UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-24712
Metrologic Instruments, Inc.
(Exact name of registrant as specified in its charter)
New Jersey 22-1866172
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Coles Road, Blackwood, New Jersey 08012
(Address of principal executive offices) (Zip Code)
(856) 228-8100
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
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]
As of July 31, 2006, there were 22,686,819 shares of Common Stock, $.01 par
value per share, outstanding.
METROLOGIC INSTRUMENTS, INC.
INDEX
Page
No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2006 (unaudited) and December 31, 2005 3
Consolidated Statements of Operations (unaudited)
-Three and Six Months Ended June 30, 2006 and 2005 4
Consolidated Statement of Shareholders' Equity (unaudited)
- Six Months Ended June 30, 2006 5
Consolidated Statements of Cash Flows (unaudited)
- Six Months Ended June 30, 2006 and 2005 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
Part II - Other Information
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 30
Item 4. Submission of Mattrs to a Vote of Security Holders 30
Item 6. Exhibits 32
Signatures 33
<page>
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Metrologic Instruments, Inc.
Consolidated Balance Sheets
(amounts in thousands except share and per share data)
June 30, December 31,
2006 2005
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 40,138 $ 49,463
Marketable securities 25,599 24,475
Accounts receivable, net of allowance
of $706 and $627, respectively 49,583 48,462
Inventory 35,682 29,364
Deferred income taxes 699 801
Other current assets 4,645 5,599
--------- ---------
Total current assets 156,346 158,164
Property, plant and equipment, net 20,873 20,402
Goodwill 26,336 25,745
Computer software, net 7,756 8,949
Other intangibles, net 9,161 8,409
Deferred income taxes 1,352 4,262
Other assets 282 251
--------- ---------
Total assets $ 222,106 $ 226,182
========= =========
Liabilities and shareholders' equity
Current liabilities:
Lines of credit $ 16,556 $ 15,989
Current portion of notes payable 16 2,444
Accounts payable 12,209 14,200
Accrued expenses 13,887 32,509
Deferred contract revenue 981 739
--------- ---------
Total current liabilities 43,649 65,881
Notes payable, net of current portion 4 3
Deferred income taxes 2,502 8
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; 22,674,769 and
22,320,014 shares issued and outstanding
on June 30, 2006 and December 31, 2005,
respectively 227 223
Additional paid-in capital 98,970 92,828
Retained earnings 77,745 68,975
Accumulated other comprehensive loss (991) (1,736)
---------- ---------
Total shareholders' equity 175,951 160,290
---------- ---------
Total liabilities and shareholders' equity $ 222,106 $ 226,182
========== =========
See accompanying notes.
<page>
Metrologic Instruments, Inc.
Consolidated Statements of Operations
(Unaudited)
(amounts in thousands except share data)
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Sales $ 62,551 $ 48,604 $122,786 $ 95,455
Cost of sales 37,337 27,044 73,746 53,777
-------- -------- -------- --------
Gross profit 25,214 21,560 49,040 41,678
Selling, general and administrative
expenses 16,032 12,139 30,819 23,534
Research and development expenses 2,763 2,218 5,249 4,170
-------- -------- -------- --------
Operating income (expenses) 6,419 7,203 12,972 13,974
Other income (expenses)
Interest income 630 416 1,260 701
Interest expense (253) (304) (1,014) (567)
Other income (expense), net 95 (45) 485 (742)
-------- -------- -------- --------
Total other income (expense) 472 67 731 (608)
-------- -------- -------- --------
Income before provision for
income taxes 6,891 7,270 13,703 13,366
Provision for income taxes 2,481 2,617 4,933 4,812
-------- -------- -------- --------
Net income $ 4,410 $ 4,653 $ 8,770 $ 8,554
======== ======== ======== ========
Earnings per share:
Basic earnings per share $ 0.19 $ 0.21 $ 0.39 $ 0.39
======== ======== ======== ========
Diluted earnings per share $ 0.19 $ 0.20 $ 0.38 $ 0.37
======== ======== ======== ========
See accompanying notes.
<page>
Metrologic Instruments, Inc.
Consolidated Statement of Shareholders' Equity
(Unaudited)
(amounts in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss Total
---- ------- -------- -------- --------
Balances, January 1, 2006 $223 $92,828 $ 68,975 $ (1,736) $160,290
Comprehensive income:
Net income - - 8,770 - 8,770
Other comprehensive income-
foreign currency
translation adjustment - - - 745 745
--------
Total comprehensive income - - - - 9,515
Stock-based compensation - 2,641 - - 2,641
Exercise of stock options 4 1,496 - - 1,500
Tax benefit from exercise of stock
options - 1,841 - - 1,841
Stock issued through employee stock
purchase plan - 164 - - 164
--------------------------------------------
Balances, June 30, 2006 $227 $98,970 $ 77,745 $ (991) $175,951
============================================
See accompanying notes.
<page>
Metrologic Instruments, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
Six Months Ended
June 30,
2006 2005
-------- --------
Operating activities
Net income $ 8,770 $ 8,554
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,871 1,741
Amortization 1,688 1,665
Stock-based compensation 2,641 -
Deferred income tax benefit (478) -
Excess tax benefits from stock-based compensation (1,841) -
(Gain) loss on disposal of equipment (3) 40
Symbol litigation settlement payment (14,882) -
Note discount amortization 16 56
Changes in operating assets and liabilities:
Accounts receivable 397 (4,625)
Inventory (5,549) 919
Other current assets 1,187 122
Other assets (31) (69)
Accounts payable (2,183) (1,587)
Accrued expenses 3,780 321)
Other liabilities - (75)
------- -------
Net cash (used in) provided by
operating activities (4,617) 7,062
Investing activities
Purchase of property, plant and equipment (2,274) (2,081)
Purchase of minority interest in subsidiary - (1,213)
Purchases of marketable securities (101,311) (108,775)
Sales of marketable securities 100,187 105,575
Patents and trademarks (1,247) (527)
Proceeds from sale of property 33 6
------- -------
Net cash used in investing activities (4,612) (7,015)
Financing activities
Proceeds from exercise of stock options and
employee stock purchase plan 1,664 1,249
Excess tax benefits from stock-based
compensation 1,841 -
Net (repayments) borrowings on lines of credit (508) 3,721
Principal payments on notes payable (2,400) (367)
Capital lease payments (50) (71)
Net cash provided by ------- -------
financing activities 547 4,532
Effect of exchange rates on cash (643) 763
------- -------
Net (decrease)increase in cash and cash
equivalents (9,325) 5,342
Cash and cash equivalents at beginning of period 49,463 36,340
------- -------
Cash and cash equivalents at end of period $ 40,138 $41,682
======== =======
Supplemental Disclosure:
Cash paid for interest $ 926 $ 403
======== =======
Cash paid for income taxes $ 2,310 $ 2,603
======== =======
See accompanying notes.
<page>
METROLOGIC INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(amounts in thousands except per share data)
(Unaudited)
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 one-dimensional and two-dimensional 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 electro-optical and
opto-mechanical systems which include wavefront correction, industrial
inspection, and scanning and dimensioning systems for commercial and government
customers. 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
Interim Financial Information
The accompanying unaudited Consolidated Financial Statements have been prepared
in accordance with accounting principles generally accepted in the
United States for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring adjustments) necessary for a fair
presentation of the Consolidated Financial Statements have been included. The
results of the interim periods are not necessarily indicative of the results to
be obtained for a full fiscal year. The Consolidated Financial Statements and
these Notes should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in this
Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for
the year ended December 31, 2005, including the Consolidated Financial
Statements and the Notes to Consolidated Financial Statements for the year ended
December 31, 2005 contained therein.
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.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Investments
Marketable securities consist of investments in auction rate securities and
other similar type instruments. All of these investments are classified as
available-for-sale. The costs of these marketable securities approximate their
market values as of June 30, 2006 and December 31, 2005. The Company invests
excess cash in a variety of marketable securities, including auction rate
securities. Auction rate securities have long-term underlying maturities, but
have interest rates that are reset every 90 days or less, at which time the
securities can typically be purchased or sold, creating a highly liquid market.
The Company's intent is not to hold these securities to maturity, but rather to
use the interest rate reset feature to provide liquidity as necessary. The
Company's investment in these securities provides higher yields than money
market and other cash equivalent investments.
3. Earnings per share
Basic earnings per share ("Basic EPS") is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share ("Diluted EPS") considers the impact of potentially
dilutive securities except in periods in which there is a loss because the
inclusion of the potential common shares would have an anti-dilutive effect.
Diluted EPS excludes potential common shares related to our share-based
compensation plans because the inclusion of the potential common shares would
have an anti-dilutive effect. For the three and six month periods ended June 30,
2006 and 2005, potential common shares excluded were 1,238,299 and
817,802, respectively for the three month period and 1,118,375 and 796,527
respectively, for the six month period.
<page>
The following table reconciles the numerator and denominator of the computations
of Diluted EPS for common stockholders for the periods presented:
Three Months ended June 30,
-----------------------------------------------------------
2006 2005
-------------------------- -----------------------------
Per Per
Net Shares Share Net Shares Share
Income Amount Income Amount
------- ---------- ------ ------- ---------- --------
Basic EPS $4,410 22,668,702 $0.19 $4,653 22,136,353 $0.21
Effect of dilutive
securities 567,824 940,005
------- ---------- ------ ------- ---------- --------
Diluted EPS $4,410 23,236,526 $0.19 $4,653 23,076,358 $0.20
------- ---------- ------ ------- ---------- --------
Six Months ended June 30,
-----------------------------------------------------------
2006 2005
-------------------------- -----------------------------
Per Per
Net Shares Share Net Shares Share
Income Amount Income Amount
------- ---------- ------ ------- ---------- --------
Basic EPS $8,770 22,549,895 $0.39 $8,554 22,021,809 $0.39
Effect of dilutive
securities 671,135 1,078,224
------- ---------- ------ ------- ---------- --------
Diluted EPS $8,770 23,221,030 $0.38 $8,554 23,100,033 $0.37
------- ---------- ------ ------- ---------- --------
4. Inventory
Inventory consists of the following:
June 30, 2006 December 31, 2005
-------------- ------------------
Raw materials $ 12,264 $ 10,368
Work-in-process 4,304 4,316
Finished goods 19,114 14,680
------ ------
Total $ 35,682 $ 29,364
------ ------
5. Comprehensive Income
The Company's total comprehensive income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Net income $ 4,410 $ 4,653 $ 8,770 $ 8,554
Other comprehensive income (loss):
Change in equity due to
foreign currency
translation adjustments 379 (902) 745 (1,198)
------- ------- ------- -------
Comprehensive income $ 4,789 $ 3,751 $ 9,515 $ 7,356
======= ======= ======= =======
6. Goodwill and Other Intangible Assets
The changes in the net carrying amount of goodwill for the six months ended
June 30, 2006 consist of the following:
Industrial
Data Automation/
Capture & Optical
Collection Systems Total
--------- ---------- ---------
Balance as of January 1, 2006 $ 15,067 $ 10,678 $ 25,745
Foreign currency translation
adjustments 591 - 591
--------- --------- ---------
Balance as of June 30, 2006 $ 15,658 $ 10,678 $ 26,336
========= ========= =========
<page>
Other Intangibles
The following table reflects the components of identifiable intangible assets:
June 30, 2006 December 31, 2005
-------------------------- --------------------------
Amortizable Gross Net Gross Net
Life Carrying Accumulated Book Carrying Accumulated Book
(years) Amount Amortization Value Amount Amorization Value
----------- --------------------------- ---------------------------
Computer
software 5 $11,920 $(4,164) $ 7,756 $11,920 $(2,971) $ 8,949
Patents and
trademarks 17 10,454 (3,177) 7,277 9,207 (2,901) 6,306
Holographic
technology 10 1,082 (1,082) - 1,082 (1,062) 20
Advance
license fee 17 2,750 (1,158) 1,592 2,750 (1,075) 1,675
Covenants not
to compete 3 700 (408) 292 700 (292) 408
------ ------- ------ ------ ------ ------
Total $26,906 $(9,989) $16,917 $25,659 $(8,301) $17,358
====== ======= ====== ====== ====== ======
The Company has determined that the lives previously assigned to these
finite-lived assets are still appropriate and has recorded $1,688 and $1,665 of
amortization expense for the six months ended June 30, 2006 and 2005,
respectively.
7. Stock-Based Compensation
The Company adopted SFAS 123(R), "Share-based Payments" ("SFAS No. 123(R)") on
January 1, 2006. SFAS No. 123(R) requires that the fair value of stock-based
compensation be recognized in financial statements. Prior to January 1, 2006,
the Company followed Accounting Principles Board ("APB") Opinion 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for
stock compensation.
The Company elected the modified prospective method in adopting SFAS No. 123(R).
Under this method, the provisions of SFAS No. 123(R) apply to all awards granted
or modified after the date of adoption. In addition, the unrecognized expense of
awards not yet vested at the date of adoption is recognized in net income in the
periods after the date of adoption using the same valuation method
(Black-Scholes) and assumptions determined under the original provisions of SFAS
123, Accounting for Stock-Based Compensation, as disclosed in our previous
filings.
Under the provision of SFAS No. 123(R), the Company recorded $1,091 and $7 of
stock-based compensation expense during the three-month period ended June 30,
2006 in relation to its Stock Option Plans and Employee Stock Purchase Plan,
respectively. The Company recorded $2,618 and $23 of stock-based compensation
expense during the six-month period ended June 30, 2006 in relation to its Stock
Option Plans and Employee Stock Purchase Plan, respectively. The Company
recorded an associated tax benefit related to the stock-based compensation
expense of $395 and $951 during the three-month and six-month periods ended June
30, 2006, respectively.
SFAS No. 123(R) also required the Company to change its classification, in our
consolidated statement of cash flows, of any tax benefits realized upon the
exercise of stock options in excess of that which is associated with the expense
recognized for financial reporting purposes. These amounts totaling $145 and
$1,841 for the three-month and six-month periods ended June 30, 2006 are
presented as financing cash inflows rather than as reductions of income taxes
paid in our consolidated statements of cash flows.
Stock Option Plans
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
has 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 448,850 shares were available for grant
under the 2004 Equity Incentive Plan at June 30, 2006. 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 weighted-average fair value of the options granted under the stock option
plans for the six months ended June 30, 2006 and 2005 was $9.66 and $12.04,
respectively. We utilized the Black-Scholes valuation model for estimating these
fair values, with the following weighted-average assumptions:
Six Months Ended
June 30,
--------------------
2006 2005
Expected Volatility 56.0 % 72.2 %
Average risk-free interest rate 4.6 % 3.9 %
Expected life (in years) 4.2 4.7 %
Dividend yield 0.0 % 0.0 %
The dividend yield of zero is based on the fact that we have never paid cash
dividends and have no present intention to pay cash dividends. Expected
volatility is generally based on the historical volatility of our common stock
over the period commensurate with the expected life of the options. The
risk-free interest rate is derived from the U.S. Federal Reserve rate in effect
at the time of grant. The expected life calculation is based on the observed
and expected time to the exercise of options by our employees based on
historical exercise patterns for similar type options.
Based on our historical experience of pre-vesting option cancellations, the
Company has assumed an annualized forfeiture rate of 2.2% for our options. Under
the true-up provisions of SFAS No.123(R), we will record additional expense if
the actual forfeiture rate is lower than we estimated, and will record a
recovery of prior expense if the actual forfeiture is higher than we estimated.
The amortization of stock compensation under SFAS 123(R) for the period after
its adoption, and under APB 25 or SFAS 123 (pro forma disclosure) for the period
prior to its adoption was calculated using the accelerated method in accordance
with Financial Accounting Standard Board ("FASB") Interpretation ("FIN") No. 28.
Total compensation cost of options granted but not yet vested, as of June 30,
2006, was $6.1 million, which is expected to be recognized over the weighted
average period of 1.54 years.
The following table summarizes activity under all stock option plans:
Six Months Ended June 30, 2006
-------------------------------------------------
Weighted Weighted
Average Average Aggregate
Exercise Remaining Intrinsic
Shares Price Per Contractual Value
Outstanding Share Term (000's)
----------- --------- ----------- ----------
Balance at December 31, 2005 1,712,553 $11.72
Options Granted 474,900 $20.16
Options Exercised (340,748) $ 4.38
Options Cancelled (47,250) $14.19
----------
Balance at June 30, 2006 1,799,455 $15.27 7.80 $ 6,350
==========
Exercisable at June 30, 2006 712,212 $12.15 6.72 $ 4,144
<page>
SFAS No. 123R requires us to present pro-forma information for the comparative
period prior to the adoption as if we had accounted for all our stock options
under the fair value method of the original SFAS 123. The following table
illustrates the effect on net income and net income per share if we had applied
the fair value recognition provisions of SFAS 123 to stock-based compensation in
the comparable period in 2005:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
(Pro forma) (Pro forma)
Net income:
As reported $ 4,653 $ 8,554
Deduct: (total stock-based
employee compensation expense
determined under fair value based
method, net of related taxes) (747) (1,465)
-------- --------
Pro forma net income $ 3,906 $ 7,089
======== ========
Earnings per share:
Basic:
As reported $ 0.21 $ 0.39
Pro forma 0.18 0.32
Diluted:
As reported $ 0.20 $ 0.37
Pro forma 0.17 0.31
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.
This plan is considered a compensatory plan under the provisions of SFAS No.
123(R).
8. Business Segment 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 the three-month and
six-month periods ended June 30, 2006 or 2005. The Company manages its business
on a business segment basis dividing the business into two major segments: Data
Capture and Collection and Industrial Automation/Optical Systems.
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 the three-and six-month periods ended June 30, 2006 and
2005 is included below:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
--------------------- --------------------
Business segment net sales:
Data Capture and Collection $ 51,059 $ 39,128 $ 101,329 $ 75,656
Industrial Automation/Optical
Systems 11,492 9,476 21,457 19,799
--------------------- --------------------
Total $ 62,551 $ 48,604 $ 122,786 $ 95,455
--------------------- --------------------
Business segment gross profit:
Data Capture and Collection $ 22,241 $ 19,095 $ 43,076 $ 36,358
Industrial Automation/Optical
Systems 2,973 2,465 5,964 5,320
--------------------- --------------------
Total $ 25,214 $ 21,560 $ 49,040 $ 41,678
--------------------- --------------------
Business segment operating income:
Data Capture and Collection $ 6,587 $ 6,932 $ 12,977 $ 12,829
Industrial Automation/Optical
Systems (168) 271 (5) 1,145
--------------------- --------------------
Total $ 6,419 $ 7,203 $ 12,972 $ 13,974
--------------------- --------------------
Total other income (expenses) $ 472 $ 67 $ 731 $ (608)
--------------------- --------------------
Income before provision for
income taxes $ 6,891 $ 7,270 $ 13,703 $ 13,366
--------------------- --------------------
<page>
9. Acquisitions and Asset Purchases
Visible-RF, LLC
On May 5, 2006, the Company acquired all of the assets of Visible-RF, LLC, a
privately held start-up company located in Needham, MA for $750.
The acquisition of the assets of Visible-RF, LLC represents a significant
addition to the Company's technology portfolio. This technology combines the
benefits of a paper label with the advantages of RFID to display visible
information that is updated via a wireless signal. The Company allocated the
cost to intangibles for the Visible-RF patent portfolio which is being amortized
over its estimated useful life of 17 years.
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, at
present value, including acquisition costs and assumed liabilities. The Company
paid $9,050 at closing, $1,950 during the year ended December 31, 2005 and
$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(R) 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 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.
Metrologic do Brasil
On February 4, 2003, the Company paid cash of $71 and signed three annual
promissory notes with a total discounted value of $204 for the remaining 49%
interest in Metrologic do Brasil. During the period ended March 31, 2006, the
Company paid the final promissory note in the amount of $75. 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 the remaining 23%
interest for approximately 2,700 Euros or $3,200 at the exchange rate on
December 31, 2005. The aggregate purchase price was 5,854 Euros or $7,099 at
various exchange rates over the installment period. The Company now owns 100% of
MEI.
10. 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 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 151 is effective
for fiscal years 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 February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments-An Amendment of FASB Statements No. 133 and 140"
("SFAS No. 155"). SFAS No. 155 allows financial instruments that contain an
embedded derivative that otherwise would require bifurcation to be accounted for
as a whole on a fair value basis, at the holders' election. SFAS No. 155 also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. The Company does not expect
that the adoption of SFAS No. 155 will have a material impact on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
<page>
In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of
Financial Assets-An Amendment of FASB Statements No. 140" ("SFAS No. 156"). SFAS
No. 156 provides guidance on the accounting for servicing assets and liabilities
when an entity undertakes an obligation to service a financial asset by entering
into a servicing contract. This statement is effective for all transactions in
fiscal years beginning after September 15, 2006. The Company does not expect
that the adoption of SFAS No. 156 will have a material impact on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the way companies are
to account for uncertainty in income taxes recognized in financial statements
and prescribes a consistent recognition threshold and measurement attribute for
recognizing, derecognizing, and measuring the tax benefits of a tax position
taken, or expected to be taken, on a tax return. This Interpretation is
effective for fiscal years beginning after December 15, 2006, although early
adoption is permitted. The Company does not plan to adopt early and is currently
in the process of evaluating the impact, if any, the adoption of the
Interpretation will have on the Company's consolidated financial position,
consolidated results of operations or liquidity.
11. Legal Matters
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 eight of
the products are not royalty bearing products under the Symbol Agreement but
that three 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 then filed a motion to enter the judgment with the
U.S. District Court for the Southern District of New York. In
response, 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. On March 13, 2006,
the Company paid $14.9 million reflecting royalties and interest due in
accordance with the judgment of which $14.4 million was accrued for at December
31, 2005, and recorded a charge of $0.5 million for interest due through the
payment date. With a payment due on approximately August 15, 2006, any
significant royalty obligations for these products will end.
On September 23, 2005, Symbol filed suit against the Company in the U.S.
District Court for 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 for the Eastern District of Texas has
been stayed pending the outcome of the matter before the ITC. Trial before the
ITC commenced on July 24, 2006 and concluded on August 1, 2006. The parties will
submit post trial briefs, after which time the matter will be ready for
determination initially by the Administrative Law Judge. Metrologic stands firm,
in its belief, that its products do not infringe Symbol's patents. In this
regard, by order dated April 17, 2006, the Administrative Law Judge found one of
Symbol's patents to be invalid. Metrologic is vigorously defending the remaining
allegations of patent infringement.
On November 4, 2005, Symbol filed another suit against the Company in the U.S.
District Court for the Eastern District of Texas alleging patent infringement.
The complaint has been served on and answered by the Company. Discovery has
just begun in this matter. We plan a vigorous defense.
Metrologic v. Symbol Technologies, Inc.
<page>
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 heard arguments on the construction of the claims in
the patents in suit in March 2006 and a trial is currently scheduled for
November 2006.
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. In September
2005, the parties filed cross motions for summary judgment. On May 1, 2006,
Symbol's motion for summary judgment was denied. Then, on June 27, 2006, our
motion for summary judgment was granted. An agreed to form of order calling for
the payment to us of $2.65 million was submitted to the Court on July 24, 2006.
As of June 30, 2006, the Company has approximately $0.8 million of royalty
receivables reflected in Other current assets in our Consolidated Balance Sheet
related to this matter. The Company will not record a gain related to the
remaining amount in its Consolidated Statement of Operations until the decision
is finalized and all appeal rights are exhausted by Symbol.
On May 8, 2006, the Company filed a Complaint against Symbol in the U.S.
District Court for New Jersey. This new Complaint asserts infringement
by Symbol of several Metrologic patents and seeks declaratory, injunctive and
monetary relief. More specifically, we assert that several of Symbol's mobile
computers infringe our mobile computing patent portfolio. Symbol has filed an
answer and counterclaim asserting, among other things, that it is licensed to
use our patents and that the patents are invalid. Discovery in this matter has
just begun.
Brazil
Our subsidiary in Brazil has received notices from the local
taxing authorities disputing the amount of import taxes and duties paid on
imported products prior to December 2002. We have filed appeals of their
assessments in the administrative courts and are awaiting decisions on our
appeals. We have accrued a liability for these claims based on what we believe
to be the most likely outcome of these appeals and other potential
administrative processes. If we are unsuccessful in our appeals and other
administrative processes, the actual liability could be approximately $1.1
million higher than the amount we have accrued as of June 30, 2006.
Janet Norton v. Metrologic Instruments, Inc.
On May 1, 2006, the Company received a Complaint filed in the Superior Court of
New Jersey which asserts an employment based claim by a current employee. Our
investigation to date demonstrates that this claim has no merit. The plaintiff
has filed an amended complaint and we will shortly be filing an answer.
PSC Scanning v. Metrologic Instruments, Inc.
On May 10, 2006, PSC Scanning ("PSC") filed an action against the Company in the
U.S. District Court in Oregon. In its complaint, PSC asserted that our Stratos
line of bi-optic scanners infringe two new patents issued on December 13, 2005
and January 31, 2006. We have filed an answer and counterclaim and intend to
vigorously defend this matter. Additionally, complying with the terms of the
settlement agreement effective March 16, 2005, we have notified PSC that two
lines of their products infringe our patents. Regarding our claims, we are
currently in a 90 day standstill period where the parties are required to meet
and confer to see if the matter can be resolved.
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 2. 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 Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2005 for a description of risk factors that
could significantly affect the Company's financial results.
General
The following discussion of our results of operations and liquidity and capital
resources should be read in conjunction with our Consolidated Financial
Statements and the related Notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q and the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements for the year ended December 31, 2005 contained
in our Annual Report on Form 10-K for the year ended December 31, 2005. The
Consolidated Financial Statements for the three and six months ended June 30,
2006 and 2005 are unaudited.
Metrologic Instruments, Inc. and its subsidiaries (collectively, "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.
Critical Accounting Policies
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States, the
Company's management must make decisions which impact the reported amounts and
the related disclosures. Such decisions include the selection of the appropriate
accounting principles to be applied and assumptions on which to base estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, the Company evaluates its estimates, including those related to
allowances for doubtful accounts, inventory reserves, legal contingencies,
stock-based compensation, and income taxes. The Company bases its estimates on
historical experience and on various other assumptions 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. Other than the Company's
compliance with the new accounting requirements of Financial Accounting
Standards Board Statement No. 123(R), "Share Based Payments" ("SFAS 123(R)"),
there have been no material changes to the critical accounting policies listed
and described in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Company's 2005 Annual
Report on Form 10-K.
Stock-Based Compensation. Effective January 1, 2006, the Company adopted SFAS
123(R) using the modified prospective method, in which compensation cost is
recognized for (a) all share-based payments granted after the effective date and
(b) for all awards granted to employees prior to the effective date of SFAS
123(R) that remain unvested as of the effective date. Under the fair value
recognition provisions of SFAS 123(R), the Company recognizes share-based
compensation net of an estimated forfeiture rate and only recognizes
compensation cost for those shares expected to vest. The Black-Scholes
option-pricing model used in calculating the fair value of share-based payment
awards requires the input of highly subjective assumptions, including the
expected life of the share-based payment awards and stock price volatility. The
assumptions used in calculating the fair value of share-based payment awards
represent management's best estimates, and these estimates involve inherent
uncertainties and the application of management judgment. As a result, should
factors and assumptions change, such as volatility, the expected life, and
forfeiture rates, the share-based compensation expense could be materially
different in the future.
<page>
Executive 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 as well as focusing on the
adoption of bar coding technology in the healthcare industry. During fiscal 2005
and the first half of 2006, we continued to see increased orders with key retail
accounts which contributed to our quarter over quarter sales growth. 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, China manufacturing facility which was completed in
2004, as well as the opening of new sales offices in these territories. 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 and believe that fiscal 2006 will benefit from these specific initiatives.
We also intend to further 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
maintain financial flexibility. As of June 30, 2006, we had total debt of
approximately $16.6 million. Furthermore, we had cash and cash equivalents and
marketable securities of approximately $65.7 million as of June 30, 2006. 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.
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. In an effort to expand our market
presence in RFID (Radio Frequency Identification) as part of our planned growth
strategy, on May 5, 2006, the Company acquired of all of the assets of
Visible-RF, LLC, a privately held company located in Needham, MA.
The acquisition of Visible-RF, LLC represents a significant addition to the
Company's technology portfolio. This technology combines the benefits of a paper
label with the advantages of RFID to display visible information that is updated
via a wireless signal. The Company intends to utilize its extensive worldwide
sales and distribution network to expand this new technology through its
existing customer base. In addition, Metrologic entered into a strategic
partnership with MaxID during March 2006 which has resulted in two recently
introduced RFID readers for the North American Market. Adding this RFID
technology enables us to serve customers in the supply chain and
transportation/logistics markets and will help redefine our Industrial Business
strategy.
Results of Operations
In addition to including results of operations under accounting principles
generally accepted in the United States of America, we disclose results of
operations data for the three-month and six-month periods ended June 30, 2006
excluding the effects of stock-based compensation. For internal management
analysis, we compare current operating expenses to periods prior to the adoption
of SFAS No. 123(R) on a "with" and "without" basis to determine the trend of
operating expenses. The reconciliation below shows the effects on the quarterly
results if we had not adopted SFAS No. 123(R). This non-GAAP financial data is
included with the intention of providing investors a more complete understanding
of our results of operations and trends as compared with prior period results,
but should only be used in conjunction with results reported in accordance with
accounting principles generally accepted in the United States.
<page>
Reconciliation of Non-GAAP Financial Information
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
($ in Thousands) ($ in Thousands)
----------------------------- --------------------------
Actual Actual
Actual Effect Before Actual Effect Before
As of SFAS SFAS As of SFAS SFAS
Reported 123R 123R Reported 123R 123R
---------------------------- --------------------------
Sales $62,551 $ - $62,551 $122,786 $ - $122,786
Cost of sales 37,337 217 37,120 73,746 538 73,208
------- ------- ------- -------- ------- --------
Gross profit 25,214 (217) 25,431 49,040 (538) 49,578
Operating expenses:
Selling, general and
administrative
expenses 16,032 662 15,370 30,819 1,593 29,226
Research and
development expenses 2,763 218 2,545 5,249 510 4,739
------- ------- ------- -------- ------- --------
Total operating expenses 18,795 880 17,915 36,068 2,103 33,965
Operating income 6,419 (1,097) 7,516 12,972 (2,641) 15,613
Other income 472 - 472 731 - 731
------- ------- ------- -------- ------- --------
Income before income taxes 6,891 (1,097) 7,988 13,703 (2,641) 16,344
Income tax expense
(benefit) 2,481 (395) 2,876 4,933 (951) 5,884
------- ------- ------- -------- ------- --------
Net income $ 4,410 $ (702) $ 5,112 $ 8,770 $(1,690) $ 10,460
======= ======= ======= ======== ======= ========
Earnings per share:
Basic $ 0.19 $ (0.04) $ 0.23 $ 0.39 $ (0.07) $ 0.46
Diluted $ 0.19 $ (0.03) $ 0.22 $ 0.38 $ (0.07) $ 0.45
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.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2006 2005 2006 2006 2005
As Excluding As As Excluding As
Reported SFAS 123R Reported Reported SFAS 123R Reported
--------------------------- ---------------------------
Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.7% 59.3% 55.6% 60.1% 59.6% 56.3%
Gross profit 40.3% 40.7% 44.4% 39.9% 40.4% 43.7%
Operating expenses:
Selling, general and
administrative
expenses 25.6% 24.6% 25.0% 25.1% 23.8% 24.7%
Research and development
expenses 4.4% 4.1% 4.6% 4.3% 3.9% 4.4%
Total operating expenses 30.0% 28.7% 29.6% 29.4% 27.7% 29.1%
Operating income 10.3% 12.0% 14.8% 10.5% 12.7% 14.6%
Other income (expenses),
net 0.8% 0.8% 0.2% 0.6% 0.6% (0.6%)
Income before income taxes 11.1% 12.8% 15.0% 11.1% 13.3% 14.0%
Provision for income taxes 4.0% 4.6% 5.4% 4.0% 4.8% 5.0%
Net income 7.1% 8.2% 9.6% 7.1% 8.5% 9.0%
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. 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.
Three Months Ended Six Months Ended
June 30, June 30,
2006 2005 2006 2005
--------- -------- -------- --------
($ in Thousands) ($ in Thousands)
Data Capture & Collection $ 51,059 $ 39,128 $101,329 $ 75,656
Industrial Automation/Optical Systems
Industrial Automation 2,639 3,461 5,122 8,015
Optical Systems 8,853 6,015 16,335 11,784
--------- -------- -------- --------
Total Industrial Automation/
Optical Systems 11,492 9,476 21,457 19,799
--------- -------- -------- --------
Total Company $ 62,551 $ 48,604 $122,786 $ 95,455
========= ======== ======== ========
Most of our product sales in Western Europe, Brazil and Asia are billed in
foreign currencies and are subject to currency exchange rate fluctuations.
For the six months ended June 30, 2006, sales and gross profit were negatively
affected by fluctuations in the value of the U.S. dollar relative to certain
foreign currencies, especially the euro, when compared to the comparable period
in 2005.
The following table sets forth certain information as to our sales by
geographic location:
------------------------------ -------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2006 % 2005 % 2006 % 2005 %
------------------------------ -------------------------------
($ in Thousands)
The Americas(1) $25,596 40.9% $23,149 47.6% $ 53,541 43.6% $45,766 47.9%
EMEA (2) 29,713 47.5% 19,387 39.9% 56,825 46.3% 38,253 40.1%
Asia/Pacific 7,242 11.6% 6,068 12.5% 12,420 10.1% 11,436 12.0%
------- ------ ------- ------ -------- ------ ------- ------
Total $62,551 100.0% $48,604 100.0% $122,786 100.0% $95,455 100.0%
======= ====== ======= ====== ======== ====== ======= ======
(1) The Americas is defined as North America, South America, Canada and Mexico
(2) EMEA is defined as Europe, Middle East and Africa
Three Months Ended June 30, 2006 Compared with Three Months Ended June 30, 2005
Sales increased 28.7% to $62.6 million in the three months ended June 30, 2006
from $48.6 million in the three months ended June 30, 2005. Sales of our data
capture and collection products increased by 30.5%, sales of industrial
automation products decreased by 23.8% and sales of optical systems increased by
47.2%. The Euro exchange rate did not have a material impact on data capture
and collection sales. Data capture and collection sales increased approximately
$15.0 million due to increased unit sales of handheld and in-counter scanners,
including new product offerings. These factors were partially offset by a
decrease of approximately $3.2 million resulting from lower average selling
prices and increased promotional programs due to competitive pricing pressures
experienced in the retail sector in all geographic regions.
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 decrease in the industrial automation
product sales is attributable to the completion of certain fixed price and other
contracts during or prior to the second quarter of 2006.
The increase in optical systems sales in the second quarter of 2006 reflects an
increase in ongoing and new customer funded research and development and
production type programs.
<page>
Sales to "The Americas" region increased $2.4 million, or 10.6%, in the three
months ended June 30, 2006 when compared to the comparable period in 2005. This
increase is primarily attributed to ongoing penetration into new vertical
markets and Tier 1 retailers, higher demand in our South America markets,
and continued growth with our key distributors. EMEA sales increased $10.3
million, or 53.3% in the three months ended June 30, 2006 when compared to the
same period a year ago. 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 as well as increased sales
of certain of our products utilized in reverse-vending applications attributable
to legislative mandates. Asia/Pacific sales increased $1.2 million, or 19.3% in
the three months ended June 30, 2006 when compared with the comparable period in
2005. We continue to experience growth in this region as a result of continued
penetration into both new and existing key markets. No individual customer
accounted for 10.0% or more of sales in the three months ended June 30, 2006 or
2005.
Cost of sales increased to $37.3 million in the three months ended June 30, 2006
from $27.0 million in the three months ended June 30, 2005. As a percentage of
sales, cost of sales increased to 59.7% in 2006 from 55.6% in 2005. The increase
in the percentage of cost of sales can be primarily attributed to the following
key factors:
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 and
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 Increased royalty costs as a result of the court decision
upholding the arbitration award that we are required to pay
royalty payments of $10 per unit on sales of certain of our
scanners.
o Increased warranty costs for certain product redesign
initiatives and quality issues identified for select products.
o Increased compensation costs as a result of the adoption of
SFAS No. 123(R).
Selling, general and administrative ("SG&A") expenses increased 32.1% to $16.0
million in the three months ended June 30, 2006 from $12.1 million for the three
months ended June 30, 2005. As a percentage of sales, SG&A expenses increased
from 25.0% of sales in the three months ended June 30, 2005 to 25.6% of sales in
the corresponding period in 2006. The increase in SG&A expenses was primarily
attributable to increased legal fees associated with ongoing litigation matters,
stock-based compensation expense resulting from the adoption of SFAS No. 123(R)
and increased variable selling expenses associated with the higher sales volume
than the comparable period in 2005. Excluding the effects of SFAS No. 123(R),
SG&A expenses would have been $15.4 million or 24.6% of sales.
Research and development ("R&D") expenses increased 24.6% to $2.8 million in the
three months ended June 30, 2006 from $2.2 million in the corresponding period
in 2005; however, as a percent of sales, R&D expenses decreased to 4.4% of sales
from 4.6% of sales. The decrease in R&D expenses as a percent of sales can be
attributed to higher sales volume in 2006. The relative increase is primarily
due to stock-based compensation expense resulting from the adoption of SFAS No.
123(R) and an increase in personnel and professional fee costs associated with
ongoing product development initiatives. Excluding the effects of SFAS No.
123(R), R&D expenses would have been $2.5 million or 4.1% of sales.
Net interest income of $0.4 million for the three months ended June 30, 2006
increased $0.3 million as compared with net interest income of $0.1 million for
the comparable period in 2005. The increase can be attributed to higher invested
cash balances and higher interest yields on investment earnings in 2006 than in
the comparable period in 2005 and a reduction of interest expense as a result of
the payoff on acquisition related notes during the first quarter of 2006.
Other income/expense reflects net other income of $0.1 million for the three
months ended June 30, 2006 compared with net other expense of $0.05 million for
the comparable period in 2005. The change can be attributed to higher foreign
exchange losses in 2005 when compared with exchange gains in the comparable
period in 2006 as a result of volatility in foreign exchange rates, primarily
the Euro, Brazilian real and the Singapore dollar.
Net income was $4.4 million, or $0.19 per diluted share for the three months
ended June 30, 2006 compared with net income of $4.7 million or $0.20 per
diluted share in 2005. Net income reflects a 36% effective tax rate for both
2006 and 2005. The effective rate for 2006 does not reflect any benefit for
research and development tax credits as the federal legislation authorizing such
credits expired on December 31, 2005, and has not yet been renewed. Excluding
the effects of SFAS No. 123(R), net income would have been $5.1 million, or
$0.22 per diluted share for the three months ended June 30, 2006.
<page>
Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005
Sales increased 28.6% to $122.8 million in the six months ended June 30, 2006
from $95.5 million in the six months ended June 30, 2005. Sales of our data
capture and collection products increased by 33.9%, sales of industrial
automation products decreased by 36.1% and sales of optical systems increased by
38.6%. Data capture and collection sales increased approximately $30.8 million
due to increased unit sales of handheld and in-counter scanners, including new
product offerings. This was offset by a weakening of the Euro against the U.S.
dollar which accounted for a decrease of approximately $2.3 million, as well as
a decrease of approximately $2.8 million resulting from lower average selling
prices and increased promotional programs due to competitive pricing pressures
experienced in the retail sector in all geographic regions.
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 decrease in the industrial automation
product sales is attributable to the completion of certain fixed price and other
contracts during or prior to the second quarter of 2006 and smaller
contributions from our Omniplanar business.
The increase in optical systems sales in 2006 reflects an increase in ongoing
and new customer funded research and development and production type programs
and the execution of contract backlog accumulated over the recent quarters.
Sales to "The Americas" region increased $7.8 million, or 17.0%, in 2006 when
compared to the comparable period in 2005. This increase is primarily attributed
to ongoing penetration into new vertical markets and Tier 1 retailers, higher
demand in our South America markets, and continued growth with our key
distributors. EMEA sales increased $18.6 million, or 48.6% in 2006 when compared
to the same period a year ago. The increase in EMEA sales is attributable to
increased unit volume offset by lower average selling prices and the weakening
of the Euro against the U.S. dollar. The increased unit volume, in part,
reflects penetration into Tier 1 retailers as well as increased sales of certain
of our products utilized in reverse-vending applications attributable to
legislative mandates. Asia/Pacific sales increased $1.0 million, or 8.6% in 2006
when compared with the comparable period in 2005. We continue to experience
growth in this region as a result of continued penetration into both new and
existing key markets. No individual customer accounted for 10.0% or more of
sales in the six months ended June 30, 2006 or 2005.
Cost of sales increased to $73.7 million in the six months ended June 30, 2006
from $53.8 million in the six months ended June 30, 2005. As a percentage of
sales, cost of sales increased to 60.1% in 2006 from 56.3% in 2005. The increase
in the percentage of cost of sales can be primarily attributed to the following
key factors:
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 and
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 Increased royalty costs as a result of the court decision
upholding the arbitration award that we are required to pay
royalty payments of $10 per unit on sales of certain of our
scanners.
o Increased scrap, warranty and obsolescence reserves for certain
product redesign initiatives and quality issues identified for
select products.
o Increased compensation costs as a result of the adoption of
SFAS No. 123(R).
Selling, general and administrative ("SG&A") expenses increased 31.0% to $30.8
million in the six months ended June 30, 2006 from $23.5 million for the six
months ended June 30, 2005. As a percentage of sales, SG&A expenses increased
from 24.7% of sales in the six months ended June 30, 2005 to 25.1% of sales in
the corresponding period in 2006. The increase in SG&A expenses was primarily
attributable to increased legal fees associated with ongoing litigation matters,
stock-based compensation expense resulting from the adoption of SFAS No. 123(R)
and increased variable selling expenses associated with the higher sales volume
than the comparable period in 2005. Excluding the effects of SFAS No. 123(R),
SG&A expenses would have been $29.2 million or 23.8% of sales.
R&D expenses increased 25.9% to $5.2 million in the six months ended June 30,
2006 from $4.2 million in the corresponding period in 2005; however, as a
percent of sales, R&D expenses decreased slightly to 4.3% of sales from 4.4% of
sales. The decrease in R&D expenses as a percent of sales can be attributed to
higher sales volume in 2006. The relative increase is primarily due to
stock-based compensation expense resulting from the adoption of SFAS No. 123(R)
and an increase in personnel and professional fee costs associated with ongoing
product development initiatives. Excluding the effects of SFAS No. 123(R), R&D
expenses would have been $4.7 million or 3.9% of sales.
<page>
Net interest income of $0.2 million for the six months ended June 30, 2006
increased $0.1 million as compared with net interest income of $0.1 million for
the comparable period in 2005. The increase can be attributed to higher invested
cash balances and higher interest yields on investment earnings in 2006 than in
the comparable period in 2005, offset by higher interest expense as a result of
the charge of $0.5 million in interest on the Symbol litigation settlement
recorded in the quarter ended March 31, 2006.
Other income/expense reflects net other income of $0.5 million for the six
months ended June 30, 2006 compared with net other expense of $0.7 million for
the comparable period in 2005. The change can be attributed to higher foreign
exchange losses in 2005 when compared with exchange gains in the comparable
period in 2006 as a result of volatility in foreign exchange rates, primarily
the Euro, Brazilian real and the Singapore dollar.
Net income was $8.8 million, or $0.38 per diluted share for the six months ended
June 30, 2006 compared with net income of $8.6 million or $0.37 per diluted
share in 2005. Net income reflects a 36% effective tax rate for both 2006 and
2005. The effective rate for 2006 does not reflect any benefit for research and
development tax credits as the federal legislation authorizing such credits
expired on December 31, 2005, and has not yet been renewed. Excluding the
effects of SFAS No. 123(R), net income would have been $10.5 million, or $0.45
per diluted share for the six months ended June 30, 2006.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on our results of
operations. However, our sales are typically impacted by fluctuation 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 budgets, (ii) the expiration of legislative calendar-year programs and (iii)
start-up investment of pilot efforts.
Liquidity and Capital Resources
Operating activities
Net cash used in operations was $4.6 million for the six-month period ended June
30, 2006 as compared to cash provided by operations of $7.1 million for the
comparable period in 2005. Net cash used in operating activities for the six
months ended June 30, 2006 can be attributed primarily to payment of the Symbol
litigation award of $14.9 million, net increases in operating assets and
liabilities of $4.7 million; offset by net income of $8.8 million, depreciation
and amortization of approximately $3.6 million and stock-based compensation
expense of $2.6 million.
Our working capital increased $20.4 million or 22.1% to $112.7 million as of
June 30, 2006 from $92.3 million as of December 31, 2005. The key components of
the increase in working capital were increases in inventory of $6.3 million and
an increase in accounts receivable of $1.1 million as a result of sales
concentrations at the end of the quarter, increases in marketable securities of
$1.1 million and net decreases in other current assets/liabilities of $11.9
million.
Investing activities
Cash used in investing activities was $4.6 million for the six months ended June
30, 2006 as compared to $7.0 million for the comparable period in 2005. The
decrease in cash used in investing activities is primarily due to changes in the
purchases, sales and maturities of marketable securities of $2.2 million plus
the scheduled purchase of the remaining 49% interest in Metrologic Eria Iberica
in the first half of 2005 for $1.2 million, offset by increases in patents and
trademarks of $0.8 million as a result of the acquisition of Visible-RF, LLC
(See Note 9-"Acquisitions" for additional information) and increased spending
for capital expenditures of $0.2 million.
Financing activities
Cash provided by financing activities was $0.5 million for the six months ended
June 30, 2006 as compared to $4.5 million for the comparable period in 2005.
Cash provided by financing activities for the six months ended June 30, 2006
consists primarily of $3.5 million of proceeds and related tax benefits from the
exercise of stock options and purchases under the employee stock purchase plan
offset by repayments of scheduled notes of $2.4 million (See "Outstanding debt
and financing arrangements" below for additional information on scheduled notes)
and repayments under lines of credit by our foreign subsidiaries of $0.5
million.
Outstanding debt and financing arrangements
In connection with the acquisition of Omniplanar, the Purchase Agreement set
forth a schedule of payments over 18 months. We paid $9.0 million at closing,
$2.0 million in 2005 and the final payment of $2.0 million 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, $0.2 million for the period ended March 31, 2006, and
the remaining scheduled payments of $0.2 million in June 2006.
<page>
Some of our European subsidiaries have entered into working capital and invoice
discounting agreements with HypoVereinsbank, Dresdner, Societe Generale and GE
Commercial Finance. Outstanding borrowings under the working capital agreement
with HypoVereinsbank have been guaranteed by Metrologic Instruments, Inc., the
parent company. These agreements provide the Company with availability of up to
$21.1 million, using June 30, 2006 exchange rates, at interest rates ranging
from 4.0% to 6.5%. In addition, our subsidiary Metrologic do Brasil has a
working capital agreement with Banco Bradesco SA with availability of up to 0.8
million real or $0.4 million, using June 30, 2006 exchange rates. At June 30,
2006, $16.6 million was outstanding under such agreements and accordingly is
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, 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 have in the past entered
and may 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
June 30, 2006.
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 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 151 is effective
for fiscal years 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 December 2004, the FASB issued Statement No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"), which replaces SFAS 123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Effective January 1, 2006,
the Company adopted SFAS No. 123(R) using the Modified Prospective Approach. See
Note 7 to our Consolidated Financial Statements for further detail regarding the
adoption of this statement.
In February 2006, the FASB issued Statement No. 155, "Accounting for Certain
Hybrid Financial Instruments-An Amendment of FASB Statements No. 133 and 140"
("SFAS No. 155"). SFAS No. 155 allows financial instruments that contain an
embedded derivative that otherwise would require bifurcation to be accounted for
as a whole on a fair value basis, at the holders' election. SFAS No. 155 also
clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140.
This statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. The Company does not expect
that the adoption of SFAS No. 155 will have a material impact on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of
Financial Assets-An Amendment of FASB Statements No. 140" ("SFAS No. 156"). SFAS
No. 156 provides guidance on the accounting for servicing assets and liabilities
when an entity undertakes an obligation to service a financial asset by entering
into a servicing contract. This statement is effective for all transactions in
fiscal years beginning after September 15, 2006. The Company does not expect
that the adoption of SFAS No. 156 will have a material impact on the Company's
consolidated financial position, consolidated results of operations or
liquidity.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the way companies are
to account for uncertainty in income taxes recognized in financial statements
and prescribes a consistent recognition threshold and measurement attribute for
recognizing, derecognizing, and measuring the tax benefits of a tax position
taken, or expected to be taken, on a tax return. This Interpretation is
effective for fiscal years beginning after December 15, 2006, although early
adoption is permitted. The Company does not plan to adopt early and is currently
in the process of evaluating the impact, if any, the adoption of the
Interpretation will have on the Company's consolidated financial position,
consolidated results of operations or liquidity.
<page>
Item 3- Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our quantitative and qualitative
disclosure about market risk since December 31, 2005.
Item 4- Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this report, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of our
Management, including our principal executive officer and principal financial
officer. Based on that evaluation these officers concluded that these disclosure
controls and procedures are effective as of the end of the period covered by
this report.
There have been no changes in the Company's internal controls over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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.
Symbol Technologies, Inc. v. Metrologic
In August 2005, the arbitrator entered a final ruling in the arbitration
awarding Symbol Technologies, Inc. ("Symbol") past royalties on certain of the
Company's products plus interest. Symbol then filed a motion to enter the
judgment with the U.S. District Court for the Southern District of New York. In
response, 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. On March 13, 2006,
the Company paid $14.9 million reflecting royalties and interest due in
accordance with the judgment of which $14.4 million was accrued for at December
31, 2005, and recorded a charge of $0.5 million for interest due through the
payment date. With a payment due on approximately August 15, 2006, any
significant royalty obligations for these products will end.
On September 23, 2005, Symbol filed suit against the Company in the U.S.
District Court for 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 for the Eastern District of Texas has
been stayed pending the outcome of the matter before the ITC. Trial before the
ITC commenced on July 24, 2006 and concluded on August 1, 2006. The parties will
submit post trial briefs, after which time the matter will be ready for
determination initially by the Administrative Law Judge. Metrologic stands firm,
in its belief, that its products do not infringe Symbol's patents. In this
regard, by order dated April 17, 2006, the Administrative Law Judge found one of
Symbol's patents to be invalid. Metrologic is vigorously defending the remaining
allegations of patent infringement.
On November 4, 2005, Symbol filed another suit against the Company in the U.S.
District Court for the Eastern District of Texas alleging patent infringement.
The complaint has been served on and answered by the Company. Discovery has
just begun in this matter. We plan a vigorous defense.
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. In September
2005, the parties filed cross motions for summary judgment. On May 1, 2006,
Symbol's motion for summary judgment was denied. Then, on June 27, 2006, our
motion for summary judgment was granted. An agreed to form of order calling for
the payment to us of $2.65 million was submitted to the Court on July 24, 2006.
As of June 30, 2006, the Company has approximately $0.8 million of royalty
receivables reflected in Other current assets in our Consolidated Balance Sheet
related to this matter. The Company will not record a gain related to the
remaining amount in its Consolidated Statement of Operations until the decision
is finalized and all appeal rights are exhausted by Symbol.
On May 8, 2006, the Company filed a Complaint against Symbol in the U. S.
District Court for New Jersey. This new Complaint asserts infringement
by Symbol of several Metrologic patents and seeks declaratory, injunctive and
monetary relief. More specifically, we assert that several of Symbol's mobile
computers infringe our mobile computing patent portfolio. Symbol has filed an
answer and counterclaim asserting, among other things, that it is licensed to
use our patents and that the patents are invalid. Discovery in this matter has
just begun.
Brazil
Our subsidiary in Brazil has received notices from the local
taxing authorities disputing the amount of import taxes and duties paid on
imported products prior to December 2002. We have filed appeals of their
assessments in the administrative courts and are awaiting decisions on our
appeals. We have accrued a liability for these claims based on what we believe
to be the most likely outcome of these appeals and other potential
administrative processes. If we are unsuccessful in our appeals and other
administrative processes, the actual liability could be approximately $1.1
million higher than the amount we have accrued as of June 30, 2006.
<page>
Janet Norton v. Metrologic Instruments, Inc.
On May 1, 2006, the Company received a Complaint filed in the Superior Court of
New Jersey which asserts an employment based claim by a current employee. Our
investigation to date demonstrates that this claim has no merit. The plaintiff
has filed an amended complaint and we will shortly be filing an answer.
PSC Scanning v. Metrologic Instruments, Inc.
On May 10, 2006, PSC Scanning ("PSC") filed an action against the Company in the
U. S. District Court in Oregon. In its complaint, PSC asserted that our Stratos
line of bi-optic scanners infringe two new patents issued on December 13, 2005
and January 31, 2006. We have filed an answer and counterclaim and intend to
vigorously defend this matter. Additionally, complying with the terms of the
settlement agreement effective March 16, 2005, we have notified PSC that two
lines of their products infringe our patents. Regarding our claims, we are
currently in a 90 day standstill period where the parties are required to meet
and confer to see if the matter can be resolved.
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 1A. Risk Factors
There have been no material changes to the risk factors faced by the Company
since December 31, 2005. For identification and discussion of the most
significant risks applicable to the Company and its business, please refer to
the Risk Factors section in Item 1A of our 2005 Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on June 15, 2006. At such meeting,
the following matters were voted upon by the shareholders, receiving the number
of affirmative, negative and withheld votes, as well as abstentions and broker
non-votes, set forth below for each matter.
(1) The vote of the common shareholders for the election of C.
Harry Knowles and Stanton L. Meltzer as directors to serve a three-year term
ending in 2009 were as follows:
Number of Votes Number of Votes
Number of Votes For Against Abstain Name
------------------- --------------- --------------- ----------------
17,550,848 0 3,863,443 C. Harry Knowles
21,036,537 0 377,754 Stanton Meltzer
(2) The vote of the common shareholders for the appointment of
Ernst & Young LLP as our registered public accounting firm for the fiscal year
ending December 31, 2006 was as follows:
Number of Votes Number of Votes
Number of Votes For Against Abstain Broker Non-Votes
------------------- --------------- --------------- ----------------
21,362,906 43,831 7,554 0
The directors whose terms continue after the Annual Meeting of
Shareholders referenced above are Richard C. Close, Janet Knowles, John Mathias,
Hsu Jau Nan and William Rulon-Miller.
Item 6. Exhibits
Exhibits:
31.1 Certification by Chairman of the Board and Interim
Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 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 Chairman of the Board and
Interim 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 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.
Date: August 9, 2006 By:/s/ C. Harry Knowles
----------------- ----------------------------------------
C. Harry Knowles
Chairman of the Board and Interim Chief
Executive Officer
(Interim Principal Executive Officer)
Date: August 9, 2006 By:/s/ Kevin J. Bratton
----------------- -----------------------------------------
Kevin J. Bratton
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit Index Page Number
31.1 Certification by Chairman of the Board and Interim Chief
Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 33
31.2 Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. 34
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 Chairman of the Board and
Interim Chief Executive Officer of the Company. 35
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. 36
Exhibit 31.1
CERTIFICATION
I, C. Harry Knowles, Chairman of the Board and Interim Chief
Executive Officer of Metrologic Instruments, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Metrologic Instruments,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 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 report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. disclosed in this 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 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/C. Harry Knowles
----------------------------------
Name: C. Harry Knowles
Title: Chairman of the Board and
Interim Chief Executive Officer
Date: August 9, 2006
<page>
Exhibit 31.2
CERTIFICATION
I, Kevin J. Bratton, Chief Financial Officer of Metrologic
Instruments, Inc., certify that:
1. I have reviewed this report on Form 10-Q of Metrologic Instruments,
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 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 report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d. disclosed in this 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 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: August 9, 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 Report of Metrologic Instruments, Inc.
(the "Company") on Form 10-Q for the quarter ended June 30, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
C. Harry Knowles, Chairman of the Board and Interim 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/C. Harry Knowles
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C. Harry Knowles
Chairman of the Board and Interim Chief Executive Officer
August 9, 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 Report of Metrologic Instruments, Inc.
(the "Company") on Form 10-Q for the quarter ended June 30, 2006 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
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Kevin J. Bratton
Chief Financial Officer
August 9, 2006