UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005 Commission file number 0-24712
METROLOGIC INSTRUMENTS, INC.
A New Jersey Corporation
I.R.S. Employer Identification No. 22-1866172
90 Coles Road
Blackwood, New Jersey 08012
856-228-8100
Common stock traded on Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12B-2 of the Exchange
Act (Check one):
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of the last business day of the Registrant's most recently
completed second fiscal quarter was approximately $150,413,000 calculated by
excluding all shares held by executive officers, directors and 5% stockholders
of the Registrant without conceding that all such persons are "affiliates" of
the Registrant for purposes of the federal securities laws.
As of March 1, 2006 there were 22,367,338 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the following documents are incorporated by reference:
Part III - The Registrant's definitive Proxy Statement for its 2006 Annual
Meeting of Shareholders, to be filed not later than 120 days after the close of
the fiscal year.
PART I
Item 1. Business
Overview
Metrologic Instruments, Inc. and its subsidiaries (referred to herein as "we",
"us" "our" or the "Company") are experts in optical image capture and processing
solutions. We utilize our expertise to design, manufacture and market
sophisticated imaging and scanning solutions serving a variety of point-of-sale,
commercial and industrial applications. Our solutions utilize a broad array of
laser, holographic and vision-based technologies designed to provide superior
functionality and a compelling value proposition for our customers.
The majority of our sales are derived from products that scan and decode bar
codes. We believe that over half of our installed base of scanners are in use in
retail environments. In addition, we design and manufacture sophisticated
advanced optical systems for government and commercial customers. We believe we
have been able to increase our market share in our bar code scanner markets by
offering products with superior performance and features at price points that
are very competitive with the products offered by others and by providing
superior customer service.
Our business is divided into two major segments: (a) Data Capture & Collection
and (b) Industrial Automation & Optical Systems.
Data Capture & Collection
-------------------------
Our Data Capture & Collection products include, but are not limited to,
bar code scanners, OEM bar code reading engines and portable data
collection devices. Bar code scanners are typically either handheld
scanners or fixed projection scanners. Handheld bar code scanners are
principally suited for retail point-of-sale, document processing,
library, healthcare and inventory applications. Fixed projection
scanners, which can be mounted on or in a counter, are principally
suited for supermarkets, convenience stores, mass merchandisers, health
clubs and specialty retailers. OEM bar code reading engines are
scanning modules for use in a variety of devices and machines like
mobile computing devices, PDAs, kiosks, and lottery terminals. Portable
data collection devices are rugged handheld computers which typically
employ a bar code reader and are used in data management applications
such as supply chain inventory and price lookup.
Industrial Automation/Optical Systems
-------------------------------------
Industrial Automation systems are comprised of fixed position readers
that are either laser- or vision-based. These systems range from
simple, one-scanner solutions to complex, integrated systems
incorporating multi-scanner, image capture and dimensioning
technologies. Optical Systems are comprised of advanced electro-optical
systems including wavefront sensors, adaptive optics systems and custom
instrumentation.
For additional information concerning our business segments, please refer to
Note 12, Financial Reporting For Business Segments and Geographical Information,
to our Consolidated Financial Statements.
Since 2001, we have increased sales, cash flow from operations and net income.
We have accomplished this primarily by applying our engineering expertise to
develop innovative products that have expanded our market opportunities and by
focusing on cost reduction to maintain a competitive advantage. Our commitment
to cost reduction has enabled us to focus on offering products with leading
technology at competitive prices. Additionally, we have decreased our overall
direct manufacturing costs as a percentage of sales from 60.3% in 2000 to 56.8%
in 2005. This was accomplished despite increasing sales to Tier 1 retailers with
aggressive pricing as well as higher contribution from our lower profitable
products and our optical systems business.
We were founded over 37 years ago in 1968 by C. Harry Knowles, Chairman and
former Chief Executive Officer as a New Jersey Corporation. We are a vertically
integrated manufacturer, producing most of our own optics, coatings and
components in our manufacturing and design facilities in the United States and
China. We have developed a broad portfolio of intellectual property that
includes over 365 patents that we aggressively protect. We employ a direct sales
force and have a broad network of distributors and value added resellers, or
VARs, to serve our worldwide customers through offices in 18 countries.
Our Markets
Market Background
Automatic Identification and Data Capture, or AIDC, is the identification and
direct collection of data into a microprocessor-controlled device, such as a
computer system, without the use of a manual input device, such as a keyboard.
AIDC technologies accelerate the speed at which information is collected and
processed and eliminate errors associated with the collection of that
information. AIDC covers a compilation of technologies and services, including
bar code technologies, vision systems, radio frequency identification (RFID),
optical character recognition (OCR), biometrics and card-based technologies.
<page>
The largest segment of the AIDC industry is bar code related technology. In the
late 1960s, a concerted effort was undertaken to standardize and automate
point-of-sale transactions. In 1973, the grocery industry selected the Universal
Product Code, or UPC, as the industry standard. Today, there are a variety of
bar code formats, or symbologies, that are used in many applications and
industries. Bar codes are critical elements in conducting business in today's
global economy because of their ability to accelerate the flow of information
with accuracy.
Markets Served
Customers in our markets demand innovative solutions that enable them to more
quickly and cost efficiently distribute, track and manage products and
information from the early stages of manufacturing to the ultimate purchase by
end users. Our industry addresses these needs with bar code scanners (including
handheld scanners, fixed position scanners, scan engines and industrial
readers), mobile computers, bar code printers and radio frequency identification
equipment. We serve primarily the bar code scanner hardware market. In addition,
we design and manufacture sophisticated advanced optical systems for government
and commercial customers.
Bar Code Scanners
Bar code scanners are typically either handheld scanners or fixed projection
scanners that are either laser-or vision-based. Handheld bar code scanners are
principally suited for retail point-of-sale, document processing, library,
healthcare and inventory applications. Fixed projection scanners, which can be
mounted on or in a counter, are principally suited for supermarkets, convenience
stores, mass merchandisers, health clubs and specialty retailers. The market for
these products is typically served by manufacturers like us, distributors or
VARs, depending upon the preference and needs of the end user. We believe that
buying decisions by end users are typically based first upon functionality and
price, then reliability and service. The sale of data capture & collection
products and service accounted for $169.7 million or 80.7% of our revenues in
2005.
Industrial Automation Products
Industrial scanning and dimensioning products are comprised of fixed position
systems that are either laser- or vision-based. These systems range from simple,
one-scanner solutions to complex, integrated systems incorporating
multi-scanner, image capture and dimensioning technologies. Industrial scanning
and dimensioning systems are sophisticated unattended solutions utilized by the
postal handling, transportation and logistics, retail distribution and
automotive industries in high-speed conveying applications. We believe end users
purchase these systems based first upon functionality and performance, then
reliability, service and price. Included in Industrial Automation sales are
revenues from Omniplanar, our software company that was acquired in September
2004 specializing in bar code recognition and decoding software serving various
markets including Bar Code scanning hardware manufacturers, postal and document
processing. The sale of industrial automation products and service accounted for
$14.0 million or 6.6% of our revenues in 2005.
Optical Systems
Optical systems are highly customized, sophisticated, electro-optical systems
used in government and commercial applications. Competitors in these markets
include government contractors and specialty research and manufacturing
companies in the commercial market. We believe contracts are awarded based
principally on capability and cost effectiveness. The sale of optical systems
accounted for $26.7 million or 12.7% of our revenues in 2005.
Our Competitive Strengths
We design, manufacture and market sophisticated imaging and scanning solutions
serving a variety of point-of-sale, commercial and industrial applications. Our
competitive strengths include:
Compelling Value Proposition
Through the combination of our ongoing investments in research and development
and our dedication to low-cost production disciplines, we are able to offer
feature-rich products at competitive prices.
Innovative Solutions Through Technological Leadership
We believe that we are recognized as a technological leader within our industry.
Approximately one out of seven of our employees are employed in an engineering
capacity, including our engineering team in Suzhou, China. We believe our
engineering expertise and ability to innovate enable us to provide and market a
broad range of superior bar code scanners and industrial automation solutions.
Additionally, we are focused on applying our innovative technologies to
production automation and cost reduction initiatives and to the development of
new solutions designed to expand our addressable markets.
<page>
Advanced Optical and Advanced Imaging Capabilities
We possess significant expertise in advanced optical and advanced imaging
systems for customized, high performance commercial and government applications.
Much of the core technology that we develop for these applications is funded
through government research and development programs. We believe that these
capabilities or this expertise provides us with an advantage relative to our
competitors in new product development.
Intellectual Property Portfolio
Over the past five years, we have more than tripled our patent portfolio to over
365 issued patents, and we currently have 195 additional new patent applications
pending. We will continue to invest in patent applications and aggressively
protect our patent position from competitors who we believe infringe our
patents.
Multiple Distribution Channels Worldwide
We sell our products worldwide through direct sales offices located in 18
countries around the world. We primarily sell our products through a growing
network of distributors and VARs. Our use of multiple distribution channels
worldwide allows us to expand our market presence and ultimately provide our
products to more end users. Our direct sales force concentrates on large retail
and OEM accounts in North America and, more recently, Europe and Asia.
Vertically Integrated Low-Cost Manufacturing
We have two primary manufacturing facilities for our bar code scanning products,
one in Blackwood, New Jersey and one in Suzhou, China. While we outsource some
of our component requirements, we believe our ability to manufacture many key
components of our products has led to increased quality and lower manufacturing
costs, enabling us to be more competitive. The vertical integration of our
manufacturing operations also aids in new product development and enables a more
rapid response to our end users' application specific needs.
We design and manufacture an increasing number of our high volume products at
our facility in Suzhou, China. Our operations in China allow us to take
advantage of lower direct labor, manufacturing and research and development
costs.
Our Growth Strategy
Our goal is to increase sales and profits by increasing our market share in our
existing markets, by entering new markets in which we can apply our engineering
and manufacturing expertise, by reducing our costs and by making selective
strategic acquisitions.
Increase Our Share of Existing Markets through New Products and Expanded Sales
Efforts
We continually invest in developing new and improved products to meet the
changing needs of our existing customers. We have concentrated our direct sales
efforts to further penetrate some of the largest retailers in the United States
and Europe. We have also expanded our international network of distributors and
VARs, and our relationships with OEMs. To better serve our customers and
distribution partners, we have increased our investments in support and service
capabilities, enhanced product availability and reliability, and increased our
custom product design and manufacturing capabilities.
Enter New Markets
A significant portion of our product development activities is focused on the
introduction of bar code scanners to address markets that we have not previously
served. For example, since 2000, we have introduced 19 new products. We believe
that our combination of high quality products and a dedication to personal
service and support at competitive price points will enable us to successfully
continue to enter and compete in these markets.
Reduce Costs While Maintaining Our Technological Capabilities
Our customers seek low-cost yet reliable and full-featured products. We
continually strive to reduce our manufacturing costs through product engineering
and design efforts and development of cost-efficient manufacturing equipment and
processes. We intend to expand our design and manufacturing capabilities at our
Suzhou, China facility to further take advantage of cost efficiencies. Quality
and productivity initiatives are also important elements of our cost reduction
strategies.
Selectively Pursue Strategic Acquisitions
In addition to our internal development and organic growth, we may selectively
pursue strategic acquisitions that we believe will broaden or complement our
current technology base and allow us to serve additional end users and their
evolving needs. For example, our acquisition of Adaptive Optics Associates, or
AOA, in 2001 enhanced our technical and engineering capabilities in industrial
and image acquisition applications. Our 2004 acquisition of Omniplanar broadened
and strengthened our portfolio of decoding software to include robust
omnidirectional decoding of linear, matrix and postal bar code images.
<page>
Our Products
Our products include laser-or vision-based bar code scanners, industrial
automation products, intelligent image processing software and advanced optical
systems. Sold primarily to distributors, VARs, OEMs and directly to end users in
various industries worldwide, our products are generally used as part of an
integrated system and are connected to a host device, such as a personal
computer or electronic point-of-sale equipment. Our products can be classified
into one of the following four categories:
o Data Capture and Collection Products;
o Industrial Automation readers including High Speed Vision and Scanning
Systems;
o Intelligent image processing software; and
o Advanced Optical Systems.
Data Capture and Collection Products
Single-line Handheld Bar Code Scanners
We produce a broad line of laser-based bar code scanners that produce a single
linear scan line and are predominantly used as handheld devices by their
operators. We believe customers choose single-line handheld scanners for their
relatively low-cost and portability. They are particularly suited for
applications where items vary significantly in size, bar codes are arranged in
lists or for reading exceptionally wide bar codes.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
Eclipse Entry level laser
Shorter scan range
- ---------------------------------------------------
Voyager Value-priced, high-end laser
Long scan range
Automatic trigger for
presentation scanning
Retail point-of-sale
VoyagerCG Voyager with CodeGate switch Inventory management
VoyagerPDF Voyager with two-dimensional Library checkout
symbol reading Hospital patient
VoyagerBT Voyager with Bluetooth wireless identification
communication Document processing
- ---------------------------------------------------
Focus Handheld area (matrix) imager
High-resolution CMOS technology
Reads 1D, 2D stacked and 2D matrix
symbologies
Picture-taking capabilities
Focus BT Focus with Bluetooth wireless
communication
- ----------------------------------------------------------------------------
Combination Handheld/Presentation Bar Code Scanners
We produce a line of compact, laser-based scanners that generate a pattern
of 20 intersecting scan lines for scanning bar codes independent of the bar
code's orientation to the scanner, also known as omnidirectional scanning.
Given their small size, light weight and omnidirectional capability, compact
combination scanners are well suited for applications that require
occasional portability given the size of objects being scanned or where
counter space is limited.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
Fusion Separate scanner and stand for
portability
Fully adjustable stand
Omnidirectional w/selectable
single-line menu mode
- --------------------------------------------------
Convenience stores
QuantumT Omnidirectional w/selectable Pharmacy
single-line menu mode Hardware stores
Protective Rubber surround Airline ticketing
Small size Apparel and speciality
retail
- --------------------------------------------------
Orbit Contoured, hand-supportable
industrial design
Unique one-piece tilting scan head
- ----------------------------------------------------------------------------
<page>
High Speed Fixed Projection Bar Code Scanners
Our line of fixed projection, laser-based bar code scanners allow operators
to quickly sweep bar codes by the scanner in any orientation. This provides
easy-to-use, high speed scanning by eliminating or reducing an operator's
need to twist and turn bar codes within the scanner's working range. Fixed
projection scanners are particularly useful in applications that require
high throughput, a capability valued by our customers.
- -----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- -----------------------------------------------------------------------------
ArgusScan Four-position mounting stand
(Vertical Small footprint
scanner)
- --------------------------------------------------
InVista Large scan area
(Vertical User-replaceable window
scanner) Built-in Electronic Article
Surveillance antenna
- --------------------------------------------------
Horizon User-replaceable window Grocery
(single line Scratch-resistant window options Mass merchandisers
in-counter Built-in Electronic Artic Liquor stores
scanner) Surveillance antenna ATM/self-service
Gated entry
- --------------------------------------------------
StratosS Compact 5-sided scanning
(Bi-optic Integrated weigh scale option
in-counter Parallel scanning systems
scanner) for speed & uptime
- --------------------------------------------------
Stratos Full size 6-sided scanning
(Bi-optic Integrated weigh scale option
in-counter Parallel scanning system for speed
scanner) & uptime
10-minute filed repair
Visual diagnostic indicator
- -----------------------------------------------------------------------------
Portable Data Collection Terminals
Our portable data collection terminals are battery-powered handheld devices
incorporating a scanning module, a keypad, application software program(s),
memory and optional radio communications. Portable data collection terminals
are particularly useful in applications that require mobile data management.
- -----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- -----------------------------------------------------------------------------
ScanPal 2 Economical
Long battery life
Alkaline or rechargeable Inventory management
battery options Price lookup
Laser or linear imger options Bridal Registry
- --------------------------------------------------
OptimusS Compact, mobile phone-like design
Long-life Li-Ion battery
Integrated laser scanner
Optional Bluetooth real-time
communication
- -----------------------------------------------------------------------------
<page>
OEM Bar Code Scan Engines
We produce laser-based scanning modules, or engines, which are designed for
integration into a variety of OEM equipment. We offer several standard and
custom scan engine models that vary in physical size, scan pattern, decoding
capabilities and scan speed. We believe customers choose our scan engines
for their low-cost, ease of integration, robust scanning characteristics
and, where applicable, fully sealed construction.
- -----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- -----------------------------------------------------------------------------
ScanQuest Completely sealed module for
(linear engine) easy handling
Decoded and non-decoded models
Tight beam control for
austomated applications
- --------------------------------------------------
QuantumE Visual and audible Scan Range
(omni- optimization Portable scanning devices
directional) Programmable single-line option Reverse vending
Completely sealed module for Mass storage devices
easy handling Medical instrumentation
Simple remote configuration Interactive kiosks
Superior up close scanning for
self-service devices
- --------------------------------------------------
IS220 Specially-designed scan pattern for
(omni- maximum performance on orthogonally
directional presented barcodes
engine)
Dual optics benches for wide scan
field
Parallel processing for increased
read rates
- -----------------------------------------------------------------------------
Industrial Automation Products
Our line of laser- and vision-based industrial products and scanning systems
are branded and marketed under the AOA name. Laser-based systems are
typically chosen for their lower cost and their ability to read
one-dimensional bar codes. We believe that vision-based technology is
rapidly becoming the predominant system sought by companies in many
industries including transportation and logistics, manufacturing, and parcel
and postal handling. Vision-based systems offer greater functionality than
traditional laser scanning devices including increased bar code read rates,
two-dimensional bar code decoding, image capture and OCR capability.
- ----------------------------------------------------------------------------
Products Key Features/Benefits Selected Applications
- ----------------------------------------------------------------------------
Tech Series Variety of models
HoloTrak One-dimensional bar code scanning Walk-under scanning,
Series Patented holographic technology order processing,
(Laser-Based (HoloTrak) moderate speed,
Scanning conveyor applications
Systems)
- ----------------------------------------------------------------------------
iQ Series Unique laser illumination High speed conveyor
(Vision-Based One-dimensional and two-dimensional scanning
Imaging bar code reading Pharmaceutical
Systems) Image lift and processing manufacturing
Parcel dimensioning Postal and parcel
Fixed focus and variable focus handling
models
- ----------------------------------------------------------------------------
Qtrace LDI Compact size High speed conveyor
(Laser-and High performance Dimensioning
Vision- Dimensions parcels Postal and parcel
Based Detects overlapping packages handling
Systems)
- ----------------------------------------------------------------------------
HoloTunnel Highly customizable Distribution/warehousing
iQ Tunnel One-dimensional and two-dimensional conveyor systems
(Multiple bar code reading and image Parcel and postal
Device acquisition handling
Laser- or Dimensioning Airport baggage handling
Vision-Based
Systems)
- -----------------------------------------------------------------------------
<page>
Advanced Optical Systems
We are a leading provider of high performance advanced optical systems to
government and commercial customers. Advanced optical systems are sophisticated,
electro-optical systems. Our systems are designed and developed for highly
advanced and customized applications that require the highest standards of
accuracy, reliability and performance. As part of our advanced optics systems,
we design and manufacture highly engineered components, wave front sensors and
monolithic lenslet modules, or MLMs. Wave front sensors provide correction
signals that control deformable mirrors. MLMs are arrays of micro lenses that
focus and shape laser beams and images. These advanced components each have
applications in the control and conditioning of lasers, retinal imaging and
laser communications. Our products are typically integrated into larger,
customized systems.
Research and Product Development
Our engineers primarily develop new products, derivations of existing products
and improvements to our products' reliability, ergonomics and performance.
Approximately 25% of our engineers are located in Suzhou, China. Approximately
41% of our engineers are located in Cambridge, Massachusetts at our AOA
facility.
Substantially all of our products are developed internally by our engineering
development programs. During 2003, 2004 and 2005 we incurred expenses of
approximately $6.8 million, $7.5 million and $8.5 million, respectively, on
research and development. We also participate in government and customer funded
research programs.
Manufacturing
We manufacture our products primarily at our Blackwood, New Jersey and Suzhou,
China facilities. Our China facility is strategically located approximately 60
miles from Shanghai, allowing us access to high quality engineers and factory
employees, and close proximity to ports for shipping and receiving goods. Our
Blackwood facility is vertically integrated, enabling us to quickly adapt and
enhance our products and services to meet specific customer requirements. This
capability reduces the length of our new product development cycle and our
products' overall time to market.
Our industrial automation products, along with many of our newer products, are
manufactured in our Blackwood, New Jersey facility, which is ISO 9001 certified
and our AOA facility. ISO 9001 is a system of management standards promulgated
by the International Organization of Standardization that sets forth what a
company must do to manage processes affecting quality. We manufacture a majority
of our handheld products, which are lower cost, higher volume products, in our
ISO 9001 certified China facility. We intend to increasingly add manufacturing
of other low-cost, high volume products to Suzhou, China to take advantage of
lower costs. During 2004, the expansion of our manufacturing facility in Suzhou,
China was completed. This expansion nearly doubled the capacity of our China
operations.
We have invested and will continue to invest in capital production equipment and
tooling that will further automate production, increase capacity and reduce
costs.
Suppliers
Although we manufacture many key components of our products, we also use a
limited number of suppliers. We do not believe that the loss of any one supplier
would have a long-term adverse effect on our business, although set-up costs and
delays would likely result if we were required to change any single supplier
without adequate prior notice. We believe our relationships with our suppliers
are good.
Sales and Marketing
We market our products and services on a global basis direct to end users and
OEMs and through a network of distributors and VARs. We have offices in 18
countries and through these sell our products worldwide.
We have contractual relationships with numerous distributors and dealers and a
limited number of OEMs, VARs and end users. OEMs purchase our products,
incorporate them into their systems and sell them under their own names. VARs
purchase our products and other peripheral components needed for specific
applications and sell them directly to end users. By utilizing multiple
distribution channels, we have been able to expand our market presence, broaden
our distribution network and sell to industries other than those serviced by our
direct sales force. We provide training and technical support to our
distributors and resellers to assist them in marketing and servicing our
systems. We also encourage our resellers to become authorized service providers
so that they can provide repair services directly to their customers.
Our subsidiaries sell, distribute and service our products throughout major
markets of the world. In addition, the adaptive optical systems market is served
through our AOA subsidiary.
<page>
Customers and End Users
Our customers and end users within the bar code scanner hardware market include
department stores, video rental chains, supermarkets, convenience store chains,
hospitality settings, theatres, hospitals, pharmacies, banks and libraries among
others. Within our industrial automation market our customers and end users
include package handlers, worldwide transportation and logistics companies,
postal agencies, automotive manufacturers, computer manufacturers, large
industrial prime contractors, airlines and pharmaceutical manufacturers. In our
advanced optical systems market our customers include governmental contractors,
specialty research agencies and manufacturing companies.
The method by which we sell our products is typically dependent upon the nature
of the end market application. For example, the majority of our bar code
scanners are sold through indirect distribution channels. By contrast, the
majority of our sales in the industrial market are sold direct to key end users
and integrators, and the majority of our sales in the advanced optical market
are sold through large prime contractors.
Inventory and Backlog
We endeavor to produce products based upon a forecast derived from historical
sales, actual weekly shipments and regularly updated estimates of future demand.
Together with our vertical integration, this forecasting process allows us to
satisfy customers' shipment demands with limited inventory of completed products
and component parts.
As of December 31, 2005, we had approximately $24.1 million in backlog orders of
which $13.5 million is attributable to AOA contracts. All but $0.3 million of
such backlog orders are anticipated to be filled prior to December 31, 2006. As
of December 31, 2004, we had approximately $19.3 million in backlog orders, of
which approximately $11.5 million was attributable to AOA contracts. All backlog
orders as of December 31, 2004 were completed by December 31, 2005.
Competition
Our industry is highly competitive. Our bar code scanners, including handheld
scanners and fixed projection scanners, compete primarily with those produced by
U.S. manufacturers Hand Held Products, Inc. (a Welch Allyn affiliate), Intermec
Inc., NCR Corporation, PSC Inc. (a division of Datalogic), and Symbol
Technologies, Inc.; European manufacturer Datalogic S.p.A.; and Asian
manufacturers Densei, Fujitsu Limited, Nippondenso ID System and Opticon, Inc.
Our industrial scanners primarily compete with those produced by U.S.
manufacturers Accu-Sort Systems, Inc., Microscan Systems, Inc.; and European
manufacturers Datalogic S.p.A., Sick AG and Opticon, Inc. and Tohken Co., Ltd.
in Asia. We compete primarily on the basis of service, product performance,
technological innovation, and price. While many of our competitors are larger
and have greater financial, technical, marketing and other resources than we do,
we believe that we compete successfully by focusing on our core markets and
offering quality, performance products with a low total cost of ownership.
Intellectual Property
We file domestic and foreign patent applications to protect our technological
position and new product development. As of March 1, 2006, we owned 306 U.S.
patents, which expire between 2006 and 2022, and 61 foreign patents, which
expire between 2005 and 2019. In addition, we have 195 patent applications
currently on file with the U.S. Patent and Trademark Office and foreign patent
offices with respect to certain products and improvements we have developed. We
own numerous United States and foreign trademark registrations. We intend to
continue to file applications for United States and foreign patents and
trademarks. Although we believe that our patents provide a competitive
advantage, we also rely upon our proprietary know-how, innovative skills,
technical competence and marketing abilities.
Government Regulations
Both we and our products are subject to regulation by various agencies both in
the United States and in the countries in which our products are sold. In the
United States, various federal agencies including the Food & Drug
Administration's Center for Devices and Radiological Health, Federal
Communications Commission, the Occupational Safety and Health Administration and
various state and municipal government agencies, have promulgated regulations
concerning laser safety and radio emissions standards. In Canada, laser safety
is regulated by Industry Canada. We also submit our products for safety
certification throughout the world by recognized testing laboratories such as
the Underwriters Laboratories, Inc. and the Canadian Standards Association. The
European countries in which our products are sold also have standards concerning
electrical and laser safety, electromagnetic compatibility and emissions, and
environmental concerns.
Weighing systems used in conjunction with our Stratos scanner model are
regulated by various national and state organizations such as the Office of
Weights and Measures of the National Institute of Standards and Technology in
the United States and the International Organization of Legal Metrology.
<page>
We believe that all of our products are in material compliance with current
standards and regulations; however, regulatory changes in the United States and
other countries may require modifications to certain of our products in order
for us to continue to be able to manufacture and market these products.
Employees
As of March 1, 2006, we had approximately 1,400 full-time employees worldwide.
None of our employees currently are represented by a labor union. However, under
Chinese law, if we have over 200 employees in China, these employees will be
required to be represented by a union. We expect that in the future our
employees in Suzhou, China may be represented by a union in accordance with
Chinese law. Management believes that its relationships with its employees are
good.
Financial Information about Geographic and Business Segment
We operate both domestically and internationally in two distinct business
segments. The financial information regarding our geographic and business
segments, which includes net revenues and gross profit for each of the years in
the three-year period ended December 31, 2005, and total long-lived assets as of
December 31, 2005, December 31, 2004 and December 31, 2003, is provided in Note
12 to the Consolidated Financial Statements. See Item 1A below for risk factors
attendant to our foreign operations.
Available Information
Our website address is www.metrologic.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to these reports are available free of charge on the Investor Relations page of
our website as soon as reasonably practicable after the reports are filed
electronically with the Securities and Exchange Commission. Information
contained on our website is not a part of this report.
The general public may read and copy any materials we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC
maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. The Internet address of the SEC's website is www.sec.gov.
Item 1A. Risk Factors
Any statements we make in our filings with the Securities and Exchange
Commission, including this filing, that are not statements of historical fact
are forward-looking statements. These statements include, without limitation,
those relating to anticipated product plans, litigation matters, currency
effects, profitability, and other commitments or goals. Forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from the statements made. These risks and
uncertainties include, but are not limited to, the following:
If our customers do not continue to accept and demand bar code scanner
technologies, the number of our customers and revenues would substantially
decrease.
Because our core business focuses on bar code scanner technologies, our success
depends on the continued acceptance of and demand for bar code systems. Demand
for our products could decline if businesses and organizations adopt alternative
technologies, such as radio frequency identification, or RFID, or otherwise
reduce their use of bar code scanners. The acceptance of and the demand for bar
code scanner technologies may not continue or grow and if the market fails to
develop as we anticipate, our business, financial condition and results of
operations could suffer.
Prolonged economic weakness in the information technology market may decrease
our revenues and margins.
The market for our products and services depends on economic conditions
affecting the broader information technology market. Prolonged weakness in this
market has caused in the past, and may cause in the future, customers to reduce
their overall information technology budgets or reduce or cancel orders for our
products. In this environment, our customers may experience financial
difficulty, cease operations and fail to budget or reduce budgets for the
purchase of our products and services. This, in turn, may lead to longer sales
cycles, delays in purchase decisions, payment and collection, and may also
result in downward price pressures, causing us to realize lower revenues and
operating margins. In addition, general economic uncertainty and general
declines in capital spending in the information technology sector make it
difficult to predict changes in the purchasing requirements of our customers and
the markets we serve. We believe that, in light of these events, some businesses
have and may continue to curtail or suspend capital spending on information
technology. These factors may cause our revenues and operating margins to
decline.
<page>
Our products are subject to government regulations and noncompliance with those
regulations could have a material adverse effect on our results of operations
and financial condition.
Our products are subject to regulations by federal, state and local agencies in
the United States and agencies in certain foreign countries where our products
are manufactured or sold. There can be no assurance of continued compliance if
these regulations were to change. Regulatory changes may require us to make
modifications to certain of those products in order for us to continue to be
able to manufacture and market our products. Noncompliance with respect to these
regulations, or delays resulting from modifications in order to come into
compliance, could have a material adverse effect on our results of operations
and financial condition.
Our research and development efforts may not be successful, which could
negatively affect our business, results of operations and financial condition.
Our customers demand innovative solutions and we must therefore be very active
in the research and development of new products and technologies. Our research
and development efforts require us to spend significant funds and may not lead
to the successful introduction of new or improved products. We may encounter
delays or problems in connection with our research and development efforts. New
products often take longer to develop, have fewer features than originally
considered desirable and may have higher costs than initially estimated. There
may be delays in starting volume production of new products and new products may
not be commercially successful. Products under development are often announced
before introduction and these announcements may cause customers to delay
purchases of existing products until the new or improved versions of those
products are available. Delays or deficiencies in development, manufacturing,
delivery of or demand for new products or higher costs could have a material
adverse effect on our business, results of operations and financial condition.
If we are unable to compete successfully against our current or future
competitors, we could lose many of our customers and our revenues would
decrease.
We face significant competition in developing and selling our products. Some of
our competitors have substantially greater marketing, financial, development and
personnel resources than we do. Increased competition from manufacturers of
products may result in price reductions, lower gross margins and loss of
customer support. If any technology that competes with ours becomes more
reliable, better performing, less expensive or has other advantages over our
technology, then the demand for our products could decrease, which could have a
material adverse effect on our financial condition and results of operations.
If we cannot offset the decrease in the average selling prices of our products,
our financial condition could be adversely affected.
The average selling price of our products usually decreases over the life of the
product. To lessen the effect of price decreases, we attempt to reduce
manufacturing costs of existing products and to introduce new products,
functions and other price/performance-enhancing features. If cost reductions,
product enhancements and new product introductions do not occur in a timely
manner or are not accepted in the marketplace, our results of operations and
financial condition could be negatively affected.
Our inability to adequately protect our intellectual property would have a
material adverse effect on our results of operations and financial condition.
Our success and ability to compete is dependent, in part, upon our ability to
maintain the proprietary nature of our technologies. We rely on a combination of
patent, trade secret, copyright and trademark law and nondisclosure agreements
to protect our intellectual property.
Patent protection and other methods on which we rely to protect our technology,
trade secrets, proprietary information and rights may not be adequate to protect
us. We have in the past and may in the future need to assert claims of
infringement against third parties to protect our intellectual property.
Litigation to defend and enforce our intellectual property rights could result
in substantial costs and diversion of resources and could have a material
adverse effect on our financial condition and results of operations regardless
of the final outcome of such litigation. Despite our efforts to safeguard our
intellectual property, we may not be successful in doing so or the steps taken
by us in this regard may not be effective to deter misappropriation of our
technology or prevent an unauthorized third party from copying or otherwise
obtaining and using our products, technology or other information that we regard
as proprietary. In addition, others may independently develop similar
technologies or duplicate our technology. We may also be subject to additional
risks as we enter into transactions in countries where intellectual property
laws are not well developed or are poorly enforced. Legal protection of our
rights may be ineffective in such countries, and technology developed in such
countries may not be protected in jurisdictions where protection is ordinarily
available.
We may become subject to claims of infringement or misappropriation of the
intellectual property or the proprietary rights of others, which could increase
our costs and subject us to monetary damages.
<page>
Third parties have in the past and could in the future, assert infringement or
misappropriation claims against us with respect to current or future products.
Although we perform investigations of the intellectual property rights of third
parties, we cannot be certain that we have not infringed the proprietary rights
of others. Any such infringement could cause third parties to bring claims
against us, resulting in significant costs, possible damages and substantial
uncertainty. We could also be forced to develop non-infringing alternatives,
which could be costly and time-consuming.
Our sales outside of North America, which in 2005 accounted for approximately
57% of our net revenue, expose us to currency exchange fluctuations and other
risks, which could adversely affect our results of operations and financial
condition.
A significant portion of our sales has been to customers located outside of
North America. In 2005, sales outside of North America accounted for
approximately 57% of our net revenue. Most of our product sales in Europe and
Asia are billed in foreign currencies and are subject to currency exchange
fluctuations. In particular, we are subject to risk from fluctuations in the
value the U.S. dollar relative to the euro, the Brazilian real, the Singapore
dollar, and the Chinese renminbi. Because most of our expenses are incurred in
the United States, sales and results of operations could be affected by
fluctuations in the U.S. dollar. Changes in the value of the U.S. dollar
compared to foreign currencies have in the past had an impact on our sales and
margins.
We operate a significant portion of our business in, and plan to expand further
into, markets outside the United States, which subjects us to additional
business and regulatory risks.
We expect that a significant portion of our revenues will continue to be derived
from sales in foreign countries. Conducting business internationally subjects us
to a number of risks and uncertainties including:
o devaluation in foreign currencies, particularly the Chinese
renminbi;
o unexpected delays or changes in regulatory requirements;
o delays and expenses associated with tariffs and other trade
barriers;
o restrictions on and impediments to repatriation of our funds
and our customers' ability to
make payments to us;
o political and economic instability;
o difficulties and costs associated with staffing and managing
international operations and implementing, maintaining and
improving financial controls;
o uncertainty in shipping and receiving products and product
components;
o increased difficulty in collecting accounts receivable and
longer accounts receivable cycles in certain foreign
countries; and
o adverse tax consequences or overlapping tax structures.
If our manufacturing capability is interrupted, we could lose customers and our
sales would decline.
Many of our products are manufactured in our facility in Suzhou, China. We
anticipate that an increased percentage of our products and subassemblies will
be manufactured at our China facility. We may experience delays and difficulties
as we increase manufacturing of certain products in our China facility.
Additionally, our manufacturing operations in China may be adversely affected by
transportation delays and interruptions, political and economic disturbances and
the outbreak of health-related problems. In addition, both of our manufacturing
facilities are subject to risks associated with fire and other natural
disasters, which could interrupt our manufacturing operations. Any delay or
interruption in our manufacturing operations could have a material adverse
effect on our results of operations and financial condition.
We rely on third parties to sell many of our products, and if there is a
shortfall in demand from these distribution sources, our results of operations
could be negatively affected.
We sell a majority of our products through distributors, VARs and OEMs. Reliance
upon third-party distribution sources subjects us to risks of business failure
by these individual distributors, VARs and OEMs, as well as credit, inventory
and business concentration risks. If there is a lessening in demand from
third-party distribution sources, our results of operations may be negatively
affected.
If our suppliers do not perform adequately or are replaced, we could experience
delays in manufacturing and shipping our products, which could have a material
adverse effect on our operations.
We currently use single source suppliers for certain key components used in our
products. If we experience quality problems with these vendors or if it becomes
necessary to replace these vendors, we could experience delays in manufacturing
and shipping our products, which could have a material adverse effect on our
results of operations.
<page>
The complex design of our products could result in manufacturing delays and
other problems that cause us to fail to meet the demand for our products on a
timely basis, increase the cost of our products, or both.
We may, in the future, experience manufacturing problems with some of our
products that could lead to production delays that could cause our distribution
network to choose to sell competing products. If we experience problems in
increasing the production of new products from pilot production to volume
production, or in transferring the manufacture of existing products from our
facility in Blackwood, New Jersey to our facility in Suzhou, China, such
problems could result in production delays that may have a material adverse
effect on our results of operations. In addition, manufacturing problems could
result in higher material, labor and other costs, which could increase the total
cost of our products and could decrease our profit margins and, thus, have a
material adverse effect on our results of operations.
Our products may have manufacturing or design defects that we discover after
shipment, which could negatively affect our revenues, increase our costs and
harm our reputation.
Our products are complex and may contain undetected and unexpected defects,
errors or failures. If these product defects are substantial, the result could
be product recalls, an increased amount of product returns, loss of market
acceptance and damage to our reputation, all of which could increase our costs,
cause us to lose sales and have a material adverse effect on our results of
operations.
Additionally, most of our products are warranted for a period of three to five
years. Some of our products cannot easily be returned to us for repair.
Accordingly, in the event of product defects or malfunctions we may be required
to send our representative to customers' locations to repair the products at our
expense. While we carry general commercial liability insurance, including
product liability, with a coverage limit of $1 million per occurrence plus an
umbrella policy with a $20 million limit and maintain warranty claim reserves on
our balance sheet, our insurance and our warranty reserves may be insufficient
to cover losses caused by our products, and, therefore, if we were required to
cover losses caused by our products it could have a material adverse effect on
our financial condition. In addition, while historically we have not been
materially affected by product recalls, there is no assurance that we will not
experience such product recalls in the future.
Inability to attract, develop or retain quality employees could adversely impact
our ability to achieve our objectives.
We have objectives in our businesses and regions to sustain and grow the
company. Continued success in achieving these objectives depends on the
recruitment, development and retention of qualified employees. Without these
employees, we may not be able to achieve these objectives.
Approximately 44% of our issued and outstanding common stock as of December 31,
2005 was controlled by our Chairman of the Board, who has significant influence
over the ability to determine the outcome of all corporate actions requiring
shareholder approval.
C. Harry Knowles, our Chairman of the Board of Directors and his spouse, Janet
H. Knowles our Vice President, Administration, Treasurer and Director
beneficially own approximately 44% of our outstanding common stock as of
December 31, 2005. Accordingly, Mr. and Mrs. Knowles currently have, and will
continue to have, a significant influence over the ability to determine the
outcome of all corporate actions requiring shareholder approval, including the
election of the entire Board of Directors. There are no provisions for
cumulative voting by shareholders and, accordingly, holders of a majority of the
outstanding shares can elect all of our directors.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
Our executive offices and U.S. manufacturing facilities are located in
Blackwood, New Jersey and until December 2003 were leased by us from C. Harry
Knowles, our Chairman of the Board and Director, and Janet H. Knowles, our Vice
President, Administration, Treasurer and Director. The building is approximately
116,000 square feet, of which approximately 82,000 square feet is dedicated to
manufacturing for products in both our data capture & collection and industrial
automation/optical systems business segment. In order to reduce our operating
costs, we purchased this facility in December 2003 for $4.79 million, which was
less than the values determined by two independent appraisals. Our facility in
Suzhou, China was leased by us until November 2004 and is used for the
production of products in our data capture & collection segment. Construction
commenced in December 2003 to double the size of the facility and upon
completion of the construction, we purchased the expanded facility and
additional land for future expansion. The facility is now approximately 46,000
square feet.
Our subsidiaries each lease office space from third parties. As of December 31,
2005 our aggregate floor space was approximately 397,000 square feet.
<page>
Item 3. Legal Proceedings
We protect our technological position and new product development with domestic
and foreign patents. When we believe competitors are infringing on these
patents, we may pursue claims or other legal action against these parties.
Additionally, from time-to-time, we receive legal challenges to the validity of
our patents or allegations that our products infringe the patents of others.
We are currently involved in matters of litigation arising in the normal course
of business including the matters described below. We believe that such
litigation either individually or in the aggregate will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows, except as noted below.
On July 21, 1999, we and six other leading members of the Automatic
Identification and Data Capture Industry (the "Auto ID companies") jointly
initiated litigation against the Lemelson Medical, Educational, & Research
Foundation, Limited Partnership (the "Lemelson Partnership"). The suit which was
commenced in the U.S. District Court, District of Nevada in Reno, Nevada, and
later transferred to the U.S. District Court in Las Vegas, Nevada, requested a
declaratory judgment that certain patents owned by the Lemelson Partnership were
not infringed, invalid and/or unenforceable for a variety of reasons. The trial
on this matter was held from November 2002 through January 2003. On January 23,
2004, the Judge issued a decision in favor of the Auto ID companies finding that
the patents in suit were not infringed, invalid and unenforceable. The Lemelson
Partnership appealed this decision to the Court of Appeals for the Federal
Circuit which upheld the trial court's decision in its September 2005 ruling. A
request for a rehearing by the Lemelson Partnership was denied.
On October 13, 1999, we filed suit for patent infringement against PSC Inc. in
the U.S. District Court for the District of New Jersey. On May 17, 2004, PSC
Scanning, Inc. ("PSC") filed suit against the Company in the U.S. District Court
for the District of Oregon alleging claims of patent infringement of certain of
its patents by at least one Metrologic product. On August 29, 2005, the parties
entered into a settlement agreement which resolved all outstanding litigation
between the parties. Key features of the settlement include a payment of $2.25
million in cash by PSC, discounts on certain products from PSC and a covenant
not to sue each other under defined sets of patent rights for product
configurations that were sold prior to March 16, 2005. The cash settlement of
$2.25 million was recorded as income during the third quarter of 2005 and is
reflected in Other income (expenses) in our Consolidated Statement of
Operations. The product discount arrangement within the settlement agreement
will be recorded in our Consolidated Statement of Operations when realized.
On May 3, 2002, we were served with a lawsuit that was filed on April 12, 2002
by Symbol Technologies, Inc. ("Symbol"), in the U.S. District Court for the
Eastern District of New York alleging that we were in breach of the terms of the
License Agreement between us and Symbol (the "Symbol Agreement"). The Complaint
sought a declaratory judgment from the Court that we were in breach of the
Symbol Agreement. On March 31, 2003, the Court entered its decision on the
parties' respective motions for summary judgment, and finding in our favor, the
Court dismissed certain counts of Symbol's complaint. On April 9, 2003, Symbol
voluntarily dismissed the remaining counts of the complaint. Symbol filed its
Notice of Appeal with the U.S. Court of Appeals for the Second Circuit on May 7,
2003. On December 23, 2003, the Court of Appeals dismissed Symbol's appeal in
this matter. In the interim, Symbol decided to proceed with the arbitration for
which the Company had filed a Demand in June 2002, which had been stayed pending
the decision by the lower court. On June 26, 2003, Symbol filed an Amended
Answer and Counterclaims asserting that (a) eleven of Metrologic's products are
royalty bearing products, as defined under the Symbol Agreement, and (b) in the
alternative, those products infringe upon one or more of Symbol's patents. In
February 2005, the arbitrator entered an interim award, finding that 8 of the
products are not royalty bearing products under the Symbol Agreement but that 3
of the products are royalty bearing products. In August, 2005, the arbitrator
entered a final ruling in the arbitration awarding Symbol past royalties on
certain of the Company's products plus interest. Symbol filed a motion to enter
the judgment with the U.S. Federal District Court in the Southern District of
New York. The Company filed its motion to vacate the arbitrator's award in the
same court. In February 2006, the Judge granted Symbol's motion to enter a
judgment affirming the arbitrator's award for past royalties. As of December 31,
2005 the Company has accrued $14.4 million reflecting royalties and interest
due in accordance with the judgment through December 31, 2005. We expect future
royalty payments to cease on these products during the second quarter of 2006
as a result of already-implemented actions.
On June 18, 2003, the Company filed suit against Symbol in the U.S. District
Court for the District of New Jersey alleging claims of patent infringement of
certain of our patents by at least two Symbol products. The complaint also
contains a claim for breach of the Symbol Agreement between the parties.
Symbol's answer to the complaint, filed on July 30, 2003, included counterclaims
requesting that a declaratory judgment be entered that the patents in suit are
invalid, are not infringed by Symbol and that Symbol is not in breach of the
Symbol Agreement. The court will hear arguments on the construction of the
claims in the patents in suit in March 2006 and a trial is currently scheduled
for September 2006.
<page>
On May 17, 2005, the Company filed suit against Symbol in the U.S. District
Court for the District of New Jersey for breach of contract for failure to pay
royalties in accordance with the terms of the Symbol Agreement. The parties have
filed cross motions for summary judgment and dismissal and those motions are
currently pending before the court.
On September 23, 2005, Symbol filed suit against the Company in the U.S.
District Court in the Eastern District of Texas alleging patent infringement.
Symbol filed a related case before the International Trade Commission ("ITC")
also alleging patent infringement of the same patents. A notice of the
investigation instituted by the ITC was served on the Company on October 24,
2005. The case in the U.S. District Court in the Eastern District of Texas have
been stayed pending the outcome of the matter before the ITC. It is expected
that a trial will be held in June 2006 in the ITC with a decision later this
year. Metrologic stands firm, in its belief, that its products do not infringe
Symbol's patents. Metrologic will vigorously defend these new allegations of
patent infringement.
On March 6, 2006, we were served with a lawsuit that was filed on November 4,
2005 by Symbol in the U.S. District Court in the Eastern District of Texas
alleging patent infringement.
We are not aware of any other legal claim or action against us, which could be
expected to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The executive officers of the Company as of December 31, 2005 were as follows:
Name Age Position
Benny A. Noens 58 Chief Executive Officer and President
Kevin J. Bratton 56 Chief Financial Officer
Gregory DiNoia 41 Vice President, The Americas
Dale M. Fischer 65 Vice President, International Sales
Janet H. Knowles 64 Director, Vice President, Administration,
and Treasurer
Joseph Sawitsky 43 Senior Vice President, Manufacturing
Mark C. Schmidt 35 Senior Vice President, Marketing
Nancy A. Smith 39 Vice President, General Counsel and
Secretary
Jeffrey Yorsz 48 Senior Vice President, Industrial Systems
The Company's executive officers are elected annually by the Board of Directors
following the annual meeting of shareholders and serve at the discretion of the
Board of Directors.
Benny A. Noens has served as the Company's Chief Executive Officer and President
since June 2004. Mr. Noens served as the Company's European Sales Manager from
1991 to 1993 and as Vice President, European Sales from 1994 to March 2004 and
was promoted to Senior Vice President, European Sales in March 2004. In
addition, Mr. Noens had been Managing Director of Metrologic Instruments GmbH
from 1994 until June 2004. From 1980 until 1991, Mr. Noens held several
positions with Data General Corporation, including serving in Latin America as
Marketing and Distribution Manager. Prior to his employment at Data General, Mr.
Noens managed a division of C.T. Janer Co., an import/export company located in
Rio de Janiero, Brazil.
Kevin J. Bratton has served as the Company's Chief Financial Officer since July
1, 2002. Mr. Bratton was employed as the Chief Financial Officer of The JPM
Company, a company that manufactured wire and cable assemblies at various
locations throughout the world, from June 2000 through June 2002. The JPM
Company filed a Chapter 11 petition in the United States Bankruptcy Court for
the District of Delaware on March 1, 2002. From July 1999 to May 2000, Mr.
Bratton was the Director of External Reporting at The JPM Company. Prior to
joining JPM, Mr. Bratton was a Vice President and Treasurer of IGI, Inc., a
manufacturer of poultry biologics and veterinary pharmaceuticals.
Gregory DiNoia has served as the Company's Vice President, North American Sales
since March 2004. In January 2005, he took over responsibility for South America
becoming Vice President, The Americas. Mr. DiNoia joined us in 1997 as the
Midwest Account Manager and has served as a Strategic Account Manager and was
promoted to Director of Strategic Retail & OEM Accounts in January 2001. Prior
to joining Metrologic, he held several positions in sales and contract
management.
Dale M. Fischer has served as the Company's Director of International Marketing
and Sales from 1990 to 1993 and has served as Vice President, International
Sales since 1994. From 1989 to 1990, Mr. Fischer was Chairman of Great Valley
Corporation, a worldwide marketing and product development company. From 1967
until 1988, Mr. Fischer held several positions with TRW Electronics Component
Group ("TRW"), most recently as International Marketing, Sales and Licensing
Director. Mr. Fischer was responsible for marketing and sales of TRW products in
more than 50 countries and was responsible for the implementation of a joint
venture in Japan and the establishment of seven technology and manufacturing
licenses throughout the world.
<page>
Janet H. Knowles was a director of the Company from 1972 to 1984 and has served
as a director since 1986. Mrs. Knowles served as Vice President, Administration
from 1976 to 1983 and has served in that capacity since 1984. Mrs. Knowles
served as Secretary from 1984 to July 2004, and as Treasurer since 1994. Mrs.
Knowles is the wife of the Chairman of the Board.
Joseph Sawitsky has served as the Company's Vice President, Manufacturing since
November 1999 and was promoted in March 2004 to Senior Vice President,
Manufacturing and Operations. He joined Metrologic in 1998 as the Production
Manager. After serving in the Nuclear Submarine Force, he worked at ICI
Composites from 1990 to 1994 and manufactured specialty polymer materials for
the aerospace and industrial markets. From 1994 to 1998 he held several
positions with Zenith Electronic Corporation making consumer electronic
equipment.
Mark C. Schmidt has served as the Company's Vice President, Marketing since
November 1999. He was promoted to Senior Vice President, Marketing in March
2004. He has been employed by Metrologic since 1992. During his tenure, Mr.
Schmidt has progressed from Optical Engineer to the position of POS Product
Manager in 1995, and Marketing Manager in 1997.
Nancy A. Smith has served as the Company's Vice President, General Counsel since
March 2002 and Secretary of the Company since July 2004. Ms. Smith joined the
Company in 1996 as its Corporate Counsel and patent attorney. Prior to joining
Metrologic, Ms. Smith was employed as a patent attorney for a private law firm
in Baltimore, Maryland. Effective March 10, 2006, Ms. Smith was no longer
employed by the Company.
Jeffrey Yorsz has served as the Vice President, Industrial Systems since March
2002. In March 2004, he was promoted to Senior Vice President, Industrial
Systems. Mr. Yorsz also serves as President and General Manager of Adaptive
Optics Associates, Inc., a wholly owned subsidiary of Metrologic Instruments,
Inc., since its acquisition in January 2001. He joined AOA as an engineer in
1984 and has held prior positions of Manager of Electrical Engineering and
Assistant General Manager of the company.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
PRICE RANGE OF OUR COMMON STOCK
Our common stock is listed on the Nasdaq National Market and trades under
the symbol MTLG. On March 1, 2006, we had 22,367,338 shares of common stock
outstanding, which were held by approximately 195 holders of record. The
following table sets forth, for the fiscal periods indicated, the high and low
sales prices per share for our common stock on the Nasdaq National Market.
High Low
Year ended December 31, 2004
First Quarter $ 33.50 $ 20.68
Second Quarter 25.75 13.81
Third Quarter 20.15 13.00
Fourth Quarter 21.84 14.50
Year ended December 31, 2005
First Quarter $ 24.12 $ 18.22
Second Quarter 23.65 12.27
Third Quarter 18.77 12.33
Fourth Quarter 20.65 15.50
DIVIDEND POLICY
We have not paid cash dividends on our common stock since becoming a public
company, and we do not intend to pay cash dividends in the foreseeable future.
We currently intend to retain any earnings to further develop and grow our
business. While this dividend policy is subject to periodic review by our Board
of Directors, there can be no assurance that we will declare and pay dividends
in the future.
<page>
Item 6. Selected Consolidated Financial Data
(in thousands except per share data)
Year Ended December 31,
2001(1)(2)2002(3) 2003(4) 2004(5) 2005(6)
---- ---- ---- ---- ----
Statement of Operations Data:
Sales $ 112,011 $ 115,806 $ 138,011 $ 177,955 $ 210,453
Cost of sales 83,527 74,385 79,654 96,227 119,638
--------- -------- --------- --------- ---------
Gross profit 28,484 41,421 58,357 81,728 90,815
Selling, general and
administrative expenses 30,877 28,873 31,449 42,518 61,362
Research and development
expenses 6,563 6,929 6,764 7,521 8,521
--------- --------- --------- -------- ---------
Operating income (loss) (8,956) 5,619 20,144 31,689 20,932
Other income (expense),
net (3,596) (2,917) 897 2,159 1,895
--------- --------- --------- -------- ---------
Income (loss) before
income taxes (12,552) 2,702 21,041 33,848 22,827
Provision (benefit) for
income taxes (4,775) 1,027 7,160 11,168 5,014
--------- --------- --------- --------- ---------
Net income (loss) $ (7,777)$ 1,675 $ 13,881 $ 22,680 $ 17,813
Add back: Goodwill
amortization 818 - - - -
Adjusted net income
(loss) $ (6,959)$ 1,675 $ 13,881 $ 22,680 17,813
========= ========= ========= ========= ========
Net income (loss) per
common share (7)
Basic $ (0.47)$ 0.10 $ 0.79 $ 1.06 $ 0.80
--------- --------- --------- --------- --------
Diluted $ (0.47)$ 0.10 $ 0.72 $ 0.99 $ 0.77
========= ========= ========= ========= ========
Weighted average number
of outstanding common
shares and equivalents(7)
Basic 16,373 16,400 17,597 21,472 22,129
========= ========= ========= ========= =========
Diluted 16,373 16,471 19,383 22,974 23,113
========= ========= ========= ========= ========
Year Ended December 31,
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 557 $ 1,202 $ 48,817 $ 64,715 $ 73,938
Working capital $ 20,606 $ 13,407 $ 74,112 $ 83,318 $ 92,283
Total assets $ 85,773 $ 74,579 $ 139,900 $ 192,527 $226,182
Long-term debt $ 27,465 $ 14,431 $ 320 $ 2,015 $ 3
Total debt $ 40,731 $ 21,486 $ 5,527 $ 18,280 $ 18,436
Total shareholders'
equity $ 26,261 $ 29,471 $ 107,608 $ 138,016 $160,290
(1) On January 8, 2001, we completed the acquisition of AOA and our results
of operations include the results of operations of AOA from that date
forward.
(2) During the year ended December 31, 2001, cost of sales included special
charges and other costs of $10.0 million that are not expected to recur
in subsequent periods.
(3) On January 1, 2002, we adopted FAS 142 and discontinued the amortization
of goodwill.
(4) During the year ended December 31, 2003, we recorded a gain of $2.2
million on the early extinguishment of debt and expenses of $463
incurred in connection with our efforts to refinance our bank debt.
(5) On September 24, 2004, we acquired Omniplanar, Inc. and our results of
operations include the results of operations of Omniplanar, Inc. from
that date forward.
(6) During the year ended December 31, 2005, selling, general and
administrative costs includes a charge of $12.6 million related to the
symbol litigation contingency.
(7) Weighted average number of common shares and per share amounts for
2001-2002 have been restated to reflect the 2003 stock splits.
<page>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements; Certain Cautionary Language
Written and oral statements provided by us from time to time may contain certain
forward looking information, as that term is defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") and in releases made by the Securities
and Exchange Commission ("SEC"). This report contains forward-looking statements
which may be identified by their use of words like "plans," "expects," "will,"
"anticipates," "intends," "projects," "estimates" or other words of similar
meaning. All statements that address expectations or projections about the
future, including statements about the company's strategy for growth, product
development, market position, expenditures, and financial results, are
forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events. The company cannot guarantee that
these assumptions and expectations are accurate or will be realized. See the
Risk Factors discussion set forth under Part 1, Item 1A for a description of
risk factors that could significantly affect the company's financial results.
Overview
We are experts in optical image capture and processing solutions. In recent
years, we have increased sales, cash flow from operations and net income
primarily through the introduction of new products, penetration into new markets
and a focus on cost reduction activities to maintain a competitive advantage.
Success factors critical to our business include sales growth through continued
penetration within our existing markets through new product introductions and
expanded sales efforts, entering into new markets, maintaining a highly
responsive and cost efficient infrastructure, achieving the financial
flexibility to ensure that we can respond to new market opportunities in order
to return value to our shareholders, and selectively pursuing strategic
acquisitions.
In order to continue our penetration into new and existing markets, our strategy
involves expanding our sales channels and expanding our product development
activities. We have concentrated our direct sales efforts to further penetrate
some of the largest retailers in the United States and Europe as well as
focusing on the adoption of bar coding technology in the healthcare industry.
During fiscal 2005, we continued to see increased orders with new and existing
key retail accounts which contributed to our year over year sales growth of
18.3%. Another key factor in achieving this sales growth is expanding our
geographic reach by capitalizing on our presence throughout Asia and emerging
markets in Central and Eastern Europe. We believe these geographic areas will
continue to be an opportunity for continued growth, as evidenced by our
investment in the expansion of our Suzhou manufacturing facility which was
completed in 2004, as well as the opening of new sales offices in these
territories. During fiscal 2005, we added offices in Thailand, Taiwan,
Australia, Korea and a fifth sales office in China. Our plans are to open
additional offices in the Asia/Pacific region as we continue to implement and
build upon our "globally local" philosophy. In addition, we continue to invest
in developing new and improved products to meet the changing needs of our
existing customers. We are continuing to focus on executing our core strategy of
leveraging our engineering expertise to produce new bar code scanners and
industrial automation products that will allow us to penetrate new markets that
we have not previously served and gain market share in our existing markets.
Furthermore, we introduced five new products in 2005 and currently have
additional new products in the pipeline. We continue to believe sales for 2006
and beyond will be positively affected as these new products either begin to
ship or ship in larger quantities.
To maintain a highly responsive and cost efficient infrastructure, our focus is
to maximize the efficiency of our organization through process improvements and
cost containment. We continue to focus on our strategy for margin expansion
through specific engineering initiatives to reduce product and manufacturing
costs. During the year ended December 31, 2005, we continued to realize the
benefits of these process improvements. In addition, the expansion of our
manufacturing facility in Suzhou, China nearly doubled the size of the existing
China operations and more importantly, is providing cost efficiencies through
lower direct labor costs as we continue to produce more of our products in this
facility. During fiscal 2005 approximately 69.0% of our data capture &
collection products were manufactured in our Suzhou, China manufacturing
facility, an increase of approximately 3.8% from fiscal 2004. We intend to
expand our manufacturing capabilities at our Suzhou, China facility in future
years to continue to take advantage of these cost efficiencies.
Closely linked to the success factors discussed above is our continued focus to
achieve financial flexibility. As of December 31, 2005, we had total debt of
approximately $18.4 million. Furthermore, we had cash and cash equivalents of
approximately $73.9 million as of December 31, 2005. We believe that our current
cash and working capital positions and expected operating cash flows will be
sufficient to fund our working capital, planned capital expenditures and debt
repayment requirements for the foreseeable future.
<page>
In addition to our internal development and organic growth, we may selectively
pursue strategic acquisitions that we believe will broaden or complement our
current technology base and allow us to serve additional end users and the
evolving needs of our existing customers. On August 31, 2005, we entered into a
cross-license agreement with Intermec IP Corp., a division of Intermec Inc. The
cross license agreement provides us full access to a number of portfolios of
patented RFID technology, including RFID tags, fixed and portable readers, and
fixed and portable printers. We anticipate that this program will allow us in
the future to offer our customers a broad Auto-ID product portfolio from a
single supplier, including RFID-enabled systems and devices. In September 2004,
our acquisition of Omniplanar, Inc., which supplies a complete package of bar
code reading software for 2D imaging for fixed position, conveyor belt and hand
held readers which can be optimized for specific hardware applications broadened
and strengthened our portfolio of decoding software to include robust
omnidirectional decoding of linear, matrix and postal bar code images.
Metrologic had licensed from Omniplanar the SwiftDecoder software since the year
2000 for use in our iQ line of industrial vision-based products. We also make
use of the software in other products as well. By acquiring this 2D imaging
technology, we have been able to reduce our licensing costs for our current and
future imaging-based products.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with generally
accepted accounting principles in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the 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.
On an on-going basis, we evaluate our estimates and judgments, including those
related to revenue recognition, asset impairment, income taxes, legal
contingencies, intangible assets and inventory and accounts receivable. We base
our estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. See
Note 2 to our consolidated financial statements, "Accounting Policies," for a
summary of each significant accounting policy. We believe the following critical
accounting policies and estimates, among others, affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition. Revenue related to sales of our products and systems is
generally recognized when products are shipped or services are rendered, the
title and risk of loss has passed to the customer, the sales price is fixed or
determinable and collectibility is reasonably assured. We accrue related product
return reserves and warranty expenses at the time of sale. Additionally, we
record estimated reductions to revenue for customer programs and incentive
offerings including special pricing agreements, price protection, promotions and
other volume-based incentives. We recognize revenue and profit as work
progresses on long-term contracts using the percentage of completion method,
which relies on estimates of total expected contract revenue and costs.
Recognized revenues and profits are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Bad Debts. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. If economic or political conditions were to change in the countries
where we do business, it could have a significant impact on the results of
operations, and our ability to realize the full value of our accounts
receivable. Furthermore, we are dependent on customers in the retail markets.
Economic difficulties experienced in those markets could have a significant
impact on our results of operations, and our ability to realize the full value
of our accounts receivable. In establishing the appropriate provisions for
customer receivable balances, we make assumptions with respect to their future
collectibility. Our assumptions are based on an individual assessment of a
customer's credit quality as well as subjective factors and trends, including
the aging of receivable balances. Once we consider all of these factors, a
determination is made as to the probability of default. An appropriate provision
is made, which takes into account the severity of the likely loss on the
outstanding receivable balance based on our experience in collecting these
amounts.
Inventory. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of the inventory
and the estimated market value, less disposal costs and reasonable profit
margin, based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory writedowns may be required.
<page>
Goodwill. Goodwill represents the excess of the cost of businesses acquired over
the fair value of the related net identifiable assets at the date of
acquisition. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," we no longer amortize
goodwill, but test for impairment of goodwill using a discounted cash flow
analysis. The goodwill impairment test is a two-step process, which requires
management to make judgments in determining what assumptions to use in the
calculation. The first step of the process consists of estimating the fair value
of each reporting unit based on a discounted cash flow model using revenue and
profit forecasts and comparing those estimated fair values with the carrying
values, which includes the allocated goodwill. If the estimated fair value is
less than the carrying value, a second step is performed to compute the amount
of the impairment by determining an "implied fair value" of goodwill. The
determination of a reporting unit's "implied fair value" of goodwill requires us
to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the
"implied fair value" of goodwill, which is compared to its corresponding
carrying value. We completed our annual impairment test as of October 1, 2005
and determined that there was no goodwill impairment to be recognized. The key
assumptions used to determine the fair value of our reporting units included (a)
cash flow periods of 5 years; (b) terminal values based upon a terminal growth
rate of 3%; and (c) a discount rate of 14.0%, which was based on the Company's
weighted average cost of capital adjusted for the risks associated with the
operations.
Long-Lived Assets. We assess the impairment of our long-lived assets, other than
goodwill, including property, plant and equipment, identifiable intangible
assets and software development costs whenever events or changes in
circumstances indicate the carrying value may not be recoverable. Factors we
consider important which could trigger an impairment review include significant
changes in the manner of our use of the acquired asset, changes in historical or
projected operating performance and significant negative economic trends.
Income Taxes. We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be recognized using enacted tax rates for the effect of temporary
differences between the book and tax bases of recorded assets and liabilities.
SFAS No. 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or the entire deferred
tax asset will not be realized. We evaluate the realizability of our deferred
tax assets on an ongoing basis by assessing the valuation allowance and by
adjusting the amount of such allowance, if necessary. The factors used to assess
the likelihood of realization is our forecast of future taxable income and
available tax planning strategies that could be implemented to realize the net
deferred tax assets. Failure to achieve forecasted taxable income might affect
the ultimate realization of the net deferred tax assets. See the section on
Forward Looking Statements included at the beginning of this Item 7 on
Management's Discussion and Analysis for a listing of factors that may affect
the achievement of our forecasted taxable income.
The Company's annual provision for income taxes and the determination of the
resulting deferred tax assets and liabilities involve a significant amount of
management judgment. Our judgments, assumptions and estimates relative to the
current provision for income tax take into account current tax laws, our
interpretation of current tax laws and possible outcomes of current and future
audits conducted by foreign and domestic tax authorities. The Company operates
within federal, state and international taxing jurisdictions and is subject to
audit in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve. The Company maintains reserves
for estimated tax exposures. Exposures are settled primarily through the
settlement of audits within these tax jurisdictions, but can also be affected by
changes in applicable tax law or other factors, which could cause management of
the Company to believe a revision of past estimates is appropriate. Management
believes that an appropriate liability has been established for estimated
exposures; however, actual results may differ materially from these estimates.
The liabilities are reviewed on an ongoing basis for their adequacy and
appropriateness. To the extent the audits or other events result in a material
adjustment to the accrued estimates, the effect would be recognized in the
provision for income taxes line in our Consolidated Statement of Operations in
the period of the event.
Legal contingencies. We are subject to legal, regulatory and other proceedings
and claims that arise in the ordinary course of our business. We record an
estimated liability for those proceedings and claims arising in the ordinary
course of business based upon the probable and reasonably estimable criteria
contained in SFAS No. 5, "Accounting for Contingencies." We review outstanding
claims with internal as well as external counsel to assess the probability and
the estimates of loss. We reassess the risk of loss as new information becomes
available, and we adjust liabilities as appropriate. The actual cost of
resolving a claim may be substantially different from the amount of the
liability recorded.
<page>
Impact of Recently Issued Accounting Standards
In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs and
wasted material (spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless of whether they
meet the criterion of "so abnormal" as stated in ARB 43. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. We do not expect the
adoption of this statement to have a material effect on our consolidated
financial position, consolidated results of operations or liquidity.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP No.
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provisions within the American Jobs Creation Act of 2004" (the
"Jobs Act"). FSP No. 109-2 provides guidance with respect to reporting the
potential impact of the repatriation provisions of the Jobs Act on an
enterprise's income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004, and provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The
deduction would result in an approximate 5.25% federal tax rate on the
repatriated earnings. To qualify for the deduction, the earnings must be
reinvested in the United States pursuant to a domestic reinvestment plan
established by a company's chief executive officer and approved by a company's
board of directors. Certain other criteria in the Jobs Act must be satisfied as
well. We repatriated approximately $17 million of foreign earnings from our
China subsidiary during the quarter ended December 31, 2005. The repatriation of
these foreign earnings has provided an income tax benefit of approximately $3.1
million, as deferred taxes had been provided on a portion of these earnings in
prior years. We adjusted our tax expense and deferred tax liability to reflect
the repatriation provisions of the Jobs Act in the financial statements for the
year ended December 31, 2005.
In December 2004, the FASB issued FASB Staff Position No. SFAS 109-1 ("FSP No.
109-1"), "Application of FASB Statement No.109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004". FSP 109-1 provides guidance on applying the
deduction for income from qualified domestic production activities. The
deduction will be phased in from 2005 through 2010. The Act also provides for a
two-year phase out of the existing extra-territorial income exclusion ("ETI")
for foreign sales. The deduction will be treated as a "special deduction" as
described in FASB Statement No. 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in which the
deduction is claimed on our tax return. The net effect of the phase out of the
ETI and the phase in of this new deduction did not result in a material change
in our effective tax rate for fiscal year 2005 and we do not expect that this
will result in a material change in 2006, based on current earnings levels.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." This Statement
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. In accordance
with a Securities and Exchange Commission Rule issued in April 2005, companies
will be allowed to implement SFAS No. 123R as of the beginning of the first
fiscal year beginning after June 15, 2005. Under SFAS No. 123R, we must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The permitted transition methods include
either retrospective or prospective adoption. Under the retrospective option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retrospective methods would
record compensation expense for all unvested stock options beginning with the
first period presented. We will adopt the provisions of SFAS No. 123R on January
1, 2006, using the prospective method. We expect to continue using the
Black-Scholes valuation model in determining the fair value of share-based
payments to employees. SFAS No. 123R will also require us to change the
classification of any tax benefits realized upon exercise of stock options in
excess of that which is associated with the expense recognized for financial
reporting purposes. These amounts will be presented as a financing cash inflow
rather than as a reduction of income taxes paid in our consolidated statement of
cash flows. We are continuing to evaluate the requirements of SFAS No. 123R and
Staff Accounting Bulletin No. 107 and currently expect that the adoption of SFAS
No. 123R will result in an increase in compensation expense in 2006 of
approximately $2 million to $3 million, excluding the estimated impact of 2006
share-based awards. However, uncertainties, including our future stock-based
compensation strategy, stock price volatility, estimated forfeitures and
employee stock option exercise behavior, make it difficult to determine whether
the stock-based compensation expense recognized in future periods will be
similar to the SFAS No. 123 pro forma expense disclosed in Note 2 to the
consolidated financial statements.
<page>
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS No. 153"). SFAS No. 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21 (b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The adoption of this statement did not
have a material effect on our consolidated financial position, consolidated
results of operations or liquidity.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations--an interpretation of FASB Statement
No. 143". This Interpretation clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. This Interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. This Interpretation was effective December 31,
2005. The adoption of this statement did not have a material effect on our
consolidated financial position, consolidated results of operations or
liquidity.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154") which replaces Accounting Principles Board
Opinions No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28."
SFAS No. 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application, unless
impracticable, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
Results of Operations
The following table sets forth certain of our consolidated statement of
operations data as a percentage of revenues for the periods indicated. The
following discussion should be read in conjunction with our Consolidated
Financial Statements and the Notes to our Consolidated Financial Statements.
December 31,
2003 2004 2005
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of sales 57.7% 54.1% 56.8%
Gross profit 42.3% 45.9% 43.2%
Operating expenses:
Selling, general and
administrative expenses 22.8% 23.9% 23.2%
Symbol litigation contingency - - 6.0%
Research and development expenses 4.9% 4.2% 4.1%
Total operating expenses 27.7% 28.1% 33.3%
Operating income 14.6% 17.8% 9.9%
Other income (expenses), net 0.6% 1.2% 0.9%
Income before income taxes 15.2% 19.0% 10.8%
Provision for income taxes 5.2% 6.3% 2.4%
Net income 10.1% 12.7% 8.4%
Our business is divided into two major segments: Data Capture & Collection, and
Industrial Automation and Optical Systems.
Bar code scanners are typically either handheld scanners or fixed projection
scanners. Prior to 2005, the Company's data capture & collection scanners were
all laser based. In 2005, the Company introduced its first vision based product
for the data capture & collection business. Handheld bar code scanners are
principally suited for retail point-of-sale, document processing, library,
healthcare and inventory applications. Fixed projection scanners, which can be
mounted on or in a counter, are principally suited for supermarkets, convenience
stores, mass merchandisers, health clubs and specialty retailers.
<page>
Industrial automation products are comprised of fixed position systems that are
either laser- or vision-based. These systems range from simple, one-scanner
solutions to complex, integrated systems incorporating multi-scanner, image
capture and dimensioning technologies. Optical Systems are comprised of advanced
electro-optical systems including wavefront sensors, adaptive optics systems and
custom instrumentation.
The following table sets forth certain information regarding our revenues by our
two business segments for the periods indicated.
Year Ended December 31,
--------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Data Capture & Collection $ 112,817 $ 140,171 $ 169,749
Industrial Automation/Optical Systems
Industrial Automation 13,539 18,475 13,958
Optical 11,655 19,309 26,746
--------- --------- ---------
Total Industrial Automation/
Optical Systems 25,194 37,784 40,704
--------- --------- ---------
Total Company $ 138,011 $ 177,955 $ 210,453
========= ========= =========
Most of our product sales in Western Europe, Brazil and Asia are billed in
foreign currencies and are subject to currency exchange rate fluctuations.
Certain of our products are manufactured in our U.S. facility and, therefore,
sales and results of operations are affected by fluctuations in the value of the
U.S. dollar relative to foreign currencies. Manufacture of our point-of-sale
products in our Suzhou, China facility accounted for approximately 69.0% and
65.2% of point-of-sale unit sales in 2005 and 2004, respectively. In 2005 and
2004, sales and gross profit were favorably affected by the continuing decline
in the value of the U.S. dollar in relation to certain foreign currencies.
The following table sets forth certain information as to our sales by
geographical location:
Year Ended December 31,
----------------------------------------------------------
2003 % 2004 % 2005 %
-------------- ---------------- -----------------
(Dollars in thousands)
The Americas $ 65,547 47.5% $ 85,731 48.2% $ 100,757 47.9%
EMEA 57,474 41.6 70,819 39.8 83,593 39.7
APAC 14,990 10.9 21,405 12.0 26,103 12.4
--------- ----- ---------- ----- --------- -----
Total $ 138,011 100.0% $ 177,955 100.0% $ 210,453 100.0%
========= ===== ========== ===== ========= =====
We derive revenue from product sales, engineering development, system
maintenance and other services. Our cost of sales includes manufacturing and
logistic costs, labor costs related to service revenues, the costs associated
with quality control and the payment of royalties on license agreements.
Selling, general and administrative ("SG&A") expenses primarily consist of
salaries, commissions and related expenses for personnel engaged in sales,
marketing and sales support functions; costs associated with other marketing
activities; salaries and related expenses for executive, finance, accounting,
legal and human resources personnel; and professional fees and corporate
expenses. Research and development ("R&D") expenses primarily consist of
salaries and expenses for development and engineering and prototype costs. We
also participate in government and customer funded research programs. Costs of
the engineers working on such programs are charged to cost of sales for the time
spent on the programs. When the engineers are not working on these programs,
they are available to work on our own internal development projects and their
costs are included in research and development expense.
Year Ended December 31, 2005 Compared with Year Ended December 31, 2004
Sales increased 18.3% to $210.5 million in 2005 from $178.0 million in 2004. On
a constant currency basis, revenues increased by approximately 17.9%. The
increase was attributed to higher sales in both the data capture & collection
and industrial automation/optical systems business segments. Sales of our data
capture & collection products increased by 21.1%, sales of industrial automation
products decreased by 24.4%, and sales of optical systems increased by 38.5%.
Data capture & collection sales increased approximately $38.1 million due to
increased unit sales, including new product offerings, through our distribution
channels as well as increased penetration into the Tier 1 retailers, primarily
in the United States and Europe. These factors were partially offset by a
decrease of approximately $8.5 million resulting from lower average selling
prices and increased promotional programs due to competitive pricing pressures
experienced in the retail sector during 2005, in all geographic regions.
<page>
The decrease in the industrial automation product sales is attributable to the
following factors: (1) a contract with a major airline customer for bar code
scanning equipment and installation services during 2004 with no comparable
contract in 2005, (2) winding down of certain fixed price and other contracts
during the first half of 2005 and (3) the loss of certain projects on which we
had been working, offset by the increased sales contribution of our Omniplanar
business which was acquired in September 2004. Our Industrial Automation
business has exhibited a greater degree of volatility than our data capture and
collection business due to the timing and size of related contracts in this
business.
The increase in optical system sales in 2005 reflects an increase in ongoing and
new customer funded research and development and production type programs and an
increase in the scope of work of selected fixed price and cost plus type
contracts during the year.
Sales to "The Americas" region increased $15.0 million, or 17.5%, in 2005 when
compared to the comparable period in 2004. This increase is primarily attributed
to ongoing penetration into new vertical markets and Tier 1 retailers, higher
demand in our South America markets, and consistent growth with our key
distributors and channel partners. EMEA sales increased $12.8 million, or 18.0%,
in 2005 when compared to the same period a year ago despite weaker and
challenging market conditions, especially during the first half of 2005. The
increase in EMEA sales is attributable to increased unit volume offset by lower
average selling prices. The increased unit volume, in part, reflects penetration
into Tier 1 retailers and continued growth with our channel partners.
Asia/Pacific sales increased $4.7 million, or 21.9%, in 2005 when compared with
the comparable period in 2004. We continue to experience sizable growth in this
region as a result of continued penetration into both new and existing key
markets. In addition, our focused expansion of our customer base has yielded
significant numbers of new customers across the region. During 2005, we added
offices in Korea, Thailand, Taiwan, Australia and a fifth sales office in China,
partly contributing to the sales growth in this region.
No individual customer accounted for 10.0% or more of sales in 2005 or 2004.
Cost of sales increased 24.3% to $119.6 million in 2005 from $96.2 million in
2004. As a percentage of sales, cost of sales was 56.8% in 2005 compared with
54.1% in 2004. The increase in the percentage of cost of sales in 2005 was due
to the following:
o Increase in the contribution of our Optical Systems revenues to
the total revenues.
o Competitive pricing on direct sales to Tier 1 retailers in the
United States and EMEA.
o Less favorable product mix within our data capture &
collection business segment resulting from increased sales
of our new product offerings that have lower margins and have
not yet been fully cost reduced as well as certain
non-Metrologic products.
o Completion of certain lower fixed price contracts in 2005 within
our Industrial Automation business, as well as an unsustainable
mix attributed to a contract with a major airline customer that
resulted in a favorable impact during 2004.
o Higher freight costs to ensure timely delivery of products to
our international locations to meet increased customer demand as
well as higher fuel surcharges.
These factors were partially offset by a decrease in direct material costs for
selected products resulting from product redesigns and our engineering efforts
to reduce bill of material costs.
SG&A expenses increased $6.2 million or 14.7%, to $48.8 million in 2005 from
$42.5 million in 2004. As a percentage of sales, SG&A expenses were 23.2% in
2005 as compared with 23.9% in 2004. The increase in SG&A expenses was due to
increased variable selling expenses associated with the higher sales volume in
2005, severance related costs associated with the reorganization of our sales
force in the EMEA sales region, and an increase in personnel costs as we started
to increase our infrastructure to support the increased sales levels during 2005
and beyond.
On February 28, 2006, the U.S. District Court for the Southern District of New
York handed down a decision upholding the arbitration award entered in August
2005 which found that we owe Symbol Technologies, Inc. for past royalties and
interest on sales of our MS9520 Voyager and MS6220 Pulsar. As a result, we
recorded a $12.6 million charge during the fourth quarter of 2005 to accrue for
all royalties and interest due in accordance with the judgment through December
31, 2005. As of December 31, 2005 we had accrued approximately $14.4 million,
which we expect to pay during the first quarter of 2006. We expect royalty
payments of $10 per unit on these products to cease during the second quarter of
2006 as a result of already-implemented actions; however in the interim, we
expect this to have a short-term effect on gross margins and interest expense.
Interest expense will continue to accrue until the cash payment is made to
Symbol Technologies, Inc.
<page>
R&D expenses increased $1.0 million or 13.3%, to $8.5 million in 2005 from $7.5
million in 2004. As a percentage of sales, R&D expenses were 4.1% in 2005 as
compared with 4.2% in 2004. The decrease in R&D expenses as a percent of sales
can be attributed to more engineers within our Optical Systems/Industrial
Automation business segment working specifically on customer funded research
programs during 2005. Costs of the engineers working on such programs are
charged to costs of sales for the time spent on the programs. These costs were
offset by higher R&D expenses within our data capture & collection business
segment as the result of ongoing new product development efforts resulting in
higher salaries and R&D material costs.
Net interest income/expense reflects $0.6 million of net interest income in 2005
compared to $0.2 million of net interest income in 2004. The increase can be
attributed to higher interest income due to higher cash and cash equivalent
balances, partially offset by higher interest expense and related borrowings
outstanding under our European credit facilities in 2005.
Other income/expense reflects net other income of $1.3 million in 2005 compared
to net other income of $2.0 million in 2004. The change can be attributed
primarily to the PSC litigation settlement pursuant to which we received $2.25
million in 2005, offset by $3.2 million of higher net foreign exchange losses
(net foreign exchange loss of $0.9 million in 2005 when compared to a net
foreign exchange gain of $2.3 million in 2004) as a result of volatility in
foreign currency exchange rates.
Net income was $17.8 million in 2005 as compared with $22.7 million in 2004. Net
income reflects a 22.0% and 33% effective income tax rate in 2005 and 2004,
respectively. The decrease in the effective income tax rate can be attributed to
the benefits afforded under the American Jobs Creation Act of 2004. During 2005
the Company repatriated approximately $17 million of foreign earnings from our
China subsidiary for which a portion of these earnings had been previously
provided for in prior years.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Sales increased 28.9% to $178.0 million in 2004 from $138.0 million in 2003. The
increase was attributed to higher sales in both the data capture & collection
and industrial automation/optical systems business segments. Sales of our data
capture & collection products increased by 24.2%, sales of industrial automation
products increased by 36.5%, and sales of optical systems increased by 65.7%.
Approximately $6.6 million of the increase in data capture & collection sales
resulted from the strengthening of the euro against the U.S. dollar in 2004.
Data capture & collection sales increased approximately $31.2 million due to
increased unit sales of our handheld scanners. These factors were partially
offset by a decrease of approximately $10.5 million resulting from lower average
selling prices due to competitive pricing pressures experienced in the retail
sector during 2004, in all geographic regions.
The increase in the industrial automation product sales is primarily due to
continued sales under a contract with a large systems integrator for use in a
new automated parcel and package system for the U.S. Postal Service, ongoing
integration services with regard to a contract with a major airline customer for
bar code scanning equipment and installation services to build and install
scanning stations and tunnels for use in baggage handling systems, and also the
sales contribution from our Omniplanar acquisition which closed at the end of
the third quarter of 2004.
The increase in optical system sales reflects an increase in ongoing customer
funded research and development programs, an increase in the scope of work of
selected cost plus type contracts during the year, and the completion of certain
short-term fixed price contracts in 2004.
International sales accounted for $101.9 million or 57.2% of total sales in 2004
and $79.9 million, or 57.9% of total sales in 2003. The increase in
international sales was from increased sales in our Europe and ROW geographic
regions. No individual customer accounted for 10% or more of revenues in 2004 or
2003. The increase in European sales can be attributed to increased unit volume
along with the strengthening of the euro against the U.S. dollar, offset by
lower average selling prices. The increase in our unit volume within Europe is
attributed to increased sales though our expansive distributor network coupled
with the addition of several new key end user accounts. The increase in our ROW
sales is primarily attributable to year over year growth due to continued
penetration into both new and existing key markets.
Cost of sales increased 20.8% to $96.2 million in 2004 from $79.7 million in
2003. As a percentage of sales, cost of sales was 54.1% in 2004 compared with
57.7% in 2003. The decrease in the percentage of cost of sales in 2004 was due
to the following:
o The strengthening of the euro against the U.S. dollar, as discussed
above, net of the decreases in average selling prices.
o A decrease in direct labor costs as a percent of sales as a result of
increased unit production in our Suzhou, China facility during 2004.
o A decrease in direct material costs as a percent of sales resulting from
cost reduction initiatives, primarily product redesigns lowering our
bill of material costs.
<page>
o A decrease in royalty costs due to a reduction in the number of products
covered by the agreement between Symbol Technologies and the Company.
(See Note 10 to the Consolidated Financial Statements, "Commitments and
Contingencies," located elsewhere in this document.)
o More favorable product mix resulting from increased sales of certain
more profitable handheld scanners in 2004.
o Lower overhead expenses, including a decrease in rent expense due to
the purchase of the Blackwood manufacturing facility in December 2003
and a decrease in indirect labor attributed to efficiencies in
manufacturing engineering and product support efforts.
These factors were partially offset by increased sales of certain lower margin
products, including our portable data terminals that are not manufactured by us,
but purchased from other sources. These items generally have margins 10-15%
lower than our own manufactured products.
SG&A expenses increased $11.1 million or 35.5%, to $42.5 million in 2004 from
$31.4 million in 2003. As a percentage of sales, SG&A expenses were 23.9% in
2004 as compared with 22.7% in 2003. The increase in SG&A expenses was due to
increased variable selling expenses associated with the higher sales volume in
2004, the strengthening of the euro against the U.S. dollar on euro denominated
expenses, increased professional service fees related to our Sarbanes-Oxley
section 404 compliance, an increase in legal costs associated with ongoing
litigation matters, and an increase in personnel costs as we started to increase
our infrastructure to support the increased sales levels during 2004 and beyond.
R&D expenses increased $0.8 million or 11.2%, to $7.5 million in 2004 from $6.8
million in 2003. As a percentage of sales, R&D expenses were 4.2% in 2004 as
compared with 4.9% in 2003. In absolute dollars, the increase in R&D expenses,
which consists primarily of higher salaries and R&D material costs, was the
result of ongoing new product development efforts including expanded efforts
focused on our development of the IQ camera-based vision system.
Net interest income/expense reflects $0.2 million of net interest income in 2004
compared to $1.3 million of net interest expense in 2003. The decrease can be
attributed to the following factors: (i) lower interest expense and related
outstanding borrowings in 2004 due to repayments and/or termination of
outstanding debt issuances during fiscal 2003 and (ii) higher interest income
due to higher cash and cash equivalent balances resulting from the proceeds
received from the follow-on public offering that closed in October 2003.
Interest expense in 2003 includes $0.2 million of unamortized original issue
discount associated with repayment of the subordinated note to Mr. and Mrs.
Knowles in October 2003.
Other income/expense reflects net other income of $2.0 million in 2004 compared
to net other income of $2.2 million in 2003. The decrease in other income was
due to (i) a $2.2 million gain on the early repayment of subordinated debt
related to the acquisition of AOA in 2003; offset by (ii) foreign exchange gains
of $2.3 million in 2004 as compared with foreign exchange gains of $0.8 million
in 2003; and (iii) $0.5 million of bank charges in 2003 incurred in connection
with our efforts to refinance our bank debt and restructure our overall debt
position that enabled us to realize the gain on early extinguishment of debt.
Net income was $22.7 million in 2004 as compared with $13.9 million in 2003. Net
income reflects a 33% and 34% effective income tax rate in 2004 and 2003,
respectively. The decrease in the effective income tax rate can be attributed to
the recognition of research & development tax credits.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on our results of
operations. However, our sales are typically impacted by decreases in seasonal
demand from European customers in our third quarter. In addition, our first
quarter is also impacted by factors, such as: (i) the establishment of new
customer budgets, (ii) the expiration of legislative calendar-year programs and
(iii) start-up investment of pilot efforts. Finally, our fourth quarter has
historically been our strongest quarter, representing approximately 30% of our
consolidated annual revenues. For quarterly results of operations, see
Supplementary Data following the Notes to our Consolidated Financial Statements.
Liquidity and Capital Resources
Operating Activities for the Period Ended December 31, 2005
Net cash provided from operations decreased $14.4 million, or 51.2% from $28.1
million in 2004 to $13.7 million in 2005. Net cash provided by operating
activities in 2005 can be attributed primarily to net income of $17.8 million,
adjusted for Symbol litigation contingency charge of $12.6 million, depreciation
and amortization of $7.0 million, increases in accrued expenses and accounts
payable of $8.5 million, offset by increases in inventory, accounts and other
receivables of $24.1 million and $8.1 million of deferred income tax benefit.
<page>
Our working capital increased $9.0 million to $92.3 million as of December 31,
2005 from $83.3 million as of December 31, 2004 as a result of our profitable
operations and the following significant balance sheet changes:
o Inventory increased $5.5 million to $29.4 million as of December 31,
2005 from $23.9 million as of December 31, 2004. The increase was a
result of a planned buildup in the inventory levels at our stocking
locations resulting from longer delivery cycles of finished goods as we
increased our use of ocean shipments to maximize logistic efficiencies
s well as to improve product availability throughout the world so that
we may capitalize on opportunities that require a timely delivery
response.
o Accounts receivable, net increased $13.3 million to $48.5 million as of
December 31, 2005 from $35.2 million as of December 31, 2004. The
increase was primarily attributable to our increased sales volumes
especially near the end of the fourth quarter and higher receivable
balances at our AOA subsidiary which was the result of contract timing.
Our days sales outstanding increased to 72 days in 2005 from 64 days in
2004.
o Cash and cash equivalents increased $9.2 million to $73.9 million as of
December 31, 2005 from o $64.7 million as of December 31, 2004. The
increase was a result of the various factors discussed above.
o The current portion of lines of credit and notes payable increased $2.1
million to $18.4 million as of December 31, 2005 from $16.3 million as
of December 31, 2004. The increase is a result of increased borrowings
under our foreign lines of credit which acts as a natural hedge against
rapid and volatile currency fluctuations.
o Deferred contract revenue decreased $0.8 million to $0.7 million as of
December 31, 2005 from $1.5 million as of December 31, 2004. The
decrease was the result of the completion and recognition of revenue for
work performed on a specific contract that was recorded as deferred
contract revenue in 2004.
o Accrued expenses increased $16.2 million to $32.5 million as of December
31, 2005 from $16.3 million as of December 31, 2004. The increase was
primarily attributable to the accruals of $14.4 million for the Symbol
litigation accrual, higher accrued corporate taxes and increased
compensation and marketing related accruals. The $14.4 million accrual
for Symbol litigation includes a fourth quarter charge of $12.6 million
plus the transfer of $1.8 million previously reserved for in other
liabilities.
o Accounts payable increased $3.5 million to $14.2 million as of December
31, 2005 from $10.7 million as of December 31, 2004. The increase was
a result of increased material purchases to meet higher forecasted
demand.
Operating Activities for the Period Ended December 31, 2004
Net cash provided from operations increased $15.9 million, or 130% from $12.2
million in 2003 to $28.1 million in 2004. Net cash provided by operating
activities in 2004 can be attributed primarily to net income of $22.7 million,
adjusted for depreciation and amortization of $4.8 million, increases in accrued
expenses and accounts payable of $11.8 million, offset by increases in inventory
and accounts receivable of $11.8 million.
Our working capital increased $9.2 million to $83.3 million as of December 31,
2004 from $74.1 million as of December 31, 2003 as a result of our profitable
operations and the following significant balance sheet changes:
o Inventory increased $6.9 million to $23.9 million as of December 31,
2004 from $17.0 million as of December 31, 2003. The increase was a
result of a buildup in the inventory levels resulting from longer
delivery cycles of finished goods as we increased our use of ocean
shipments to maximize logistic efficiencies as well as to improve
product availability throughout the world so that we may capitalize on
opportunities that require a timely delivery response.
o Accounts receivable, net increased $7.8 million to $35.2 million as of
December 31, 2004 from $27.4 million as of December 31, 2003. The
increase was primarily attributable to our increased sales volumes
especially near the end of the fourth quarter. Our days sales
outstanding increased slightly to 64 days in 2004 from 63 days in 2003.
o Cash and cash equivalents increased $15.9 million to $64.7 million as of
December 31, 2004 from $48.8 million as of December 31, 2003. The
increase was a result of the various factors discussed above.
o The current portion of lines of credit and notes payable increased $11.1
million to $16.3 million as of December 31, 2004 from $5.2 million as of
December 31, 2003. The increase was a result of notes issued as a result
of the Omniplanar acquisition in the third quarter of 2004, as well as
increased borrowings under our foreign line of credit which acts as a
natural hedge against rapid and volatile currency fluctuations.
<page>
o Deferred contract revenue increased $1.2 million to $1.5 million as of
December 31, 2004 from $0.3 million as of December 31, 2003. The
increase was the result of the recognition of deferred revenue for a
contract in which cash received was in excess of the revenue earned
based on percentage completed.
o Accrued expenses increased $4.8 million to $16.3 million as of December
31, 2004 from $11.5 million as of December 31, 2003. The increase was
primarily attributable to higher accrued corporate taxes, warranties
and professional fees.
o Accounts payable increased $3.2 million to $10.7 million as of December
31, 2004 from $7.5 million as of December 31, 2003. The increase was a
result of increased material purchases to meet higher forecasted demand.
Investing activities
Cash used in investing activities was $9.3 million and $21.7 million for the
years ended December 31, 2005 and 2004, respectively. The decrease in cash used
in investing activities was primarily due to the closing of the Omniplanar
acquisition resulting in a cash payment of approximately $9.1 million in
September, 2004, and the purchase of the remaining 49% interest in Metrologic
Eria France in fiscal 2004 for approximately $4.3 million, offset by increased
quarterly installments of approximately $1.0 million to purchase the remaining
49% minority interest in Metrologic Eria Iberica in fiscal 2005. See
"Acquisition of Minority Interests" below for additional information regarding
these transactions.
For 2006, we expect capital expenditures to more than double the levels
experienced in 2005. Our current plans for future capital expenditures include,
but are not limited to: (i) continued investment and expansion of our
facilities; and (ii) additional manufacturing automation equipment and
information technology related equipment.
Financing activities
Cash provided by financing activities was $3.2 million and $11.7 million for the
years ended December 31, 2005 and 2004, respectively. This change was primarily
attributed to (i) reduced net borrowings of $5.1 million on lines of credit
during 2005; (ii) repayment of $1.9 million of the notes payable in connection
with the acquisition of Omniplanar; (iii) lower cash proceeds of $1.5 million
from the exercise of stock options and employee stock purchases under the
employee stock purchase plan during 2005.
Outstanding debt and financing arrangements
On January 31, 2003, we executed an Amendment (the "Amendment") to the Amended
and Restated Credit Agreement dated July 9, 2002 (the "Agreement"). The
Amendment, which extended the Agreement until January 31, 2006, provided for a
$13 million revolving credit facility and a $4.5 million term loan. Principal
payments on the term loan were $94,000 each month commencing in March 2003 with
the balance due at maturity. The interest rates under the Amendment were prime
plus 0.25% on borrowings under the revolving credit facility and prime plus
0.75% on the term loan. The Amendment contained various negative and positive
covenants, including minimum tangible net worth requirements and fixed charge
coverage ratios. All outstanding borrowings under the Agreement were repaid in
October 2003 and the Agreement was terminated. As a result, unamortized deferred
financing costs of $0.1 million were recognized as a charge to income in the
fourth quarter of 2003.
In connection with the acquisition of AOA, we entered into Subordinated
Promissory Notes ("Subordinated Debt") aggregating $11.0 million with UTOS. In
January 2003, we and UTOS entered into a Payoff Agreement to accelerate the
principal payments on the Subordinated Debt. In accordance with the Payoff
Agreement, we paid UTOS $5.0 million on January 31, 2003 and $3.8 million on
March 31, 2003 as payment in full of our obligation under the Subordinated Debt.
Accordingly, we recorded a $2.2 million gain on the extinguishment of the
Subordinated Debt in March 2003.
In order to provide us with sufficient subordinated financing within the time
period required to meet the terms of the Payoff Agreement which provided a $2.2
million gain, in January 2003 we issued a $4.3 million subordinated note to C.
Harry Knowles, our Chairman and former Chief Executive Officer, and his spouse,
Janet H. Knowles, a Director and Vice President, Administration. The
subordinated note bore interest at 10.0% and required 60 monthly principal
payments of $36,000 with the balance of $2.1 million due in January 2008. In
connection with this note, we issued a common stock purchase warrant, expiring
on January 31, 2013, to Mr. and Mrs. Knowles to purchase 195,000 shares of our
common stock at an exercise price of $3.47 per share, which was the fair market
value on the date of issuance. These warrants were valued at the time of issue
at approximately $0.25 million, and the resulting original issue discount was
being amortized into interest expense over the life of the subordinated note.
This note was paid in full in October 2003 and the unamortized original issue
discount of $0.2 million was recognized as a charge to interest expense in the
fourth quarter of 2003.
In connection with the acquisition of Omniplanar, the Company signed a
promissory note with a discounted value of $3.8 million. During the year ended
December 31, 2005, the Company paid $1.9 million with the remaining $1.9 million
payable in March 2006.
<page>
Certain of the Company's European subsidiaries have entered into working capital
and invoice discounting agreements with HypoVereinsbank, Dresdner, Societe
Generale, La Caixa and HSBC Bank. Outstanding borrowings under the working
capital agreement with HypoVereinsbank, Dresner and HSBC have been guaranteed by
the parent company. These agreements provide the Company with availability of up
to $19.1 million, using December 31, 2005 exchange rates, at interest rates
ranging from 3.1% to 6.5%. In addition, the Company's subsidiary Metrologic do
Brasil has a working capital agreement with Banco Bradesco SA with availability
of up to 0.6 million real or $0.3 million, using December 31, 2005 exchange
rates. At December 31, 2005 and 2004, $16.0 million and $14.1 million were
outstanding under such agreements, and accordingly, are included in lines of
credit in our consolidated balance sheets.
We believe that our current cash and working capital positions and expected
operating cash flows will be sufficient to fund our working capital, planned
capital expenditures, and debt repayment requirements for the foreseeable
future.
Foreign Currency Exchange
Our liquidity has been, and may continue to be, adversely affected by changes in
foreign currency exchange rates, particularly the value of the U.S. dollar
relative to the euro, the Brazilian real, the Singapore dollar and the Chinese
renminbi. In an effort to mitigate the financial implications of the volatility
in the exchange rate between the euro and the U.S. dollar, we selectively enter
into derivative financial instruments to offset our exposure to foreign currency
risks. Derivative financial instruments may include (i) foreign currency forward
exchange contracts with our primary bank for periods not exceeding six months,
which partially hedge sales to our German subsidiary and (ii) euro based loans,
which act as a partial hedge against outstanding intercompany receivables and
the net assets of our European subsidiary, which are denominated in euros.
Additionally, our European subsidiary invoices and receives payment in certain
other major currencies, including the British pound, which results in an
additional mitigating measure that reduces our exposure to the fluctuation
between the euro and the U.S. dollar although it does not offer protection
against fluctuations of that currency against the U.S. dollar. No derivative
instruments were outstanding at December 31, 2005.
Acquisition of Minority Interests
Our original 51.0% interest in Metrologic Eria Iberica contained an option for
us to purchase the remaining 49.0% interest. The purchase price under the option
is calculated based on a twelve-month multiple of sales and provides us with a
twelve-month period in which to find a buyer or negotiate a purchase price with
a default minimum. In 2003, we agreed to purchase the 49.0% of Metrologic Eria
Iberica that we did not own for approximately 5.9 million euros. Payments were
scheduled over 3 years commencing in August 2003. On December 1, 2005, the
Company accelerated the payments and purchased all the remaining minority
interest. During the year ended December 31, 2005, the Company purchased the
outstanding interest of 23% for approximately 2.7 million euros or $3.2 million
at the exchange rate on December 31, 2005.
Disclosures about Contractual Obligations and Commercial Commitments
Less
than 1 1-3 4-5 Over
Contractual Obligations Total Year Years Years 5 Years
(In thousands)
Long-Term Debt 2,400 2,400 - - -
Capital Lease Obligations 64 61 3 - -
Operating Leases 14,138 3,112 5,192 3,881 1,953
-------- -------- -------- -------- --------
Total Contractual Cash
Obligations $ 16,602 $ 5,573 $ 5,195 $ 3,881 $ 1,953
======== ======== ======== ======== ========
Total Less
Amounts than 1 1-3 4-5 Over 5
Other Commercial Committed Year Years Years Years
Commitments
(In thousands)
Revolving credit facility $ 15,989 $ 15,989 $ - $ - $ -
======== ========= ========== ========= ========
<page>
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
Market Risk Sensitive Instruments. The market risk inherent in our market risk
sensitive instruments and position is the potential loss arising from adverse
changes in foreign currency exchange rates and interest rates.
Interest Rate Risk. Our bank loans expose our earnings to changes in short-term
interest rates, since interest rates on the underlying obligations are either
variable or fixed for such a short period of time as to effectively become
variable. The fair values of our bank loans are not significantly affected by
changes in market interest rates. The impact on earnings of a hypothetical 10%
change in interest rates on our outstanding debt would have been approximately
$0.1 million and $0.04 million in 2005 and 2004, respectively. Actual results
may differ.
Foreign Exchange Risk. We periodically enter into forward foreign exchange
contracts principally to hedge the currency fluctuations in transactions
denominated in foreign currencies, namely the euro, thereby mitigating our risk
that would otherwise result from changes in exchange rates. Principal
transactions hedged are intercompany sales and payments. A large percentage of
our foreign sales are transacted in foreign local currencies. As a result, our
international operating results are subject to foreign exchange rate
fluctuations. A hypothetical 10% percent strengthening or weakening of the U.S.
dollar against the euro could have had an impact of $0.2 million and $0.1
million on our net earnings in 2005 and 2004, respectively. Actual results may
differ.
We are subject to risk from fluctuations in the value of the euro relative to
the U.S. dollar for our European subsidiaries, which use the euro as their
functional currency and are translated into U.S. dollars in consolidation. Such
changes result in cumulative translation adjustments which are included in other
comprehensive income (loss). At December 31, 2005 and 2004, we had translation
exposure. The potential effect on other comprehensive income (loss) resulting
from a hypothetical 10% change in the quoted euro rate amounts to $1.3 million
and $0.4 million in 2005 and 2004, respectively. Actual results may differ.
In addition, we held debt denominated in euros at December 31, 2005 and 2004,
and recognized foreign currency translation adjustments in net income. The
potential effect resulting from a hypothetical 10% adverse change on the quoted
euro rate amounts to $1.6 million and $1.4 million in 2005 and 2004,
respectively. Actual results may differ.
Item 8. Financial Statements and Supplementary Data
Index Pages
Report of Management on Internal Controls over Financial Reporting F-1
Report of Independent Registered Public Accounting Firm on Internal
Control over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm
on Financial Statements and Schedule F-3
Consolidated Balance Sheets at December 31, 2005 and 2004 F-4
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2005, 2004 and 2003 F-5
Consolidated Statements of Shareholders' Equity for each of the
three years in the period ended December 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2005, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-8
Supplementary Data F-26
Financial statement schedule:
Schedule II - Valuation and Qualifying Accounts is filed herewith.
All other schedules are omitted because they are not applicable,
not required, or because the required information is included in the
consolidated financial statements or notes thereto. F-28
<page>
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended for the Company. The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the Unites States of America.
The Company's internal control over financial reporting includes those policies
and procedures that:
i. pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
ii. provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the financial statements in
accordance with accounting principles generally accepted in
the United States of America, and that receipts and
expenditures of the Company are being made only in accordance
with authorizations of management and directors of the
Company; and
iii. provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005, based on criteria for effective
internal control over financial reporting described in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management concluded that the
Company maintained effective internal control over financial reporting as of
December 31, 2005, based on the specified criteria.
Ernst & Young LLP, an Independent Registered Public Accounting Firm, has audited
the Company's consolidated financial statements and schedule and has issued an
attestation report on management's assessment of the Company's internal control
over financial reporting which appears on the following page.
- ------------------------------------- -----------------------------------
Benny Noens Kevin Bratton
Chief Executive Officer and President Chief Financial Officer
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
To the Board of Directors and Shareholders of Metrologic Instruments, Inc.
We have audited management's assessment, included in the accompanying Report of
Management on Internal Control over Financial Reporting, that Metrologic
Instruments, Inc. maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Metrologic
Instruments, Inc.'s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Metrologic Instruments, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Metrologic Instruments, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Metrologic Instruments, Inc. as of December 31, 2005 and 2004, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2005 of Metrologic
Instruments, Inc. and our report dated March 13, 2006 expressed an unqualified
opinion thereon.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
March 13, 2006
Report of Independent Registered Public Accounting Firm on Financial Statements
and Schedule
To the Board of Directors and Shareholders of Metrologic Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Metrologic
Instruments, Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2005. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These financial
statements and 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 in accordance with the standards of the Public Company
Accounting Oversight Board (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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metrologic
Instruments, Inc. at December 31, 2005 and 2004, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Metrologic
Instruments Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 13, 2006 expressed an unqualified opinion thereon.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
March 13, 2006
<page>
Metrologic Instruments, Inc.
Consolidated Balance Sheets
(amounts in thousands except share data)
December 31,
-----------------------
2005 2004
Assets --------- ---------
Current assets:
Cash and cash equivalents $ 73,938 $ 64,715
Accounts receivable, net of allowance of
$627 and $544 in 2005 and 2004, respectively 48,462 35,153
Inventory, net 29,364 23,865
Deferred income taxes 801 692
Other current assets 5,599 3,677
--------- ---------
Total current assets 158,164 128,102
Property, plant and equipment, net 20,402 19,468
Goodwill 25,745 24,607
Computer software, net 8,949 11,221
Other intangibles, net 8,409 7,634
Deferred income taxes 4,262 1,332
Other assets 251 163
---------- ---------
Total assets $ 226,182 $ 192,527
========== =========
Liabilities and shareholders' equity
Current liabilities:
Lines of credit $ 15,989 $ 14,138
Current portion of notes payable 2,444 2,127
Accounts payable 14,200 10,734
Accrued expenses 32,509 16,278
Deferred contract revenue 739 1,507
---------- ---------
Total current liabilities 65,881 44,784
Notes payable, net of current portion 3 2,015
Deferred income taxes 8 5,055
Other liabilities - 2,657
Shareholders' equity:
Preferred stock, $0.01 par value: 500,000
shares authorized; none issued - -
Common stock, $0.01 par value: 30,000,000
shares authorized; 22,320,014 and 21,782,276
shares issued and outstanding in 2005
and 2004, respectively 223 218
Additional paid-in capital 92,828 87,500
Retained earnings 68,975 51,162
Accumulated other comprehensive loss (1,736) (864)
----------- ---------
Total shareholders' equity 160,290 138,016
----------- ---------
Total liabilities and shareholders' equity $ 226,182 $ 192,527
=========== =========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Operations
(amounts in thousands except share and per share data)
Year Ended December 31,
----------------------------------
2005 2004 2003
---------- ----------- -----------
Sales $ 210,453 $ 177,955 $ 138,011
Cost of sales 119,638 96,227 79,654
---------- ----------- -----------
Gross profit 90,815 81,728 58,357
Selling, general and administrative
expenses 48,762 42,518 31,449
Symbol litigation contingency 12,600 - -
Research and development expenses 8,521 7,521 6,764
---------- ----------- -----------
Operating income 20,932 31,689 20,144
Other income (expenses)
Interest income 1,626 624 123
Interest expense (1,046) (441) (1,414)
Foreign currency transaction
gain (loss) (947) 2,258 805
Litigation settlement 2,250 - -
Gain on extinguishment of debt - - 2,200
Other, net 12 (282) (817)
---------- ----------- -----------
Total other income 1,895 2,159 897
---------- ----------- -----------
Income before income taxes 22,827 33,848 21,041
Provision for income taxes 5,014 11,168 7,160
----------- ----------- -----------
Net income $ 17,813 $ 22,680 $ 13,881
=========== =========== ============
Basic earnings per share:
Weighted average shares outstanding 22,129,235 21,472,021 17,597,068
=========== =========== ===========
Basic earnings per share $ 0.80 $ 1.06 $ 0.79
=========== =========== ===========
Diluted earnings per share:
Weighted average shares outstanding 22,129,235 21,472,021 17,597,068
Net effect of dilutive securities 984,144 1,501,860 1,785,582
----------- ----------- ----------
Total shares outstanding used in
computing diluted earnings per share 23,113,379 22,973,881 19,382,650
=========== =========== ===========
Diluted earnings per share $ 0.77 $ 0.99 $ 0.72
=========== =========== ===========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Shareholders' Equity
(amounts in thousands except share data)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock*Capital Earnings Loss Total
---- ------- -------- -------- --------
Balances, January 1, 2003 $164 $17,579 $ 14,601 $ (2,873) $ 29,471
Comprehensive income:
Net income - - 13,881 - 13,881
Other comprehensive income -
foreign currency
translation adjustment - - - 1,590 1,590
--------
Total comprehensive income - - - - 15,471
--------
Issuance of 3,450,000 shares of
common stock 35 55,480 - - 55,515
Issuance of warrants - 247 - - 247
Exercise of stock options 9 3,354 - - 3,363
Tax benefit from exercise of stock
options - 3,488 - - 3,488
Stock issued through employee stock
purchase plan - 53 - - 53
--------------------------------------------
Balances, December 31, 2003 $208 $80,201 $ 28,482 $ (1,283) $107,608
Comprehensive income:
Net income - - 22,680 - 22,680
Other comprehensive income -
foreign currency
translation adjustment - - - 419 419
--------
Total comprehensive income - - - - 23,099
Exercise of stock options 10 3,082 - - 3,092
Tax benefit from exercise of stock
options - 4,107 - - 4,107
Stock issued through employee stock
purchase plan - 110 - - 110
--------------------------------------------
Balances, December 31, 2004 $218 $87,500 $ 51,162 $ (864) $138,016
Comprehensive income:
Net income - - 17,813 - 17,813
Other comprehensive loss -
foreign currency
translation adjustment - - - (872) (872)
--------
Total comprehensive income - - - - 16,941
Exercise of stock options 5 1,484 - - 1,489
Tax benefit from exercise of stock
options - 3,682 - - 3,682
Stock issued through employee stock
purchase plan - 162 - - 162
--------------------------------------------
Balances, December 31, 2005 $223 $92,828 $ 68,975 $ (1,736) $160,290
============================================
*Amounts denoted include the effect of the 2003 stock splits.
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
Year Ended December 31,
-------------------------------
2005 2004 2003
--------- -------- ---------
Operating activities
Net income $ 17,813 $ 22,680 $ 13,881
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 3,618 3,483 2,915
Amortization 3,367 1,321 620
Deferred income tax (benefit) provision (8.086) 1,274 1,634
(Gain) loss on disposal of property (2) 110 109
Gain on extinguishment of debt - - (2,200)
Amortization of warrants and deferred
financing fees - - 357
Note discount amortization 101 - -
Changes in operating assets and liabilities:
Accounts receivable (15,233) (6,106) (5,446)
Inventory (6,667) (5,738) (1,829)
Other current assets (2,225) 15 (1,434)
Other assets (88) 41 554
Accounts payable 3,632 3,087 (1,480)
Accrued expenses 17,512 8,682 5,331
Other liabilities (15) (735) (802)
--------- -------- ---------
Net cash provided by operating activities 13,727 28,114 12,210
Investing activities
Restricted cash - - 1,000
Purchase of property, plant and equipment (4,640) (4,934) (6,892)
Patents and trademarks (1,385) (1,054) (882)
Cash paid for purchase of business, net of
cash acquired - (9,087) -
Purchase of minority interests in subsidiaries (3,345) (6,726) (1,442)
Proceeds from sale of property 77 53 -
--------- -------- ----------
Net cash used in investing activities (9,293) (21,748) (8,216)
Financing activities
Proceeds from equity offering, net of
expenses - - 55,515
Proceeds from exercise of stock options
and employee stock purchase plan 1,651 3,202 3,416
Proceeds from issuance of notes payable - - 4,169
Principal payments on notes payable (2,037) (134) (22,206)
Net borrowings on lines of credit 3,723 8,779 3,576
Capital lease payments (139) (139) (77)
Issuance of warrants - - 247
Increase in deferred financing costs - - (110)
--------- -------- ----------
Net cash provided by financing
activities 3,198 11,708 44,530
Effect of exchange rates on cash 1,591 (2,176) (909)
--------- -------- ----------
Net increase in cash and cash
equivalents 9,223 15,898 47,615
Cash and cash equivalents at beginning
of year 64,715 48,817 1,202
--------- --------- ----------
Cash and cash equivalents at end of year $ 73,938 $ 64,715 $ 48,817
========= ========= ==========
Supplemental Disclosures:
Cash paid during the year for interest $ 895 $ 267 $ 1,469
======== ========= ==========
Cash paid during the year for income taxes $ 7,325 $ 2,709 $ 2,989
======== ========= ==========
Noncash investing and financing activites:
Equipment acquired through capital leases $ - $ 53 $ 287
======== ========= ==========
Tax benefit from exercise of stock options $ 3,682 $ 4,107 $ 3,488
======== ========= ==========
See accompanying notes
Metrologic Instruments, Inc.
Notes to Consolidated Financial Statements
December 31, 2005
(dollars in thousands, except per share data)
1. Business
Metrologic Instruments, Inc. and its subsidiaries (collectively, the "Company")
design, manufacture and market bar code scanning and high-speed automated data
capture solutions using laser, holographic and vision-based technologies. The
Company offers expertise in 1D and 2D bar code reading, portable data
collection, optical character recognition, image lift, and parcel dimensioning
and singulation detection for customers in retail, commercial, manufacturing,
transportation and logistics, and postal and parcel delivery industries.
Additionally, through its wholly-owned subsidiary, Adaptive Optics Associates,
Inc. ("AOA"), the Company is engaged in developing, manufacturing, marketing and
distributing custom optical systems which include precision laser beam delivery,
high speed imaging control and data processing, industrial inspection, and
scanning and dimensioning systems for the aerospace and defense industry. The
Company's products are sold in more than 110 countries worldwide through the
Company's sales, service and distribution offices located in North and South
America, Europe and Asia.
2. Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
Metrologic Instruments, Inc., and its domestic and foreign subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Shipping and Handling
Amounts charged to customers for shipping and handling are included in sales.
Shipping and handling amounts incurred by the Company are included in costs of
sales.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the sales price is fixed or determinable, and
collectibility is reasonably assured.
Revenue from product sales is recognized upon shipment of products and passage
of title to customers. The Company has agreements with certain distributors that
provide limited rights of return. Allowances for product returns and allowances
are estimated based on historical experience and provisions are recorded at the
time of shipment.
Revenue is recognized on a percentage of completion basis (generally measured
using the cost-to-cost method) for long-term contracts for the sale of tangible
products and upon delivery for short-term contracts. Cost and profit estimates
are continually re-evaluated and revised, when necessary, throughout the life of
the contract. Any adjustments to revenue and profit due to changes in estimates
are accounted for in the period of the change in estimate. Provisions for
estimated losses, if any, on uncompleted contracts are made in the periods in
which such losses become probable and can be reasonably estimated.
Revenue for the sale of software licenses is recognized when: (1) the Company
enters into a legally binding arrangement with a customer for the license of
software; (2) the Company delivers the software; (3) customer payment is deemed
fixed or determinable and free of contingencies or significant uncertainties;
and (4) collection from the customer is probable. If the Company determines that
collection of a fee is not reasonably assured, the fee is deferred and revenue
is recognized at the time collection becomes reasonably assured. As it relates
to the general Post-Contract Customer Support ("PCS") clauses within each of the
contracts, we currently do not have any vendor specific objective evidence
("VSOE") of fair value to bifurcate the PCS from the license fee element. In
addition, we believe that we meet each of the four criteria which allows us to
recognize the revenue together with the license fee at the onset of the license
period, assuming delivery of the software has taken place.
Advertising Expenses
The Company expenses all advertising costs as incurred and classifies these
costs in selling, general and administrative expenses. Advertising expenses for
fiscal years 2005, 2004, and 2003 were $2.9 million, $2.4 million, and $2.0
million, respectively.
<page>
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and accounts
payable approximate fair value because of their short-term nature. The carrying
amount of long-term debt approximates its fair value because the interest rate
is reflective of rates that the Company could currently obtain on debt with
similar terms and conditions. The Company records an allowance for doubtful
accounts when it becomes probable that a customer will be unable to make its
required payments. Accounts receivable are written off against the allowance for
doubtful accounts when collection is deemed remote and all collection efforts
have been abandoned.
Inventory
Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is generally
determined on the straight-line method for building and improvements over
estimated useful lives of 31 to 40 years and on an accelerated method for
machinery and equipment over estimated useful lives of 3 to 15 years.
Software Development Costs
Costs incurred in the research and development of new software embedded in
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. After technological
feasibility is established, any additional development costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed." Capitalization ceases when the product is available for general
release to customers.
Internal Use Software
Costs incurred in the development or purchase of internal use software, other
than those incurred during the application development stage, are expensed as
incurred. Costs incurred during the application development stage are
capitalized and amortized over the estimated useful life of the software. The
Company has capitalized $3,278 and $3,127 of software obtained for internal use
through December 31, 2005 and December 31, 2004, respectively. Capitalized
software costs are amortized on a straight-line basis over seven years.
Amortization related to the capitalized software was $576, $487, and $339 for
the years ended December 31, 2005, 2004, and 2003, respectively.
Acquisitions
Acquisitions are accounted for using the purchase method. The purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair market values. Any excess purchase price over the fair market
value of the net assets acquired is recorded as goodwill. For all acquisitions,
operating results are included in the consolidated statement of operations from
the dates of the acquisitions.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of businesses acquired over the fair
value of the related net assets at the date of acquisition. The Company accounts
for goodwill in accordance with the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets". SFAS 142 provides guidance on accounting for goodwill
and intangible assets with indefinite useful lives and prohibits the
amortization of these assets. Intangible assets with finite lives continue to be
amortized over their estimated useful lives. Intangible assets, including
goodwill, that are not subject to amortization are tested for impairment and
possible writedown on an annual basis. The Company tests goodwill for impairment
using the two-step process prescribed in SFAS 142. The first step is a screen
for potential impairment, while the second step measures the amount of
impairment, if any. The Company uses a discounted cash flow analysis to complete
the first step in the process. The Company completed its annual impairment tests
in 2005, 2004 and 2003 and determined that there were no goodwill impairments to
be recognized.
<page>
Long-Lived Assets
The Company evaluates impairment of its intangible and other long-lived assets,
other than goodwill, in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which has been adopted by the
Company as of January 1, 2002. SFAS 144 provides guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," and the accounting and reporting
provisions of Accounting Principles Bulletin Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." When indicators of impairment exist, the Company will compare the
estimated future cash flows, on an undiscounted basis, of the underlying
operations or assets with their carrying value to determine if any impairment
exists. If impairment exists, any adjustment will be determined by comparing the
carrying amount of the impaired asset to its fair value. The Company considers
all impaired assets "to be held and used" until such time as management commits
to a plan to dispose of the impaired asset. At that time, the impaired asset is
classified as "to be disposed of" and is carried at its fair value less its cost
of disposal. No assets were determined to be impaired in 2005, 2004 and 2003 and
the adoption of SFAS 144 had no effect on the Company's financial position or
its results of operations.
Foreign Currency Translation
The financial statements of Metrologic's foreign subsidiaries have been
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The gains and losses
resulting from the changes in exchange rates from year to year have been
reported separately in other comprehensive loss in the consolidated financial
statements. Foreign currency transaction gains and losses are included in other
income (expense) in the consolidated statements of operations.
Income Taxes
The provision for income taxes is determined using the asset and liability
approach of accounting for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under this approach, deferred taxes represent the
future tax consequences expected to occur when the reported amounts of assets
and liabilities are recovered or paid. The provision for income taxes represents
income taxes paid or payable for the current year plus the change in deferred
taxes during the year. Deferred taxes result from differences between the
financial and tax bases of Metrologic's assets and liabilities and are adjusted
for changes in tax rates and tax laws when changes are enacted. Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with SFAS No.
128, "Earnings Per Share." Basic earnings per share is calculated by dividing
net income by the weighted average shares outstanding for the year and diluted
earnings per share is calculated by dividing net income by the weighted average
shares outstanding for the year plus the dilutive effect of stock options. The
following shares were not included in the computation of diluted earnings per
share because the option prices were above the average market price of the
company's common stock, (in thousands): 803, 217, and 0 in 2005, 2004 and 2003,
respectively.
Concentrations of Credit Risk
The Company has operations, subsidiaries and affiliates in the United States,
Europe, Asia and South America. The Company performs ongoing credit evaluations
of its customers' financial condition, and except where risk warrants, requires
no collateral. The Company may require, however, letters of credit or prepayment
terms for those customers in lesser-developed countries.
Short-term cash investments are placed with high credit quality financial
institutions or in short-term high quality debt securities. The Company limits
the amount of credit exposure in any one institution or single investment.
<page>
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and related interpretations in accounting
for stock options. Under APB 25, if the exercise price of the Company's stock
options equals or exceeds the market price of the underlying common stock on the
date of grant, no compensation expense is recognized. Had compensation expense
for the Company's stock option plan been determined based upon the fair value at
the grant date using the Black Scholes pricing model prescribed under SFAS No.
123, "Accounting for Stock Based Compensation," the Company's net income and net
income per share would approximate the pro-forma amounts as follows:
2005 2004 2003
---- ---- ----
Net income:
As reported $17,813 $22,680 $13,881
Deduct: (total stock-based employee
compensation expense determined
under fair value based method, net of
related taxes) (3,449) (741) (778)
------- ------- -------
Pro forma $14,364 $21,939 $13,103
======= ======= =======
Net income per share:
Basic:
As reported $ 0.80 $ 1.06 $ 0.79
Pro forma 0.65 1.02 0.74
Diluted:
As reported $ 0.77 $ 0.99 $ 0.72
Pro forma 0.62 0.95 0.68
Derivative Financial Instruments
The Company recognizes all derivative instruments as either assets or
liabilities in the consolidated balance sheet measured at fair value. Changes in
fair value are recognized immediately in earnings unless the derivative
qualifies as a hedge of future cash flows. For derivatives qualifying as cash
flow hedges, the effective portion of changes in fair value of the derivative
instrument is recorded as a component of other comprehensive income and
reclassified to earnings in the same period during which the hedged transaction
affects earnings. Any ineffective portion (representing the remaining gain or
loss on the derivative instrument in excess of the cumulative change in the
present value of future cash flows of the hedged transaction) is recognized in
earnings as it occurs.
The Company formally designates and documents each derivative financial
instrument as a hedge of a specific underlying exposure as well as the risk
management objectives and strategies for entering into the hedge transaction
upon inception. The Company also assesses whether the derivative financial
instrument is effective in offsetting changes in the fair value of cash flows of
the hedged item. The Company recognized no gain or loss related to hedge
ineffectiveness in 2005, 2004 or 2003, respectively.
The Company has historically utilized derivative financial instruments to hedge
the risk exposures associated with foreign currency fluctuations for payments
from the Company's international subsidiaries denominated in foreign currencies.
These derivative instruments are designated as either fair value or cash flow
hedges, depending on the exposure being hedged, and have maturities of less than
one year. Gains and losses on these derivative financial instruments and the
offsetting losses and gains on hedged transactions are reflected in the
Company's statement of operations. The Company does not use these derivative
financial instruments for trading purposes. At December 31, 2005, the Company
had no derivative financial instruments outstanding.
Stock Splits
On June 6, 2003, the Board of Directors approved a three-for-two stock split of
the Company's common stock. The stock split was payable in the form of a 50%
stock dividend and entitled each stockholder of record at the close of business
on June 23, 2003 to receive three shares of common stock for every two
outstanding shares of common stock held on that date. The stock dividend was
payable on July 3, 2003.
On October 7, 2003, the Board of Directors approved a two-for-one stock split of
the Company's common stock. The stock split was payable in the form of a 100%
stock dividend and entitled each stockholder of record at the close of business
on October 20, 2003 to receive two shares of common stock for every outstanding
share of common stock held on that date. The stock dividend was payable on
October 30, 2003.
The capital stock accounts, all share data and earnings per share data in the
consolidated financial statements give effect to the stock splits, applied
retroactively, to all periods presented.
<page>
Impact of Recently Issued Accounting Standards
In November 2004, the FASB issued Statement No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs and
wasted material (spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless of whether they
meet the criterion of "so abnormal" as stated in ARB 43. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company does not
expect the adoption of this statement to have a material effect on its
consolidated financial position, consolidated results of operations or
liquidity.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP No.
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provisions within the American Jobs Creation Act of 2004" (the
"Jobs Act"). FSP No. 109-2 provides guidance with respect to reporting the
potential impact of the repatriation provisions of the Jobs Act on an
enterprise's income tax expense and deferred tax liability. The Jobs Act was
enacted on October 22, 2004, and provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year period. The
deduction would result in an approximate 5.25% federal tax rate on the
repatriated earnings. To qualify for the deduction, the earnings must be
reinvested in the United States pursuant to a domestic reinvestment plan
established by a company's chief executive officer and approved by a company's
board of directors. Certain other criteria in the Jobs Act must be satisfied as
well. The Company has repatriated approximately $17 million of foreign earnings
from its China subsidiary during the quarter ended December 31, 2005. The
repatriation of these foreign earnings has provided an income tax benefit of
approximately $3.1 million, as deferred taxes had been provided on a portion of
these earnings in prior years. The Company has adjusted its tax expense and
deferred tax liability to reflect the repatriation provisions of the Jobs Act in
the financial statements for the year ended December 31, 2005.
In December 2004, the FASB issued FASB Staff Position No. SFAS 109-1 ("FSP No.
109-1"), "Application of FASB Statement No.109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004". FSP 109-1 provides guidance on applying the
deduction for income from qualified domestic production activities. The
deduction will be phased in from 2005 through 2010. The Act also provides for a
two-year phase out of the existing extra-territorial income exclusion ("ETI")
for foreign sales. The deduction will be treated as a "special deduction" as
described in FASB Statement No. 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the enactment date.
Rather, the impact of this deduction will be reported in the period in which the
deduction is claimed on the Company's tax return. The net effect of the phase
out of the ETI and the phase in of this new deduction did not result in a
material change in its effective tax rate for fiscal year 2005 and the Company
does not expect that this will result in a material change in 2006, based on
current earnings levels.
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." This Statement
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. In accordance
with a Securities and Exchange Commission Rule issued in April 2005, companies
will be allowed to implement SFAS No. 123R as of the beginning of the first
fiscal year beginning after June 15, 2005. Under SFAS No. 123R, the Company must
determine the appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the transition
method to be used at date of adoption. The permitted transition methods include
either retrospective or prospective adoption. Under the retrospective option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options at the beginning of the first
quarter of adoption of SFAS No. 123R, while the retrospective methods would
record compensation expense for all unvested stock options beginning with the
first period presented. The Company will adopt the provisions of SFAS No. 123R
on January 1, 2006, using the prospective method. The Company expects to
continue using the Black-Scholes valuation model in determining the fair value
of share-based payments to employees. SFAS No. 123R will also require the
Company to change the classification of any tax benefits realized upon exercise
of stock options in excess of that which is associated with the expense
recognized for financial reporting purposes. These amounts will be presented as
a financing cash inflow rather than as a reduction of income taxes paid in its
consolidated statement of cash flows. The Company is continuing to evaluate the
requirements of SFAS No. 123R and Staff Accounting Bulletin No. 107 and
currently expects that the adoption of SFAS No. 123R will result in an increase
in compensation expense in 2006 of approximately $2 million to $3 million,
excluding the estimated impact of 2006 share-based awards. However,
uncertainties, including the Company's future stock-based compensation strategy,
stock price volatility, estimated forfeitures and employee stock option exercise
behavior, make it difficult to determine whether the stock-based compensation
expense recognized in future periods will be similar to the SFAS No. 123 pro
forma expense disclosed in Note 2 to the consolidated financial statements.
<page>
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions" ("SFAS No. 153"). SFAS No. 153 eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21 (b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
periods beginning after June 15, 2005. The adoption of this statement did not
have a material effect on the Company's consolidated financial position,
consolidated results of operations or liquidity.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations--an interpretation of FASB Statement
No. 143". This Interpretation clarifies that the term conditional asset
retirement obligation as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations," refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a
future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though
uncertainty exists about the timing and (or) method of settlement. Thus, the
timing and (or) method of settlement may be conditional on a future event.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. This Interpretation also clarifies when an entity
would have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. This Interpretation was effective December 31,
2005. The adoption of this statement did not have a material effect on the
Company's consolidated financial position, consolidated results of operations or
liquidity.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154") which replaces Accounting Principles Board
Opinions No. 20, "Accounting Changes," and SFAS No. 3, "Reporting Accounting
Changes in Interim Financial Statements-An Amendment of APB Opinion No. 28."
SFAS No. 154 provides guidance on the accounting for and reporting of accounting
changes and error corrections. It establishes retrospective application, unless
impracticable, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
Reclassifications
Certain reflaccifications have bgeen made to prior years balances in order to
conform to the 2005 presentation.
3. Inventory
Inventory consists of the following:
December 31,
2005 2004
---- ----
Raw materials $ 10,368 $ 7,534
Work-in-process 4,316 2,320
Finished goods 14,680 14,011
--------- --------
$ 29,364 $ 23,865
========= ========
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
2005 2004
---- ----
Land $ 1,331 $ 1,312
Buildings and improvements 11,773 11,387
Machinery and equipment 26,208 23,477
Capitalized internal use software 3,278 3,127
Capitalized software development costs 546 546
-------- --------
43,136 39,849
Less accumulated depreciation 22,734 20,381
-------- --------
$ 20,402 $ 19,468
======== ========
<page>
Machinery and equipment included $345 and $438 under capital leases as of
December 31, 2005 and 2004, respectively. Accumulated depreciation on these
assets was $124 and $121 as of December 31, 2005 and 2004, respectively.
Depreciation expense on the Company's property, plant and equipment was
approximately $3,600, $3,500, and $2,900, for 2005, 2004, and 2003,
respectively.
5. Goodwill and Other Intangible Assets
Goodwill
The changes in the net carrying amount of goodwill for the years ended 2005,
2004 and 2003 consist of the following:
Data Industrial
Capture & Automation/
Collection Optical Total
-------- -------- --------
Balance as January 1, 2003 $ 4,497 $ 10,678 $ 15,175
Purchase of minority interest
in subsidiaries 1,548 - 1,548
Currency translation adjustments 813 - 813
-------- -------- --------
Balance as of December 31, 2003 $ 6,858 $ 10,678 $ 17,536
Purchase of minority interest
in subsidiaries 6,157 - 6,157
Currency translation adjustments 914 - 914
-------- -------- --------
Balance as of December 31, 2004 $ 13,929 $ 10,678 $ 24,607
Purchase of minority interest
in subsidiaries 2,486 - 2,486
Currency translation adjustments (1,348) - (1,348)
-------- -------- --------
Balance as of December 31, 2005 $ 15,067 $ 10,678 $ 25,745
======== ======== ========
Other Intangibles
The Company has other intangible assets with a net book value of $17.4 million
and $18.9 million as of December 31, 2005 and December 31, 2004, respectively.
The following table reflects the components of identifiable intangible assets:
December 31, 2005 December 31, 2004
--------------------- --------------------
Amortizable Gross Gross Gross Gross
Life Carrying Accumulated Carrying Accumulated
(years) Amount Amortization Amount Amortization
----------- --------------------- ---------------------
Computer software 5 $11,920 $(2,971) $11,810 $ (589)
Patents and Trademarks 17 9,207 (2,901) 8,197 (2,400)
Holographic Technology 10 1,082 (1,062) 1,082 (946)
License Agreements 17 2,750 (1,075) 2,000 (941)
Covenants not to compete 3 700 (292) 700 (58)
------- ------- ------- -------
$25,659 $(8,301) $23,789 $(4,934)
======= ======= ======= =======
The Company has determined that the lives previously assigned to these
finite-lived assets are still appropriate, and has recorded $3,367, $1,321 and
$620 of amortization expense for 2005, 2004 and 2003, respectively.
Estimated amortization expense for each of the five succeeding years is
anticipated to be $3,400, $3,400, $3,300, $2,700 and $1,000, respectively.
6. Accrued Expenses
Accrued expenses consist of the following:
December 31,
2005 2004
---- ----
Accrued compensation $ 5,171 $ 3,792
Accrued corporate taxes 2,453 1,848
Accrued marketing 2,202 1,168
Accrued commissions 1,639 1,377
Accrued other taxes 672 1,001
Product warranty 1,074 1,139
Accrued professional fees 1,233 1,321
Accrued rent 755 773
Accrued royalties 223 212
Accrued symbol litiation contingency 14,383 -
Other 2,704 3,647
--------- --------
$ 32,509 $ 16,278
========= =========
<page>
7. Debt
Credit Facility
In October 2003, the Company paid all outstanding borrowings and terminated its
Amendment to the Amended and Restated Credit Agreement with its primary bank
lenders. As a result, the Company recorded a charge to income of $86 for
unamortized deferred financing fee in the fourth quarter of 2003. The Amendment,
which extended the Amended and Restated Credit Agreement until January 31, 2006,
provided for a $13,000 revolving credit facility and a $4,500 term loan.
Security interest in the Company's assets and properties were granted to the
bank as security for borrowings under the Amendment and the Amended and Restated
Credit Agreements. A portion of the outstanding borrowings under the Amended and
Restated Credit Agreement were guaranteed by C. Harry Knowles, Chairman and
former Chief Executive Officer, and his spouse, Janet Knowles, a Director and
Vice President, Administration. In connection with the Amendment, the personal
guarantee by C. Harry Knowles and Janet Knowles were released. The Company
currently has no domestic revolving credit facility or term loan agreements in
effect.
Subordinated Debt
In connection with the acquisition of AOA, the Company entered into Subordinated
Promissory Notes ("Subordinated Debt") aggregating $11,000 with United
Technologies Optical Systems, Inc. ("UTOS"), the former parent of AOA, with
scheduled maturities of $9,000 in 2003 and $1,000 in 2004 and 2005. Interest
rates were fixed at 10%. In January 2003, the Company and UTOS entered into a
Payoff Agreement to accelerate the principal payments on the Subordinated Debt.
In accordance with the Payoff Agreement, the Company paid UTOS $5,000 on January
31, 2003 and $3,800 on March 31, 2003 as payment in full of its obligation under
the Subordinated Debt. Accordingly, the Company has recorded a $2,200 gain on
the extinguishment of the Subordinated Debt in March 2003.
In order to provide the Company with sufficient subordinated financing within
the time period required to meet the terms of the Payoff Agreement which
provided a $2,200 gain, in January 2003, the Company issued a $4,260
subordinated note to C. Harry Knowles, its Chairman and former Chief Executive
Officer, and his spouse, Janet H. Knowles, a Director and Vice President,
Administration. The subordinated note bore interest at 10.0% and required 60
monthly principal payments of $36 with the balance of $2,130 due in January
2008. In connection with this note, the Company issued a common stock purchase
warrant, expiring on January 31, 2013, to Mr. and Mrs. Knowles to purchase
195,000 shares of its common stock at an exercise price of $3.47 per share,
which was the fair market value on the date of issuance. These warrants were
valued at the time of issue at $247 in aggregate, and the resulting original
issue discount was to be amortized into interest expense over the life of the
subordinated note. The subordinated note to Mr. and Mrs. Knowles was paid in
full in October 2003 and the unamortized original issue discount of $214 was
recognized as a charge to interest expense in the fourth quarter of 2003.
Lines of Credit
Certain of the Company's European subsidiaries have entered into working capital
and invoice discounting agreements with HypoVereinsbank, Dresdner, Societe
Generale, La Caixa and HSBC Bank. Outstanding borrowings under the working
capital agreement with HypoVereinsbank, Dresner and HSBC have been guaranteed by
the parent company. These agreements provide the Company with availability of up
to $19.1 million, using December 31, 2005 exchange rates, at interest rates
ranging from 3.1% to 6.5%. In addition, the Company's subsidiary Metrologic do
Brasil has a working capital agreement with Banco Bradesco SA with availability
of up to 0.6 million real or $0.3 million, using December 31, 2005 exchange
rates. At December 31, 2005 and 2004, $16.0 million and $14.1 million were
outstanding under such agreements, and accordingly, are included in lines of
credit in our consolidated balance sheets.
Other
In connection with the acquisition of Omniplanar, the Company signed a
promissory note with a discounted value of $3.8 million. During the year ended
December 31, 2005, the Company paid $1.9 million with the remaining $1.9 million
payable in March 2006. On September 1, 2005 the Company entered into a
Cross-License Agreement with Intermec IP Corp., a division of Intermec Inc.,
which includes a license origination fee of $0.8 million. The Company paid $0.4
million during the year ended December 31, 2005. The remaining scheduled payment
of $0.4 million will be paid proportionally in April and July 2006.
<page>
Notes payable consist of the following:
December 31,
2005 2004
---- ----
Promissory notes $ 2,009 $ 3,933
Capital lease obligations 63 209
Others 375 -
------- ---------
2,447 4,142
Less: current maturities 2,444 2,127
------- ---------
$ 3 $ 2,015
======= =========
8. Income Taxes
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 reporting purposes and are
disclosed in the consolidated balance sheets. Significant components of the
Company's deferred tax assets and liabilities are as follows:
December 31,
2005 2004
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 305 $ 376
Tax credit carryovers 189 405
Reserves on current assets 744 688
Inventory capitalization 203 152
Warranty reserve 437 430
License reserve 5,941 667
Other 587 425
------- --------
8,406 3,143
------- --------
Deferred tax liability:
Advance license fee 389 396
Unrealized gain on foreign currency 374 482
Depreciation and amortization 879 955
U.S. taxes on unremitted earnings 1,408 4,261
Other 301 80
------- --------
3,351 6,174
------- --------
Net deferred tax asset/(liability) $ 5,055 $ (3,031)
======= ========
Significant components of the provision for income taxes are as follows:
Year ended December 31,
2005 2004 2003
---- ---- ----
Current:
Federal $ 8,944 $ 7,942 $ 3,196
Foreign 2,280 1,989 920
State 1,842 (37) 1,410
-------- --------- ---------
Total current 13,066 9,894 5,526
Deferred:
Federal (6,937) 2,039 1,702
Foreign (205) (90) -
State (910) (675) (68)
-------- --------- ---------
Total deferred (8,052) 1,274 1,634
-------- --------- ---------
Provision for income taxes $ 5,014 $ 11,168 $ 7,160
======== ========= =========
<page>
The effective income tax rate of 22.0%, 33.0% and 34.0% for the years ended
December 31, 2005, 2004, and 2003, respectively, differs from the federal
statutory rate of 34% for 2003 and 2004 respectively and 35% for 2005 because of
the difference in treatment of certain expense items for financial and income
tax reporting purposes and state and foreign taxes. A reconciliation between the
statutory provision and the provision for financial reporting purposes is as
follows:
December 31,
2005 2004 2003
---- ---- ----
Statutory federal tax provision $ 7,990 $ 11,508 $ 7,154
State income taxes, net of
federal income tax benefit 655 (470) 886
Foreign income tax rate differential (1,528) (1,837) (1,443)
US taxes provided on foreign income (1,731) 2,720 1,191
Tax credits/carryforwards (295) (473) -
Gain on extinguishment of debt - - (748)
Other, net (77) (280) 120
--------- -------- ---------
Provision for income taxes $ 5,014 $ 11,168 $ 7,160
========= ======== ==========
The Company has state net operating loss carryforwards of $5,468 and they
generally begin to expire in 2009. The Company also has state tax credit
carryforwards of $291 that begin to expire in 2013.
The Company's earnings in China were not subject to local income taxes in the
years 2002 through 2003. In addition, the Company will pay income taxes at 50%
of the local statutory rate for the years 2004 through 2006. The Company has
provided deferred income taxes on $4,000 of taxable income in China at U.S.
statutory rates as it is the Company's intention to repatriate such earnings.
The Company's cumulative undistributed earnings of foreign subsidiaries that are
expected to be reinvested indefinitely, for which no incremental U.S. income or
foreign withholding taxes have been recorded, approximated $9,148 at December
31, 2005.
9. Related Party Transactions
The Company's principal shareholder, Director and Chairman of the Board C. Harry
Knowles and his spouse, Janet H. Knowles, the Company's Vice President,
Administration, Treasurer and Director, owned and leased to the Company certain
real estate utilized in the operation of the Company's business. Lease payments
made to these related parties were approximately $1,209 for the year ended
December 31, 2003. Under the terms of the Amended and Restated Credit Agreement,
no rental payments were paid to Mr. and Mrs. Knowles during the term of the
Amended and Restated Credit Agreement. The unpaid, accrued portion of the rental
payments were repaid to Mr. and Mrs. Knowles during 2003 after the Amendment to
the Amended and Restated Credit Agreement was executed. The lease for the real
estate was replaced in January 2003 with a new lease which was due to expire in
December 2012. In December 2003, the Company purchased the real estate from Mr.
& Mrs. Knowles for approximately $4.79 million, which was less than the fair
market values contained in two independent appraisals.
The accounting firm in which Stanton L. Meltzer, a director of the Company, is a
principal, charged fees of approximately $4 and $50 for tax consulting services
performed for the Company during the years ended December 31, 2004 and 2003,
respectively. The 2004 payments were made prior to the Annual Shareholders
meeting in May 2004.
The investment banking company of Janney Montgomery Scott LLC ("JMS") in which
William Rulon-Miller, a director of the Company, serves as Senior Vice President
and Director of Investment Banking charged fees totaling approximately $175 in
2003 in connection with assisting the Company with its plans to refinance its
bank debt and restructure its overall debt position along with the acquisition
of AOA.
10. Commitments & Contingencies
Operating Leases
The Company has entered into operating lease agreements with unrelated companies
to lease manufacturing and office equipment, office space and vehicles for its
foreign subsidiaries.
Future minimum lease payments required under the lease agreements as of December
31, 2005 are $3,112 in 2006, $2,704 in 2007, $2,488 in 2008, $1,965 in 2009,
$1,917 in 2010 and $1,953 thereafter. Rental expenses paid to third parties for
2005, 2004 and 2003 were approximately $3,300, $2,992, and $3,402, respectively.
<page>
Cross-Licensing Agreement and Settlement of Patent Litigation
In December 1996, the Company and Symbol Technologies, Inc. ("Symbol") executed
an extensive cross-license of patents (the "Symbol Agreement") for which the
Company and Symbol pay royalties to each other under certain circumstances
effective January 1, 1996. In connection with the Symbol Agreement, the Company
paid Symbol an advance license fee of $1 million in December 1996 and another $1
million in quarterly installments of $125 over the subsequent two years ended
December 1998. The Company has amended the Symbol Agreement providing for
additional patent licenses whereby the Company and Symbol make recurring
periodic royalty payments. Royalty payments under the Symbol Agreement amounted
to $811, $1,942, and $1,869 in 2005, 2004, and 2003, respectively. The Company
recorded royalty income from Symbol under the agreement of $382, $1,330, and
$1,157 in 2005, 2004 and 2003, respectively. The parties are currently in
litigation with respect to the Symbol Agreement. For further discussions on the
litigation, see Item C below in "Other Legal Matters."
Other Legal Matters
The Company filed domestic and foreign patent applications to protect its
technological position and new product development. When the Company believes
competitors are infringing on these patents, the Company may pursue claims or
other legal action against these parties. Additionally, from time-to-time, the
Company may receive legal challenges to the validity of its patents or
allegations that its products infringe the patents of others.
The Company is currently involved in matters of litigation arising in the normal
course of business including the matters described below. The Company believes
that such litigation either individually or in the aggregate will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows, except as noted below.
A. Symbol Technologies, Inc. et al. v. the Lemelson Partnership
On July 21, 1999, we and six other leading members of the Automatic
Identification and Data Capture Industry (the "Auto ID companies") jointly
initiated litigation against the Lemelson Medical, Educational, & Research
Foundation, Limited Partnership (the "Lemelson Partnership"). The suit which was
commenced in the U.S. District Court, District of Nevada in Reno, Nevada, and
later transferred to the U.S. District Court in Las Vegas, Nevada, requested a
declaratory judgment that certain patents owned by the Lemelson Partnership were
not infringed, invalid and/or unenforceable for a variety of reasons. The trial
on this matter was held from November 2002 through January 2003. On January 23,
2004, the Judge issued a decision in favor of the Auto ID companies finding that
the patents in suit were not infringed, invalid and unenforceable. The Lemelson
Partnership appealed this decision to the Court of Appeals for the Federal
Circuit which upheld the trial court's decision in its September 2005 ruling. A
request for a rehearing by the Lemelson Partnership was denied.
B. Metrologic v. PSC Inc. and PSC Scanning, Inc. v. Metrologic
On October 13, 1999, we filed suit for patent infringement against PSC Inc. in
the U.S. District Court for the District of New Jersey. On May 17, 2004, PSC
Scanning, Inc. ("PSC") filed suit against the Company in the U.S. District Court
for the District of Oregon alleging claims of patent infringement of certain of
its patents by at least one Metrologic product. On August 29, 2005, the parties
entered into a settlement agreement which resolved all outstanding litigation
between the parties. Key features of the settlement include a payment of $2.25
million in cash by PSC, discounts on certain products from PSC and covenant not
to sue each other under defined sets of patent rights for product configurations
that were sold prior to March 16, 2005. The cash settlement of $2.25 million was
recorded as income during the third quarter of 2005 and is reflected in Other
income (expenses) in our Consolidated Statement of Operations. The product
discount arrangement within the settlement agreement will be recorded in our
Consolidated Statement of Operations when realized.
C. Symbol Technologies, Inc. v. Metrologic
On May 3, 2002, we were served with a lawsuit that was filed on April 12, 2002
by Symbol Technologies, Inc. ("Symbol"), in the U.S. District Court for the
Eastern District of New York alleging that we were in breach of the terms of the
License Agreement between us and Symbol (the "Symbol Agreement"). The Complaint
sought a declaratory judgment from the Court that we were in breach of the
Symbol Agreement. On March 31, 2003, the Court entered its decision on the
parties' respective motions for summary judgment, and finding in our favor, the
Court dismissed certain counts of Symbol's complaint. On April 9, 2003, Symbol
voluntarily dismissed the remaining counts of the complaint. Symbol filed its
Notice of Appeal with the U.S. Court of Appeals for the Second Circuit on May 7,
2003. On December 23, 2003, the Court of Appeals dismissed Symbol's appeal in
this matter. In the interim, Symbol decided to proceed with the arbitration for
which the Company had filed a Demand in June 2002, which had been stayed pending
the decision by the lower court. On June 26, 2003, Symbol filed an Amended
Answer and Counterclaims asserting that (a) eleven of Metrologic's products are
royalty bearing products, as defined under the Symbol Agreement, and (b) in the
alternative, those products infringe upon one or more of Symbol's patents. In
February 2005, the arbitrator entered an interim award, finding that 8 of the
products are not royalty bearing products under the Symbol Agreement but that 3
of the products are royalty bearing products.
<page>
In August, 2005, the arbitrator entered a final ruling in the arbitration
awarding Symbol past royalties on certain of the Company's products plus
interest. Symbol filed a motion to enter the judgment with the U.S. Federal
District Court in the Southern District of New York. The Company filed its
motion to vacate the arbitrator's award in the same court. In February 2006, the
Judge granted Symbol's motion to enter a judgment affirming the arbitrator's
award for past royalties. As of December 31, 2005 the Company has accrued $14.4
million reflecting royalties and interest due in accordance with the judgment
through December 31, 2005. We expect future royalty payments to cease on these
products during the second quarter of 2006 as a result of already-implemented
actions.
D. Metrologic v. Symbol Technologies, Inc.
On June 18, 2003, the Company filed suit against Symbol in the U.S. District
Court for the District of New Jersey alleging claims of patent infringement of
certain of our patents by at least two Symbol products. The complaint also
contains a claim for breach of the Symbol Agreement between the parties.
Symbol's answer to the complaint, filed on July 30, 2003, included counterclaims
requesting that a declaratory judgment be entered that the patents in suit are
invalid, are not infringed by Symbol and that Symbol is not in breach of the
Symbol Agreement. The court will hear arguments on the construction of the
claims in the patents in suit in March 2006 and a trial is currently scheduled
for September 2006.
E. Metrologic v. Symbol Technologies, Inc.
On May 17, 2005, the Company filed suit against Symbol in the U.S. District
Court for the District of New Jersey for breach of contract for failure to pay
royalties in accordance with the terms of the Symbol Agreement. The parties have
filed cross motions for summary judgment and dismissal and those motions are
currently pending before the court.
F. Symbol Technologies, Inc. v. Metrologic
On September 23, 2005, Symbol filed suit against the Company in the U. S.
District Court in the Eastern District of Texas alleging patent infringement.
Symbol filed a related case before the International Trade Commission ("ITC")
also alleging patent infringement of the same patents. A notice of the
investigation instituted by the ITC was served on the Company on October 24,
2005. The case in the U.S. District Court in the Eastern District of Texas have
been stayed pending the outcome of the matter before the ITC. It is expected
that a trial will be held in June 2006 in the ITC with a decision later this
year. Metrologic stands firm, in its belief, that its products do not infringe
Symbol's patents. Metrologic will vigorously defend these new allegations of
patent infringement.
G. Symbol Technologies, Inc. v. Metrologic
On March 6, 2006, we were served with a lawsuit that was filed on November 4,
2005 by Symbol in the U.S. District Court in the Eastern District of Texas
alleging patent infringement.
We are not aware of any other legal claim or action against us, which could be
expected to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
11. Retirement Plans
The Company maintains a noncontributory defined contribution cash or deferred
profit sharing plan covering substantially all employees. Contributions are
determined by the Chief Executive Officer and are equal to a percentage of each
participant's compensation. No contributions were made to the Plan for the three
years ended December 31, 2005.
Additionally, the Company maintains an employee funded Deferred Compensation
Retirement 401(k) Plan, contributions to which are partially matched by the
Company at a rate of 60% on the first six percent of employee's earnings.
Contribution expenses were $812, $697, and $599 in 2005, 2004, and 2003,
respectively.
12. Financial Reporting for Business Segments and Geographical Information
The Company generates its revenue from the sale of laser bar code scanners
primarily to distributors, value-added resellers, original equipment
manufacturers and directly to end users, in locations throughout the world. No
individual customer accounted for 10% or more of revenues in 2005, 2004 or 2003.
The Company manages its business on a business segment basis dividing the
business into two major segments: Data Capture & Collection and Industrial
Automation/Optical Systems.
<page>
The accounting policies of the segments are the same as those described in the
summary of the significant accounting policies. A summary of the business
segment operations for 2005, 2004 and 2003 is included below:
2005 2004 2003
---- ---- ----
Business segment net sales:
Data Capture & Collection $ 169,749 140,171 112,817
Industrial Automation/Optical Systems 40,704 37,784 25,194
--------- ------- -------
Total 210,453 177,955 138,011
--------- ------- -------
Business segment gross profit:
Data Capture & Collection $ 79,928 69,814 49,954
Industrial Automation/Optical Systems 10,887 11,914 8,403
--------- ------- -------
Total 90,815 81,728 58,357
--------- ------- -------
Business segment operating income:
Data Capture & Collection $ 18,724 27,413 18,129
Industrial Automation/Optical Systems 2,208 4,276 2,015
--------- ------- -------
Total 20,932 31,689 20,144
--------- ------- -------
Total other income $ 1,895 2,159 897
--------- ------- -------
Income before income taxes $ 22,827 33,848 21,041
--------- ------- -------
Business segment total assets:
Data Capture & Collection $ 186,114 147,963 116,631
Industrial Automation/Optical Systems 40,068 44,564 23,269
--------- ------- -------
Total $ 226,182 192,527 139,900
--------- ------- -------
Geographical Information
Geographic results are prepared on a "country of destination" basis, meaning
that net sales are included in the geographic area where the customer is
located. Assets are included in the geographic area in which the selling
entities are located.
The following table details the geographic distribution of the Company's sales
and long-lived assets.
2005 2004 2003
------------------ ------------------- ------------------
Long-Lived Long-Lived Long-Lived
Sales Assets(a) Sales Assets(a) Sales Assets(a)
-------- -------- -------- -------- -------- --------
The Americas $100,757 $ 44,828 $ 85,731 45,159 $ 65,547 32,333
EMEA 83,593 14,896 70,819 14,081 57,474 7,128
APAC 26,103 3,781 21,405 3,690 14,990 1,627
-------- -------- -------- -------- -------- --------
$210,453 $ 63,505 $177,955 $ 62,930 $138,011 $ 41,088
(a) Represents property, plant and equipment, net, goodwill, computer software,
net and other intangibles, net
13. Incentive Plan
During 2004, the Company's Board of Directors adopted the 2004 Equity Incentive
Plan as the 1994 Incentive Plan had expired. The Company's Board of Directors
have granted incentive and non-qualified stock options pursuant to the Company's
Incentive Plans to certain eligible employees and board members. The shares
issued will either be authorized and previously unissued common stock or issued
common stock reacquired by the Company. The total number of shares authorized
for issuance under the 2004 Equity Incentive Plan is 1,500,000. Shares canceled
for any reason without having been exercised shall again be available for
issuance under the Plan. An aggregate of 889,500 shares were available for grant
under the 2004 Equity Incentive Plan at December 31, 2005. Options granted under
the 2004 Equity Incentive Plan become exercisable over periods ranging from one
to four years. Each option shall expire no more than ten years after becoming
exercisable.
<page>
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying common stock on
the date of grant, no compensation expense is recognized. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS 123. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk-free interest rates of 3.93% in 2005 and 4.25% in 2004;
dividend yields of 0.0%; volatility factors of the expected market price of the
Company's common stock of 72% for 2005 and 2004; and a weighted-average expected
life of the option of 6.25 years for 2005 and 2004.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 2003, 2004, and 2005 follows:
Options Weighted-Average
(in thousands) Exercise Price
Outstanding - January 1, 2003 3,276 $ 3.01
Granted - -
Exercised (933) 3.60
Canceled (22) 3.40
------
Outstanding - December 31, 2003 2,321 $ 2.78
Granted 353 20.08
Exercised (965) 3.21
Canceled (18) 1.48
------
Outstanding, December 31, 2004 1,691 $ 6.16
Granted 577 20.07
Exercised (528) 2.83
Canceled (25) 15.57
------
Outstanding, December 31, 2005 1,715 $ 11.73
======
Exercisable at December 31, 2005 759
======
Weighted-average fair value of
options granted during 2005 $ 12.04
=======
Approximately 2,799,500 shares of common stock have been reserved for future
issuance, consisting of 1,715,000 shares for outstanding options under the
Company's Incentive Plans, 889,500 shares available for grant under the
Company's 2004 Equity Incentive Plan and 195,000 shares for warrants issued to
Mr. and Mrs. Knowles.
The following table summarizes the status of stock options outstanding and
exercisable at December 31, 2005:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Contractual Exercise Exercise
prices per share Shares Life Price Shares Price
- -----------------------------------------------------------------------------
$ 1.48 - $ 1.48 491,070 6.69 $ 1.48 312,870 $ 1.48
$ 2.49 - $ 3.07 111,589 5.05 $ 2.80 111,589 $ 2.80
$ 3.08 - $ 3.44 102,810 3.81 $ 3.44 102,810 $ 3.44
$ 3.45 - $ 4.86 97,419 2.66 $ 4.42 97,419 $ 4.42
$ 4.87 - $20.00 208,665 8.48 $ 17.48 81,166 $ 17.38
$20.01 - $22.20 603,000 9.02 $ 20.13 13,125 $ 20.30
$22.21 - $25.00 100,000 8.47 $ 25.00 40,000 $ 25.00
--------- ------- ---------- --------- ----------
$ 1.48 - $25.00 1,714,553 7.32 $ 11.73 758,979 $ 5.58
<page>
14. Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan whereby eligible employees have
the opportunity to acquire the Company's common stock quarterly through payroll
deductions, at 90% of the lower of (a) the fair market value of the stock on the
first day of the applicable quarterly offering period or (b) the fair market
value of the stock on the last day of the applicable quarterly offering period.
15. Acquisitions
Omniplanar, Inc.
On September 24, 2004, the Company acquired 100% of the common stock of
Omniplanar, Inc. ("Omniplanar"), an imaging software company, for $12,851
including acquisition costs and assumed liabilities. The Company paid $9,050 at
closing and $1,950 during the year ended December 31, 2005, and will pay an
additional $1,950 in March 2006. Omniplanar supplies a complete package of bar
code reading software for 2D imaging for fixed position, conveyor belt and hand
held readers which can be optimized for specific hardware applications. The
acquisition of Omniplanar represents a significant addition to the Company's
technology portfolio. The Company has licensed the SwiftDecoder software since
the year 2000 for use in its iQ line of industrial vision-based products. The
Company intends to make use of this software's unique decoding ability in other
products as well. The assets acquired have been recorded at their estimated fair
values. The consolidated financial statements reflect the results of Omniplanar
since the effective date of the acquisition. The pro forma results of operations
have not been provided because the effects were not material. The results of
operations for Omniplanar have been included in the Industrial Automation
Optical Systems business segment.
In connection with the acquisition, the Company allocated $12,620 to
identifiable intangible assets comprising $11,920 of computer software which is
being amortized over 5 years and $700 to a non-compete agreement which is being
amortized over 3 years.
The following table summarizes the allocation of the purchase price of assets
recorded at the date of acquisition.
Assets:
Cash and cash equivalents $ 5
Accounts receivable 455
Deferred income taxes 555
Identifiable intangible assets 12,620
------
Total assets acquired 13,635
------
Liabilities:
Accrued expenses 88
Deferred contract revenue 141
Deferred income taxes 555
------
Total liabilities assumed 784
------
Net assets acquired $ 12,851
======
The Company accounted for this acquisition under the purchase method of
accounting.
Metrologic do Brasil
On February 4, 2003, the Company paid cash of $71 and signed three promissory
notes with a total discounted value of $204 for the remaining 49% interest in
Metrologic do Brasil. The Company paid the scheduled payments of $75 on February
4, 2005 and 2004, respectively, and will pay the remaining payment of $75 on
February 4, 2006.
The Company accounted for this acquisition under the purchase method of
accounting. The total purchase price and costs in excess of assets acquired
(goodwill) was $275.
Metrologic Eria Iberica ("MEI")
On August 5, 2003, the Company entered into an agreement to purchase the
remaining 49% interest in MEI for a purchase price of 5,900 euros. Payments were
being made in twelve quarterly installments over three years which commenced
August 5, 2003 with a scheduled maturity date of April 3, 2006. On December 1,
2005, the Company accelerated the payments and purchased all the remaining
minority interest. During the year ended December 31, 2005, the Company
purchased the outstanding interest of 23% for approximately 2.7 million euros or
$3.2 million at the exchange rate on December 31, 2005. The Company now owns
100% of MEI.
Metrologic Eria France ("MEF")
On March 19, 2004, the Company purchased the remaining 49% minority interest of
MEF for a purchase price of 3,600 euros, or $4,300 at the exchange rate on March
31, 2004. The Company now owns 100% of MEF.
<page>
Supplementary Data
The following tables present unaudited quarterly operating results for the
Company for each quarter of 2005 and 2004. This information has been derived
from unaudited financial statements and includes all adjustments, consisting
only of normal recurring accruals, which the Company considers necessary for a
fair presentation of the results of operations for these periods. Such quarterly
operating results are not necessarily indicative of the Company's future results
of operations.
Quarterly Consolidated Operating Results (Unaudited)
(in thousands except per share data)
Three Months Ended
March 31, June 30, September 30, December 31,
2005 2005 2005 2005
--------- --------- --------- ---------
Sales $ 46,851 $ 48,604 $ 54,005 $ 60,993
Cost of sales 26,733 27,044 30,341 35,520
--------- --------- --------- ---------
Gross profit 20,118 21,560 23,664 25,473
Selling, general and
administrative expenses 11,395 12,139 11,423 13,805
Symbol litigation contingency - - - 12,600
Research and development
expenses 1,952 2,218 2,354 1,997
--------- --------- --------- ---------
Operating income 6,771 7,203 9,887 (2,929)
Other income (expenses)
Interest income 285 416 410 515
Interest expense (263) (304) (287) (192)
Foreign currency
transaction loss (684) (42) (183) (38
Litigation settlement - - 2,250 -
Other, net (13) (3) (46) 74
--------- --------- --------- ---------
Total other income (expenses) (675) 67 2,144 359
--------- --------- --------- ---------
Income before provision
for income taxes 6,096 7,270 12,031 (2,570)
Provision (benefit) for
income taxes 2,195 2,617 4,331 (4,129)
--------- --------- --------- ---------
Net income $ 3,901 $ 4,653 $ 7,700 $ 1,559
========= ========= ========= =========
Basic earnings
per share
Weighted average
shares outstanding 21,907 22,136 22,202 22,271
========= ========= ========= =========
Basic earnings
per share $ 0.18 $ 0.21 $ 0.35 $ 0.07
========= ========= ========= =========
Diluted earnings
per share
Weighted average
shares outstanding 21,907 22,136 22,202 22,271
Net effect of dilutive
securities 1,217 940 901 879
--------- --------- --------- ---------
Total shares outstanding
used in computing diluted
earnings per share 23,124 23,076 23,103 23,150
========= ========= ========= =========
Diluted earnings per
share $ 0.17 $ 0.20 $ 0.33 $ 0.07
========= ========= ========= =========
<page>
Supplementary Data (Con't)
Quarterly Consolidated Operating Results (Unaudited)
(In thousands except per share data)
Three Months Ended
March 31, June 30, September 30, December 31,
2004 2004 2004 2004
--------- --------- --------- ---------
Sales $ 39,700 $ 40,990 $ 44,156 $ 53,109
Cost of sales 20,049 22,749 24,088 29,341
--------- --------- --------- ---------
Gross profit 19,651 18,241 20,068 23,768
Selling, general and
administrative expenses 9,374 9,099 10,997 13,048
Research and development
expenses 1,723 2,124 1,824 1,850
--------- --------- --------- ---------
Operating income 8,554 7,018 7,247 8,870
Other income (expenses)
Interest income 110 138 170 206
Interest expense (99) (114) (107) (121)
Foreign currency
transaction (loss) gain (238) (227) 330 2,393
Other, net (88) (72) (88) (34)
--------- --------- --------- ---------
Total other income (expenses) (315) (275) 305 2,444
--------- --------- --------- ---------
Income before provision
for income taxes 8,239 6,743 7,552 11,314
Provision for
income taxes 3,131 2,562 2,870 2,605
--------- --------- --------- ---------
Net income $ 5,108 $ 4,181 $ 4,682 $ 8,709
========= ========= ========= =========
Basic earnings
per share
Weighted average
shares outstanding 21,151 21,504 21,555 21,679
========= ========= ========= =========
Basic earnings
per share $ 0.24 $ 0.19 $ 0.22 $ 0.40
========= ========= ========= =========
Diluted earnings
per share
Weighted average
shares outstanding 21,151 21,504 21,555 21,679
Net effect of dilutive
securities 1,816 1,450 1,393 1,348
--------- --------- --------- ---------
Total shares outstanding
used in computing diluted
earnings per share 22,967 22,954 22,948 23,027
========= ========= ========= =========
Diluted earnings per
share $ 0.22 $ 0.18 $ 0.20 $ 0.38
========= ========= ========= =========
<page>
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004, and 2003
(All dollar amounts in thousands)
2005 2004 2003
------ ------ ------
Allowance for possible losses on accounts and
notes receivable:
Balance at beginning of year $ 544 $ 485 $ 341
Additions charged to expense 192 135 123
Write-offs (85) (99) (64)
Currency translation and other (24) 23 85
------ ------ ------
Balance at end of year $ 627 $ 544 $ 485
====== ====== ======
<page>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
No change of accountants and/or disagreement on any matter of accounting
principles or financial statement disclosures has occurred within the last two
years.
Item 9A. Controls and Procedures
As of the end of the period covered by this annual report, an evaluation was
performed under the supervision and with participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934, as
amended, Rules 13a-15 and 15d-15. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are effective to provide that material information relating to
us, including our consolidated subsidiaries, is (a) made known to them by our
other employees and the employees of our consolidated subsidiaries, particularly
material information related to the period for which this annual report is being
prepared; and (b) recorded, processed, summarized, evaluated, and reported, as
applicable, within the time period specified in the rules and forms promulgated
by the Securities and Exchange Commission.
Management's annual report on the Company's internal control over financial
reporting and the independent registered public accounting firm's attestation
report are included in the Company's 2005 Financial Statements in Item 8 of this
Annual Report on Form 10-K, under the headings "Report of Management on Internal
Control Over Financial Reporting" and "Report of Independent Registered Public
Accounting Firm on Internal Control Over Financial Reporting", respectively, and
is incorporated herein by reference.
During the fiscal quarter ended December 31, 2005, there have been no changes in
our internal control over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
PART III
The information called for by Item 10, Directors and Executive Officers of the
Registrant (except for the information regarding executive officers called for
by Item 401 of Regulation S-K, which is included in Part I hereof in accordance
with General Instruction G(3)), Item 11, Executive Compensation, Item 12,
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters, Item 13, Certain Relationships and Related Transactions,
and Item 14, Principal Accountant Fees and Services, is incorporated herein by
reference to the Registrant's definitive proxy statement for its 2006 Annual
Meeting of Shareholders which shall be filed with the Securities and Exchange
Commission within 120 days from the end of the Registrant's fiscal year ended
December 31, 2005.
<page>
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements
The following consolidated financial
statements of Metrologic Instruments, Inc.
and subsidiaries are filed as part of this
report under Item 8 - Financial Statements
and Supplementary Data:
Report of Management on Internal Control
Over Financial Reporting
Report of Independent Registered Public
Accounting Firm on Internal Control Over
Financial Reporting
Report of Independent Registered Public
Accounting Firm on Financial Statements and
Schedule
Consolidated Balance Sheets at December 31,
2005 and 2004
Consolidated Statements of Operations for
each of the three years in the period ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended December 31, 2005, 2004 and
2003
Consolidated Statements of Cash Flows for
each of the three years in the period ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
Supplementary Data (Unaudited)
2. Financial statement schedule
Schedule II - Valuation and Qualifying
Accounts is filed herewith. All other
schedules are omitted because they are not
applicable, not required, or because the
required information is included in the
consolidated financial statements or notes
thereto.
3. Exhibits required to be filed by Item 601 of
Regulation S-K.
2.1 Option Agreement dated as of March 1,
1995 among Metrologic Instruments, Inc. and
the parties listed on schedule A thereto
(incorporated by reference to Exhibit 2.3 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995).
3.1 Amended and Restated Certificate of
Incorporation of Metrologic Instruments,
Inc. (incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1994).
3.2 Amended and Restated Bylaws of
Metrologic Instruments, Inc. (incorporated
by reference to Exhibit 3.02 to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994).
3.3 Certificate of Amendment to the
Certificate of Incorporation of Metrologic
Instruments, Inc. dated October 20, 2003
effecting the two for one stock split
(incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30,
2003).
<page>
3.4 Certificate of Amendment to the
Certificate of Incorporation of Metrologic
Instruments, Inc. dated June 6, 2003
effecting the three for two stock split
(incorporated by reference to Exhibit 3.4 to
the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003).
4.1 Specimen Stock Certificate
(incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-78358)).
10.1 Metrologic Instruments, Inc. 1994
Incentive Plan (incorporated by reference to
Exhibit 99 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 33-89376)).
10.2 Metrologic Instruments, Inc. Employee
Stock Purchase Plan (incorporated by
reference to Exhibit 99 to the Registrant's
Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (Reg. No.
33-86670) and Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995).
10.3 Indemnification Agreement between
Metrologic Instruments, Inc. and C. Harry
Knowles and Janet H. Knowles (incorporated
by reference to Exhibit 10.9 to the
Registrant's Registration statement on Form
S-1 (Reg. No. 33-78358)).
10.4 Agreement between Symbol Technologies,
Inc. and Metrologic Instruments, Inc. dated
December 18, 1996 (incorporated by reference
to Exhibit 10 to the Registrant's Current
Report on Form 8-K filed on February 14,
1997).
10.5 First Amendment to Metrologic
Instruments, Inc. 1994 Incentive Plan dated
July 1, 1997 (incorporated by reference to
Exhibit 10 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997).
10.6 Stock Purchase Agreement dated
December 22, 2000 by and among United
Technologies Optical Systems, Inc.,
Hamilton Sundstrand Corporation, MTLG
Investments Inc. and Metrologic Instruments,
Inc. (incorporated by reference to Exhibit
2 to the Registrant's Current Report on
Form 8-K filed January 23, 2001).
10.7 Employment Agreement dated as of May
13, 2002 between Metrologic Instruments,
Inc. and Janet H. Knowles (incorporated by
reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K/A3 for the period
ended December 31, 2001).
10.8 Registration Rights Agreement dated
January 31, 2003 between Metrologic
Instruments, Inc. and C. Harry Knowles and
Janet Knowles (incorporated by reference to
Exhibit 99.5 to the Company's Form 8-K for
the period ending January 31, 2003).
10.9 Amended Common Stock Purchase Warrant
dated February 5, 2003 in the amount of
65,000 shares of Metrologic Instruments,
Inc. common stock to C. Harry Knowles and
Janet Knowles (incorporated by reference to
Exhibit 10.31 to the Company's Form 10-K for
the year ending December 31, 2002).
10.10 Agreement of Sale dated December 22,
2003 between Metrologic Instruments, Inc.
and C. Harry and Janet H. Knowles
(incorporated by reference to Exhibit 10.13
to the Company's Form 10-K for the year
ending December 31, 2003).
<page>
10.11 Code of Ethics approved by the Board
of Directors of the Registrant at a meeting
held on December 11, 2003 (incorporated by
reference to Exhibit 14 to the Company's
Form 10-K for the year ending December 31,
2003).
10.12 Stock Purchase Agreement between
Omniplanar, Inc. and Metrologic Instruments,
Inc. subsidiary MTLG Investments Inc. dated
September 24, 2004 (incorporated by
reference to Exhibit 10.1 to the Company's
Form 10-Q dated September 30, 2004).
10.13 Executive Employment Agreement
effective July 1, 2004 and executed November
16, 2004 by and between Metrologic
Instruments, Inc. and Benny A. Noens,
President and Chief Executive Officer
(incorporated by reference to Exhibit 10.1
to the Company's Form 8-K/A dated November
16, 2004).
10.14 Metrologic Instruments, Inc. 2004
Equity Incentive Plan (incorporated by
reference to Exhibit 4.1 to the Company's
Form S-8 dated December 3, 2004).
10.15 Metrologic Instruments, Inc. Form of
Option Agreement under the Registrant's 2004
Equity Incentive Plan dated December 2, 2004
(incorporated by reference to Exhibit 10.1
to the Company's Form 8-K dated December 22,
2004).
10.16 Compensation Arrangements for the
named Executive Officers.
10.17 Director Compensation Arrangements.
21 Subsidiaries of the Registrant
23.1 Consent of Independent Registered
Public Accounting Firm
31.1 Rule 13a-14(a)/15d-14(a) Certification
by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Rule 13a-14(a)/15d-14(a) Certification
by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
executed by the Chief Executive Officer of
the Company.
32.2 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
executed by the Chief Financial Officer of
the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
METROLOGIC INSTRUMENTS, INC.
By:/s/Benny Noens
--------------------------------
Benny Noens
Chief Executive Officer
(Principal Executive Officer)
Dated: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934,
the report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/Kevin Bratton
- -----------------------------
Kevin Bratton Chief Financial Officer March 15, 2006
(Principal Financial Officer
and Principal Accounting
Officer)
/s/Richard C. Close
- -----------------------------
Richard C. Close Director March 15, 2006
/s/C. Harry Knowles
- -----------------------------
C. Harry Knowles Chairman of the Board March 15, 2006
/s/Janet H. Knowles
- -----------------------------
Janet H. Knowles Director, Vice President, March 15, 2006
Administration, and Treasurer
/s/John H. Mathias
- -----------------------------
John H. Mathias Director March 15, 2006
/s/Stanton L. Meltzer
- -----------------------------
Stanton L. Meltzer Director March 15, 2006
/s/Hsu Jau Nan
- -----------------------------
Hsu Jau Nan Director March 15, 2006
/s/William Rulon-Miller
- -----------------------------
William Rulon-Miller Director March 15, 2006
/s/Benny A. Noens
- -----------------------------
Benny A. Noens Chief Executive Officer, March 15, 2006
President and Director
(Principal Executive Officer)
Exhibit Index
Exhibit
Number Item Page
- ------ -------------------------------------------------------------- -----
2.1 Option Agreement dated as of March 1, 1995 among Metrologic
Instruments, Inc. and the parties listed on schedule A thereto
(incorporated by reference to Exhibit 2.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
3.1 Amended and Restated Certificate of Incorporation of Metrologic
Instruments, Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1994).
3.2 Amended and Restated Bylaws of Metrologic Instruments, Inc.
(incorporated by reference to Exhibit 3.02 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994).
3.3 Certificate of Amendment to the Certificate of Incorporation of
Metrologic Instruments, Inc. dated October 20, 2003 effecting the two
for one stock split (incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
3.4 Certificate of Amendment to the Certificate of Incorporation of
Metrologic Instruments, Inc. dated June 6, 2003 effecting the three
for two stock split (incorporated by reference to Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003).
4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement on Form S-1 (Reg. No.
33-78358)).
10.1 Metrologic Instruments, Inc. 1994 Incentive Plan (incorporated by
reference to Exhibit 99 to the Registrant's Registration Statement on
Form S-8 (Reg. No. 33-89376)).
10.2 Metrologic Instruments, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 99 to the Registrant's
Post-Effective Amendment No. 1 to the Registration Statement on Form
S-8 (Reg. No. 33-86670) and Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995).
10.3 Indemnification Agreement between Metrologic Instruments, Inc. and C.
Harry Knowles and Janet H. Knowles (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration statement on Form S-1
(Reg. No. 33-78358)).
10.4 Agreement between Symbol Technologies, Inc. and Metrologic
Instruments, Inc. dated December 18, 1996 (incorporated by reference
to Exhibit 10 to the Registrant's Current Report on Form 8-K filed on
February 14, 1997).
10.5 First Amendment to Metrologic Instruments, Inc. 1994 Incentive Plan
dated July 1, 1997 (incorporated by reference to Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
10.6 Stock Purchase Agreement dated December 22, 2000 by and among United
Technologies Optical Systems, Inc., Hamilton Sundstrand Corporation,
MTLG Investments Inc. and Metrologic Instruments, Inc. (incorporated
by reference to Exhibit 2 to the Registrant's Current Report on Form
8-K filed January 23, 2001).
10.7 Employment Agreement dated as of May 13, 2002 between Metrologic
Instruments, Inc. and Janet H. Knowles (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K/A3 for the
period ended December 31, 2001).
10.8 Registration Rights Agreement dated January 31, 2003 between
Metrologic Instruments, Inc. and C. Harry Knowles and Janet Knowles
(incorporated by reference to Exhibit 99.5 to the Company's Form 8-K
for the period ending January 31, 2003).
10.9 Amended Common Stock Purchase Warrant dated February 5, 2003 in the
amount of 65,000 shares of Metrologic Instruments, Inc. common stock
to C. Harry Knowles and Janet Knowles (incorporated by reference to
Exhibit 10.31 to the Company's Form 10-K for the year ending December
31, 2002).
10.10 Agreement of Sale dated December 22, 2003 between Metrologic
Instruments, Inc. and C. Harry and Janet H. Knowles (incorporated by
reference to Exhibit 10.13 to the Company's Form 10-K for the year
ending December 31, 2003).
<page>
10.11 Code of Ethics approved by the Board of Directors of the Registrant
at a meeting held on December 11, 2003 (incorporated by reference to
Exhibit 14 to the Company's Form 10-K for the year ending December 31,
2003).
10.12 Stock Purchase Agreement between Omniplanar, Inc. and Metrologic
Instruments, Inc. subsidiary MTLG Investments Inc. dated September 24,
2004 (incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q dated September 30, 2004).
10.13 Executive Employment Agreement effective July 1, 2004 and executed
November 16, 2004 by and between Metrologic Instruments, Inc. and
Benny A. Noens, President and Chief Executive Officer (incorporated by
reference to Exhibit 10.1 to the Company's Form 8-K/A dated November
16, 2004).
10.14 Metrologic Instruments, Inc. 2004 Equity Incentive Plan (incorporated
by reference to Exhibit 4.1 to the Company's Form S-8 dated December
3, 2004).
10.15 Metrologic Instruments, Inc. Form of Option Agreement under the
Registrant's 2004 Equity Incentive Plan dated December 2, 2004
(incorporated by reference to Exhibit 10.1 to the Company's Form
8-K dated December 22, 2004).
10.16 Compensation Arrangements for the named Executive Officers. 44
10.17 Director Compensation Arrangements. 45
21 Subsidiaries of the Registrant 46
23.1 Consent of Independent Registered Public Accounting Firm 47
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer 48
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer 49
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted 50
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
executed by the Chief Executive Officer of the Company.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted 51
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
executed by the Chief Financial Officer of the Company.
<page>
EXHIBIT 10.16
Compensation Arrangements for the Named Executive Officers.
Set forth below is a summary of the compensation paid by the company to its
named Executive officers (defined in Regulation S-K Item 402(a)(3)) in their
current positions as of the date of filing of the Company's Annual Report on
Form 10-K for the year ended December 31, 2005 (the "Form 10-K"). Except for the
CEO all of the company's Executive Officers are at-will employees whose
compensation and employment status may be changed at any time in the discretion
of the Company's Board of Directors. The CEO has an employment contract which
was entered into on July 1, 2004 which was filed as Exhibit 10.1 to the
Company's Form 8-K/A dated November 16, 2004.
Base salary. Effective January 1, 2006 the named Executive Officers are
scheduled to receive the following annual base salaries in their current
positions:
Name Principal Position Salary($)
- ---- ------------------------------------------------ ---------
Benny A. Noens Chief Executive Officer and President 300,000
Gregory DiNoia Vice President, The Americas 165,000
Dale M. Fischer Vice President, International Sales 160,000
Joseph Sawitsky Senior Vice President, Manufacturing 185,000
Mark Schmidt Senior Vice President, Marketing 185,000
Jeffrey Yorsz Senior Vice President, Industrial and President of
Adaptive Optics Associates, Inc. 185,000
Annual Incentive Plans. In their current positions the named Executive
Officers are eligible to receive annual cash incentive awards as follows:
Benny Noens, Chief Executive Officer and President is eligible to receive an
annual incentive compensation cash award that is based on a formula with respect
to the Company's actual consolidated net income as compared with the Company's
budgeted net income as set forth in his employment contract which was entered
into on July 1, 2004 and was filed as Exhibit 10.1 to the Company's Form 8-K/A
dated November 16, 2004.
Gregory DiNoia, Vice President, the Americas, is eligible to receive incentive
compensation awards that are based on a formula with respect to the Company's
revenues, margins and operating expenses for the Americas geographic region.
Dale M. Fischer, Vice President, International Sales, is eligible to receive
incentive compensation awards that are based on a formula with respect to the
Company's revenues, margins and operating expenses for the Asia Pacific
geographic region.
Joseph Sawitsky, Senior Vice President, Manufacturing is eligible to receive an
annual incentive compensation cash award that is based on a formula with respect
to the Company's annual revenues as compared with the Company's budgeted annual
revenues.
Mark Schmidt, Senior Vice President, Marketing is eligible to receive an annual
incentive compensation cash award that is based on a formula with respect to the
Company's annual revenues as compared with the Company's budgeted annual
revenues.
Jeffrey Yorsz, Senior Vice President, Industrial and President of Adaptive
Optics Associates, is eligible to receive incentive compensation awards that are
based on a formula with respect to the Company's revenues, margins and operating
expenses for the industrial automation and optical systems businesses.
EXHIBIT 10.17
Director Compensation Arrangements
On October 3, 2005, the Registrant approved several changes to the compensation
payable to non-employees members of the Board of Directors for their service on
the committees of the Board. These changes, which are described below, are
effective as of July 1, 2005.
Committee members will receive (i) $1,500 per committee meeting, whether
attended in person or via telephone (increased from $1,000 per in-person meeting
and $500 for attendance via telephone), (ii) $500 for subsequent committee
meetings on the same day, (iii) $5,000 to chair a committee (increased from
$2,500) and (iv) $1,500 for any day where a substantial portion of the day was
spent on committee-related tasks.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
o MTLG Investments Inc., a Delware corporation
o Adaptive Optics Associates, Inc., a Delaware corporation
o Omniplanar, Inc.
o Metrologic do Brasil Ltda., a Brazil corporation
o Metro (Suzhou) Technologies Co., Ltd., a China corporation
o Metrologic Instruments GmbH, a German corporation
o Metrologic Eria France SA, a France corporation
o Metrologic Instruments Italia srl, an Italy corporation
o Metrologic Instruments Poland Sp.z o.o
o Metrologic Russia
o Metrologic Eria Iberica, SL, a Spain corporation
o Metrologic Instruments UK Limited, a United Kingdom corporation
o Metrologic Asia (Pte) Ltd., a Singapore corporation
o MTLG Auto ID Instruments (Shanghai) Co. Ltd.
o Metrologic Japan Co., Ltd., a Japan corporation
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Metrologic Instruments, Inc. of our report dated March 13, 2006, with respect
to the consolidated financial statements of Metrologic Instruments, Inc.,
included in the 2005 Annual Report to Shareholders of Metrologic Instruments,
Inc.
Our audits also included the financial statement schedule of Metrologic
Instruments, Inc. listed in Item 15(a). This schedule is the responsibility of
Metrologic Instruments, Inc.'s management. Our responsibility is to express an
opinion based on our audits. In our opinion, as to which the date is March 13,
2006, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We consent to the incorporation by reference in the following Registration
Statements:
(1) Registration Statement (Form S-8 No. 33-89376), pertaining to
the Metrologic Instruments, Inc. 1994 Incentive Plan,
(2) Registration Statement (Form S-8 No. 333-120992), pertaining to
the Metrologic Instruments, Inc. 2004 Equity Incentive Plan,
and
(3) Registration Statement (Form S-8 No. 33-86670), pertaining to
the Metrologic Instruments, Inc. Employee Stock Purchase Plan;
of our report dated March 13, 2006, with respect to the consolidated financial
statements of Metrologic Instruments, Inc. incorporated herein by reference, our
report dated March 13, 2006, with respect to Metrologic Instruments, Inc.
management's assessment of the effectiveness of internal control over financial
reporting and the effectiveness of internal control over financial reporting of
Metrologic Instruments, Inc., included herein, and our report included in the
preceding paragraph with respect to the financial statement schedule of
Metrologic Instruments, Inc. included in this Annual Report (Form 10-K) of
Metrologic Instruments, Inc.
Philadelphia, Pennsylvania /s/ Ernst & Young LLP
March 13, 2006
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) CERTIFICATION
I, Benny Noens, Chief Executive Officer of Metrologic Instruments, Inc., certify
that:
1. I have reviewed this annual report on Form 10-K of Metrologic
Instruments, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and we have:
a. designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. designed such internal control over financial reporting or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this annual report based on such evaluation; and
d. disclosed in this annual report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/ Benny Noens
__________________________________
Name: Benny Noens
Title: Chief Executive Officer
Date: March 15, 2006
<page>
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) CERTIFICATION
I, Kevin J. Bratton, Chief Financial Officer of Metrologic Instruments, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Metrologic
Instruments, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and we have:
a. designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. designed such internal control over financial reporting or
caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this annual report based on such evaluation; and
d. disclosed in this annual report any change in the
registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize, and report financial information; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By: /s/Kevin J. Bratton
___________________________________
Name: Kevin J. Bratton
Title: Chief Financial Officer
Date: March 15, 2006
<page>
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Metrologic
Instruments, Inc. (the "Company") on Form 10-K for the year ended December 31,
2005 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Benny Noens, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Benny Noens
- ------------------------------------
Benny Noens
Chief Executive Officer
March 15, 2006
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Metrologic
Instruments, Inc. (the "Company") on Form 10-K for the year ended December 31,
2005 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Kevin J. Bratton, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/Kevin J. Bratton
- ------------------------------------
Kevin J. Bratton
Chief Financial Officer
March 15, 2006