnings for the fiscal years ended March 31, 1999 and 1998. For fiscal 2000, a precondition for conversion related to the debentures was not satisfied; therefore the potential dilutive effect of these debentures has also been omitted for the diluted earnings per share calculations.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CONTINGENT AND UNUSUAL ITEMS
Contingent and unusual items are expensed as incurred when events giving rise to such items are probable and the amounts are estimable in accordance with the requirements of Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("SFAS 5").
During fiscal 2000, the Company recorded an estimated loss of $2,023 on a product sales contract with a significant domestic retail customer under the requirements of SFAS 5. The contract will result in a probable aggregate loss based on the fair value assigned to trade in-units as compared to the product revenue allowance given. The net realizable value of these units was negatively impacted by the Company's supply of the traded-in units as compared to demand for those products. The contract was entered into and structured in order to meet that customer's demands.
The net product revenues and cost of product revenues recorded on the contract for fiscal 2000 were $3,142 and $5,165, respectively. In connection with the recording of the loss on the contract, the accrual for the allowances due of $3,523 has been recorded as an accrued liability as of March 31, 2000 on the accompanying Consolidated Balance Sheets. The amount of the accrual noted above is $1,500 greater than the loss recognized on the contract as of March 31, 2000. This difference is due to provisions and accruals recorded to offset gross profit
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
earned, excluding allowances given, upon the shipment of products to the customer during fiscal 2000. The delivery of the Company's product called for in the contract to the customer will occur over the next two fiscal quarters. Total net product revenues and costs of product revenues under the contract are expected to be $15,077 and $17,100, respectively.
RECLASSIFICATIONS
Certain items in the fiscal 1999 and 1998 consolidated financial statements and notes thereto have been reclassified to conform to the fiscal 2000 presentation.
NOTE 2 - FINANCIAL RESULTS AND LIQUIDITY
The Company incurred net losses from operations in both fiscal 2000 and 1999 of $90,363 and $106,897. The Company has also experienced decreases in consolidated revenues of $30,643 and $58,662 in fiscal 2000 and fiscal 1999 as compared to the prior fiscal periods. Cash flows used in operations were $75,304 and $27,616 for fiscal 2000 and fiscal 1999, respectively. The Company's primary source of cash flows for fiscal 2000 was the sale of a portion of the Company's holdings of Cisco common stock for $150,000. The primary source of cash flows for fiscal 1999 was net borrowings under its credit facilities (including product-financing arrangements) which aggregated $65,567. With the proceeds from the sale of the Cisco shares in fiscal 2000, the Company extinguished the short-term and long-term debt outstanding on its credit facility and terminated that credit agreement. The Company also entered into a new credit and pledge agreement to replace its former credit facility. This credit and pledge agreement contains more favorable financial terms for the Company. The maximum borrowing on this new agreement is $236,000. The Company has no short-term debt outstanding at March 31, 2000. The Company also paid significant amounts of accounts payable and accrued liabilities in order to enhance the Company's relations with vendors and to increase its financial flexibility.
The Company's stockholders' equity and working capital at March 31, 2000 were $321,827 and $125,949. These amounts compare to stockholders' equity and working capital at March 31, 1999 of $16,966 and $34,275, respectively. Although the Company has incurred a loss from operations during fiscal 2000, the Company recorded significant non-operating gains related to the sale of subsidiary stock and the merger of its former Aironet subsidiary with Cisco of $32,025 and $396,161, respectively. At March 31, 2000, the Company holds $321,863 of Cisco common stock, at fair value. Additionally, at March 31, 2000, these securities were adjusted to fair market value through equity and comprehensive income by $54,159, $33,099 after tax.
Management believes that the Company currently has the financial wherewithal and liquidity to execute its business plan, and if successfully executed, this business plan can significantly improve the Company's operations and financial results. The continued support of the Company's vendors, customers, lenders, stockholders and employees will continue to be key to the Company's future success.
NOTE 3 - RESTATEMENT
On February 23, 1999, the Company announced that, having completed the review of certain judgmental accounting matters with the Company's then outside auditors, it would restate its previously issued financial statements for the fiscal years 1998, 1997 and 1996, and its unaudited interim financial statements for the first and
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
second quarters of fiscal 1999. Additionally, the Company announced on June 16, 1999, that it would further restate its unaudited results for the second quarter of fiscal 1999. The accompanying consolidated financial statements and the information shown below as "As Previously Reported" for fiscal 1999 and 1998 reflect those restatements.
On June 29, 2000, the Company announced that it would be further restating its fiscal 1999 and 1998 financial results. This restatement was based on the completion of a review of recently uncovered documentary evidence relating to side agreements made during the fourth quarter of fiscal 1998 with a VAD. These side agreements provided the VAD with complete rights of return for certain subject goods, rights to require the repurchase of the subject goods and rights to require the Company to pay the carrying costs of the subject goods. The amount of revenues and costs of revenues subject to these side agreements were $8,100 and $4,860, respectively. As a result of these side agreements, revenue should more appropriately be recognized on the sell-through basis. The VAD did not resell all of the subject goods. All of the goods were either sold through or returned to the Company for credit in the amounts of $4,941 and $3,159 during the first and second quarters of fiscal 1999, respectively. Since no revenue reductions should have been recorded in fiscal 1999 related to the subject goods that were returned, the correction of these revenue transactions increased the consolidated revenues recorded for that fiscal year. The related income tax impact of $1,264 has been recorded in each fiscal period to reflect the income tax consequences of the restatement adjustment described above. Since the impacts of the adjustments noted above have the effect of decreasing fiscal 1998 net income by $1,976 and increasing fiscal 1999 net income by that same amount, the March 31, 1999 Consolidated Balance Sheet, including stockholders' equity, remains unchanged.
A summary of the effects of this restatement of the Company's Consolidated Statements of Operations for the years ended March 31, 1999 and 1998 follows. Also presented below is a summary of the effects of the restatement adjustments on the Consolidated Balance Sheet as of March 31, 1998(in thousands, except per share data):
CONSOLIDATED STATEMENTS OF OPERATIONS
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
CONSOLIDATED BALANCE SHEETS
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
NOTE 4 - INVENTORIES
Inventories at March 31, consisted of the following:
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
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
reduction in the estimated net realizable value of existing inventory. The provision was the result of the acceptance of quantities in excess of projected demand of trade-in units of the Company's older products to satisfy a significant customer's requirements. The $1,178 provision for international finished goods was due to a write-down of the carrying value on older products.
Management disposes of excess and obsolete inventory as necessary and as manpower permits, although there are no formal programs to do so. During fiscal 2000, the Company disposed of $24,619 of excess and obsolete material. Of this amount $21,806 related to manufacturing purchased components, $1,770 related to the Company's customer service inventories and $1,043 related to the Company's international operations. There were no material recoveries related to the disposal of this material.
At March 31, 2000, the Company had $6,236 of finished goods inventory held at distributors and customers, and $10,107 of manufactured purchased components at contract manufacturers. At March 31, 1999, the Company had $25,733 of finished goods inventory held at distributors and customers, and $5,714 of manufactured purchased components at contract manufacturers. The decrease in the amount of finished goods held at distributors and customers was the result of revenue recognized, for previously deferred transactions, upon installation and customer acceptance of the Company's products. Additionally, the inventory value of finished goods due back from customers for product returns decreased in proportion to the decrease in the reserve for sales returns and allowances.
At March 31, 1999, the inventory allowance accounts were primarily composed of manufactured purchased components of $22,816, customer service spare parts and used equipment of $4,138 and international finished goods inventories of $1,892. The overall increase in the allowance accounts was due to provisions related to the discontinuance of several of the Company's products, including the PTC 1194, PTC 1124, PTC 1134, and PTC 1184 as well as other products. A number of factors arose during the later part of the year ended March 31, 1999 that contributed to management's decision to discontinue these products. These factors included the extended length of time the development cycle experienced with these products, customer acceptance issues related to products shipped and more advanced features contained in competing products. These factors led to a reduction in customer demand and a related backlog for these products. Additionally, the effort needed to modify the existing products to meet increased customer demands for performance features was determined to be cost prohibitive. Prior to the reduction in demand and the backlog related to these products, the Company believed that these products could be developed and sold successfully in the marketplace and pursued activities designed to bring this about. The Company discontinued the active marketing of these products in March 1999.
During the Company's analysis of these discontinued products, manufactured components that could be utilized to fulfill specific customer demands were retained and not provided for. Additionally, the Company continued to accept returned goods as trade-in units for revenue credit, and continued to sell these discontinued products as used or remanufactured product.
Provisions were made for manufactured components of $35,125, customer service spare parts and used equipment of $1,127 and international finished goods of $1,178. The provisions for remanufacturing obsolescence were made as revenues related to the Company's remanufacturing operations did not materialize as anticipated. During the fourth quarter of the fiscal year ended March 31, 1999, the Company significantly reduced its management emphasis on remanufacturing operations. Provisions for test
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
equipment held by customers were made as such inventory aged and was determined either not to be salable to such customers or able to be returned and utilized by the Company. During the year ended March 31, 1999, the Company reduced its shipments of test equipment to customers as a sales tool.
During fiscal 1999, the following amounts were scrapped: manufactured purchased components $3,676, international inventories of finished goods $484 and test equipment held at customers of $3,710. Recoveries that were related to the disposition of such inventory were immaterial.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, consisted of the following:
Depreciation expense for fiscal 2000, 1999 and 1998 amounted to $18,211, $19,104 and $15,135, respectively. Fiscal 2000 depreciation includes $321 of accelerated depreciation related to leasehold improvements located on property currently leased by the Company's former Aironet subsidiary, and $371 of accelerated depreciation related to leasehold improvements located at the Company's former world headquarters in Akron, Ohio. Since the financial position and results of the Company's former Aironet subsidiary are no longer consolidated, and the sublease rent paid to the Company by Aironet is less than the Company's lease cost, capitalization of these leasehold improvements is no longer appropriate under the provisions of SFAS 121. Additionally, in November 1999, the Company announced that it would move its executive offices from Akron, Ohio to Cincinnati, Ohio and relocate substantially all of its remaining Akron operations to The Woodlands, Texas and Cincinnati, Ohio. Since the Akron, Ohio location will no longer be utilized after a transition period ending June 30, 2000, depreciation of leasehold improvements at this location has been accelerated accordingly.
During fiscal 2000, assets with a cost basis of $37,238 and accumulated depreciation of $37,115 were disposed of; prompting the Company to recognize a loss on disposals of $123. These amounts included an impairment charge of $381 related to the Company's aircraft hanger, which was due in part to the sale of the Company's corporate jet during fiscal 2000. Fiscal 1999 included $1,262 of accelerated depreciation and amortization related to demonstration equipment and tooling associated with end-of-life products.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
As mentioned above, and as discussed in Note 17 - Divestitures and Subsidiary Stock Transactions, since the financial position of the Company's former Aironet subsidiary is no longer consolidated, property and equipment of $6,348 and accumulated depreciation of $3,968 related to Aironet have been excluded from the Company's fiscal 2000 consolidated balance sheet.
Net capital lease additions were $660 and $1,698 in fiscal 2000 and 1998, respectively. There were no additions in fiscal 1999. These additions and retirements were non-cash transactions and, accordingly, have been excluded from property and equipment additions in the accompanying consolidated statements of cash flows. Amortization of capital lease assets has been included in depreciation expense. Accumulated amortization related to capital lease assets aggregated $408 and $2,483 in fiscal 2000 and 1999, respectively.
NOTE 6 - INTANGIBLE AND OTHER ASSETS
Net intangible and other assets consisted of the following at March 31:
Amortization expense for the years ended March 31, was as follows:
The Company assesses the carrying value of non-marketable securities at each balance sheet date using all available information including internal and external audited financial statements of investees, investee transactions with third parties and convertibility into marketable equity securities. The Company carries all of its investments in non-marketable securities under the cost method as no investment represents more than 20% of the voting interest in any investee and the Company cannot otherwise exert significant influence over such investee. If a permanent decline in the value below cost is indicated based upon information obtained, the carrying value of the investment is adjusted to such value.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
During fiscal 2000 and 1999, the Company recorded an impairment charge of $1,283 and $1,725 against its investment in the third party that acquired the Company's Virtual Vision subsidiary, respectively. The Company had received 750,000 shares of the purchaser's Series F preferred shares, with a value of $4,500, as payment for the stock of the Company's Virtual Vision subsidiary. The impairment charge reflects the dilution of the Company's investment in the purchaser resulting from the purchaser's subsequent issuance of a series of preferred shares with superior rights over the preferred shares owned by the Company.
During fiscal 2000, the third party that acquired Virtual Vision made several changes in its capital structure, including the merger into a SEC registrant. As a result of this restructuring, the Company holds 683,818 restricted common shares in the restructured SEC registrant. The closing price per share of this SEC registrant at March 31, 2000 was $20.81. The Company is subject to a lock up period of two years that substantially restricts the Company's ability to sell these common shares. As a result of the lock up period the Company has continued to carry this investment at cost, which amounted to $1,492 and $2,775 at March 31, 2000 and 1999, respectively, and has been included in intangible and other assets in the accompanying consolidated balance sheets as detailed above.
During fiscal 2000, the Company recorded a gain of $761 from the sale of stock in a development stage technology company. The proceeds of the sale were $1,523.
During fiscal 2000 and 1999, the Company repurchased 1,905,930 and 400,000 shares, respectively, of the voting common stock of Metanetics from third parties at an average price of $6.58 and $4.88 per share, respectively. At March 31, 2000 the Company owned 100% of Metanetics. Since Metanetics was already included in the Company's consolidated results as a majority-owned subsidiary, due to the Company's 100% funding of the Metanetics operations, these repurchases of shares reflected an additional investment which has been recorded as goodwill. This additional investment is being amortized over a useful life of three years. During fiscal 2000 and 1999, the Company recorded $1,066 and $570, respectively, of amortization related to this additional investment, which was characterized as goodwill amortization expense in the above table. Refer to Note 17 - Divestitures and Subsidiary Stock Transactions for additional details on the repurchase of Metanetics stock.
During fiscal 1998, impairment charges of $1,100 and $1,434 were recorded against the Company's investments in two unrelated third parties. These investments were fully impaired due to poor historical financial performance, inability to repay amounts owed to the Company and lack of evidence that would indicate a future ability of these entities to support the carrying value of the Company's investments.
During fiscal 1998, the Company recorded a charge of $3,535 to fully impair the long-term notes receivable due from the purchaser of the assets of certain of the Company's retail application software operations for its purchase of those assets. These long-term notes receivable were fully impaired due to the purchaser's inability to make its scheduled payments against the promissory notes and the lack of persuasive evidence indicating its ability to make such payments in the future.
Additionally, in connection with the impairment of the promissory notes receivable related to the Company's divestiture of retail software operations
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
during fiscal 1998, the Company continued to amortize the underlying software associated with the divested asset and recorded $932 of amortization in fiscal 1998.
NOTE 7 - MARKETABLE SECURITIES AND DERIVATIVES
SECURITIES AVAILABLE FOR SALE AS OF MARCH 31,:
-----------------------------
Cost basis $ 267,704
Gross unrealized holding gains 54,159 ----------------------------- Aggregate fair market value $ 321,863 =============================
As described in Note 17 - Divestitures and Subsidiary Stock Transactions, Cisco acquired the Company's former Aironet subsidiary by merger in exchange for shares of Cisco common stock. At March 15, 2000, the consummation date of the merger, the Company owned 6,366,086 shares of Cisco, and the closing price on that date was $64.32 per share (as adjusted for the two for one stock split that occurred on March 23, 2000). The Company has treated the exchange of its Aironet shares for Cisco shares under the requirements of APB 29 "Accounting for Non-monetary Transactions" thus recognizing a non-operating gain upon the exchange of shares. Subsequent to the Cisco/Aironet merger, the Company accounted for the investment retained in Cisco shares in accordance with the requirements of SFAS 115 based upon the Company's intent to hold the securities for an extended length of time and to not engage in frequent buying and selling of the securities. That statement requires investments in marketable equity securities to be accounted for as either "trading" or "available for sale" securities. The Company has recorded its investment in Cisco shares as "available for sale" securities. The Company has recorded a cost basis for these securities equivalent to the securities fair market value as of the Cisco/Aironet merger consummation. On March 31, 2000, a $54,159 unrealized holding gain was recorded to reflect an increase in market value of the Company's investment in Cisco, in accordance with the requirements of SFAS 115.
GROSS SALES OF MARKETABLE SECURITIES AS OF MARCH 31,:
-----------------------------
Cost basis $ 141,488
Aggregate market value of sale 149,995
----------------------------- Gross realized gains $ 8,507 =============================
During fiscal 2000, the Company sold a portion of its marketable securities (1,100,000 shares (prior to the two for one stock split) at an average selling price of $136.36) in Cisco to satisfy various debt and working capital obligations. Upon the sale of these marketable securities the Company realized a gain on marketable securities of $8,507, in accordance with the provisions of SFAS 115. This realized non-operating gain was calculated as the difference between the market value in Cisco shares as of the consummation date of the merger, March 15, 2000 (the Company's basis date), and the market value of the shares sold to an
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
unrelated party on the date of sale, March 22, 2000. Due to the highly liquid nature of the Company's investment, specific identification of share price was utilized in determining share value and related gains.
The Company has reduced the related market risk in its investment of Cisco securities by entering into two derivative financial instruments (referred to collectively herein as (the "Collar")), on March 23, 2000. The Collar essentially hedges the Company's risk of loss on the marketable securities by utilizing put options. Conversely, the Collar arrangement also limits the Company's potential gain by employing call options. By employing a hedging alternative such as the Collar, the Company can be assured that its gains and losses will reside within the range created by the Collar. This range is set in such a way that the Black Scholes value of the call is equivalent to the Black Scholes value of the put; therefore, utilizing this means of hedging is cost effective for the Company since the premiums and costs related to the two opposing features effectively netted.
Information regarding the Collar is illustrated in the table below.
OPTION STRIKE NUMBER OF NUMBER OF TYPE PRICE OPTIONS SHARES HEDGED - ------------------ --------------------- ------------------ -----------------
Call $ 106.99 20,800 2,080,000 Put $ 59.33 20,800 2,080,000
Call $ 94.25 20,800 2,080,000 Put $ 66.75 20,800 2,080,000
The effect of the Collar is to hedge 4,160,000 shares, or 99.9%, of the Company's remaining investment in Cisco. The Collar limits the Company's loss by placing a floor on the value the shares may be potentially sold at of, on average, $63.04 per share. Conversely, the Collar also limits the Company's gain by creating a ceiling on the value the shares may be potentially sold at of, on average, $100.62 per share. Therefore, the Company's maximum potential gain or (loss) realized from the sale of its marketable securities at March 31, 2000 is on average $151,487 or ($5,074), respectively. This potential gain or loss was calculated by utilizing the average strike prices from above, and the Company's original cost basis in its investment in Cisco at March 31, 2000 of $267,704. However, the options contained within the Collar agreement have an expiration date of March 26, 2001 and may only be exercised on this date. For each collar, the election of a third party to exercise the call feature, or the Company's option to exercise the put feature, will automatically terminate the opposing component of the Collar agreement, and the owner of such option agreement will have no further rights or obligations under the agreement once this occurs.
NOTE 8 - SHORT-TERM FINANCING
During fiscal 2000, the Company entered into a loan and pledge agreement arranged with a lending institution to provide the Company with an open line of credit not to exceed $236,000 collateralized by the Company's investment in marketable securities. The maximum availability of $236,000 is based on 90.0% of the floor value of the Collar as described in Note 7 - Marketable Securities and Derivatives. The line of credit, which carries a borrowing rate of LIBOR plus thirty basis points, has no fees associated with it. The one-month LIBOR rate at March 31, 2000 was 6.13%. There are no borrowings against this line of credit as of March 31, 2000. The purpose of the
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
facility is to ensure that the Company meets its short-term working capital requirements.
During fiscal 2000, the Company also entered into an unsecured revolving promissory note with a bank for $5,000. The note matures April 30, 2001. Interest on advances is at the bank's prime rate plus 2.00%. There are no borrowings against this note as of March 31, 2000.
During fiscal 2000, the Company had a weighted-average of $66,357 outstanding under its secured credit facility, revolving credit agreement and revolving promissory note with a weighted-average interest rate of 10.20% per annum. During fiscal 1999, the Company had a weighted average of $49,700 outstanding under its revolving credit agreement, revolving promissory note and product financing arrangement with a weighted average interest rate of 9.03% per annum.
On August 30, 1999, the Company entered into a loan and security agreement whereby Telxon obtained a $100,000 senior secured credit facility as a replacement for the Company's existing revolving credit agreement and business purpose promissory note. The facility consisted of both term and revolving credit arrangements. On November 18, 1999, the Company entered into an amendment of this security agreement whereby additional borrowings of $20,000 were provided. The amendment also extended the maturity date of the $30,000 term loan (which represents a portion of the $100,000 senior secured credit facility) to March 31, 2000. Amounts due under this facility were repaid on March 23, 2000 as set forth below.
Borrowings under the revolving loan provisions of such facility were subject to availability on qualifying accounts receivable and inventory, reduced by amounts borrowed and outstanding under the facility's term loan features and letters of credit.
The secured credit facility had four term loan features, each feature having specific limitations and requirements. Two of the term loans were limited by the market value of Aironet capital stock owned by the Company. The amounts ranged from $6,000 to $30,000. The interest rate charged on the revolving loan, and two of the term loans was 0.5% above the financial institution's prime lending rate. The other two term loans were fixed at 12.5%. Two of the term loans had the ability to be converted to Euro-rate loans at the option of the Company; converted loans would be charged a rate of 2.75% plus the Eurodollar rate. The $100,000 credit facility was collateralized by essentially all of the Company's assets and the credit facility required the maintenance of various financial and non-financial covenants. During the year, the Company's lenders modified certain of these debt covenants. Due to this modification, the Company was in compliance with all financial covenants.
On March 23, 2000, the Company, with funds received from the sale of approximately $150,000 of the Company's investment in marketable securities, extinguished the principal balance outstanding of $76,632 on the secured credit facility including accrued and unpaid interest, expenses and an early termination premium of $1,500. The payment of this termination fee plus the unamortized debt issuance costs of $324 were charged against income, net of taxes of $711, as an extraordinary item in accordance with Statement of Financial Accounting Standards No.4, "Reporting Gains and Losses from Extinguishment of Debt"("SFAS 4").
During fiscal 1999, the Company capitalized $1,148 in waiver fees for the aforementioned waivers. The capitalized waiver fees, which were amortized over the respective periods, were included in the prepaid expenses and other current assets
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
line item of the accompanying Consolidated Balance Sheet. At March 31, 1999, the Company had $432 in unamortized waiver fees.
As of March 31, 2000 and 1999 the Company had a note payable of $- and $7,097, respectively, outstanding and recorded on its Consolidated Balance Sheet related to a product financing arrangement. This product financing arrangement charged interest at a rate of 10.25% and called for the payment of various administrative and advance fees.
NOTE 9 - ACCRUED LIABILITIES
Accrued liabilities at March 31, consisted of the following:
2000 1999 ------- ------- Deferred customer service revenues $11,823 $15,351 Accrued payroll and other employee compensation 8,624 9,624 Accrued taxes other than payroll and income taxes 4,429 1,132 Accrued royalties 3,651 3,466 Provision for loss contract 3,523 -- Accrued employee termination benefits 3,483 3,610 Accrued professional fees 2,947 4,263 Accrued losses on inventory purchase commitments and discontinued product costs 2,751 12,422 Accrued facility closing costs 2,083 -- Accrued interest 1,813 1,929 Deferred product revenues 1,193 14,168 Accrued commissions 1,056 2,025 Other accrued liabilities 6,395 6,295 ------- ------- $53,771 $74,285 ======= =======
Pursuant to Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Cost to Exit an Activity (Including Certain Costs Incurred in a Restructuring)", accrued employee termination benefits at March 31, 2000 include costs to terminate 14 employees. It is expected that there will be an additional 115 employees terminated in the next fiscal year. Costs totaling $169, $95, $657, $51 and $2,511 were charged to cost of product revenues, cost of customer service revenues, selling expenses, product development and engineering expenses and general and administrative expenses, respectively. All employee termination benefits are expected to be paid in cash during the next fiscal year.
The Company's domestic accrual for employee termination benefits decreased from a balance of $3,381 at March 31, 1999 to a balance of $1,786 at March 31, 2000. This decrease was caused by severance charges of $1,871 during fiscal 2000, which were more than offset by severance payments of $3,466 to terminated employees. A total of 47 domestic employees were terminated during fiscal 2000. The areas of the Company affected were domestic sales operations, domestic product development, manufacturing operations and corporate administration. In addition to the domestic severance activity, 4 employees were terminated in the Company's international sales operations during fiscal 2000. The severance recorded related to these employees was $1,200. At March 31, 2000, $100 was accrued related to international operations; $1,100 of the amount accrued of this severance has been paid.
The Company incurred several charges related to the relocation of its operations in Akron, Ohio to Cincinnati, Ohio and The Woodlands, Texas. The Company recorded $1,597 in stay-on bonuses, healthcare and outplacement benefits for 103 employees
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
in Akron who elected not to relocate and stayed through the transition process. All of these accruals were based on the amount of stay-on bonuses earned during the transition period ending June 30, 2000. At March 31, 2000, there is a balance of $3,383 of accrued employee termination benefits that are expected to be paid in cash in the next fiscal year related to severance charges for terminated employees and stay-on bonuses related to Akron personnel.
At March 31, 2000 and 1999, the Company accrued $- and $9,370 related to non-cancelable purchase commitments to an outside vendor and processor related to discontinued products. The Company commits to purchase finished products related to goods held in processor's inventory as those goods are acquired.
During fiscal 2000, the Company recorded an estimated loss of $2,600 related to a non-cancelable purchase commitment with a bar code scanner supplier. The commitment calls for the purchase of specified products offered by the supplier over a specified time period. The Company had received a portion of the product during fiscal 2000. However, the Company has returned the goods to the supplier based upon significant questions raised as to the products salability and is negotiating with the supplier regarding its commitment. There are no assurances that these negotiations will relieve the Company of any liability under the commitment. The amount of the estimated loss was determined based upon quoted market prices from the supplier's distributors of those products.
NOTE 10 - INCOME TAXES
Components of income (loss) before taxes:
2000 1999 1998 --------- ----------- --------- (Restated) (Restated) Domestic operations $319,737 $(127,643) $4,802 International operations 5,207 11,261 8,360 --------- ----------- --------- $324,944 $(116,382) $13,162 ========= =========== =========
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the tax rates and laws that are currently in effect.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Components of the provision for income taxes by taxing jurisdiction are as follows:
Current: 2000 1999 1998 --------- ------- -------- (Restated) (Restated) U.S. $ 7,085 $4,246 $ 5,301 State and local 250 30 498 Foreign 2,681 4,823 3,470 --------- ------- -------- Subtotal $10,016 9,099 9,269
Deferred:
U.S. 56,625 9,297 (3,130) State and local 6,192 (99) (46) Foreign -- 327 (130) --------- ------- --------
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
Subtotal 62,817 9,525 (3,306) -------- -------- -------- Provision for income taxes $72,833 $18,624 $ 5,963 ======== ======== ========
The reconciliation between the reported total income tax expense (benefit) and the amount computed by multiplying income (loss) before income taxes by the U.S. federal statutory tax rate is as follows:
The reconciliation between the reported total income tax expense (benefit) and the amount computed by multiplying income (loss) before income taxes by the U.S. statutory tax rate is as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at March 31, are presented below:
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
The $48,186 decrease in the valuation allowance for year ended March 31, 2000 was based on the Company's assessment that it is more likely than not that the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies. Accordingly, the valuation allowance was reduced in the current year in accordance with provisions of SFAS 109. Prior to the consummation of the Cisco/Aironet merger, in March 2000, the Company's deferred tax assets were essentially fully reserved through a valuation allowance as the Company believed it was more likely than not that such assets would not be realized at that time.
A provision for U.S. income taxes has not been provided on the $15,229 balance of undistributed earnings at March 31, 2000 since the amounts are indefinitely reinvested. The determination of the amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries is not practicable.
Income taxes paid in fiscal 2000, 1999, and 1998 were $4,837, $2,667 and $9,428, respectively. Income tax refunds received in fiscal 1999 and 1998 aggregated $1,077 and $473, respectively.
As of March 31, 2000, the Company has foreign operating loss carryovers of $129 for both tax and financial reporting purposes. This foreign loss carryover period is indefinite. The Company has a total of $27,030 in U.S. net operating loss carryovers and an additional $11,340 loss carryover, which relates to the Company's Metanetics subsidiary. The net operating loss for Metanetics is fully reserved. These net operating loss carryovers begin to expire in fiscal 2011 through fiscal 2019.
As a result of acquisitions in prior years, the Company has domestic research and development credit carryovers for tax and financial reporting purposes in the amount of $1,045 and $209, respectively, which are subject to separate limitations of the acquired company. These credit carryovers are fully reserved. These carryovers expire beginning in fiscal 2009 through fiscal 2019.
As of March 31, 2000, the Company has domestic alternative minimum tax credit carryovers of $5,374, of which $2,687 has been reserved. The domestic alternative minimum tax credit carryforward period is indefinite. There can be no assurance that foreign and domestic tax carryovers will be utilized.
As of March 31, 2000, the Company has foreign tax credit carryovers of $730, which are fully reserved. The original carryforward period is five years and expires in fiscal 2002.
NOTE 11 - STOCK OPTIONS AND RESTRICTED STOCK
The Company account for stock based compensation issued to its employees and non-employee directors in accordance with APB 25 and has elected to adopt the "disclosure-only" provisions of SFAS 123.
During the periods shown below, the officers and other key employees of the Company received and held stock options under the Telxon Corporation 1990 Stock Option Plan (the "1990 Plan"). The persons to whom options are granted, the number of shares granted to each, the period over which the options become exercisable (generally in
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
equal installments over a three-year period on the first three anniversaries of the date of grant) and the maximum term of the options (generally eight years after the date of grant) are determined by the Option and Stock Committee of the Board of Directors ("the Committee"). The exercise price is equal to the closing market price for the Company's Common Stock as of the last trading day prior to the grant date. During fiscal 1998, the Company's stockholders approved an amendment to the 1990 Plan that increased the number of shares authorized for issuance under the Plan by 750,000 shares, to a total of 4,100,000 shares. Options available to be granted under the 1990 Plan at March 31, 2000, were 14,552.
The following is a summary of the activity in the Company's 1990 employee stock option plan during fiscal 2000, 1999 and 1998:
STOCK OPTIONS ------------- WEIGHTED AVERAGE SHARES PRICE PER SHARE ------------------------- -----------------------
March 31, 1997 3,114,622 $15.23 Granted 727,475 $23.19 Exercised (745,358) $13.28 Returned to pool due to employee terminations (151,154) $19.19 ------------------------- March 31, 1998 2,945,585 $17.59 Granted 345,000 $11.24 Exercised (110,177) $14.89 Returned to pool due to employee terminations (74,350) $20.05 ------------------------- March 31, 1999 3,106,058 $16.92 Granted 1,323,100 $12.38 Exercised (412,008) $14.98 Cancelled (240,000) $20.13 Returned to pool due to employee terminations (1,059,602) $17.93 ------------------------- March 31, 2000 2,717,548 $14.33 =========================
At March 31, 2000, 1999 and 1998 1,158,953, 2,253,613 and 1,644,852 options outstanding under the 1990 Plan, respectively, were exercisable. The options outstanding at March 31, 2000 were granted at exercise prices ranging from $7.97 to $29.63 per share and had a remaining weighted-average contractual life of 6.31 years.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
The Company also has in effect a stock option plan for non-employee directors (the "Director Plan"). Under the Director Plan, each non-employee director is granted 25,000 options upon first being elected to the Board of Directors and 10,000 additional options each year thereafter. Additionally, the Director Plan also permits the making of discretionary option grants to non-employee directors. Each non-employee director's initial grant becomes exercisable in equal thirds on each of the first three anniversaries of the grant date, while each subsequent grant becomes exercisable in full on the third anniversary of its grant date. Each option granted under the Director Plan has a seven year term, which may be extended to up to ten years and an option exercise price equal to the closing market price for the Company's Common Stock as of the last trading day prior to the grant date. During fiscal 1996, the Company's stockholders approved an amendment to the Director Plan that increased the number of shares authorized for issuance under the Director Plan by 150,000 shares, to a total of 400,000 shares. At March 31, 2000, there were no options available to be granted under the Director Plan.
The following is a summary of the activity in the Company's non-employee directors stock option plan during fiscal 2000, 1999 and 1998:
STOCK OPTIONS ------------------------------------------ WEIGHTED AVERAGE SHARES PRICE PER SHARE --------------- --------------------------
March 31, 1997 260,000 $16.10 Granted 105,000 $23.62 Exercised (25,000) $ 9.88 --------------- March 31, 1998 340,000 $18.88 Granted 11,567 $19.44 Exercised -- -- --------------- March 31, 1999 351,567 $18.90 Granted -- -- Exercised (20,000) $11.31 --------------- March 31, 2000 331,567 $19.36 ===============
At March 31, 2000, 1999 and 1998 301,567, 251,567 and 186,667 options outstanding under the Director Plan, respectively, were exercisable. The options outstanding under the Director Plan at March 31, 2000 were granted at exercise prices ranging from $9.125 to $25.25 per share and had a weighted-average contractual life of 3.05 years.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
At March 31, 2000, 1999 and 1998 there were 6,000 options outstanding and exercisable at $14.63 per share which were granted to a non-employee director prior to the adoption of the Director Plan. Additionally, during fiscal 2000, 25,000 options at $15.06 per share were issued to an employee outside of the 1990 Plan. These options have a five-year life and are immediately exercisable.
During fiscal 1993, the Company adopted a Restricted Stock Plan (the "Restricted Stock Plan"), under which 250,000 shares may be issued. The Committee determines the persons to whom restricted stock is granted, the number of shares granted to each person, the time periods during which the stock is exercisable and the criteria upon which the restricted stock is subject to forfeiture (generally, the forfeiture restrictions lapse in equal installments of each grant over a five-year period on the first five anniversaries of the date of grant, provided that the grantee then continues in the Company's employ). During fiscal 2000, 23,200 shares were granted under the Restricted Stock Plan and 33,473 restricted shares were granted outside the Restricted Stock Plan at a combined weighted grant date fair value of $8.48 per share. There were no shares granted under the Restricted Stock Plan during fiscal 1999. During fiscal 1998, 19,000 shares were granted under the Restricted Stock Plan at a weighted-average grant date fair value of $25.35 per share. At March 31, 2000, 237,000 and 23,374 restricted shares that were granted under the Restricted Stock Plan and outside of the Restricted Stock Plan had vested, respectively. At March 31, 2000, 13,000 shares under the Restricted Stock Plan were outstanding subject to forfeiture, and 10,099 restricted shares granted outside the Restricted Stock Plan were outstanding subject to forfeiture. There were no shares available to be granted under the Restricted Stock Plan at March 31, 2000. Expense related to restricted stock amortization totaled $447, $152 and $199 in 2000, 1999 and 1998, respectively.
During fiscal 1996, the Company's stockholders approved the 1995 Employee Stock Purchase Plan (the "1995 Stock Purchase Plan"), under which 500,000 shares of common stock were authorized for sale to eligible employees at a 15% discount from market value. During fiscal 2000, 1999 and 1998 the Company re-issued 74,543, 52,999 and 57,112 shares of its treasury stock at a weighted-average price of $18.25, $19.34 and $15.15 per share, respectively, in satisfaction of purchases made under the 1995 Stock Purchase Plan. At March 31, 2000, a total of 300,495 shares had been issued and purchased under the 1995 Stock Purchase Plan since its inception, and 199,505 shares remained available for future purchases.
During fiscal 1998, the Company's subsidiary, PenRight! Corporation adopted the PenRight! Corporation 1997 Stock Option Plan (the "PenRight! Plan"). The PenRight! Plan provides for the granting of options to key employees, directors and outside advisors in order to promote the retention of valued human capital. The total number of shares for which PenRight! may grant options may not exceed 300,000 shares of common stock. Options are awarded at a price not less than the fair market value on the date the option is granted. If a fair market value can not be readily attained on the date of grant the Company, and PenRight's board of directors, will determine an equitable value for the options granted. Each option shall have a term of ten years and shall vest based upon the options grant date in the following manner: a) for options granted prior to fiscal 2000 fifty percent of options granted will vest on the grant date and the remaining fifty percent will vest over a three year period (on the anniversary of the date of grant) in 17% increments, b) for options that were granted during fiscal 2000 twenty-five percent of options granted will vest on the grant date and the remaining seventy-five percent will vest over a three year period (on the anniversary date of grant) in twenty-five percent increments. The options will become exercisable when either of the following two events occur: a) a change in control (as defined by the PenRight! Plan to mean when any person becomes a
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
beneficial owner (as defined by the Securities and Exchange Act of 1934) of securities of the PenRight! representing fifty percent or more of the combined voting power of the PenRight's then outstanding securities or when any person becomes a beneficial owner of securities representing a 15% or more of the combined voting power of Telxon Corporation's then outstanding securities), or b) an initial public offering of PenRight! securities.
The following is a summary of the activity in PenRight!'s 1997 Stock Option Plan during fiscal years 2000, 1999 and 1998:
STOCK OPTIONS -------------------------------------------------- WEIGHTED AVERAGE SHARES PRICE PER SHARE ------------------------- ------------------------
March 31, 1997 -- -- Granted 15,000 $.18 Exercised -- -- Returned to pool due to employee terminations -- -- ------------------------- March 31, 1998 15,000 .18 Granted 10,000 .18 Exercised -- -- Returned to pool due to employee terminations -- -- ------------------------- March 31, 1999 25,000 .18 Granted 155,000 .25 Exercised -- -- Returned to pool due to employee terminations -- -- ------------------------- March 31, 2000 180,000 .24 =========================
Effective March 22, 1999, the Company entered into a letter agreement with John W. Paxton to serve as Chairman, Chief Executive Officer and President of the Company. The letter summarized the principal elements of Mr. Paxton's employment obligations and compensation package to be included in a definitive agreement, and specified, among other things, term of employment, salary, bonus compensation, stock-based compensation and termination benefits. The letter obligated Mr. Paxton to purchase 300,000 shares of the Company's common stock at $8.72 per share, which represented the fair market value of the Company's common stock at the date the agreement was executed. The letter also granted Mr. Paxton options with a ten year term (unless otherwise indicated) to purchase 700,000 shares of the Company's common stock, with vesting provisions as follows: a) 300,000 shares with an eight year term which vest in equal annual installments over three years; b) 200,000 shares to vest at the earlier of six years or when the Company's common stock price reaches $14.00 per share; c) 100,000 shares to vest at the earlier of six years or when the Company's common stock price reaches $22.00 per share; and d) 100,000 shares to vest at the earlier of six years or when the Company's common stock price reaches $27.00 per share. Included in the options to purchase 700,000 shares of the Company's common stock were 300,000 stock options granted to Mr. Paxton during fiscal 1999 under the 1990 Plan. No compensation expense was recorded during fiscal 1999 related to the stock-based compensation outlined in the letter agreement between the Company and Mr. Paxton in accordance with the provisions of APB No. 25.
During Fiscal 2000, Aironet Wireless Communications, a former subsidiary of the Company, sold shares of its voting common stock on the NASDAQ National Market in an initial public offering. Subsequent to this sale Aironet was acquired by Cisco Systems. As a result of these events Aironet's results of operations are no longer consolidated
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
within the operating results of the Company for fiscal 2000, except for the Company's equity share of Aironet's net income which is recorded as other non-operating income. However, the results of Aironet's operations are included within the Company results of operations for fiscal years 1999 and 1998. Accordingly, historical information pertaining to option activity related to Aironet is included below for these periods only.
In July 1996, Aironet established the Aironet Wireless Communications, Inc. 1996 Stock Option Plan which was amended and restated on March 30, 1998 ("1996 Amended Plan"). The 1996 Amended Plan provides for the granting of options to key Aironet employees and to certain employees of the Company and outside Aironet directors. The total number of shares for which Aironet may grant options under the 1996 Amended Plan cannot exceed 2,150,500. Options were awarded at a price not less than the fair market value on the date the option was granted. Options granted prior to March 30, 1998, had a term of ten years and generally vested one-third on the date granted and one-third on each of the two successive anniversary dates therefrom. Options granted on or after March 30, 1998, had the same terms except an option could only be exercised after the earlier of a change in control or an initial public offering, as defined in the 1996 Amended Plan, and vest in one-third increments on each of the three successive anniversary dates from the date of grant.
Effective March 31, 1999, Aironet's Board of Directors and Stockholders approved an additional amendment to the 1996 Amended Plan that permits vested options granted under the 1996 Amended Plan to be exercised at any time after the earlier of an initial public offering, change in control, as defined, or March 31, 2001. In addition, Aironet's Board of Directors accelerated the vesting of certain options held by persons not employed by Aironet. As a result of this amendment to the 1996 Amended Plan and immediate vesting of certain outstanding options on March 31, 1999, Aironet recorded non-cash compensation expense related to employees of $933 and non-cash compensation expense related to non-employees of $943.
The following is a summary of the activity in Aironet's 1996 Amended Plan during fiscal years 1999 and 1998:
STOCK OPTIONS -------------------------------------------------- WEIGHTED AVERAGE SHARES PRICE PER SHARE ------------------------- ------------------------
March 31, 1997 1,257,000 $1.86 Granted 500,000 $3.50 Exercised (270,000) $1.86 Returned to pool due to employee terminations (6,500) $1.86 ------------------------- March 31, 1998 1,480,500 $2.41 Granted 105,000 $3.50 Exercised (5,833) $3.50 Returned to pool due to employee terminations (36,667) $3.09 ------------------------- March 31, 1999 1,543,000 $2.47 =========================
At March 31, 1999, options to purchase 1,543,000 shares were outstanding under the 1996 Amended Plan of which 784,012 were exercisable at a weighted-average price per share of $1.86. In February 1998, an Aironet employee exercised 200,000 options with a grant price and fair value of $1.86 per share. At the date of grant, Aironet provided the employee a non-recourse loan of $372, which was applied towards the
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
payment of the exercise price of the options. The terms of the note did not extend the original option period. The note bears non-recourse interest at 6% per annum on amounts outstanding through maturity, October 31, 2002, and at a prime rate plus 4% per annum thereafter until paid. All unpaid principal and all accrued interest is due in full on October 31, 2002. The 200,000 shares issued (or approved replacement collateral of equal value at the employee's discretion) collateralize the note. Any amounts paid on the note shall be applied first to accrued but unpaid interest and then to unpaid principal. The employee may, at any time, prepay the note without premium or penalty in amounts of at least $25. Pursuant to Emerging Issues Task Force ("EITF") Issue No. 85-1, "Classifying Notes Received for Capital Stock" ("EITF 85-1") the note has been recorded as a reduction of Aironet's additional paid-in capital rather than an asset. In addition, pursuant to EITF No. 95-16, "Accounting for Stock Compensation Arrangements with Employee Loan Features Under APB Opinion No. 25," Aironet has accounted for the options as variable plan options from the note issuance date until the note is settled or otherwise amended resulting in a $325 and $1,078 non-cash charge recorded for the years ended March 31, 1998 and 1999, respectively.
On February 16, 1999, Aironet's Board of Directors had approved, subject to stockholder approval (which was determined to be perfunctory), the to be adopted Aironet Wireless Communications, Inc. 1999 Omnibus Stock Incentive Plan (the "1999 Plan") and granted options to acquire 400,000 shares at $9.00 under such plan. The 1999 Plan provides for the granting of options, stock appreciation rights ("SARs"), restricted stock and performance units, as defined, to certain officers and other key employees of the Company. The total number of shares Aironet may grant under the 1999 Plan cannot exceed 1,765,817. Options granted under the 1999 Plan have a ten-year term and must have an exercise price equal to or greater than the fair market value of Aironet's common stock on the date of grant. Options granted generally vest over a three-year period on the first three anniversary dates after the date of grant. Aironet's Board of Directors formally adopted and approved the 1999 Plan on April 12, 1999, and Aironet's stockholders formally adopted and approved the 1999 Plan on May 7, 1999.
At March 31, 1999, there were options outstanding under the 1999 Plan to purchase 400,000 shares of Aironet common stock, none of which are currently exercisable, at a weighted-average price per share of $9.00.
Aironet's compensation expense related to all Aironet options granted to Aironet employees for the fiscal years ended March 31, 1999 and 1998 was $2,010 and $325, respectively. Aironet's compensation expense related to all Aironet options granted to Company employees and Aironet's outside directors, for the fiscal years ended March 31, 1999 and 1998 was $994 and $80, respectively.
For SFAS 123 purposes, the fair value of each option granted under the Company's 1990 and Director Plans is estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for stock options granted in fiscal 2000, 1999 and 1998, respectively: expected volatility of 71.07%, 51.57% and 44.66%, risk-free interest rates of 6.16%, 5.29% and 5.88%, and an expected life of five years for grants. A weighted-average dividend yield of .069% and .038% was utilized in the Black-Scholes option-pricing model for 1999 and 1998, respectively. Since the Company has opted to discontinue the payment of dividends to its shareholders a dividend yield was not utilized as an assumption in calculating the fiscal 2000 option compensation expense.
Additionally, the fair value of each right to purchase stock under the Company's 1995 Stock Purchase Plan for SFAS 123 purposes is estimated as of the first day of each
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
six-month payment period (during which payroll deductions for purchases are made) using the Black-Scholes option pricing model with the following weighted-average assumptions used in fiscal 2000, 1999 and 1998, respectively: dividend yield of .00%, .069% and 0.38% expected volatility of 81.15%, 53.13% and 44.66%, risk-free interest rates of 4.89%, 5.18% and 5.29%, and an expected life of six months.
The fair value of each PenRight! option was calculated utilizing the minimum value method of valuing employee stock options of nonpublic subsidiaries, in accordance with the provisions of SFAS 123. The applicable weighted-average risk free rate of interest utilized in this calculation was 6.59%.
The fair value of Mr. Paxton's options to purchase 400,000 shares of the Company's common stock upon the stock's attainment of certain per share prices as identified above, was estimated for SFAS 123 purposes for fiscal 1999 compensation expense, as of the date of grant using a path dependent model with the following assumptions: a dividend yield of .069%, an expected volatility of 53.13% and a risk-free interest rate of 5.25%. The expected term of these options is determined by the path dependent model.
For SFAS 123 purposes, the fair value of each option granted under Aironet's 1996 Amended Plan and 1999 Plan were estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for stock options granted in fiscal 1999 and 1998, respectively: dividend yield of 0%, expected volatility of 51.57% and 56.00%, risk-free interest rates of 5.14% and 5.72%, and an expected life of five years. The weighted-average fair value on the date of grant for options granted during fiscal years 1999 and 1998 were $8.43 and $3.50, respectively.
If the Company had elected to recognize the compensation cost of its stock option and stock purchase plans, certain portions of Mr. Paxton's stock-based compensation and Aironet's stock option plans based on the fair value of the awards under those plans and letter agreement in accordance with SFAS 123, net income (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts below:
NOTE 12 - LEASES
The Company leases certain equipment under capital leases generally for terms of five years or less with renewal and purchase options. The present value of future minimum lease payments for these capital lease obligations is reflected in the consolidated balance sheets as current and non-current capital lease obligations. In addition,
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
the Company leases office facilities, customer service locations and certain equipment under non-cancelable operating leases.
Future minimum lease payments for the fiscal years ending March 31 are as follows:
CAPITAL OPERATING LEASES LEASES ------------------ ------------------
2001 $ 275 $ 11,102 2002 275 6,663 2003 117 4,264 2004 6 3,685 2005 -- 2,123 2006 and thereafter -- 1,611 ------------------ ------------------ Subtotal 673 $ 29,448 ================== Amount representing interest (68) ------------------ Present value of minimum lease payments $ 605 ==================
Current portion $ 236 Long-term portion $ 369
During fiscal 2000, the Company purchased its corporate jet by buying out its operating lease commitment. The corporate jet was immediately sold to a third party upon the buyout of this operating lease. The buyout had the effect of reducing the Company's minimum lease commitment by $708 per year through fiscal 2005 and by $2,186 thereafter. This transaction has been treated as a non-cash transaction in the accompanying Consolidated Statements of Cash Flows.
As discussed in Note 5 - Property and Equipment, in November 1999 the Company announced that it would move its executive offices from Akron, Ohio to Cincinnati, Ohio and would relocate substantially all of its remaining Akron operations to The Woodlands, Texas. Since the Akron Ohio location will no longer be utilized, after a transition period ending June 30, 2000, it is no longer appropriate to include the present value of the operating lease commitment for each of the lease renewal periods relating to the leased Akron, Ohio offices above. The removal of these renewal period lease payments had the effect of reducing the Company's minimum lease commitment by $1,766 per year.
The Company has an option to purchase the 100,000 square foot facility currently occupied by its corporate offices. The purchase option is exercisable prior to September 1, 2001 for a price equal to the fair market value of the premises as determined by an independent appraisal.
Rent expense, net of subleases rental income, for fiscal 2000, 1999 and 1998 amounted to $14,182, $13,057 and $10,820, respectively. Fiscal 2000 rent expense includes an abandonment charge of $1,495 related to office space located at the Company's former world headquarters in Akron, Ohio. This charge was recorded during fiscal 2000 to accrue for the expected cost of the abandonment of the Summit Park building as of June 30, 2000. Also during fiscal 2000, the Company recorded an impairment charge related to a building leased to the Company's former subsidiary, Aironet Wireless Communications. This charge of $134 is also included in rental expense for fiscal 2000.
The Company subleases certain of its leased office facilities to third parties. Sublease rental income is recorded as a reduction in the Company's rent expense in the accompanying consolidated statements of operations.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
Future expected minimum sublease payment for the fiscal years ending March 31 are as follows:
OPERATING LEASES ----------
2001 $ 1,233 2002 285 2003 48 2004 48 2005 48 2006 and thereafter 48 ---------- $ 1,710 ==========
Sublease rental income for fiscal 2000, 1999 and 1998 amounted to $1,389 $1,092 and $337, respectively.
NOTE 13 - CONVERTIBLE SUBORDINATED NOTES AND DEBENTURES
Convertible subordinated notes and debentures consisted of $82,500 of 5-3/4% Convertible Subordinated Notes (the "5-3/4% Notes") and $24,413 of 7-1/2% Convertible Subordinated Debentures (the "7-1/2% Debentures") at March 31, 2000 and 1999.
The 5-3/4% Notes, issued December 12, 1995, are due January 1, 2003. The conversion price for the 5-3/4% Notes is $27.50 per common share and is subject to adjustment in certain events. Interest is payable on January 1 and July 1 in each year, and commenced July 1, 1996. On or after January 5, 1999, the 5-3/4% Notes are redeemable at any time at the option of the Company, in whole or in part, at the following prices for the following calendar years: 2000, 102.464%; 2001, 101.643% and 2002, 100.821%.
The 7-1/2% Debentures, issued June 1, 1987, are due June 1, 2012. The conversion price for the 7-1/2% Debentures of $26.75 per common share is subject to adjustment in certain events. Interest is payable on June 1 and December 1 in each year, and commenced December 1, 1987. On and after June 1, 1997, the Debentures are redeemable at par. The sinking fund requires mandatory annual payments of 5% of the original $46,000 principal amount commencing June 1, 1997, calculated to retire 75% of the issue prior to maturity. During fiscal 1991, the Company purchased and retired debentures with a principal face amount aggregating $21,266, which is being applied to the earliest of the Company's sinking fund payment obligations.
During fiscal 1999, $311 in aggregate principal amount of the Company's 7-1/2% Convertible Subordinated Debentures were surrendered for conversion into 11,626 shares of the Company's common stock. During fiscal 1997, $10 in aggregate principal amount of the Company's 7-1/2% Convertible Subordinated Debentures were surrendered for conversion into 373 shares of the Company's common stock. The surrendered Convertible Subordinated Debentures have been canceled effective as of their conversion into common stock.
Total interest paid by the Company in fiscal 2000, 1999 and 1998 (including but not limited to the interest on the Convertible Subordinated Notes and Debentures) was $13,987, $10,852 and $7,417, respectively.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
The combined annual aggregate amount of maturities and sinking fund requirements are as follows:
2001 $ -- 2002 -- 2003 82,500 2004 -- 2005 -- Thereafter 24,413 ----------- $ 106,913 ===========
These notes and debentures contain various non-financial covenants. The Company was in compliance with these covenants at March 31, 2000.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value Financial Instruments" ("SFAS 107"), requires that the Company disclose the fair value of its financial instruments, where practical.
The following methods and assumptions were used by the Company in estimating the fair value of the following financial instruments:
Cash and Cash Equivalents The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents approximate fair value due to the short-term nature of these instruments.
5-3/4% Notes The fair value of the Company's 5-3/4% Notes is based on discounted cash flow analysis, as there is no regular public trading market for the 5-3/4% notes. Refer to Note 13 - Convertible Subordinated Notes and Debentures for additional information concerning the 5-3/4% Notes.
7-1/2% Debentures The fair value of the Company's 7-1/2% Debentures is based on quoted market prices. Refer to Note 13 - Convertible Subordinated Notes and Debentures for additional information concerning the 7-1/2% Debentures.
Forward Foreign Currency Exchange Contracts The fair value of forward foreign currency exchange contracts is estimated based on quotes from currency brokers. At March 31, 2000, the Company had several forward foreign currency exchange contracts to purchase various foreign currencies as presented in the table below. These contracts matured in April 2000.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
The Company had no forward foreign currency exchange contracts at March 31, 1999.
(1) Represents US Dollar equivalent based on contractual exchange rate. (2) Represents US Dollar equivalent based on March 31, 2000 exchange rate. (3) Represents difference between value at contractual exchange rate and March 31, 2000 exchange rate.
Cisco Collar The fair value of the Cisco Collar at March 31, 2000 approximates zero, which was the fair value at March 22, 2000, the date of its execution.
Investments in Non-traded Companies It was not practicable for the Company to estimate the fair value of its investments in non-traded, closely held companies because of the lack of quoted market prices for those investments and the inability to estimate fair values without incurring excessive costs. These investments, which the Company holds for purposes other than trading, amounted to $7,147 and $11,347 at March 31, 2000 and 1999, respectively, and are carried at cost in intangible and other assets in the accompanying consolidated balance sheets. However, during fiscal 2000 and fiscal 1999, the Company recorded impairment charges of $1,283 and $1,725, respectively, against its investment in the third party that acquired the Company's Virtual Vision subsidiary. The impairment charges reflect the dilution of the Company's investment resulting from this third party's issuance of a series of preferred shares with superior rights over the preferred shares owned by the Company.
Additionally, during fiscal 2000, the Company recorded an impairment charge of $150 against its investment in a separate third party. This investment was considered fully impaired due to poor historical financial performance and lack of evidence that would indicate a future ability of this entity to support the carrying value of the Company's investment. Refer to Note 6 - Intangible and Other Assets, for additional information concerning the Company's investments in non-traded companies.
Long-term Notes Receivable It was not practicable for the Company to estimate the fair value of certain of its long-term notes receivable due from non-traded, closely held companies because of the lack of quoted market prices for similar financial instruments and the inability to estimate fair values without incurring excessive costs. The long-term notes receivable, which were repaid during fiscal 2000, earned interest at a fixed rate of 6% and had an original maturity of three years. The long-term notes receivable, which total $445 at March 31, 1999, are carried at cost in intangible and other assets in the accompanying fiscal 1999 consolidated balance sheet. Refer to Note 6 - Intangible and Other Assets for additional information concerning long-term notes receivable.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
NOTE 15 - STOCKHOLDERS' EQUITY
The exercise of non-qualified stock options results in state and federal income tax benefits to the Company based on the difference between the market price of the common stock at the date of exercise and the option price. During fiscal 2000, 1999 and 1998 $740, $(411) and $1,970, respectively of state and federal income tax effects were credited (debited) to additional paid-in capital as a result of such option exercises.
NOTE 16 - BUSINESS SEGMENTS
During fiscal 1999, the Company adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires additional financial disclosure of segment information in the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers.
The Company designs, develops, manufactures, markets and services mobile and wireless transaction systems and solutions for vertical markets. The Company's business consists of three geographic operating segments: a) sales and distribution of all of its product lines in the United States; b) sales and distribution of all of its product lines in Europe and c) sales and distribution of all of its product lines in international locations outside of Europe.
In fiscal 1999, the Company reported results for a fourth operating segment the Company's former Aironet subsidiary. Aironet designs, develops, markets, and services high-speed standards-based wireless local area networking solutions. Aironet is presented below for the fiscal years ended 1999 and 1998 as a separate segment. As described in Note 17 - Divestitures and Subsidiary Stock Transactions, the Company has ceased consolidating the results of Aironet as of April 1, 1999 as such, Aironet is not included in the fiscal 2000 business segment information presented below. The gain recognized from the sale of Aironet stock in Aironet's initial public offering of $32,025 has been included within the U.S. operating segment for the fiscal year ended March 31, 2000.
The Company has operations in the United States, Europe, Canada, and other international locations including Mexico, Australia and Asia.
Intercompany sales were at cost plus a negotiated mark-up. During fiscal 2000, the Company increased its transfer price to more currently reflect costs incurred in the United States related to sales to its international subsidiaries.
Assets of geographic areas are identified with the operations of each area.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
(1) Includes assets from non-US locations of $2,768.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
(1) Includes external revenues and assets from non-US locations of $5,630 and $7,553, respectively.
NOTE 17 - DIVESTITURES AND SUBSIDIARY STOCK TRANSACTIONS
During fiscal 2000, Cisco announced that it had entered into a merger agreement (the "Agreement") providing for its acquisition of Aironet, an affiliate of the Company, for shares of Cisco common stock (the "Cisco/Aironet Transaction"). As a result of the Cisco/Aironet Transaction, which became effective March 15, 2000, Aironet common stockholders received .6373 shares of Cisco for each common share of Aironet owned. (This merger exchange ratio and all Cisco share amounts and prices stated in this footnote are stated prior to giving effect to the two for one forward split of Cisco's common stock which became effective March 22, 2000; Aironet stockholders received the benefit of the Cisco stock split.) Immediately prior to the Cisco/Aironet Transaction the Company owned 4,994,262 shares of Aironet. Aironet had been organized as a subsidiary by the Company in 1993, and had effected its initial public offering in July 1999. Upon consummation of the Cisco/Aironet
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
Transaction the Company owned 3,183,043 shares of Cisco common stock. The shares of Cisco owned by the Company were valued at $409,419 based on a market price of $128.63 per Cisco share on March 15, 2000. Prior to consummation of the Cisco/Aironet Transaction the Company owned approximately 35% of Aironet, and had accounted for its investment in Aironet under the equity method of accounting, in accordance with Accounting Principles Board 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). The Company's carrying value of its investment balance in Aironet prior to the Cisco/Aironet Transaction was $21,765. As a result of the Cisco/Aironet Transaction, the Company will account for the investment retained in Cisco shares in accordance with the requirements of SFAS 115. That statement requires investments in marketable equity securities to be recorded at fair value. Accordingly, the difference between the carrying value of the Company's investment prior to Cisco/Aironet Transaction and the fair value on the date of the transaction has been recorded as a non-operating pre-tax gain of $387,654 in the accompanying fiscal 2000 Consolidated Statements of Operations.
Subsequent to the Cisco/Aironet Transaction, the Company sold approximately $150,000 of its holdings in Cisco shares in market transactions. The proceeds were subsequently utilized to retire amounts outstanding under the Company's senior credit facility and other identified liabilities. The sale of these Cisco shares resulted in a non-operating pre-tax gain of $8,507 in the accompanying fiscal 2000 Consolidated Statements of Operations.
The $396,161 non-operating pre-tax gain on the sale of marketable securities included in the fiscal 2000 Statement of Operations is composed of the Cisco/Aironet gains related to the transaction and the sale of shares as discussed above.
During fiscal 2000, Aironet and the Company sold 6,919,434 shares of Aironet's voting common stock in an initial public offering on the NASDAQ National Market at an offering price of $11.00 per share. Of the total number of shares offered, Aironet sold 4,637,196 shares and the Company sold 2,282,238 shares. The aggregate proceeds, net of underwriting discounts and commissions, were approximately $47,400 to Aironet and $23,300 to the Company. Subsequent to this transaction, the Company's remaining interest in Aironet was approximately 35%. Prior to the sale of these shares, the Company's interest in Aironet was approximately 76%. As a result of this transaction, the Company recorded a non-operating gain of $32,025, net of additional transaction costs of $1,500. Also as a result of this transaction, the Company ceased consolidation of Aironet effective April 1, 1999. The Company accounted for its investment under the equity method of accounting. Investment income of $1,066 was recorded for the Company's interest in the earnings of Aironet for fiscal 2000.
During fiscal 2000, the Company acquired the remaining 1,370,930 shares of voting common stock of Metanetics, a development stage subsidiary that develops image processing technology, from corporations owned by Mr. Meyerson, former Chairman and Chief Executive Officer of the Company, and his wife. The Metanetics shares were acquired in exchange for 477,790 voting common shares of the Company and the cancellation of certain debt and accrued interest amounting to $1,558. On the closing date of the transaction, the closing price per share of the voting common shares of the Company was $22.63. In addition to the Metanetics shares, Mr. Meyerson surrendered stock options for the purchase 240,000 shares of the Company's stock in connection with the Metanetics transaction. These stock options had a fair value of $1,941 on the closing date of the transaction. Giving effect to the share acquisition, the Company's interest in the voting common stock of Metanetics was 100%. Prior to the acquisition of these shares, the Company's interest in the voting common stock of Metanetics was 71%. In connection with the acquisition of the Metanetics shares, the Company also made
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
payments for compensation amounting to $3,105 to certain Metanetics employees and a consultant. The amount of the compensation was determined based upon the implicit value of the Metanetics stock options that were previously granted and subsequently canceled. These payments were charged to expense in fiscal 2000.
During fiscal 2000, the Company repurchased 475,000 shares of the voting common stock of Metanetics from current and former key employees, at a price of $6.73 per share. Giving effect to the share repurchase, the Company's interest in the voting common stock of Metanetics was 71%. Prior to the repurchase of these shares, the Company's interest in the voting common stock of Metanetics was 62%.
The fair value paid for the Metanetics fiscal 2000 stock repurchases in excess of identifiable assets was approximately $13,743. This premium has been classified as goodwill and is being amortized over a useful life of three years.
During fiscal 2000, the Company repurchased 60,000 shares of the voting common stock of Metanetics from former key employees, at a price of $2.00 per share. Giving effect to the share repurchase, the Company's interest in the voting common stock of Metanetics was 62%. Prior to the repurchase of these shares, the Company's interest in the voting common stock of Metanetics was 60%.
During fiscal 1999, Aironet sold 222,222 shares of its voting common stock to various third party investors at a price of $3.50 per share. Proceeds from this sale of stock were $778. The resulting pre-tax net gain of $340 was recorded as a gain on sale of subsidiary stock in the accompanying fiscal 1999 Consolidated Statement of Operations. In addition to the sale of the shares of stock, 66,667 warrants at $3.50 per share for the purchase of Aironet voting common stock were issued. A gain of $47 relating to these warrants had been deferred until the warrants are exercised or lapse. Prior to Aironet's fiscal 1999 stock sales, the Company's interest in the voting common stock of Aironet was 78%. Subsequent to these sales and as of March 31, 1999, the Company's interest in the voting common stock of Aironet was 76%.
During fiscal 1999, the Company entered into a series of transactions with a business partner relating to Metanetics. The Company repurchased 400,000 voting common shares of Metanetics for $1,950 or $4.875 per share. Simultaneously, the business partner agreed to pay amounts due of $1,850 for previously purchased manufacturing rights and software licenses. Additionally, the companies mutually agreed to terminate such agreements and released each other from any future liability related to the original agreements. The Company has capitalized this additional investment as goodwill to be amortized over a useful life of three years. Giving effect to the share repurchase, the Company's interest in the voting common stock of Metanetics was 60%. Prior to the repurchase of these shares, the Company's interest in the voting common stock of Metanetics was 52%.
During fiscal 1998, the Company sold the stock of its Virtual Vision subsidiary to a third party in exchange for $500 in cash and 750,000 shares of the acquirer's Series F Preferred Stock valued at $6.00 per share or $4,500. As all of the conditions of the sale were not satisfied as of March 31, 1998, the related gain of $900 was deferred. During fiscal 1999, all conditions of the sale were satisfied, and the $900 gain was recognized as non-operating income in the accompanying Fiscal 1999 Consolidated Statement of Operations.
During fiscal 1998, Aironet sold 984,126 shares of its voting common stock to various third party investors at a price of $3.50 per share. Proceeds from the sale of stock totaled $3,444. The resulting pre-tax gain of $402, net of related transaction costs, was recorded as a gain on sale of subsidiary stock in the accompanying fiscal
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
1998 consolidated statement of operations. Prior to Aironet's fiscal 1998 stock sales, the Company's interest in the voting common stock of Aironet was 87%. Subsequent to these sales the Company's remaining interest in the voting common stock of Aironet was 78%. In addition to the sale of the shares of stock, 395,237 warrants for the purchase of Aironet voting common stock were issued. A gain of $251 relating to these warrants had been deferred until the warrants are exercised or lapse.
During fiscal 1998, options to purchase 270,000 shares of Aironet voting common stock at $1.86 per share were exercised. The pre-tax gain of $241 was recorded as a gain on sale of subsidiary stock in the accompanying fiscal 1998 Consolidated Statement of Operations. Prior to the option exercises, the Company's interest in the voting common stock of Aironet was 90%. The Company's remaining interest subsequent to these purchases was 87%.
During fiscal 1998, the Company repurchased 100,000 shares of the voting common stock of Metanetics from former employees, at a price of $1.04 per share. Giving effect to the share repurchase, the Company's interest in the voting common stock of Metanetics was 52% at March 31, 1998. Prior to the repurchase of these shares, the Company's interest in the voting common stock of Metanetics was 50%.
NOTE 18 - TREASURY STOCK TRANSACTIONS
During fiscal 2000, the Company re-issued 74,543 shares of its treasury stock at a weighted-average price of $18.25 per share to satisfy purchases made by employees through the Company's 1995 Stock Purchase Plan, and 3,941 shares at a weighted-average price of $15.77 per share to satisfy stock options exercised under the Company's stock options plans. The re-issuances of treasury stock in satisfaction of purchases made through the 1995 Stock Purchase Plan and exercises of stock options under the Company's stock option plans have been excluded from the accompanying Consolidated Statements of Cash Flows as non-cash transactions.
During fiscal 1999, the Company repurchased 63,300 shares of its Common Stock, at a weighted-average price of $17.19 per share, pursuant to its open market repurchase program. The Company also re-issued 52,999 shares of its treasury stock during the year at a weighted-average price of $19.34 per share to satisfy purchases made by employees through its 1995 Stock Purchase Plan, and 94,234 shares at a weighted-average price of $21.82 per share to satisfy stock options exercised under the Company's stock options plans. The 78,484 shares of treasury stock remaining at March 31, 1999 have been accounted for at cost plus brokerage fees under the caption of treasury stock in the accompanying consolidated financial statements. The re-issuances of treasury stock in satisfaction of purchases made through the 1995 Stock Purchase Plan and exercises of stock options under the Company's stock option plans have been excluded from the accompanying Consolidated Statements of Cash Flows as non-cash transactions.
NOTE 19 - COMMITMENTS AND CONTINGENCIES
On September 21, 1993, a derivative Complaint was filed in the Court of Chancery of the State of Delaware, in and for Newcastle County, by an alleged stockholder of the Company derivatively on behalf of Telxon. The named defendants are the Company; Robert F. Meyerson, former Chairman of the Board, Chief Executive Officer and director; Dan R. Wipff, then President, Chief Operating Officer and Chief Financial Officer and director; Robert A. Goodman, Corporate Secretary and outside director; Norton W. Rose, then an outside director; and Dr. Raj Reddy, outside
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
director. The Complaint alleges breach of fiduciary duty to the Company and waste of the Company's assets in connection with certain transactions entered into by Telxon and compensation amounts paid by the Company. The Complaint seeks an accounting, injunction, rescission, attorney's fees and costs. While the Company is nominally a defendant in this derivative action, the plaintiff seeks no monetary relief from the Company.
On November 12, 1993, Telxon and the individual director defendants filed a Motion to Dismiss. The plaintiff filed its brief in opposition to the Motion on May 2, 1994, and the defendants filed a final responsive brief. The Motion was argued before the Court on March 29, 1995, and on July 18, 1995, the Court issued its ruling. The Court dismissed all of the claims relating to the plaintiff's allegations of corporate waste; however, the claims relating to breach of fiduciary duty survived the Motion to Dismiss.
On October 31, 1996, plaintiff's counsel filed a Motion to Intervene in the derivative action on behalf of a new plaintiff stockholder. As part of the Motion to Intervene, the intervening plaintiff asked that the Court designate as operative for the action the intervening plaintiff's proposed Complaint, which alleges that a series of transactions in which the Company acquired technology from a corporation affiliated with Mr. Meyerson was wrongful in that Telxon already owned the technology by means of a pre-existing consulting agreement with another affiliate of Mr. Meyerson; the intervenor's complaint also names Raymond D. Meyo, President, Chief Executive Officer and director at the time of the first acquisition transaction, as a new defendant. The defendants opposed the Motion on grounds that the new claim alleged in the proposed Complaint and the addition of Mr. Meyo were time-barred by the statute of limitations and the intervening plaintiff did not satisfy the standards for intervention. After taking legal briefs, the Court ruled on June 13, 1997, to permit the intervention. On March 18, 1998, defendant Meyo filed a Motion for Judgement on the Pleadings (as to himself), in response to which Plaintiff filed its Answer and Brief in Opposition. The Motion was argued before the Court on November 4, 1998, and was granted from the bench, dismissing Meyo as a defendant in the case.
The defendants filed a Motion for Summary Judgment on November 15, 1999, and the plaintiff filed a cross Motion for Summary Judgment on December 7,1999. The Motions were argued before the Court in February 2000. Following the hearing, the parties submitted supplemental briefs, the last of which was filed on March 6, 2000. The parties are awaiting the Court's decision on the cross motions for summary judgment. No trial date has been set.
The defendants believe that the post-intervention claims lack merit, and they intend to continue vigorously defending this action. While the ultimate outcome of this action cannot presently be determined, the Company does not anticipate that this matter will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any loss or related insurance recovery in its financial statements.
On February 7, 1998, a complaint was filed against the Company in the District Court of Harris County, Texas, by Southwest Business Properties, the landlord of the Company's former Wynnwood Lane facility in Houston, Texas, alleging counts for breach of contract and temporary and permanent injunctive relief, all related to alleged environmental contamination at the Wynnwood property, and seeking specific performance, unspecified monetary damages for all injuries suffered by plaintiff, payment of pre-judgement interest, attorneys' fees and costs and other unspecified
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
relief. In December 1999, the case was settled by the parties, and the $500 cost of the initial settlement, $275 of which has been covered by the Company's insurer, was recorded in the Company's financial statements; additional amounts of up to $100 are required to be paid as part of the settlement in the event that the remediation described below is not timely completed.
While the litigation with the landlord was pending, Telxon and the landlord filed on July 7, 1999 a joint application with the Texas Natural Resource Conservation Commission for approval of a proposed Response Action Work Plan for the property pursuant to the Commission's Voluntary Cleanup Program. The plan, which was approved by the Commission in August 1999, projects completion of remediation and issuance of a closure certificate in 2002, for which the Company had at March 31, 2000 accrued the then estimated costs of $250. As the result of changes to the remediation plan made after March 31, 2000 to better assure its completion within the projected schedule, the Company has increased its estimate of the total expected remediation cost to $350. If closure of the remediation is not certified when contemplated by the plan, and the Company were ultimately to become responsible for the alleged contamination, the associated loss could have a material adverse effect on results of operations for one or more quarters in which the associated charge(s) would be taken.
On May 8, 1998, two class action suits were filed in the Court of Chancery of the State of Delaware, in and for the County of New Castle, by certain alleged stockholders of Telxon on behalf of themselves and purported classes consisting of Telxon stockholders, other than defendants and their affiliates, relating to an alleged offer by Symbol Technologies, Inc. ("Symbol") to acquire the Company. Named as defendants were Telxon and its Directors at the time, namely, Frank E. Brick, Robert A. Goodman, Dr. Raj Reddy, John H. Cribb, Richard J. Bogomolny, and Norton W. Rose. The plaintiffs alleged that on April 21, 1998, Symbol made an offer to purchase Telxon for $38.00 per share in cash and that on May 8, 1998, Telxon rejected Symbol's proposal. Plaintiffs further alleged that Telxon has certain anti-takeover devices in place purportedly designed to thwart hostile bids for the Company. Plaintiffs charged the Director defendants with breach of fiduciary duty and claimed that they entrenched themselves in office. On February 10, 2000, the plaintiffs filed a notice for the dismissal of the action without prejudice, which was approved by the Court on February 17, 2000.
From December 1998 through March 1999, a total of 27 class actions were filed in the United States District Court, Northern District of Ohio, by certain alleged stockholders of the Company on behalf of themselves and purported classes consisting of Telxon stockholders, other than the defendants and their affiliates, who purchased stock during the period, from May 21, 1996 through February 23, 1999 or various portions thereof, alleging claims for "fraud on the market" arising from alleged misrepresentations and omissions with respect to the Company's financial performance and prospects and an alleged violation of generally accepted accounting principles by improperly recognizing revenues. The named defendants are the Company, former President and Chief Executive Officer Frank E. Brick and former Senior Vice President and Chief Financial Officer Kenneth W. Haver. The actions were referred to a single judge. On February 9, 1999, the plaintiffs filed a Motion to consolidate all of the actions and the Court heard motions on naming class representatives and lead class counsel on April 26, 1999.
On August 25, 1999, the Court appointed lead plaintiffs and their counsel, ordered the filing of an Amended Complaint, and dismissed 26 of the 27 class action suits without prejudice and consolidated those 26 cases into the first filed action. The appointed lead plaintiffs appointed by the Court filed an Amended Class Action Complaint on September 30, 1999. The Amended Complaint alleges that the defendants engaged in a scheme to defraud investors through improper revenue recognition practices and concealment of material adverse conditions in Telxon's business and finances. The Amended Complaint seeks certification of the identified class, unspecified compensatory and punitive damages, pre- and post-judgment interest, and attorneys' fees and costs. Various appeals and writs challenging the District Court's August 25, 1999 rulings were filed by two of the unsuccessful plaintiffs but have all been denied by the Court of Appeals.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
On November 8, 1999, the defendants jointly moved to dismiss the Amended Complaint. The Court held a case management conference on November 16, 1999 at which it set a conditional schedule. Briefing of the defendants' motion to dismiss and the plaintiffs' opposition thereto was completed January 18, 2000. The motion to dismiss remains pending, and all discovery remains stayed pending the Court's ruling on the motion. A motion filed by the plaintiffs on November 16, 1999 to lift the discovery stay to allow the serving of discovery requests on a non-party has been denied by the Court. The defendants believe that these claims lack merit, and they intend to vigorously defend the consolidated action.
By letter dated December 18, 1998, the Staff of the Division of Enforcement of the Securities and Exchange Commission (the "Commission") advised the Company that it was conducting a preliminary, informal inquiry into trading of the securities of the Company at or about the time of the Company's December 11, 1998 press release announcing that the Company would be restating the revenues for its second fiscal quarter ended September 30, 1998. On January 20, 1999, the Commission issued a formal Order Directing Private Investigation And Designating Officers To Take Testimony with respect to the referenced trading and specified accounting matters, pursuant to which subpoenas have been served requiring the production of specified documents and testimony. The Company and its current and former independent accountants are also currently assessing the effects of recent comments issued to the Company by the Commission's Division of Corporation Finance as part of its ongoing review of various accounting matters in the Company's previous filings with the Commission, including, but not limited to, the recognition of revenues from the Company's indirect sales channel and the timing of charges which the Company recorded during fiscal 1999, 1998 and 1997 for inventory obsolescence, severance and asset impairment. The Company has cooperated, and intends to continue cooperating fully with, the Commission Staff. The Company has not accrued for any fines or penalties under SFAS 5 because it has no basis to conclude that it is probable that at the conclusion of the investigation the Commission will seek a fine or penalty, and because the amount of any such fine or penalty is not estimable.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
On December 30, 1999, a Derivative Complaint was filed in the Court of Chancery of the State of Delaware, in and for Newcastle County, by an alleged stockholder of the Company derivatively on behalf of Telxon. The named defendants are the Company; the then directors of the Company, Richard J. Bogomolny, John H. Cribb, Robert A. Goodman, Raj Reddy, Frank Brick and Norton Rose; Robert F. Meyerson, former Chairman of the Board, Chief Executive Officer and director; and Telantis Venture Partners V Inc., an affiliate of Robert F. Meyerson. The Complaint alleges that Telxon's sale of stock in its then Aironet Wireless Communications, Inc. subsidiary to Meyerson interests constitutes a waste and gift of Telxon assets in breach of the defendant directors' duties of care and to act in good faith. The Complaint also alleges that the defendant directors' opposition of an alleged offer by Symbol to acquire the Company in the Spring of 1998 violated their duties of loyalty, good faith and due care and wasted Company's assets. The Complaint seeks an order rescinding the Aironet stock transactions (or in the event such relief cannot be granted, recissory damages), requiring the defendants other than the Company to account for Telxon's losses in connection with the alleged wrongs (including the funds spent resisting the alleged Symbol bid) and awarding plaintiff its attorneys' fees and expenses. While the Company is nominally a defendant in this derivative action, the plaintiff seeks no monetary relief from the Company.
On March 8, 2000, all defendants except Messrs. Goodman and Meyerson answered the complaint and moved for judgment on the pleadings. Messrs. Goodman and Meyerson have filed motions to dismiss. In addition, all defendants have moved to stay discovery. All of these motions are currently being briefed, and no hearing date has been scheduled for any of the motions.
The defendants believe that these derivative claims lack merit and intend to vigorously defend this action. While the ultimate outcome of this action cannot presently be determined, the Company does not anticipate that this matter will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any loss or related insurance recovery in its financial statements.
The Company has received a number of letters from its customers requesting Telxon to indemnify them with respect to their defense of demands which have been made on them by the Lemelson Medical, Education & Research Foundation Limited Partnership for the payment of a license fee for the alleged infringement of the Foundation's so-called "bar-code" patents by the customers' systems utilizing automatic identification technology, portions of which have been supplied by the Company. On October 27, 1999, the Foundation also sent a letter directly to the Company similarly demanding that the Company purchase a license with respect to "Telxon's use of machine vision and bar coding technology." On April 14, 2000 the Foundation filed five lawsuits against a total of approximately 430 end users, including a number of the Company's customers, whom the Foundation alleges use automatic identification technology which infringes the Foundation's patents; the Company is not named as a defendant in any of these lawsuits. The Company continues to receive requests for indemnity from customers with regard to claims being informally asserted against them by the Foundation as well as from customers who have been formally sued by the Foundation.
The Company believes that the patents so being asserted against it and its customers are invalid, unenforceable and not infringed and on April 24, 2000 filed a federal court action against the Foundation seeking a declaratory judgment to that effect. The Company's declaratory judgment action is substantially similar to the federal court action jointly filed by seven other companies in the automatic identification industry, including the Company's principal competitors, in July 1999 seeking like declaratory relief against the Foundation. On May 30, 2000 the Foundation filed an answer and counterclaim against the Company in response to its declaratory judgment action denying the invalidity of its patents are invalid, unenforceable or not infringed by the Company or its customers and counter-claiming that the Company likely induces or contributes to the direct infringement of unspecified claims of the Foundation's patents. The Foundation's counterclaim against the Company is the same as the one which has been asserted by the Foundation against the companies which filed the other declaratory judgment action. Discovery in the Company's declaratory judgment action is just beginning. The Company believes that the Foundation's counterclaim is without merit and intends to vigorously defend against it.
Except as otherwise specified, in the event that any of the foregoing litigation ultimately results in a money judgment against the Company or is otherwise determined adversely to the Company by a court of competent jurisdiction, such
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
determination could, depending on the particular circumstances, adversely affect the Company's conduct of its business and the results and condition thereof.
In the normal course of its operations, the Company is subject to performance under contracts and assertions that technologies it utilizes may infringe third party intellectual properties, and is also subject to various pending legal actions and contingencies, which may include matters involving suppliers, customers, lessors of Company products to customers, lessors of equipment to the Company and existing and potential business and development partners. The Company is vigorously defending all such claims which do not lack merit. While the ultimate outcome of such matters cannot presently be determined, the Company does not anticipate that these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows and accordingly has not made provisions for any losses or related insurance recoveries in its financial statements.
NOTE 20 - CHANGE IN ACCOUNTING PRINCIPLE
On November 20, 1997, the FASB's Emerging Issues Task Force issued a new consensus ruling, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation" ("EITF 97-13"). EITF 97-13 requires business process reengineering costs associated with information systems development to be expensed as incurred. The Company has been involved in a corporate-wide information systems implementation project that is affected by this pronouncement. In accordance with this ruling, during fiscal 1998, the Company recorded a one-time, after-tax, non-cash charge of $1,016 to expense previously capitalized costs associated with this project. Such costs had primarily been incurred during the second quarter of fiscal 1998.
NOTE 21 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). This Staff Accounting Bulletin expresses the views of the Securities and Exchange Commission in applying accounting principals generally accepted in the United States while recognizing revenue. The Company adopted the provisions of this bulletin when recognizing revenue.
On November 24, 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 100 "Restructuring and Impairment Charges". This Staff Accounting Bulletin expresses the views of the SEC staff regarding the accounting and disclosure of certain expenses commonly reported in connection with exit activities and business combinations. The Company has also abided by the guidance contained within this document in accounting for current exit costs.
During fiscal 1999, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 provides accounting and reporting standards for derivative instruments. This standard will require the Company to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. The Company is required to adopt the provisions of SFAS 133 during the first quarter of fiscal 2002 (as delayed by Statement of Financial Accounting Standards No. 137 - "Deferral of the Effective Date of FASB Statement No. 133"). Management is evaluating the impact of this statement; however, at this
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
time it believes that the adoption of this pronouncement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
NOTE 22 - SUBSEQUENT EVENT
Subsequent to March 31, 2000, the Company loaned John W. Paxton, the Chief Executive Officer of the Company, $3,100 in connection with the prior acquisition of the Company's common stock. It is anticipated that this loan will be repaid during the second quarter of the next fiscal year once those shares are registered, as will facilitate his refinancing of the loan through a third party lender.
NOTE 23 - QUARTERLY DATA (UNAUDITED)
(a) During the second quarter of fiscal 2000, the Company recorded a $32,025 gain related to the IPO of Aironet. (b) During the fourth quarter of fiscal 2000, the Company recorded a gain on marketable securities of $396,161 and charges of $8,315 and $9,267 related to obsolescence for manufacturing and customer service and revaluation of used equipment inventories, respectively. The Company also recorded a provision of $3,523 for the probable loss on a customer contract that will be completed in fiscal 2001. Charges were recorded for doubtful accounts of $3,380 and transition costs of $4,029, including provisions for stay-on bonuses, employee termination benefits, and lease abandonment, to reflect the expenses of closing the Akron, Ohio facility. In conjunction with the repurchase of Metanetics stock held by minority shareholders, payments for compensation were made to Metanetics employees aggregating $3,105 and the March 2000 goodwill amortization on the Metanetics stock repurchased was $378. In addition, a probable loss on manufacturing inventory purchase commitments of $2,600, adjustments to accrued taxes other than income taxes for $1,222, professional fees and consulting charges of $1,829, and incentive compensation to retain key sales personnel of $1,023 were recorded. (c) The net (loss) income per share for the quarters does not equal net income per share for the year due to differentials in the impact of quarterly and annual weighted new stock issuances on the weighted-average number of shares outstanding for each respective period.
On February 23, 1999, the Company announced that, having completed a review of certain judgmental accounting matters with the Company's then independent accountants it would restate its previously issued audited financial statements for fiscal years 1998, 1997 and 1996 and its unaudited interim financial statements for the first, second and third quarters of fiscal years 1999, 1998 and 1997. Additionally, the Company announced on June 16, 1999, that it would restate its unaudited results for the second quarter of fiscal 1999.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
As discussed in Note 3 - Restatement, on June 29, 2000 the Company announced that it would further restate its audited results for the fiscal years ended March 31, 1999 and 1998 and its unaudited results for the fourth quarter of fiscal 1998 as well as the first, second and fourth quarters of fiscal 1999. The results of this restatement are reflected in the "Restated" quarterly results provided below. The effects of the prior restatements discussed above have been previously reported and as such are included in the "As Previously Presented" quarterly results below.
(a) During the fourth quarter of fiscal 1999, the Company recorded charges of $23,626 related to the discontinuance of certain of its products and $7,278 for excess and obsolete inventories. The fourth quarter results of operations also include severance charges of $3,534, bad debt provisions of $3,695, non-cash compensation related to stock options in its Aironet subsidiary of $3,409 and charges related to the carrying value of investments of $2,094. The aggregate impact to fourth quarter earnings per share was $2.72 per share (diluted).
(b) The net loss per share for the quarters does not equal net income per share for the year due to differentials in the impact of quarterly and annual weighted new stock issuances on the weighted-average number of shares outstanding for each respective period.
TELXON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS (CONTINUED)
(a) During the fourth quarter of fiscal 1998, the Company recorded a true up of capitalized software costs, net of amortization of $1,722. After the related income tax impact, the aggregate impact on fourth quarter earnings was $1,119 or $.05 per share (diluted). The impact of such adjustment on the reported earnings during the first three quarters of fiscal 1998 was not material. In addition, during the fourth quarter the Company recorded a $1,637 gain on the sale of voting common stock of its Aironet subsidiary.
(b) The net income per share for the quarters does not equal net income per share for the year due to differentials in the impact of quarterly and annual weighted new stock issuances on the weighted-average number of shares outstanding for each respective period.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES ---------------------
As previously reported, the Company engaged its current independent accountants, Arthur Andersen LLP, on July 19, 1999 to audit the Company's consolidated financial statements for fiscal 2000. The Company's former independent accountants, PricewaterhouseCoopers LLP, were accordingly dismissed upon the completion of the audit of and their report on the Company's consolidated financial statements for fiscal 1999. Subsequent to the change in independent accountants and as reported in the Company's Current Report on Form 8-K dated June 29, 2000 and filed June 30, 2000, the Company, in consultation with its current and former accountants, determined to further restate its fiscal 1999 and 1998 financial results as discussed in Note 3 - Restatement to the consolidated financial statements included in Item 8 above. The further restatement constitutes a "reportable event" within the meaning of Item 304(a)(1)(v) of Regulation S-K, but since the change in independent accountants, the Company has not had any "disagreements" with its independent accountants within the meaning of that regulation.
PART III
Except for certain information relating to the Company's executive officers included in Part I of this Form 10-K, the information called for by this Part III is not set forth herein but is incorporated by reference from the definitive proxy statement which the Company intends to file with the Securities and Exchange Commission within 120 days of the close of its fiscal year ended March 31, 2000, with respect to the 2000 Annual Meeting of the Company's stockholders scheduled to be held on September 15, 2000 or will otherwise be timely filed.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
(a) List of documents filed as part of this Annual Report on Form 10-K:
(1) Consolidated Financial Statements: Reference is made to the Index on page 53 of this Annual Report on Form 10-K.
(2) Financial Statement Schedule: Reference is made to the Index on page 53 of this Annual Report on Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K:
3.1 Restated Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit No. 2(b) to Registrant's Registration Statement on Form 8-A with respect to its Common Stock filed pursuant to Section 12(g) of the Securities Exchange Act, as amended by Amendment No. 1 thereto filed under cover of a Form 8 and Amendment No. 2 thereto filed on Form 8-A/A.
3.2 Amended and Restated By-Laws of Registrant, incorporated herein by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended March 31, 1999.
4.1 Portions of the Restated Certificate of Incorporation of Registrant pertaining to the rights of holders of Registrant's Common Stock, par value $.01 per share, incorporated herein by reference to Exhibit No. 2(b) to Registrant's Registration Statement on Form 8-A with respect to its Common Stock filed pursuant to Section 12(g) of the Securities Exchange Act, as amended by Amendment No. 1 thereto filed under cover of a Form 8 and Amendment No. 2 thereto filed on Form 8-A/A.
4.2 Text of form of Certificate for Registrant's Common Stock, par value $.01 per share, and description of graphic and image material appearing thereon, incorporated herein by reference to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended June 30, 1995.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) ----------- 4.3 Rights Agreement between Registrant and KeyBank National Association, as Rights Agent, dated as of August 25, 1987, as amended and restated as of July 31, 1996, incorporated herein by reference to Exhibit 4 to Registrant's Form 8-K dated August 5, 1996.
4.3.1 Form of Rights Certificate (included as Exhibit A to the Rights Agreement included as Exhibit 4.3 above). Until the Distribution Date (as defined in the Rights Agreement), the Rights Agreement provides that the common stock purchase rights created thereunder are evidenced by the certificates for Registrant's Common Stock (the text of which and description thereof is included as Exhibit 4.2 above, which stock certificates are deemed also to be certificates for such common stock purchase rights) and not by separate Rights Certificates; as soon as practicable after the Distribution Date, Rights Certificates will be mailed to each holder of Registrant's Common Stock as of the close of business on the Distribution Date.
4.3.2 Letter agreement among Registrant, KeyBank National Association and Harris Trust and Savings Bank, dated June 11, 1997, with respect to the appointment of Harris Trust and Savings Bank as successor Rights Agent under the Rights Agreement included as Exhibit 4.3 above, incorporated herein by reference to Exhibit 4.3.2 to Registrant's Form 10-K for the year ended March 31, 1997.
4.4 Indenture by and between Registrant and AmeriTrust Company National Association, as Trustee, dated as of June 1, 1987, regarding Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012, incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-3, Registration No. 33-14348, filed May 18, 1987.
4.4.1 Form of Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012 (set forth in the Indenture included as Exhibit 4.4 above).
4.5 Indenture by and between Registrant and Bank One Trust Company, N.A., as Trustee, dated as of December 1, 1995, regarding Registrant's 5-3/4% Convertible Subordinated Notes due 2003, incorporated herein by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
4.5.1 Form of Registrant's 5-3/4% Convertible Subordinated Notes due 2003 issued under the Indenture included as Exhibit 4.5 above, incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
4.5.2 Registration Rights Agreement by and among
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
Registrant and Hambrecht & Quist LLC and Prudential Securities Incorporated, as the Initial Purchasers of Registrant's 5-3/4% Convertible Subordinated Notes due 2003, with respect to the registration of said Notes under applicable securities laws, incorporated herein by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
10.1 Compensation and Benefits Plans of Registrant.
10.1.1 Amended and Restated Retirement and Uniform Matching Profit-Sharing Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.1 to Registrant's Form 10-K for the year ended March 31, 1999.
10.1.2 1990 Stock Option Plan for employees of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.2 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.1.3 1990 Stock Option Plan for Non-Employee Directors of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.3 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.1.4 Non-Qualified Stock Option Agreement between Registrant and Raj Reddy, dated as of October 17, 1988, incorporated herein by reference to Exhibit 10.1.4 to Registrant's Form 10-Q for the year ended March 31, 1999.
10.1.4.a Description of amendments extending the term of the Agreement included as Exhibit 10.1.4 above, incorporated herein by reference to Exhibit 10.1.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.1.5 1992 Restricted Stock Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.5 to Registrant's Form 10-Q for the quarter ended December 31, 1998.
10.1.6 1995 Employee Stock Purchase Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-Q for the quarter ended September 30, 1995.
10.1.7 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., a subsidiary of Registrant, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-K for the year ended March 31, 1997.
10.1.7.a Amended and Restated 1996 Stock Option Plan for employees,
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.a to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.7.b First Amendment to Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc. herein by reference to Exhibit 10.1.7.b to Registrant's Form 10-K for the year ended March 31, 1999.
10.1.8 1999 Stock Option Plan for Non-Employee Directors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.1.9 Non-Competition Agreement by and between Registrant and Robert F. Meyerson, effective February 27, 1997, incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-K for the year ended March 31, 1997.
10.1.10 Employment Agreement between Registrant and John W. Paxton, Sr., effective as of March 22, 1999, incorporated herein by reference to Exhibit 10.1.10 to Registrant's Form 10-K for the year ended March 31, 1999.
10.1.11 Employment Agreement between Registrant and Kenneth A. Cassady, effective as of June 7, 1999, incorporated herein by reference to Exhibit 10.1.11 to Registrant's Form 10-K for the year ended March 31, 1999.
10.1.12 Employment Agreement between Registrant and Woody M. McGee, effective as of June 1, 1999, incorporated herein by reference to Exhibit 10.1.12 to Registrant's Form 10-K for the year ended March 31, 1999.
10.1.13 Employment Agreement between Registrant and David M. Biggs, effective as of June 7, 1999, incorporated herein by reference to Exhibit 10.1.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.1.14 Offer and acceptance of employment between Registrant and Gene Harmegnies, effective as of January 31, 2000, incorporated herein by reference to Exhibit 10.1.14 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.1.15 Description of Key Employee Retention Program, incorporated herein by reference to Exhibit 10.1.15 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.15.a Form of letter agreement made
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
with key employees selected under the retention program described in Exhibit 10.1.15 above, incorporated herein by reference to Exhibit 10.1.15.a to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.16 Employment Agreement, effective as of April 1, 1997, between Registrant and Frank E. Brick, a former executive officer, incorporated herein by reference to Exhibit 10.1.9 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.17 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and James G. Cleveland, a former executive officer, incorporated herein by reference to Exhibit 10.1.10 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.18 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and Kenneth W. Haver, a former executive officer, incorporated herein by reference to Exhibit 10.1.11 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.19 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and David W. Porter, a former executive officer, incorporated herein by reference to Exhibit 10.1.13 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.20 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and Danny R. Wipff, a former executive officer, incorporated herein by reference to Exhibit 10.1.14 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.21 Letter agreement of Registrant with Robert A. Goodman, dated as of December 29, 1997 and executed and delivered January 20, 1998, for continued consulting services following certain changes in his law practice, incorporated herein by reference to Exhibit 10.1.17 to Registrant's Form 10-K for the year ended March 31, 1998.
10.1.22 Letter agreement of Registrant with R. Dave Garwood, dated August 30, 1999, for MRP-II consulting services, incorporated herein by reference to Exhibit 1.1.20 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.2 Material Leases of Registrant.
10.2.1 Lease between Registrant and 3330 W. Market Properties, dated as of December 30, 1986, for premises at 3330 West Market Street, Akron, Ohio, incorporated herein by reference to Exhibit 10.2.1 to Registrant's
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
Form 10-K for the year ended March 31, 1999.
10.2.2 Lease Agreement between The Woodlands Commercial Properties Company, L.P. and Registrant, made and entered into as of January 16, 1998, including Rider No. 1 thereto, for premises at 8302 New Trails Drive, The Woodlands, Texas, incorporated herein by reference to Exhibit 10.2.2 to Registrant's Form 10-K for the year ended March 31, 1998.
10.2.3 Standard Office Lease (Modified Net Lease) between Registrant and John D. Dellagnese III, dated as of July 19, 1995, for premises at 3875 Embassy Parkway, Bath, Ohio, including an Addendum thereto, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1996.
10.2.3.a Second Addendum, dated as of October 5, 1995, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.a to Registrant's Form 10-K for the year ended March 31, 1996.
10.2.3.b Third Addendum, dated as of March 1, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.b to Registrant's Form 10-K for the year ended March 31, 1996.
10.2.3.c Fourth Addendum, dated as of April 16, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.c to Registrant's Form 10-Q for the quarter ended June 30, 1997.
10.2.3.d Fifth Addendum, dated as of June 24, 1997, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.d to Registrant's Form 10-Q for the quarter ended June 30, 1997.
10.2.3.e Sixth Addendum, dated as of March, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.e to Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.2.3.f Seventh Addendum, dated as of July 20, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.f to
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.2.3.g Eighth Addendum, dated as of September 8, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.g to Registrant's Form 10-Q for the quarter ended September 30, 1998.
10.2.3.h Sublease Agreement, dated as of September 1, 1998, between Registrant and Aironet Wireless Communications, Inc. for the premises subject to the Lease included as Exhibit 10.2.3 above, as amended through the Eighth Addendum thereto included as Exhibit 10.2.3.g above, incorporated herein by reference to Exhibit 10.2.3.h to Registrant's Form 10-K for the year ended March 31, 1999.
10.2.3.i Renewal, dated June 16, 1999, with respect to the Sublease Agreement included as Exhibit 10.2.3.h above, incorporated herein by reference to Exhibit 10.2.3.i to Registrant's Form 10-K for the year ended March 31, 1999.
10.2.4 Lease Contract between Desarrollos \ Inmobiliarios Paso del Norte, S.A. de C.V. and Productos y Servicios de Telxon, S.A. de C.V., a subsidiary of Registrant, made and entered into as of April 10, 1997, for premises in Ciudad Juarez, Chihuahua, Mexico, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1998.
10.2.5 Lease between Milford Partners, LLC and Registrant, made as of March 17, 2000 for premises in Ridgewood Corporate Center, 1000 Summit Drive, Milford, Ohio, filed herewith.
10.2.6 Lease Agreement between Woodlands Office Equities-'95 Limited and Registrant, effective January 20, 2000, for premises at 8701 New Trails Drive, The Woodlands, Texas, including an Expansion, Modification and Ratification thereof dated May 1, 2000, filed herewith.
10.3 Credit Agreements of Registrant.
10.3.1 Credit Agreement by and among Registrant, the lenders party thereto from time to time and The Bank of New York, as letter of credit issuer, swing line lender and agent for the lenders, dated as of March 8, 1996 (refinanced and replaced by the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
reference to Exhibit 10.3.2 to Registrant's Form 10-K for the year ended March 31, 1996.
10.3.1.a Amendment No. 1, dated as of August 6, 1996, to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.2.a to Registrant's Form 8-K dated August 16, 1996.
10.3.1.b Amendment No. 2, dated as of December 16, 1996, to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.2.c to Registrant's Form 8-K dated December 16, 1996.
10.3.1.c Amendment No. 3, dated as of December 12, 1997, to the Agreement included as Exhibit 10.3.1 above, included herein by reference to Exhibit 10.3.1.d to Registrant's Form 10-K for the year ended March 31, 1998.
10.3.1.d Waiver and Agreement, dated as of December 29, 1998, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.e to Registrant's Form 10-Q for the quarter ended December 31, 1998.
10.3.1.e Waiver Extension and Agreement, dated as of February 12, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.f to Registrant's Form 10-Q for the quarter ended December 31, 1998.
10.3.1.f Second Waiver Extension Agreement and Amendment No. 4, dated as of March 26, 1999, with respect to the Agreement included as Exhibit 10.3.1 above , incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated April 1, 1999.
10.3.1.g Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and The Bank of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
herein by reference to Exhibit 10.3.1.b to Registrant's Form 8-K dated April 1, 1999.
10.3.1.h Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of The Bank of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1.h to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.1.i Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1 to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.1.j Pledge Agreement, dated as of March 26, 1999, by Registrant to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1.j to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.1.k Third Waiver Extension Agreement and Amendment No. 5, dated as of June 29, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
July 1, 1999.
10.3.2 Business Purpose Revolving Promissory Note (Swing Line) made by Registrant in favor of Bank One, NA, dated August 4, 1998 (refinanced and replaced by the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-Q for the quarter ended June 30, 1998.
10.3.2.a Consent, dated as of December 29, 1998, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998.
10.3.2.b Further Consent, dated as of February 12, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998.
10.3.2.c Second Further Consent and Agreement, dated as of March 26, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.c b to Registrant's Form 8-K dated April 1, 1999.
10.3.2.d Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.d to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.2.e Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.e to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.2.f Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.f to Registrant's Form 10-K for the year ended March 31, 1999.
10.3.2.g Third Further Consent and Note Modification Agreement, dated as of June 29, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.g b to Registrant's Form 8-K dated July 1, 1999.
10.3.3 Loan and Security Agreement, dated as of August 26, 1999, by and between the Registrant, the Lenders party thereto, and Foothill Capital Corporation, as Agent (repaid and retired in full during March 2000 as described in Registrant's consolidated financial statements including such month), incorporated by reference to Exhibit 10.3.3 to Registrant's Form 8-K dated August 30, 1999.
10.3.3.a Pledge Agreement, dated as of August 26, 1999, between Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above, pledging, among other assets, the stock owned by Registrant in Aironet Wireless Communications, Inc. and Registrant subsidiaries to Agent as collateral to secure Registrant's obligations under the Loan and Security
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
Agreement (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.a to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.3.3.b Real Property Deed of Trust (Harris County, Texas), made as of August 26, 1999 by Registrant unto Joseph C. Mathews as trustee for the benefit of Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.b to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.3.3.c Patent, Trademark, Copyright and License Mortgage, made as of August 26, 1999, by Registrant in favor of Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.c to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.3.3.d First Amendment, dated as of November 18, 1999, to the Loan and Security Agreement included as Exhibit 10.3.3
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
above, incorporated herein by reference to Exhibit 10.3.3.d to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.3.3.e Second Amendment, dated as of February 11, 2000, to the Loan and Security Agreement included as Exhibit 10.3.3 above, incorporated herein by reference to Exhibit 10.3.3.e to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.3.4 Loan and Pledge Agreement, dated as of March 15, 2000, by and among Deutsche Bank AG, London Branch, with Deutsche Bank Securities, Inc., as agent, and Telxon Systems Services Inc., a wholly owned subsidiary of Registrant (secured by the Cisco Systems, Inc. stock subject to the options transactions effected pursuant to the Confirmations included as Exhibit 10.4 below) and letter confirming determination of interest applicable to borrowings thereunder, filed herewith.
10.3.5 Promissory Note, dated June 16, 2000, by Registrant with respect to uncommitted swing line for working capital financing available from Fifth Third Bank, Northeastern Ohio, filed herewith.
10.4 Confirmations of Share Option Transactions of Telxon Systems Services, Inc., a wholly owned subsidiary of Registrant, with Deutche Bank AG, London Branch with respect to substantially all of the stock which Telxon Systems Services continues to hold in Cisco Systems, Inc., dated as of March 23, 2000, filed herewith.
10.5 Amended and Restated Agreement between Registrant and Symbol Technologies, Inc., dated as of September 30, 1992, incorporated herein by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended March 31, 1998.
10.6 Agreement, dated as of November 8, 1999, by and among Registrant, Cisco Systems, Inc. and Aironet Wireless Communications, Inc. (the forms of the Purchase Agreement and License Agreement included as Exhibits A and B, respectively, thereto became effective upon the March 15, 2000 consummation of the acquisition through Merger of Aironet by Cisco), incorporated herein by reference to Exhibit 10.5.2 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.7 Asset Purchase Agreement by and among Dynatech Corporation, IAQ Corporation, Registrant and Itronix Corporation, then a subsidiary of Registrant, dated as of December 28, 1996, incorporated herein by reference to Exhibit 2 to Registrant's Form 8-K dated December 31, 1996.
10.8 Agreement of Purchase and Sale of Assets by and among Vision Newco, Inc., a subsidiary of Registrant, Virtual Vision, Inc., as debtor and debtor in possession, and the Official Unsecured Creditors' Committee, on behalf of the bankruptcy estate of Virtual Vision, dated as of July 13, 1995, incorporated herein by reference to Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended June 30, 1995.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (CONTINUED) -----------
10.9 Stock Purchase Agreement by and among Registrant and FED Corporation, dated as of March 31, 1998, with respect to FED Corporation's purchase of all of the stock of Virtual Vision, Inc. (fka Vision Newco, Inc.), incorporated herein by reference to Exhibit 10.7 to Registrant's Form 10-K for the year ended March 31, 1998.
10.9.1 Escrow Agreement by and among FED Corporation, Registrant and First Union National Bank, with respect to the transactions under the Stock Purchase Agreement included as Exhibit 10.9 above, incorporated herein by reference to Exhibit 10.7.1 to Registrant's Form 10-K for the year ended March 31, 1998.
10.10 Stock Purchase Agreement, dated as of January 19, 2000, between Registrant, Accipiter Corporation and Accipiter II, Inc. (superseded by the Agreement and Plan of Merger included as Exhibit 10.12 below), incorporated herein by reference to Exhibit 10.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
10.11 Stock Purchase Agreement, dated as of February 17, 2000, by and between Registrant and named then minority stockholders of Registrant's Metanetics Corporation subsidiary, filed herewith.
10.12 Plan and Agreement of Merger, dated as of February 22, 2000, among Registrant, its wholly owned Meta Technologies Corporation subsidiary and its Metanetics Corporation subsidiary, filed herewith.
10.12.1 Investment and Registration Rights Agreement, dated as of February 22, 2000, by and among Accipiter Corporation, Accipiter II, Inc., Registrant and Registrant's wholly owned Meta Technologies Corporation subsidiary made pursuant to the Plan and Agreement of Merger included as Exhibit 10.12 above, filed herewith.
10.13 Stockholder Agreement, made as of November 8, 1999 between Cisco Systems, Inc., Osprey Acquisition Corporation and Registrant, and related Irrevocable Proxy, executed by Registrant as a stockholder of Aironet Wireless Communications, Inc. as an inducement toward the entry by Cisco Systems, Inc. and Osprey Acquisition Corporation into an Agreement and Plan of Merger and Reorganization dated of even date providing for the acquisition of Aironet by Cisco, and Joinders thereto by, and related Irrevocable Proxy of, The Retail Technology Group, Inc., a wholly owned subsidiary of Registrant, and, in turn, by and of Telxon Systems Services, Inc., a wholly owned subsidiary of The Retail Technology Group, filed herewith.
10.14 DFS Vendor Agreement between Registrant and Deutsche Financial Services Corporation, dated as of September 30, 1998, incorporated herein by reference to Exhibit 10.15 to Registrant's Form 10-Q for the quarter ended December 31, 1998.
21. Subsidiaries of Registrant, filed herewith.
23.1 Consent of Arthur Andersen LLP, filed herewith.
23.2 Consent of PricewaterhouseCoopers LLP, filed herewith.
24. Power Attorney executed by the members of Registrant's Board of Directors, filed herewith.
27.1 Financial Data Schedule as of March 31, 2000, filed herewith.
27.2 Restated Financial Data Schedule as of March 31, 1999, filed herewith (1).
27.3 Restated Financial Data Schedule as of March 31, 1998, filed herewith (1). ---------- (1) Included for convenience of reference with respect to the identified prior period affected by the June 29, 2000 further restatement of the Registrant's results of operations for fiscal years 1999 and 1998 as discussed in Note 3 - Restatement to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The restated financial results reflected in the consolidated financial statements are included herein in lieu of Registrant separately filing amendments to its Form 10-K and 10-Q filings for the affected periods.
(b) Reports on Form 8-K
During the last quarter of the fiscal annual period covered by this Annual Report on Form 10-K, Registrant filed a Current Report on Form 8-K, dated March 15, 2000 and filed March 30, 2000, presenting the pro forma effects on the Registrant of the consummation on March 15, 2000 of the acquisition through merger by Cisco Systems, Inc. of the Registrant's former Aironet Wireless Communications, Inc. subsidiary and the resulting conversion of the Registrant's stockholdings in Aironet into Cisco common stock and the Registrant's use of proceeds from its disposition of a portion of those Cisco shares.
Subsequent to the end of the fiscal annual period covered by this Annual Report on Form 10-K, Registrant filed a Current Report on Form 8-K, dated June 29, 2000 and filed June 30, 2000, attaching Registrant's press release of June 29, 2000, which announced a restatement of the Registrant's results of operations for fiscal years 1999 and 1998 resulting from an agreement made during the fourth quarter of fiscal 1998 with a value-added distributor and a delay in the filing of this Annual Report on Form 10-K to permit the incorporation into the financial statements included herein of the restatement and of recent comments received from the Securities and Exchange Commission's Division of Corporation Finance regarding the Registrant's previous filings.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TELXON CORPORATION
Date: July 7, 2000 By: /s/ John W. Paxton John W. Paxton, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. This report may be signed in multiple counterparts, all of which taken together shall constitute a single document.
- - The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K pursuant to the Power of Attorney filed with the Securities and Exchange Commission as Exhibit 24 hereto on behalf of the Directors named therein unless otherwise indicated by manual signature on this Annual Report on Form 10-K.
Date: July 7, 2000 By: /s/ Woody M. McGee Woody M. McGee, Attorney-in-fact
TELXON CORPORATION
EXHIBITS
TO
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2000 INDEX TO EXHIBITS WHERE FILED - -----
* 3.1 Restated Certificate of Incorporation of Registrant, incorporated herein by reference to Exhibit No. 2(b) to Registrant's Registration Statement on Form 8-A with respect to its Common Stock filed pursuant to Section 12(g) of the Securities Exchange Act, as amended by Amendment No. 1 thereto filed under cover of a Form 8 and Amendment No. 2 thereto filed on Form 8-A/A.
* 3.2 Amended and Restated By-Laws of Registrant, incorporated herein by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended March 31, 1999.
* 4.1 Portions of the Restated Certificate of Incorporation of Registrant pertaining to the rights of holders of Registrant's Common Stock, par value $.01 per share, incorporated herein by reference to Exhibit No. 2(b) to Registrant's Registration Statement on Form 8-A with respect to its Common Stock filed pursuant to Section 12(g) of the Securities Exchange Act, as amended by Amendment No. 1 thereto filed under cover of a Form 8 and Amendment No. 2 thereto filed on Form 8-A/A.
* 4.2 Text of form of Certificate for Registrant's Common Stock, par value $.01 per share, and description of graphic and image material appearing thereon, incorporated herein by reference to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended June 30, 1995.
INDEX TO EXHIBITS WHERE FILED - ----- * 4.3 Rights Agreement between Registrant and KeyBank National Association, as Rights Agent, dated as of August 25, 1987, as amended and restated as of July 31, 1996, incorporated herein by reference to Exhibit 4 to Registrant's Form 8-K dated August 5, 1996.
* 4.3.1 Form of Rights Certificate (included as Exhibit A to the Rights Agreement included as Exhibit 4.3 above). Until the Distribution Date (as defined in the Rights Agreement), the Rights Agreement provides that the common stock purchase rights created thereunder are evidenced by the certificates for Registrant's Common Stock (the text of which and description thereof is included as Exhibit 4.2 above, which stock certificates are deemed also to be certificates for such common stock purchase rights) and not by separate Rights Certificates; as soon as practicable after the Distribution Date, Rights Certificates will be mailed to each holder of Registrant's Common Stock as of the close of business on the Distribution Date.
* 4.3.2 Letter agreement among Registrant, KeyBank National Association and Harris Trust and Savings Bank, dated June 11, 1997, with respect to the appointment of Harris Trust and Savings Bank as successor Rights Agent under the Rights Agreement included as Exhibit 4.3 above, incorporated herein by reference to Exhibit 4.3.2 to Registrant's Form 10-K for the year ended March 31, 1997.
* 4.4 Indenture by and between Registrant and AmeriTrust Company National Association, as Trustee, dated as of June 1, 1987, regarding Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012, incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-3, Registration No. 33-14348, filed May 18, 1987.
* 4.4.1 Form of Registrant's 7-1/2% Convertible Subordinated Debentures Due 2012 (set forth in the Indenture included as Exhibit 4.4 above).
* 4.5 Indenture by and between Registrant and Bank One Trust Company, N.A., as Trustee, dated as of December 1, 1995, regarding Registrant's 5-3/4% Convertible Subordinated Notes due 2003, incorporated herein by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
* 4.5.1 Form of Registrant's 5-3/4% Convertible Subordinated Notes due 2003 issued under the Indenture included as Exhibit 4.5 above, incorporated herein by reference to Exhibit 4.2 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
* 4.5.2 Registration Rights Agreement by and among
INDEX TO EXHIBITS WHERE FILED - -----
Registrant and Hambrecht & Quist LLC and Prudential Securities Incorporated, as the Initial Purchasers of Registrant's 5-3/4% Convertible Subordinated Notes due 2003, with respect to the registration of said Notes under applicable securities laws, incorporated herein by reference to Exhibit 4.3 to Registrant's Registration Statement on Form S-3, Registration No. 333-1189, filed February 23, 1996.
10.1 Compensation and Benefits Plans of Registrant.
* 10.1.1 Amended and Restated Retirement and Uniform Matching Profit-Sharing Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.1 to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.1.2 1990 Stock Option Plan for employees of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.2 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.1.3 1990 Stock Option Plan for Non-Employee Directors of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.3 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.1.4 Non-Qualified Stock Option Agreement between Registrant and Raj Reddy, dated as of October 17, 1988, incorporated herein by reference to Exhibit 10.1.4 to Registrant's Form 10-Q for the year ended March 31, 1999.
* 10.1.4.a Description of amendments extending the term of the Agreement included as Exhibit 10.1.4 above, incorporated herein by reference to Exhibit 10.1.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.1.5 1992 Restricted Stock Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.5 to Registrant's Form 10-Q for the quarter ended December 31, 1998.
* 10.1.6 1995 Employee Stock Purchase Plan of Registrant, as amended, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-Q for the quarter ended September 30, 1995.
* 10.1.7 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc., a subsidiary of Registrant, incorporated herein by reference to Exhibit 10.1.7 to Registrant's Form 10-K for the year ended March 31, 1997.
* 10.1.7.a Amended and Restated 1996 Stock Option Plan for employees,
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directors and advisors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.7.a to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.7.b First Amendment to Amended and Restated 1996 Stock Option Plan for employees, directors and advisors of Aironet Wireless Communications, Inc. herein by reference to Exhibit 10.1.7.b to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.1.8 1999 Stock Option Plan for Non-Employee Directors of Aironet Wireless Communications, Inc., incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
* 10.1.9 Non-Competition Agreement by and between Registrant and Robert F. Meyerson, effective February 27, 1997, incorporated herein by reference to Exhibit 10.1.8 to Registrant's Form 10-K for the year ended March 31, 1997.
* 10.1.10 Employment Agreement between Registrant and John W. Paxton, Sr., effective as of March 22, 1999, incorporated herein by reference to Exhibit 10.1.10 to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.1.11 Employment Agreement between Registrant and Kenneth A. Cassady, effective as of June 7, 1999, incorporated herein by reference to Exhibit 10.1.11 to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.1.12 Employment Agreement between Registrant and Woody M. McGee, effective as of June 1, 1999, incorporated herein by reference to Exhibit 10.1.12 to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.1.13 Employment Agreement between Registrant and David M. Biggs, effective as of June 7, 1999, incorporated herein by reference to Exhibit 10.1.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.1.14 Offer and acceptance of employment between Registrant and Gene Harmegnies, effective as of January 31, 2000, incorporated herein by reference to Exhibit 10.1.14 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.1.15 Description of Key Employee Retention Program, incorporated herein by reference to Exhibit 10.1.15 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.15.a Form of letter agreement made
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with key employees selected under the retention program described in Exhibit 10.1.15 above, incorporated herein by reference to Exhibit 10.1.15.a to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.16 Employment Agreement, effective as of April 1, 1997, between Registrant and Frank E. Brick, a former executive officer, incorporated herein by reference to Exhibit 10.1.9 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.17 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and James G. Cleveland, a former executive officer, incorporated herein by reference to Exhibit 10.1.10 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.18 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and Kenneth W. Haver, a former executive officer, incorporated herein by reference to Exhibit 10.1.11 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.19 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and David W. Porter, a former executive officer, incorporated herein by reference to Exhibit 10.1.13 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.20 Amended and Restated Employment Agreement, effective as of April 1, 1997, between Registrant and Danny R. Wipff, a former executive officer, incorporated herein by reference to Exhibit 10.1.14 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.21 Letter agreement of Registrant with Robert A. Goodman, dated as of December 29, 1997 and executed and delivered January 20, 1998, for continued consulting services following certain changes in his law practice, incorporated herein by reference to Exhibit 10.1.17 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.1.22 Letter agreement of Registrant with R. Dave Garwood, dated August 30, 1999, for MRP-II consulting services, incorporated herein by reference to Exhibit 1.1.20 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
10.2 Material Leases of Registrant.
* 10.2.1 Lease between Registrant and 3330 W. Market Properties, dated as of December 30, 1986, for premises at 3330 West Market Street, Akron, Ohio, incorporated herein by reference to Exhibit 10.2.1 to Registrant's INDEX TO EXHIBITS WHERE FILED - -----
Form 10-K for the year ended March 31, 1999.
* 10.2.2 Lease Agreement between The Woodlands Commercial Properties Company, L.P. and Registrant, made and entered into as of January 16, 1998, including Rider No. 1 thereto, for premises at 8302 New Trails Drive, The Woodlands, Texas, incorporated herein by reference to Exhibit 10.2.2 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.2.3 Standard Office Lease (Modified Net Lease) between Registrant and John D. Dellagnese III, dated as of July 19, 1995, for premises at 3875 Embassy Parkway, Bath, Ohio, including an Addendum thereto, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1996.
* 10.2.3.a Second Addendum, dated as of October 5, 1995, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.a to Registrant's Form 10-K for the year ended March 31, 1996.
* 10.2.3.b Third Addendum, dated as of March 1, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.4.b to Registrant's Form 10-K for the year ended March 31, 1996.
* 10.2.3.c Fourth Addendum, dated as of April 16, 1996, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.c to Registrant's Form 10-Q for the quarter ended June 30, 1997.
* 10.2.3.d Fifth Addendum, dated as of June 24, 1997, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.2.d to Registrant's Form 10-Q for the quarter ended June 30, 1997.
* 10.2.3.e Sixth Addendum, dated as of March, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.e to Registrant's Form 10-Q for the quarter ended September 30, 1998.
* 10.2.3.f Seventh Addendum, dated as of July 20, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.f to
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Registrant's Form 10-Q for the quarter ended September 30, 1998.
* 10.2.3.g Eighth Addendum, dated as of September 8, 1998, to the Lease included as Exhibit 10.2.3 above, incorporated herein by reference to Exhibit 10.2.3.g to Registrant's Form 10-Q for the quarter ended September 30, 1998.
* 10.2.3.h Sublease Agreement, dated as of September 1, 1998, between Registrant and Aironet Wireless Communications, Inc. for the premises subject to the Lease included as Exhibit 10.2.3 above, as amended through the Eighth Addendum thereto included as Exhibit 10.2.3.g above, incorporated herein by reference to Exhibit 10.2.3.h to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.2.3.i Renewal, dated June 16, 1999, with respect to the Sublease Agreement included as Exhibit 10.2.3.h above, incorporated herein by reference to Exhibit 10.2.3.i to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.2.4 Lease Contract between Desarrollos \ Inmobiliarios Paso del Norte, S.A. de C.V. and Productos y Servicios de Telxon, S.A. de C.V., a subsidiary of Registrant, made and entered into as of April 10, 1997, for premises in Ciudad Juarez, Chihuahua, Mexico, incorporated herein by reference to Exhibit 10.2.4 to Registrant's Form 10-K for the year ended March 31, 1998.
** 10.2.5 Lease between Milford Partners, LLC and Registrant, made as of March 17, 2000 for premises in Ridgewood Corporate Center, 1000 Summit Drive, Milford, Ohio, filed herewith.
** 10.2.6 Lease Agreement between Woodlands Office Equities-'95 Limited and Registrant, effective January 20, 2000, for premises at 8701 New Trails Drive, The Woodlands, Texas, including an Expansion, Modification and Ratification thereof dated May 1, 2000, filed herewith.
10.3 Credit Agreements of Registrant.
* 10.3.1 Credit Agreement by and among Registrant, the lenders party thereto from time to time and The Bank of New York, as letter of credit issuer, swing line lender and agent for the lenders, dated as of March 8, 1996 (refinanced and replaced by the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by
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reference to Exhibit 10.3.2 to Registrant's Form 10-K for the year ended March 31, 1996.
* 10.3.1.a Amendment No. 1, dated as of August 6, 1996, to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.2.a to Registrant's Form 8-K dated August 16, 1996.
* 10.3.1.b Amendment No. 2, dated as of December 16, 1996, to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.2.c to Registrant's Form 8-K dated December 16, 1996.
* 10.3.1.c Amendment No. 3, dated as of December 12, 1997, to the Agreement included as Exhibit 10.3.1 above, included herein by reference to Exhibit 10.3.1.d to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.3.1.d Waiver and Agreement, dated as of December 29, 1998, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.e to Registrant's Form 10-Q for the quarter ended December 31, 1998.
* 10.3.1.e Waiver Extension and Agreement, dated as of February 12, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.f to Registrant's Form 10-Q for the quarter ended December 31, 1998.
* 10.3.1.f Second Waiver Extension Agreement and Amendment No. 4, dated as of March 26, 1999, with respect to the Agreement included as Exhibit 10.3.1 above , incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated April 1, 1999.
* 10.3.1.g Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and The Bank of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated
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herein by reference to Exhibit 10.3.1.b to Registrant's Form 8-K dated April 1, 1999.
* 10.3.1.h Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of The Bank of New York, as Agent for the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1.h to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.1.i Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above, (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1 to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.1.j Pledge Agreement, dated as of March 26, 1999, by Registrant to The Bank of New York, as Agent for the benefit of the Lenders from time to time party to the Agreement included as Exhibit 10.3.1 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.1.j to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.1.k Third Waiver Extension Agreement and Amendment No. 5, dated as of June 29, 1999, with respect to the Agreement included as Exhibit 10.3.1 above, incorporated herein by reference to Exhibit 10.3.1.a to Registrant's Form 8-K dated
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July 1, 1999.
* 10.3.2 Business Purpose Revolving Promissory Note (Swing Line) made by Registrant in favor of Bank One, NA, dated August 4, 1998 (refinanced and replaced by the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.4 to Registrant's Form 10-Q for the quarter ended June 30, 1998.
* 10.3.2.a Consent, dated as of December 29, 1998, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998.
* 10.3.2.b Further Consent, dated as of February 12, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.a to Registrant's Form 10-Q for the quarter ended December 31, 1998.
* 10.3.2.c Second Further Consent and Agreement, dated as of March 26, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.4.c b to Registrant's Form 8-K dated April 1, 1999.
* 10.3.2.d Amended and Restated Security Agreement, dated as of March 26, 1999, by and among Registrant and Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.d to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.2.e Deed of Trust, Assignment of Leases and Rents, Security Agreement, Fixture Filing and Financing Statement, dated as of March 26, 1999, by Registrant to First American Title Insurance Company as Trustee for the benefit of Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the
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Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.e to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.2.f Patent and Trademark Security Agreement, dated as of March 26, 1999, by Registrant and certain of its subsidiaries to Bank One, NA with respect to the Note included as Exhibit 10.3.2 above (terminated in connection with the refinancing obtained pursuant to the Loan and Security Agreement included as Exhibit 10.3.3 below), incorporated herein by reference to Exhibit 10.3.2.f to Registrant's Form 10-K for the year ended March 31, 1999.
* 10.3.2.g Third Further Consent and Note Modification Agreement, dated as of June 29, 1999, with respect to the Note included as Exhibit 10.3.2 above, incorporated herein by reference to Exhibit 10.3.2.g b to Registrant's Form 8-K dated July 1, 1999.
* 10.3.3 Loan and Security Agreement, dated as of August 26, 1999, by and between the Registrant, the Lenders party thereto, and Foothill Capital Corporation, as Agent (repaid and retired in full during March 2000 as described in Registrant's consolidated financial statements including such month), incorporated by reference to Exhibit 10.3.3 to Registrant's Form 8-K dated August 30, 1999.
* 10.3.3.a Pledge Agreement, dated as of August 26, 1999, between Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above, pledging, among other assets, the stock owned by Registrant in Aironet Wireless Communications, Inc. and Registrant subsidiaries to Agent as collateral to secure Registrant's obligations under the Loan and Security
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Agreement (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.a to Registrant's Form 10-Q for the quarter ended September 30, 1999.
* 10.3.3.b Real Property Deed of Trust (Harris County, Texas), made as of August 26, 1999 by Registrant unto Joseph C. Mathews as trustee for the benefit of Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.b to Registrant's Form 10-Q for the quarter ended September 30, 1999.
* 10.3.3.c Patent, Trademark, Copyright and License Mortgage, made as of August 26, 1999, by Registrant in favor of Foothill Capital Corporation, as Agent for the Lenders from time to time party to the Loan and Security Agreement included as Exhibit 10.3.3 above (terminated in connection with the repayment and retirement of Registrant's indebtedness under the Loan and Security Agreement during March 2000 as described in Registrant's Consolidated Financial Statements including such month), incorporated herein by reference to Exhibit 10.3.3.c to Registrant's Form 10-Q for the quarter ended September 30, 1999.
* 10.3.3.d First Amendment, dated as of November 18, 1999, to the Loan and Security Agreement included as Exhibit 10.3.3
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above, incorporated herein by reference to Exhibit 10.3.3.d to Registrant's Form 10-Q for the quarter ended December 31, 1999.
* 10.3.3.e Second Amendment, dated as of February 11, 2000, to the Loan and Security Agreement included as Exhibit 10.3.3 above, incorporated herein by reference to Exhibit 10.3.3.e to Registrant's Form 10-Q for the quarter ended December 31, 1999.
** 10.3.4 Loan and Pledge Agreement, dated as of March 15, 2000, by and among Deutsche Bank AG, London Branch, with Deutsche Bank Securities, Inc., as agent, and Telxon Systems Services Inc., a wholly owned subsidiary of Registrant (secured by the Cisco Systems, Inc. stock subject to the options transactions effected pursuant to the Confirmations included as Exhibit 10.4 below) and letter confirming determination of interest applicable to borrowings thereunder, filed herewith.
** 10.3.5 Promissory Note, dated June 16, 2000, by Registrant with respect to uncommitted swing line for working capital financing available from Fifth Third Bank, Northeastern Ohio, filed herewith.
** 10.4 Confirmations of Share Option Transactions of Telxon Systems Services, Inc., a wholly owned subsidiary of Registrant, with Deutche Bank AG, London Branch with respect to substantially all of the stock which Telxon Systems Services continues to hold in Cisco Systems, Inc., dated as of March 23, 2000, filed herewith.
* 10.5 Amended and Restated Agreement between Registrant and Symbol Technologies, Inc., dated as of September 30, 1992, incorporated herein by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.6 Agreement, dated as of November 8, 1999, by and among Registrant, Cisco Systems, Inc. and Aironet Wireless Communications, Inc. (the forms of the Purchase Agreement and License Agreement included as Exhibits A and B, respectively, thereto became effective upon the March 15, 2000 consummation of the acquisition through Merger of Aironet by Cisco), incorporated herein by reference to Exhibit 10.5.2 to Registrant's Form 10-Q for the quarter ended September 30, 1999.
* 10.7 Asset Purchase Agreement by and among Dynatech Corporation, IAQ Corporation, Registrant and Itronix Corporation, then a subsidiary of Registrant, dated as of December 28, 1996, incorporated herein by reference to Exhibit 2 to Registrant's Form 8-K dated December 31, 1996.
* 10.8 Agreement of Purchase and Sale of Assets by and among Vision Newco, Inc., a subsidiary of Registrant, Virtual Vision, Inc., as debtor and debtor in possession, and the Official Unsecured Creditors' Committee, on behalf of the bankruptcy estate of Virtual Vision, dated as of July 13, 1995, incorporated herein by reference to Exhibit 10.8 to Registrant's Form 10-Q for the quarter ended June 30, 1995.
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* 10.9 Stock Purchase Agreement by and among Registrant and FED Corporation, dated as of March 31, 1998, with respect to FED Corporation's purchase of all of the stock of Virtual Vision, Inc. (fka Vision Newco, Inc.), incorporated herein by reference to Exhibit 10.7 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.9.1 Escrow Agreement by and among FED Corporation, Registrant and First Union National Bank, with respect to the transactions under the Stock Purchase Agreement included as Exhibit 10.9 above, incorporated herein by reference to Exhibit 10.7.1 to Registrant's Form 10-K for the year ended March 31, 1998.
* 10.10 Stock Purchase Agreement, dated as of January 19, 2000, between Registrant, Accipiter Corporation and Accipiter II, Inc. (superseded by the Agreement and Plan of Merger included as Exhibit 10.12 below), incorporated herein by reference to Exhibit 10.13 to Registrant's Form 10-Q for the quarter ended December 31, 1999.
** 10.11 Stock Purchase Agreement, dated as of February 17, 2000, by and between Registrant and named then minority stockholders of Registrant's Metanetics Corporation subsidiary, filed herewith.
** 10.12 Plan and Agreement of Merger, dated as of February 22, 2000, among Registrant, its wholly owned Meta Technologies Corporation subsidiary and its Metanetics Corporation subsidiary, filed herewith.
** 10.12.1 Investment and Registration Rights Agreement, dated as of February 22, 2000, by and among Accipiter Corporation, Accipiter II, Inc., Registrant and Registrant's wholly owned Meta Technologies Corporation subsidiary made pursuant to the Plan and Agreement of Merger included as Exhibit 10.12 above, filed herewith.
** 10.13 Stockholder Agreement, made as of November 8, 1999 between Cisco Systems, Inc., Osprey Acquisition Corporation and Registrant, and related Irrevocable Proxy, executed by Registrant as a stockholder of Aironet Wireless Communications, Inc. as an inducement toward the entry by Cisco Systems, Inc. and Osprey Acquisition Corporation into an Agreement and Plan of Merger and Reorganization dated of even date providing for the acquisition of Aironet by Cisco, and Joinders thereto by, and related Irrevocable Proxy of, The Retail Technology Group, Inc., a wholly owned subsidiary of Registrant, and, in turn, by and of Telxon Systems Services, Inc., a wholly owned subsidiary of The Retail Technology Group, filed herewith.
* 10.14 DFS Vendor Agreement between Registrant and Deutsche Financial Services Corporation, dated as of September 30, 1998, incorporated herein by reference to Exhibit 10.15 to Registrant's Form 10-Q for the quarter ended December 31, 1998.
** 21. Subsidiaries of Registrant, filed herewith.
** 23.1 Consent of Arthur Andersen LLP, filed herewith.
** 23.2 Consent of PricewaterhouseCoopers LLP, filed herewith.
** 24. Power Attorney executed by the members of Registrant's Board of Directors, filed herewith.
** 27.1 Financial Data Schedule as of March 31, 2000, filed herewith.
** 27.2 Restated Financial Data Schedule as of March 31, 1999, filed herewith.
** 27.3 Restated Financial Data Schedule as of March 31, 1998, filed herewith.
- ----------- * Previously filed ** Filed herewith