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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 10-K
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(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998, 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)
(609) 228-8100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 29, 1999 was $20,043,356 calculated by excluding
all shares held by executive officers, directors and 5% stockholders of the
Registrant without conceding that all such persons are "affiliates" of the
Registrant for purposes of the federal securities laws.
As of March 29, 1999 there were 5,410,125 shares of Common Stock outstanding.
Documents Incorporated by Reference
Portions of the following documents are incorporated herein by reference:
Part III - The Registrant's definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed not later than 120 days after the
close of the fiscal year.
PART I
Item 1. Business
Introduction
Metrologic Instruments, Inc. ("Metrologic" or the "Company") designs,
manufactures and markets bar code scanning equipment incorporating laser and
holographic technology. These scanners rapidly, accurately and efficiently read
and decode all widely used bar codes and provide an efficient means for data
capture and automated data entry into computerized systems. The Company's
principal laser scanner products are hand-held scanners, fixed projection
scanners, in-counter scanners and industrial scanners. The Company's marketing
efforts are also currently focused on additional products, including wireless
scanner interfaces, holographic scanners and related integrated systems,
hand-mounted scanners, which provide hands-free scanning capability, and laser
engines, which perform scanning functions in products manufactured by others.
The Company is vertically integrated, designing and manufacturing its own
optics, optical coatings, magnetic and inductive electronic components and
fabricated parts.
The Company was incorporated in New Jersey in May 1969 as a successor to a sole
proprietorship, which commenced operations in 1968. The Company's executive and
administrative offices are located at 90 Coles Road, Blackwood, New Jersey
08012. The Company's telephone number is 609-228-8100.
The Company's principal subsidiaries include: Metrologic Instruments GmbH;
Metrologic Asia (PTE) Ltd.; Metrologic do Brasil Ltda (a 51% joint venture);
Holoscan, Inc. ("Holoscan"), and an affiliate, Metrologic, South America, an
exclusive sales office.
The Company's Products
The Company's scanners use solid state visible-laser-diodes and incorporate
custom integrated circuits and surface mount components for virtually all of
their electronics. In addition, the Company's scanners use proprietary
software, such as ScanSet(R) software and the ScanSelect(TM) bar code booklet
program, which allow the end-user to reconfigure and program the scanners'
performance characteristics. These programs also permit the scanner to read
commonly used bar codes and to perform a variety of other functions. In
addition, the Company's interpretive and decode software provide the capability
of high speed and aggressive decoding. The Company's scanners interface into
most computers, cash registers and portable data terminals.
Bar code laser scanners are the Company's predominant products and accounted
for 94.4%, 92.8% and 92.0% of the Company's sales in 1998, 1997 and 1996,
respectively. The following laser bar code scanners have historically accounted
for a substantial portion of the Company's product revenues.
Hand-Held Scanners. Since late 1990, the Company has offered for sale its MS900
Series of automatically triggered hand-held scanners. These scanners generally
are used in retailing, libraries, industrial warehousing, production lines and
commercial applications because of their low cost, size and versatility. Using
infrared sensor detectors, the MS900 Series turns on automatically and can be
manually presented to a bar code or fixed mounted and used as a stationary
scanner. These scanners can automatically read and discriminate among all
commonly used bar code symbols. Priced to compete directly with other low cost
bar code reading devices such as the charge coupled device ("CCD") and the
light pen, the MS900 Series also competes in a class of more expensive high
performance scanners due to its performance and reliability.
Fixed Projection Scanners. Since 1990, the Company has offered for sale its
MS700 Series of high performance fixed projection scanners. By projecting a
pattern of multiple laser lines at very high speeds, the MS700 Series is
capable of reading bar codes presented in multiple directions or
"omnidirectionally." These scanners are generally mounted on the top of a
counter and are used in high volume retail stores and outlets, magazine
distribution and processing centers, libraries and other applications where
greater scanning throughput is required.
In 1998, the Company introduced the Orbit(TM) MS7100. The MS7100 is a compact,
omnidirectional presentation laser bar code scanner. This scanner is small and
lightweight and designed for applications where counter and workspace is
limited. Orbit can be used for many applications, including point-of-sale
applications in retail and specialty stores. The MS7100 is positioned on a
unit sales price basis between the MS 6720 hand-held and MS 700 Series.
In-counter Mini-Slot(R) Scanners. Since 1985 the Company has offered for sale
its in-counter Slot scanners. The Company's MS800 Series of in-counter
Mini-Slot(R) scanners has been offered for sale since 1991 and was developed
for supermarket, discount and specialty stores which require high-throughput
scanning but have limited space in which to work.
Omnidirectional Hand-Held Scanners. In 1996, the Company introduced a
multi-purpose omnidirectional scanner. The MS6720 incorporates omnidirectional
scanning technology into a hand-supportable housing, offering ergonomic
hand-held scanning and fixed presentation throughput. The MS6720 is positioned
on a unit sales price basis between the Company's cost-effective MS900 Series
and high-performance fixed presentation MS700 scanners.
Industrial Scanners. Since 1991, the Company has offered its TECH series of
scanners. These scanners generally are used in conveyor belt or other
industrial applications requiring automated scanning capability. The TECH
series is designed to withstand the rigors associated with equipment used in
industrial environments and may be mounted in any orientation, giving the
end-user installation flexibility. Other industrial products include
ScanQuest(R) engines, ScanGlove(R) scanners and ScanKey(TM) scanners.
Holographic Industrial Scanners. Since 1996, the Company has offered its
HoloTrak(R) line of holographic scanners. These scanners utilize proprietary
Metrologic technology to offer increased scanning performance at a more
affordable price than similar fixed industrial-use omnidirectional scanners.
The HoloTrak(R) line is designed to increase user efficiency and productivity
in high volume package-handling situations. Holographic scanner products
include the Company's versatile 8000 Series scanners, C Series scanners
designed for industrial conveyor belt scanning, and tunnel systems which
integrate cost-effective holographic scanner technology with other
technologies, including Q-Trak(TM) tracking software for a broad range of
high-speed, automated applications.
Research and Product Development
The Company conducts its own engineering programs for the purposes of
developing new products, improving its existing products' reliability,
ergonomics and performance and reducing manufacturing and support costs. The
Company is engaged in continuous development programs in the areas of optics,
holography, electronics, radio-frequency interfacing, automated manufacturing
methods and mechanics.
During 1998, the Company's research and development efforts were focused on new
product introductions for 1998 and 1999, which include hand held scanners,
fixed projection scanners, and holographic scanners. During 1998, 1997 and
1996, the Company incurred expenses of approximately $4.2 million, $3.4 million,
and $3.1 million, respectively, on research and development activities.
Sales and Marketing
The Company sells its products through distributors, value-added resellers
("VARs") and original equipment manufacturers ("OEMs") and directly to
end-users located throughout the world. The Company also utilizes its
subsidiaries and affiliates to sell, distribute and service its products
throughout major markets of the world. Metrologic Instruments GmbH, a
wholly-owned subsidiary located near Munich, Germany, provides sales,
distribution and service to European customers. In 1997, the Company
established Metrologic Asia (PTE) Ltd., a wholly-owned subsidiary located in
Singapore which provides sales, distribution and service, to develop and
support the Company's growing Asian customer base. In 1998, the Company
completed a joint venture agreement providing for a 51% equity interest in
Metrologic do Brasil Ltda., located in Sao Paulo, Brazil. Metrologic do Brasil
Ltda. provides sales, distribution and service for the Company's Brazilian
customer base. Metrologic Instruments, South America was relocated to Sao
Paulo, Brazil in 1998 and remains the exclusive sales office for the Company's
South American customers outside of Brazil.
The Company has continued to strengthen its focus to better support sales to
distributors and resellers, sales to OEM's, and sales of holographic industrial
scanners including pre-sales application testing and support.
The Company has contractual relationships with numerous distributors and
dealers and a limited number of OEMs, VARs and end-users. OEMs purchase the
Company's products, incorporate them into their systems and sell them under
their own names. VARs purchase the Company's products and other peripheral
components needed for specific applications and sell them directly to
end-users. By utilizing multiple distribution channels, the Company has been
able to expand its market presence, broaden its distribution network and sell
to industries other than those serviced by the Company's direct sales force.
The Company has also entered into brand label agreements for sales of its
HoloTrak industrial holographic scanners with selected companies and an
exclusive sales agreement for HoloTrak sales in Japan with Matsushita
Inter-Techno Co. (a company of the Panasonic Corporation). Additionally, the
Company has developed a separate VAR network for the sales, service and
distribution of the HoloTrak(R) scanners.
As of December 31, 1998, the Company had approximately $4.6 million in backlog
orders. All such backlog orders are anticipated to be filled prior to December
31, 1999. As of December 31, 1997, the Company had approximately $1.7 million
in backlog orders, of which were filled during the 1998 fiscal year.
The Company performs ongoing credit evaluations of its customers' financial
condition, and except where risk warrants, requires no collateral. The Company
may, however, require, letters of credit or prepayment terms for those customers
in lesser developed countries.
The following table sets forth certain information as to the Company's sales by
geographical location: (amounts in thousands)
Year Ended December 31,
1996 1997 1998
North America $17,445 $19,684 $26,058
Europe 23,466 26,475 28,849
Rest of World 6,060 7,336 10,734
------- ------- -------
Total $46,971 $53,495 $65,641
======= ======= =======
Foreign sales of the Company's products are subject to the normal risks of
foreign operations, such as protective tariffs, export/import controls and
transportation delays and interruptions. The Company's international sales are
invoiced in U.S. dollars, German marks, Singapore dollars, Brazilian reals, and
various other European currencies and are thus subject to currency exchange
fluctuations. Since the Company's products are manufactured in the United
States, the Company's sales and results of operations are routinely affected by
fluctuations in the value of the U.S. dollar. The Company undertakes certain
hedging activities to the extent of known cash flow in an attempt to mitigate
the effects of foreign exchange fluctuations.
Competition
The bar code scanning industry is highly competitive. The Company's scanners
compete primarily with those produced by Accu-Sort Systems, Inc., Microscan
Systems, Inc., NCR Corporation, PSC, Inc., Symbol Technologies, Inc., Unova,
Welch Allyn, Inc. and others in the United States as well as Scantech located
in the Netherlands, Datalogic, Inc. located in Italy, Sick located in Germany,
and Nippondenso ID Systems, Opticon, Inc. and many other manufacturers located
in Asia. While many of the Company's competitors are much larger and have
greater financial, technical, marketing and other resources than the Company,
the Company believes that it competes on the basis of price, quality, service
and product performance.
Patent, Copyright and Trademark Matters
The Company files domestic and foreign patent applications to protect its
technological position and new product development. The Company currently has
53 issued U.S. patents, which expire between 1999 and 2017, and 14 foreign
patents, which expire between 2005 and 2012. In addition, the Company currently
has 26 U.S. allowed patent applications which are expected to issue as patents
shortly. The Company has filed additional patent applications with the U.S.
Patent and Trademark Office and foreign patent offices with respect to products
and improvements developed by the Company. The Company owns U.S. trademark
registrations covering Metrologic(R), HandSet(R), HoloTrak(R), HoloSet(R),
Mini-Slot(R), Liberty(R), ScanQuest(R), ScanSet(R), ScanSelect(TM),
ScanGlove(R), ScanPal(R), Tech 7(R), Tech 8(R), Tech 10(R), and VarSide(R). The
Company also has several registered trademarks in foreign countries. The
Company has filed additional trademark and service mark applications including
ScanKey(TM), HoloPrism(TM), HoloTunnel(TM), C3(TM), MetroSet(TM),
OmniQuest(TM), Orbit(TM), and Concert(TM) and for other marks it is using both
in the United States and abroad. The Company intends to continue to file
applications for U.S. and foreign patents and trademarks. Although management
believes that its patents provide some competitive advantage and market
protection, the Company relies primarily upon its proprietary know-how,
innovative skills, technical competence and marketing abilities for its success.
The Company regards its software as proprietary and attempts to safeguard it
with protection under copyright and trade secret law and nondisclosure
agreements. Despite this protection, it may be possible for competitors or
users to copy aspects of the Company's products or to obtain information which
the Company regards as trade secrets. Computer software generally has not been
patented and existing copyright laws afford only limited practical protection.
The laws of foreign countries generally do not protect the Company's
proprietary rights in its products to the same extent as the laws of the United
States. In addition, the Company may experience more difficulty in enforcing
its proprietary rights in certain foreign jurisdictions.
In December 1996, the Company and Symbol Technologies, Inc. ("Symbol") executed
an extensive cross-license of patents (the "Symbol Agreement") for which the
Company and Symbol pay royalties to each other under certain circumstances
effective January 1, 1996. In connection with the Symbol Agreement, the Company
paid Symbol an advance license fee of $1 million in December 1996 and agreed to
pay another $1 million in quarterly installments of $125,000 over two years
ending in December 1998. In December 1997, the Company and Symbol amended the
Symbol Agreement to provide for the purchase of the Company's HoloTrak
industrial holographic scanners for resale by Symbol under Symbol's brand
label. This replaces a prior commitment of Symbol under the Symbol Agreement to
purchase the Company's products.
In connection with the settlement of a December 1993 patent lawsuit with
Symbol, the Company agreed to make payments to Symbol through December 31,
2004. As a result of the patent lawsuit, the Company redesigned its hand-held
scanners to convert them from a triggered version to a triggerless version. In
connection with the Symbol Agreement, Symbol and the Company amended the
December 1993 settlement to reduce the maximum aggregate amount payable
thereunder by the Company from $7.5 million to approximately $5.1 million. For
additional information concerning the settlement, see Note 10 of the Notes to
Consolidated Financial Statements.
Manufacturing and Suppliers
The Company manufactures all of its products at its Blackwood, New Jersey
headquarters, enabling the Company to quickly adapt and enhance its products
and services to meet specific customer requirements. This capability also
reduces the length of the new product development cycle and speeds the
integration of new products into manufacturing. Product quality assurance is
achieved by an experienced workforce.
The Company has invested and will continue to invest in capital production
equipment and tooling that will automate production, increase capacity and
reduce direct labor costs.
The Company currently relies on a limited number of suppliers for several
components used in the manufacture of its products. The Company does not
believe that the loss of any one supplier would have a long term adverse effect
on its business, although set-up costs and delays would likely result if the
Company were required to change any single supplier without adequate prior
notice. In 1999, the Company acquired a 20% equity interest in Metro Asia
Resources, Inc., an international purchasing office located in Taiwan for the
purpose of expanding its suppliers, reducing material costs, and performing
on-site inspections of Asian suppliers. To date, the investment in Metro Asia
Resources, Inc. has not been significant.
In 1998, the Company experienced shortages in manufacturing capacity which
directly impacted sales. The Company has taken steps to improve the
efficiencies of certain manufacturing processes and increase capacity in an
effort to keep pace with demand for the Company's products. The failure to
relieve capacity constraints could hinder the Company's ability to deliver
ordered products to customers in a timely manner.
Government Regulations
The Company and its products are subject to regulation by various agencies both
in the United States and in the countries in which its products are sold. The
Food & Drug Administration's Center for Devices and Radiological Health
regulates laser safety in the United States, and in Canada, laser safety is
regulated by Industry Canada. In addition, the Occupational Safety and Health
Administration and various state and municipal government agencies have
promulgated regulations concerning working condition safety standards in
connection with the use of lasers in the workplace. Radio emissions are the
subject of governmental regulation in all countries in which the Company
currently sells its products. The Company also submits its products for safety
certification throughout the world by recognized testing laboratories such as
the Underwriters Laboratories, Inc. and the Canadian Standards Association.
The European countries in which the Company's products are sold also have
standards concerning electrical and laser safety and electromagnetic
compatibility and emissions. The Company's products comply with the European
standards regarding electromagnetic compatibility, allowing these products to
bear the CE mark.
The Company believes that it is currently in compliance with all of the
regulations to which it and its products are subject. There can be no
assurance, however, that governmental agencies will not require the Company to
modify its products or working conditions and, if so required, that the Company
would be able to make such modifications. Failure by the Company to comply with
any regulation or standard could have a material adverse effect on the Company.
Employees
As of December 31, 1998, the Company had approximately 534 full-time employees.
None of the Company's employees are represented by a labor union. Management
believes that its relationships with its employees are good.
Item 2. Properties
Since 1990, the Company's executive offices and manufacturing facilities have
been located in Blackwood, New Jersey and leased by the Company from C. Harry
Knowles, Chairman of the Board, President and Chief Executive Officer of the
Company, and Janet H. Knowles, Vice President, Administration, Secretary and
Treasurer of the Company. Under a lease agreement entered into on April 1,
1994, the Company leased the building for a term of five years and has renewed
the lease for an additional five-year term. The initial annual rent under the
lease for the first year was $356,440 and increases annually at a rate of 4.5%.
An expansion of the facilities consisting of an additional 51,000 square feet
was completed in October 1995, which increased the Company's facility to an
aggregate of 113,000 square feet. The expanded space is being leased from Mr.
and Mrs. Knowles pursuant to the terms of the April 1, 1994 lease. The total
lease rate as of April 1, 1999 will be approximately $67,000 per month,
excluding taxes and insurance.
The Company's wholly-owned subsidiaries, Metrologic Instruments GmbH,
Metrologic Asia (PTE) Ltd., and Holoscan each lease office space from third
parties. Metrologic do Brasil Ltda., a joint venture, and the Company's South
American sales office, both lease office space from a third party in Sao Paulo,
Brazil.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
The executive officers of the Company as of March 31, 1999 are as follows:
Name Age Position
C. Harry Knowles* 70 Chairman of the Board, President, and
Chief Executive Officer
Janet H. Knowles* 57 Director, Vice President, Administration,
Secretary and Treasurer
Thomas E. Mills IV 39 Director,** Executive Vice President, Chief
Operating Officer, Chief Financial Officer
and Vice President Finance
Dr. LeRoy D. Dickson 64 Vice President, Optical Engineering,
Metrologic Instruments, Inc. and President
and Chief Operating Officer, Holoscan, Inc.
Dale M. Fischer 58 Vice President, International Sales
Joseph Milacci 55 Vice President, Industrial Automation
Benny A. Noens 51 Vice President, European Sales, and
Managing Director, Metrologic Instruments
GmbH
John L. Patton 53 Director, Human Resources
William G. Smeader 60 Vice President, Manufacturing
Kevin P. Woznicki 45 Vice President, North American Sales
- -----------------------------------
* Mr. and Mrs. Knowles are husband and wife.
**Mr. Mills became a director of the Company effective March 25, 1999.
The Company's executive officers are elected annually by the Board of Directors
following the annual meeting of stockholders and serve at the discretion of the
Board of Directors.
C. Harry Knowles is the founder of the Company and has been Chairman of the
Board of Directors since its inception in 1969. Mr. Knowles served as President
of the Company from its inception through 1982 and has served as President and
Chief Executive Officer since 1985. In addition, Mr. Knowles served as chief
technical officer with responsibility for all of the Company's research and
development activities from 1982 to 1985. Since 1988, Mr. Knowles has also
served as a Managing Director of Metrologic Instruments GmbH. Prior to founding
the Company, Mr. Knowles was the general manager of Westinghouse Electric
Corporation's integrated circuits division in Elkridge, Maryland.
Janet H. Knowles was a director of the Company from 1972 to 1984 and has served
as a director since 1986. Mrs. Knowles served as Vice President,
Administration from 1976 to 1983 and has served in that capacity and as
Secretary since 1984, and as Treasurer since 1994. Mrs. Knowles is responsible
for the Company's administrative matters.
Thomas E. Mills IV, CPA, became a director of the Company effective March 25,
1999, and has served as the Company's Executive Vice President and Chief
Operating Officer since April 1998, as the Company's Vice President, Finance
since June 1995 and as Chief Financial Officer since May 1994. Mr. Mills was
employed by Ferranti International, Inc. from 1986 to April 1994 in various
positions, most recently as Senior Vice President, U.S. Operations. Prior to
his employment with Ferranti International, Inc., Mr. Mills was employed by
KPMG Peat Marwick in various positions from 1981 to 1986, most recently as
Audit Manager.
Dr. LeRoy D. Dickson has served as the Company's Vice President, Optical
Engineering since January 1997. He is also the President and Chief Operating
Officer and co-founder of Holoscan, Inc., a company established in 1993 to
develop holographic bar code scanners. Dr. Dickson served as Chairman, Chief
Executive Officer and President of Holoscan until March 1996, the date of the
Company's acquisition of Holoscan. Prior to 1993, Dr. Dickson spent 24 years
with IBM Corporation developing optical technology and laser scanning systems,
including IBM's holographic supermarket scanners.
Dale M. Fischer served as the Company's Director of International Marketing and
Sales from 1990 to 1993 and has served as Vice President, International Sales
since 1994. From 1989 to 1990, Mr. Fischer was Chairman of Great Valley
Corporation, a worldwide marketing and product development company. From 1967
until 1988, Mr. Fischer held several positions with TRW Electronics Component
Group ("TRW"), most recently as International Marketing, Sales and Licensing
Director. Mr. Fischer was responsible for marketing and sales of TRW products
in more than 50 countries and was responsible for the implementation of a joint
venture in Japan and the establishment of seven technology and manufacturing
licenses throughout the world. Mr. Fischer has also served as President of
Dalex International Corporation, a company devoted to export/import and
worldwide market development.
Joseph Milacci has served as the Company's Vice President, Industrial
Automation since October 1997. From 1993 to 1997, Mr. Milacci was employed as
General Manager and Member of the Board of Directors for OPCO, Inc., a
manufacturer of optical components. From 1987 to 1997, on a part time basis
from 1993 to 1997, Mr. Milacci owned and operated JEM Group, Inc., a process
and service company. From 1985 to 1987, Mr. Milacci served as Vice President of
Operations for Z-Tel, Inc., a telecommunications company. From 1977 to 1985,
Mr. Milacci served as the Vice President and General Manager of Fischer
Scientific Corporation. Mr. Milacci was previously employed by Metrologic from
1973 to1977 as Operations Manager.
Benny A. Noens served as the Company's European Sales Manager from 1991 to 1993
and has served as Vice President, European Sales since 1994. In addition, Mr.
Noens has been Managing Director of Metrologic Instruments GmbH since 1994.
From 1980 until 1991, Mr. Noens held several positions with Data General
Corporation, including serving in Latin America as Marketing and Distribution
Manager. Prior to his employment at Data General, Mr. Noens managed C.T. Janer
Co., an import/export company located in Rio de Janiero, Brazil.
John L. Patton served as the Company's Human Resources Manager from 1993 to
1996 and has served as Director, Human Resources since December 1996. From 1988
to 1993, he was employed as a human resources consultant with the Gordon Walls
Company and from 1984 to 1988, he was employed as human resources manager at
TRW, IRC Division. From 1979 to 1984 he held the position of Personnel Manager
at Oral B Laboratories.
William G. Smeader served as the Company's Director of Manufacturing from 1988
to 1993 and has served as its Vice President, Manufacturing since 1994. From
1964 to 1987, he was employed by Leeds and Northrup, a manufacturer of
industrial instrumentation controls and a unit of General Signal Corporation,
where he held several positions including Engineering Manager of New Product
Development, Manager of New Product Introductions, Purchasing Manager, Director
of Advanced Business Development and Director of Materials and MIS Systems.
Kevin P. Woznicki served as the Company's Director of Marketing from August
1995 to July 1996, Vice President of Marketing from August 1996 to November
1996, and has served as Vice President, North American Sales since December
1996. From 1994 to July 1995, he was employed by Franklin Electronic Publishing
as North American Sales Manager. From 1988 to 1994 he was employed by SL Waber,
Inc., a manufacturer of portable power protection devices, where he held
several positions including Vice President, General Manager of the business
products division and Vice President, Sales and Marketing.
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The common stock of the Company, par value $.01 per share ("Common Stock") is
traded on The Nasdaq Stock Market under the symbol "MTLG." The following table
sets forth, for the indicated periods, the high and low closing prices of the
Company's Common Stock as reported by Nasdaq:
High Low
January to March 1997 $17 1/2 $13 1/4
April to June 1997 $19 3/4 $13 3/4
July to September 1997 $19 5/8 $14
October to December 1997 $15 3/4 $12 1/4
January to March 1998 $17 3/8 $12 5/8
April to June 1998 $18 $14 3/4
July to September 1998 $15 7/8 $12
October to December 1998 $14 1/4 $11
On March 29, 1999 there were 153 stockholders of record of Common Stock.
The Company currently anticipates that it will retain all of its earnings to
finance the operation and expansion of its business, and therefore does not
intend to pay dividends on its Common Stock in the foreseeable future. Any
determination to pay dividends is at the discretion of the Company's Board of
Directors and will depend upon the Company's financial condition, results of
operations, capital requirements, limitations contained in loan agreements and
such other factors as the Board of Directors deems relevant.
Item 6. Selected Consolidated Financial Data
(in thousands except share and per share data)
Year ended December 31,
1994 1995 1996 1997 1998
-------------------------------------------------
Statement of Operations Data:
Sales $ 35,960 $ 41,563 $ 46,971 $ 53,495 $ 65,641
Cost of sales 20,633 24,092 28,799 33,240 39,698
-------------------------------------------------
Gross profit 15,327 17,471 18,172 20,255 25,943
Selling, general and
administrative expenses 7,830 10,589 10,505 12,087 15,537
Research and development
expenses 1,765 3,024 3,110 3,359 4,157
-------------------------------------------------
Operating income 5,732 3,858 4,557 4,809 6,249
Other income (expense), net (242) 353 221 (156) 456
-------------------------------------------------
Income before (provision)
benefit for income taxes 5,490 4,211 4,778 4,653 6,705
(Provision) benefit for income
taxes(1) 333 (1,669) (1,803) (1,673) (2,212)
-------------------------------------------------
Net income $ 5,823 $ 2,542 $ 2,975 $ 2,980 $ 4,493
=================================================
Pro forma adjustment
(unaudited) (2) Provision
for income taxes
as a C Corporation (2,617) n/a n/a n/a n/a
-------------------------------------------------
Pro forma net income (2) $ 3,206 n/a n/a n/a n/a
=================================================
Basic earnings per share (3)
Weighted average shares
outstanding used in
computing basic EPS 3,898,899 5,238,112 5,255,275 5,330,596 5,391,797
=================================================
Basic earnings per share $ 1.49 $ 0.49 $ 0.57 $ 0.56 $ 0.83
=================================================
Pro forma basic earnings
per share (2) $ 0.82 n/a n/a n/a n/a
=================================================
Diluted earnings per share(3)
Weighted average shares
outstanding used in
computing diluted EPS 3,912,100 5,278,683 5,301,066 5,447,277 5,512,758
=================================================
Diluted earnings per share $ 1.49 $ 0.48 $ 0.56 $ 0.55 $ 0.82
=================================================
Pro forma diluted earnings
per share (2) $ 0.82 n/a n/a n/a n/a
=================================================
December 31,
1994 1995 1996 1997 1998
------------------------------------------------------
Balance Sheet Data:
Cash and cash
equivalents $ 11,925 $ 12,065 $ 10,358 $ 13,096 $ 10,684
Working capital $ 14,942 $ 14,733 $ 15,200 $ 18,599 $ 21,496
Total assets $ 26,342 $ 31,401 $ 35,992 $ 38,458 $ 46,296
Long-term debt $ 803 $ 817 $ 1,764 $ 1,496 $ 2,608
Other long-term
obligations $ 3,718 $ 3,126 $ 2,033 $ 1,329 $ 676
Total liabilities $ 11,329 $ 13,475 $ 14,945 $ 13,557 $ 16,295
Common stock $ 52 $ 52 $ 53 $ 54 $ 54
Total shareholders'
equity $ 15,013 $ 17,926 $ 21,047 $ 24,901 $ 30,001
Cash dividends declared
per common share $ 0.83 $ - $ - $ - $ -
(1) Benefit for income taxes for the year ended December 31, 1994 includes a
benefit of $1.7 million related to the change in the Company's federal
income tax status upon termination of its election to be treated as an S
Corporation.
(2) In connection with the consummation of the Company's initial public
offering in October 1994, the Company's status as an S Corporation
terminated, and the Company is now subject to corporate income taxes.
Accordingly, pro forma net income and pro forma net income per share
reflect a pro forma adjustment for corporate income taxes which would have
been recorded had the Company not been an S Corporation in the periods
presented.
(3) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards No.
128, Earnings Per Share.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company derives its revenues from sales of its scanners through
distributors, value-added resellers VARs and original equipment manufacturers
OEMs and directly to end-users in the United States and in over 85 foreign
countries.
Forward Looking Statements; Certain Cautionary Language
Written and oral statements provided by the Company 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"). The cautionary
statements which follow are being made pursuant to the provisions of the Act
and with the intention of obtaining the benefits of the "safe harbor"
provisions of the Act. While the Company believes that the assumptions
underlying such forward looking information are reasonable based on present
conditions, forward looking statements made by the Company involve risks and
uncertainties and are not guarantees of future performance. Actual results may
differ materially from those in the Company's written or oral forward looking
statements as a result of various factors, including but not limited to, the
following:
Reliance on third party resellers, distributors and OEMs which subjects the
Company to risks of business failure, credit and collections exposure, and
other business concentration risks; continued or increased competitive pressure
which could result in reduced selling prices of products or increased sales and
marketing promotion costs; a prolonged disruption of scheduled deliveries from
suppliers when alternative sources of supply are not available to satisfy the
Company's requirements for raw material and components; continued or prolonged
capacity constraints that may hinder the Company's ability to deliver ordered
product to customers; difficulties or delays in the development, production,
testing and marketing of products, including, but not limited to, a failure to
ship new products when anticipated, failure of customers to accept these
products when planned, any defects in products or a failure of manufacturing
efficiencies to develop as planned; the costs of legal proceedings or
assertions by or against the Company relating to intellectual property rights
and licenses, and adoption of new or changes in accounting policies and
practices; occurrences affecting the slope or speed of decline of the life
cycle of the Company's products, or affecting the Company's ability to reduce
product and other costs, and to increase productivity; the impact of unusual
items resulting from the Company's ongoing evaluation of its business
strategies, acquisitions, asset valuations and organizational structures; the
effects of and changes in trade, monetary and fiscal policies, laws and
regulations and other activities of governments, agencies and similar
organizations, including but not limited to trade restrictions or prohibitions,
inflation, monetary fluctuations, import and other charges or taxes,
nationalizations and unstable governments; the future health of the U.S. and
international economies and other economic factors that directly or indirectly
affect the demand for the Company's products; foreign currency exchange rate
fluctuations between the U.S. Dollar and other major currencies including, but
not limited to, the German Mark / Euro, Singapore Dollar, Brazilian Real, and
British Pound can significantly affect the Company's results of operations; the
Company invoices and accepts payment for goods in the aforementioned
currencies, however, the economic slowdown of other foreign nations may also
adversely affect the Company's results of operations; issues that have not been
anticipated in the transition to the new European currency that may cause
prolonged disruption of the Company's business; the inability of parties
external to the Company to provide goods and services in a timely, accurate
manner as a result of Year 2000 processing problems; and increased competition
due to industry consolidation or new entrants into the Company's existing
markets.
All forward-looking statements included herein are based upon information
presently available, and the Company assumes no obligation to update any
forward-looking statements.
Results of Operations
Most of the Company's product sales in Western Europe and Brazil are billed in
foreign currencies and are subject to currency exchange rate fluctuations.
Substantially all of the Company's products are manufactured in the Company's
U.S. facility, and therefore, sales and results of operations are affected by
fluctuations in the value of the U.S. dollar relative to foreign currencies.
Accordingly, in 1998 and 1997, sales and gross profit were adversely affected
by the continuing rise in the value of the U.S. dollar in relation to foreign
currencies.
In 1998, the Company experienced shortages in manufacturing capacity which
directly impacted sales. The Company has taken steps to improve the
efficiencies of certain manufacturing processes in an effort to keep pace with
demand for the Company's products. In the fourth quarter of 1998, the Company
was unable to ship approximately $1,500 of customer orders of mostly new
products due to capacity constraints. During the fourth quarter, however, the
Company hired a significant number of production personnel in anticipation of
increased customer demand. The Company will continue its efforts to increase
capacity by improving manufacturing processes. The failure to relieve capacity
constraints could hinder the Company's ability to deliver ordered products to
customers in a timely manner.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
(amounts in thousands except per share information)
Sales increased 22.7% to $65,641 in 1998 from $53,495 in 1997, principally as a
result of the continued increase in market acceptance of the Company's
point-of-sale ("POS") products, an increase in sales of the Company's HoloTrak
industrial holographic laser scanners, and increased sales and marketing
efforts. The increase in sales volume in 1998 was offset by lower average unit
selling prices on the Company's POS products and reflected unfavorable foreign
currency exchange fluctuations.
International sales accounted for $39,583 (60.3% of total sales) in 1998 and
$33,811 (63.2% of total sales) in 1997. Two customers accounted for 5.9% and
5.4%, respectively, of the Company's revenues in 1998. One customer accounted
for 5.9% of the Company's revenues in 1997.
Cost of sales increased 19.4% to $39,698 in 1998 from $33,240 in 1997, while
cost of sales as a percentage of sales decreased to 60.5% from 62.1%. The
decrease in cost of sales as a percentage of sales was due primarily to reduced
product costs of certain POS products and operating leverage that resulted from
greater unit volumes, partially offset by lower average unit selling prices on
POS products.
Selling, general and administrative ("SG&A") expenses increased 28.5% to
$15,537 in 1998 from $12,087 in 1997 and increased as a percentage of sales to
23.7% from 22.6%. The increase in SG&A expenses was due primarily to increased
marketing efforts, which include costs associated with the Company's Concert
Program(TM), a business partner program used to market and promote the
Company's products.
Research and development ("R&D") expenses increased 23.8% to $4,157 in 1998
from $3,359 in 1997, and remained constant as a percentage of sales at 6.3%.
The increase in R&D expenses was due primarily to higher expenditures for the
development of new POS and industrial products, including development of the
Company's HoloTunnel(TM).
Operating income increased 29.9% to $6,249 in 1998 from $4,809 in 1997, and
operating income as a percentage of sales increased to 9.5% from 9.0%.
Other income/expenses reflect net other income of $456 in 1998 compared to net
other expenses of $156 in 1997. Net other income in 1998 reflects higher
interest income and foreign currency transaction gains as compared to 1997.
Net income increased 50.8% to $4,493 in 1998 from $2,980 in 1997. Net income
reflects a 33% effective income tax rate for 1998 compared to 36% in 1997. The
reduced effective income tax rate resulted from the utilization of the
Company's foreign sales corporation which permits the Company to reduce its
United States federal income tax liability on profits from sales to foreign
customers. Foreign currency exchange fluctuations negatively affected diluted
earnings per share by approximately $.04 per share.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 (amounts
in thousands except per share information)
Sales increased 13.9% to $53,495 in 1997 from $46,971 in 1996, principally as a
result of the continued increase in market acceptance of the Company's
hand-held scanners, scan engines sold to OEM's, HoloTrak holographic industrial
scanners, and increased sales and marketing efforts, despite lower average unit
selling prices compared to the prior period, primarily on certain of the
Company's POS products. Average unit selling prices reflected significant
unfavorable foreign currency exchange fluctuations. The reduction in the value
of the German mark against the U.S. dollar during 1997 negatively affected the
recorded U.S. dollar value of sales by approximately 12.5% or approximately
$3,200 in the year ended December 31, 1997.
International sales accounted for $33,811 (63.2% of total sales) in 1997 and
$29,526 (62.9% of total sales) in 1996. Sales to one customer accounted for
approximately 5.9% of total sales in 1997. The Company's sales to two customers
accounted for approximately 5.3% and 5.2%, respectively, of total sales in
1996. During these periods, no other customer accounted for more than 5.0% of
sales.
Cost of sales increased 15.4% to $33,240 in 1997 from $28,799 in 1996, and cost
of sales as a percentage of sales increased to 62.1% from 61.3%. These
increases were due primarily to a reduction in the average selling prices on
certain of the Company's products, which average unit selling prices reflected
the unfavorable foreign currency exchange fluctuations noted above. An
additional factor negatively affecting cost of sales included initial
production and setup costs associated with HoloTrak industrial scanners, for
sales levels of which had not yet achieved sufficient levels to fully absorb
these costs. The increases in cost of sales were partly offset by reduced
product costs resulting from engineering enhancements to certain products and
manufacturing efficiencies resulting from greater unit volumes. If sales are
adjusted to negate the effect of unfavorable foreign currency fluctuations
during 1997, cost of sales as a percentage of sales would have been 58.8% in
1997 compared with 61.3% in 1996.
SG&A expenses increased 15.1% to $12,087 in 1997 from $10,505 in 1996 and
increased as a percentage of sales to 22.6% from 22.4%. The increases were
primarily due to increased salaries resulting from the hiring of additional
sales and marketing personnel throughout North America, Europe and the rest of
the world, and increased salaries resulting from the hiring of additional
administration personnel during the year primarily due to the growth of the
business. SG&A expenses were positively affected by reductions in the value of
the German mark against the U.S. dollar. The positive impact of the reduced
value of the German mark during 1997 on consolidated SG&A expenses was
approximately 3.4% or $413 in the year ended December 31, 1997.
R&D expenses increased 8.0% to $3,359 in 1997 from $3,110 in 1996, and
decreased as a percentage of sales to 6.3% from 6.6%. The increase in R&D
expenses was primarily due to the hiring of additional research and development
personnel.
Operating income increased 5.5% to $4,809 in 1997 from $4,557 in 1996, while
operating income as a percentage of sales decreased to 9.0% from 9.7%.
Other expenses/income reflect net other expenses of $156 in the year ended
December 31, 1997 compared to net other income of $221 in the year ended
December 31, 1996. Net other expenses in 1997 reflect higher foreign currency
transaction losses and interest expense compared to the prior year.
Net income increased 0.2% to $2,980 in 1997 from $2,975 in 1996. Net income
reflects a 36.0% effective income tax rate for the year ended December 31,
1997, compared with 37.7% in 1996. The reduced effective income tax rate
resulted from the utilization of the Company's foreign sales corporation which
permits the Company to reduce its United States federal income tax liability on
profits from sales to foreign customers. Also, the Company did not incur income
tax liability with respect to any of its foreign subsidiaries in 1997. The
reduction in the value of the German mark against the U.S. dollar during 1997
negatively affected net income by approximately $0.37 per share.
Inflation and Seasonality
Inflation and seasonality have not had a material impact on the Company's
results of operations. There can be no assurance, however, that the Company's
sales in future years will not be impacted by fluctuations in seasonal demand.
Liquidity and Capital Resources (amounts in thousands)
The Company's working capital increased approximately 15.6 % to $21,496 as of
December 31, 1998 from $18,599 as of December 31, 1997.
The Company's operating activities provided cash of $534 in 1998 compared with
net cash provided of $3,333 in 1997. Net cash provided by operating activities
in 1998 resulted primarily from such year's net income as well as increases in
accounts payable and accrued expenses, partially offset by increases in
accounts receivable and inventory.
The Company's total deferred income tax asset of $1,308 and deferred tax
liability of $725 are based upon cumulative temporary differences as of
December 31, 1998, which provide approximately $1,462 of future net tax
deductions against future taxable income. The deferred tax asset arises
primarily from recording reserves on current assets as expenses for accounting
purposes prior to receiving the related tax benefits. The deferred tax
liability arises primarily from recording the advance license fee pursuant to
the December 1996 licensing agreement with Symbol Technologies, Inc. as an
expense for tax purposes and an amortizable asset for book purposes.
The Company is a party to an Amended and Restated Loan and Security Agreement,
as amended, with its primary bank which provides for an unsecured line of
credit in the amount of $7,500. The line of credit requires the Company to
comply with certain financial covenants and other restrictions. As of December
31, 1998, the Company was in compliance with these financial covenants and no
amounts were outstanding under this line of credit. The Amended and Restated
Loan and Security Agreement expires on June 30, 1999.
The Company also has a 500 German mark unsecured revolving credit facility with
a German bank in the name of its German subsidiary, Metrologic Instruments
GmbH. As of December 31, 1998, no amounts were outstanding under this revolving
credit facility.
In April 1998, the Company entered into a line of credit with its primary bank,
denominated in German marks ("DM Line"), in an amount not to exceed $1,500, for
the purchase of fixed assets. As of December 31, 1998, the Company converted
the outstanding balance on the DM Line of $1,500 to a term note, payable over a
54-month period.
In December 1998, the Company entered into an additional line of credit with
its primary bank, denominated in U.S. dollars ("U.S. Dollar Line"), in an
amount not to exceed $1,500, for the purchase of fixed assets. As of December
31, 1998, approximately $1,100 was available under the U.S. Dollar Line. The
Company is currently making interest-only payments on the U.S. Dollar Line
until December 31, 1999, at which time amounts outstanding will convert to a
term note, payable over a 54-month period.
The Company's current plans for capital expenditures for the next twelve months
potentially include the purchase of (i) additional manufacturing facilities,
(ii) manufacturing automation equipment, (iii) office equipment, and (iv) a new
integrated management information system. Potential capital expenditures amount
to approximately $13,000. The Company expects to finance such potential
expenditures with a combination of term notes, operating and capital leases,
and mortgages.
The Company's liquidity has been, and may continue to be, adversely affected by
changes in foreign currency exchange rates, particularly in the value of the
German mark relative to the U.S. dollar. In an effort to mitigate the financial
implications of the volatility in the exchange rate between the German mark and
the U.S. dollar, the Company has selectively entered into derivative financial
instruments to offset its exposure to foreign currency risks. Derivative
financial instruments may include (i) foreign currency forward exchange
contracts with its primary bank for periods not exceeding six months, which
partially hedge future cash flows from sales to the Company's German subsidiary
and (ii) German mark based loans, which act as a partial hedge against the net
assets of its German subsidiary.
The Company believes that its current cash and cash equivalent balances, along
with cash generated from operations and availability under its revolving credit
facilities, will be adequate to fund the Company's operations through at least
the next twelve months.
Impact of Year 2000
The Year 2000 issue is the result of computer programs using only the last two
digits to indicate the year. If uncorrected, such computer programs will be
unable to interpret dates beyond the year 1999, which could cause computer
system failure or other computer errors disrupting operations. The Company has
been evaluating its year 2000 readiness and taking corrective action where
necessary. The following discussion broadly addresses the Company's efforts to
identify and address the Company's and relevant third parties' Year 2000
problems. The scope of the Year 2000 readiness effort includes (i) information
technology ("IT") such as software and hardware; (ii) non-IT ("Non-IT") systems
or embedded technology such as micro-controllers contained in various
manufacturing and lab equipment, facilities and utilities, and the Company's
products with date-sensitivity; and (iii) readiness of key third parties,
including suppliers and customers.
It would be impractical for the Company to attempt to address all Year 2000
problems of third parties that have been or may in the future be identified.
Specifically, Year 2000 problems have been or may in the future be identified
with respect to the IT and Non-IT systems of third parties having widespread
national and international interactions with persons and entities generally
(for example, certain IT and Non-IT systems of governmental agencies, utilities
and telecommunications, information and financial networks) that, if
uncorrected, could have a material adverse impact on the Company's business,
financial condition or results of operations. Notwithstanding anything set
forth below, the Company is not in a position to address any such Year 2000
problems. If needed modifications and conversions are not made on a timely
basis, the Year 2000 issue could have a material adverse effect on the
Company's operations.
(i) IT. The Company's current IT systems are not Year 2000
compliant. The Company is in the process of replacing its current IT system
with a new, Year 2000 compliant, fully integrated IT system for itself and its
subsidiaries. The total cost of the new IT system is estimated to be
approximately $1,800, which includes external resource costs, a substantial
portion of which will be capitalized. Through December 31, 1998, the Company
spent approximately $700. The new IT system's estimated implementation dates in
the Company's U.S. operations will be phased in beginning May 1999, with other
application software currently scheduled for implementation in October 1999,
which is prior to any anticipated impact on the Company's operating systems.
(ii) Non-IT. The Company currently uses standard mass-market vendor supplied
software on its desktop systems and laptops. These standard software
applications limit the number of information technology vendors with which the
Company must work in order to ensure Year 2000 readiness. Many of these vendors
are still implementing their Year 2000 compliance programs. The Company
maintains maintenance contracts with all information technology vendors and
will implement the Year 2000 compliant versions of hardware and/or software as
required when those solutions become available. The Company's hardware for
workstations, servers, and network routers are expected to be Year 2000
compliant by the third quarter of 1999. As of December 31, 1998, approximately
70% of the Company's hardware and software applications were Year 2000
compliant. However, no assurance can be provided that all required replacement
programs will be implemented in a timely manner or that the failure to
implement such programs will not have a material adverse effect on the
Company's business, results of operations or financial condition. As of
December 31, 1998, approximately 80% of the Company's facilities and
manufacturing system were Year 2000 compliant.
(iii) Third Parties. The Company is in contact with key suppliers in an effort
to assure no interruption in the relationship between the Company and these
important third parties resulting from the Year 2000 issue. If third parties do
not convert their systems in a timely manner and in a way that is compatible
with the Company's systems, the Year 2000 issue could have a material adverse
effect on the Company's operations. The Company believes that its actions with
respect to key suppliers and customers will minimize these risks. As of
December 31, 1998, 80% of the Company's suppliers (constituting all significant
vendors) had responded affirmatively regarding their respective Year 2000
readiness. However, such response does not assure Year 2000 compliance of the
IT and Non-IT systems used by such suppliers, but instead provides only an
indication of the status of their efforts.
The Company's current estimates of the time and costs necessary to resolve Year
2000 issues are based on the facts and circumstances existing at this time. The
estimates were made using assumptions of future events, including the continued
availability of certain resources, Year 2000 modification plans, implementation
success by key third-parties, and other factors. There can be no assurance that
these estimates will be achieved and actual results could differ materially
from those anticipated.
The Company currently anticipates that any identified Year 2000 problem
affecting its own systems or that of its significant customers, suppliers,
creditors, financial organizations and utilities providers will be either
corrected by December 31, 1999 or will not have a material adverse affect on
the Company's business, financial condition or results of operations. Moreover,
the Company is working to minimize any disruption to the business of its
vendors and suppliers due to Year 2000 problems that may have a material
adverse affect on the Company's business, financial condition or results of its
operations. However, notwithstanding the Company's efforts to identify and
correct such Year 2000 problems, there can be no assurance that the Company
will be successful in addressing the Year 2000 problems as they pertain to its
products and its internal systems, or that the failure to do so would not have
a material adverse effect on the Company's business, financial condition or
results of operations. In addition, notwithstanding such efforts, there can be
no assurance that the systems of third parties with which the Company interacts
will not suffer from Year 2000 problems, or that such problems will not have a
material adverse effect on the Company's business, financial condition or
results of operations. In particular, Year 2000 problems that have been or may
in the future be identified with respect to the IT and Non-IT systems of third
parties having widespread national and international interactions with persons
and entities generally (for example, certain IT and Non-IT Systems of
governmental agencies, utilities and information and financial networks) could
have a material adverse impact on the Company's business, financial condition
or results of operations.
The Company currently is in the process of reviewing its Year 2000 compliance
plans to determine what contingency plans, if any, are appropriate. The Company
does not currently have any contingency plans. The Company anticipates
completing such review and preparing contingency plans, if appropriate, by
October 1999. There can be no assurance that such measures will prevent the
occurrence of Year 2000 problems, which could have a material adverse effect
upon the Company's business, results of operations or financial condition.
Euro Conversion.
On January 1, 1999, several member countries of the European Union established
fixed conversion rates between their existing sovereign currencies and adopted
the Euro as their new common legal currency. As of that date, the Euro traded
on currency exchanges and the legacy currencies remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. The countries that adopted the Euro on January 1, 1999 are
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, and Spain. During the transition period, non-cash
payments can be made in the Euro, and parties can elect to pay for goods and
services and transact business using either the Euro or legacy currency.
Between January 1, 1999 and January 1, 2002 the participating countries will
introduce Euro notes and coins and withdraw all legacy currencies so that they
will no longer be available. The Euro conversion may affect cross-border
competition by creating cross-border transparency. The Company is assessing its
pricing/marketing strategy in order to insure that it remains competitive in a
broader European market. The Company is also assessing its information
technology systems to allow for transactions to take place in both legacy
currencies and the Euro and the eventual elimination of the legacy currencies,
and is reviewing whether certain existing contracts will be need to be
modified. The Company's currency risk and risk management for operations in
participating countries may be reduced as the legacy currencies are converted
to the Euro.
Pronouncements Adopted in 1998
In December 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131") which established new standards for reporting
information about operating segments, geographic areas, and major customers.
Interim reporting requirements under SFAS 131 becomes effective for the
Company's quarterly reporting beginning in 1999. Adoption of SFAS 131 had
no effect on the Company's consolidated results of operations, financial
position or cash flows. As required by SFAS 131, the Company has modified
certain disclosures on segment reporting and geographic areas.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") No. 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company followed
the SOP in accounting for the costs of computer software obtained for internal
use during 1998.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS
133") SFAS 133 establishes accounting and reporting standards for derivative
financial instruments. SFAS 133 requires recognition of derivatives in the
balance sheet, to be measured at fair value. Gains or losses resulting from
changes in the value of derivatives would be accounted for depending on the
intended use of the derivative and whether it qualifies for hedge accounting.
SFAS 133 is effective for the Company's financial statements beginning in 2000.
The Company is currently reviewing the effects of adopting SFAS 133. However,
due to the Company's limited use of derivative financial instruments, adoption
of SFAS 133 is not expected to have a significant effect on the Company's
consolidated results of operations financial position, or cash flows.
Item 7a - Quantitative and Qualitative Disclosures about Market Risk
Market Risk Sensitive Instruments. The market risk inherent in the Company's
market risk sensitive instruments and positions is the potential loss arising
from adverse changes in foreign currency exchange rates and interest rates.
Interest Rate Risk. The Company's bank loans expose earnings to changes in
short-term interest rates since interest rates on the underlying obligations
are either variable or fixed for such a short period of time as to effectively
become variable. The fair values of the Company's bank loans are not
significantly affected by changes in market interest rates. The change in fair
value of the Company's long-term debt resulting from a hypothetical 10%
decrease in interest rates is not material.
Foreign Exchange Risk. The Company enters into forward foreign exchange
contracts principally to hedge the currency fluctuations in transactions
denominated in foreign currencies, namely the German mark, thereby mitigating
the Company's risk that would otherwise result from changes in exchange rates.
Principal transactions hedged are intercompany purchases. Gains and losses on
forward foreign exchange contracts and the offsetting losses and gains on
hedged transactions are reflected in the Company's statement of earnings. A
large percentage of the Company's foreign sales are transacted in local
currencies. As a result, the Company's international operating results are
subject to foreign exchange rate fluctuations. A hypothetical five percent
strengthening or weakening of the U.S. dollar against the German mark could
have had a $730 impact on the net earnings of the Company. Actual results may
differ.
The Company is subject to risk from fluctuations in the value of the German
mark relative to the U.S. dollar for its subsidiary, which uses the German mark
as their functional currency and translated into U.S. dollars in consolidation.
Such changes result in cumulative translation adjustments which are included in
other comprehensive income (loss). At December 31, 1998, the Company had
translation exposure. The potential effect on other comprehensive income (loss)
resulting from a hypothetical 10% change in the quoted German mark rate amounts
to $372. Actual results may differ.
In addition, the Company holds debt denominated in German marks and recognizes
foreign currency translation adjustments in net income. The potential loss
resulting from a hypothetical 10% adverse change in the quoted German mark rate
is approximately $242. Actual results may differ.
Item 8. Financial Statements and Supplementary Data
Index Pages
Report of Ernst & Young LLP, Independent Auditors 21
Consolidated Balance Sheets at December 31, 1998 and 1997 22
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998 23
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December 31, 1998 24
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998 25
Notes to Consolidated Financial Statements 26-35
Supplementary Data (Unaudited) 36-37
Financial statement schedules:
Schedule II - Valuation and Qualifying Accounts is filed
herewith. All other schedules are omitted because they are
not applicable, not required, or because the required
information is included in the consolidated financial
statements or notes thereto. 42
Report of Independent Auditors
The Board of Directors and Shareholders
Metrologic Instruments, Inc.
We have audited the accompanying consolidated balance sheets of Metrologic
Instruments, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metrologic
Instruments, Inc. at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/Ernst & Young, LLP
Philadelphia, Pennsylvania
February 25, 1999
Metrologic Instruments, Inc.
Consolidated Balance Sheets
(amounts in thousands except share data)
December 31,
Assets 1998 1997
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Current assets:
Cash and cash equivalents $ 10,684 $ 13,096
Accounts receivable, net of allowance of $389 and
$408 in 1998 and 1997, respectively 14,542 9,249
Inventory 6,900 4,684
Deferred income taxes 1,308 1,698
Other current assets 1,073 604
-------- --------
Total current assets 34,507 29,331
Property, plant and equipment, net 6,382 4,625
Patents and trademarks, net of amortization
of $604 and $511 in 1998 and 1997, respectively 1,745 1,254
Holographic technology, net of amortization of $250
and $154 in 1998 and 1997, respectively 832 734
Deferred income taxes - 414
Advance license fee, net of amortization of $235
and $118 in 1998 and 1997, respectively 1,765 1,882
Security deposits and other assets 1,065 218
-------- --------
Total assets $ 46,296 $ 38,458
======== ========
Liabilities and shareholders' equity
Current liabilities:
Current portion of notes payable $ 908 $ 543
Accounts payable 4,155 2,859
Accrued expenses 7,260 6,505
Accrued legal settlement 688 825
-------- --------
Total current liabilities 13,011 10,732
Notes payable, net of current portion 2,608 1,496
Deferred income taxes 676 524
Accrued legal settlement - 805
Shareholders' equity:
Preferred stock, $0.01 par value: 500,000 shares
authorized; none issued - -
Common stock, $0.01 par value: 10,000,000 shares
authorized; 5,404,512 and 5,369,090 shares
issued and outstanding in 1998 and 1997,
respectively 54 54
Additional paid-in capital 16,933 16,389
Retained earnings 13,069 8,576
Deferred compensation - (2)
Accumulated other comprehensive income (55) (116)
-------- --------
Total shareholders' equity 30,001 24,901
-------- --------
Total liabilities and shareholders' equity $ 46,296 $ 38,458
======== ========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Operations
(amounts in thousands except share and per share data)
Year ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Sales $ 65,641 $ 53,495 $ 46,971
Cost of sales 39,698 33,240 28,799
--------- --------- ---------
Gross profit 25,943 20,255 18,172
Selling, general and administrative
expenses 15,537 12,087 10,505
Research and development expenses 4,157 3,359 3,110
--------- --------- ---------
Operating income 6,249 4,809 4,557
Other income (expenses)
Interest income 521 460 431
Interest expense (177) (175) (108)
Foreign currency transaction
gain (loss) 81 (445) (101)
Other, net 31 4 (1)
--------- --------- ---------
Total other income (expenses) 456 (156) 221
--------- --------- ---------
Income before provision for income taxes 6,705 4,653 4,778
Provision for income taxes 2,212 1,673 1,803
--------- --------- ---------
Net income $ 4,493 $ 2,980 $ 2,975
========= ========= =========
Basic earnings per share
Weighted average shares
outstanding 5,391,797 5,330,596 5,255,275
========= ========= =========
Basic earnings per share $ 0.83 $ 0.56 $ 0.57
========= ========= =========
Diluted earnings per share
Weighted average shares outstanding 5,391,797 5,330,596 5,255,275
Net effect of dilutive securities 120,961 116,681 45,791
--------- --------- ---------
Total shares outstanding used in
computing diluted earnings per
share 5,512,758 5,447,277 5,301,066
========= ========= =========
Diluted earnings per share $ 0.82 $ 0.55 $ 0.56
========= ========= =========
See accompanying notes.
Metrologic Instruments, Inc.
Consolidated Statements of Shareholders' Equity
(amounts in thousands)
Accumulated
Other
Additional Comprehensive
Common Paid-in Deferred Retained Income
Stock Capital Compensation Earnings (Loss) Total
----------------------------------------------------------
Balances,
December 31, 1995 $ 52 $14,807 $(37) $ 2,621 $483 $17,926
Comprehensive
income:
Net income 2,975 2,975
Other
comprehensive
income -
foreign currency
translation
adjustment (132) (132)
Total comprehensive
income 2,843
Exercise of stock
options 1 188 189
Stock issued through
employee stock
purchase plan 60 60
Compensation expense
related to stock
awards 29 29
----------------------------------------------------------
Balances,
December 31, 1996 53 15,055 (8) 5,596 351 21,047
Comprehensive
income:
Net income 2,980 2,980
Other
comprehensive
income -
foreign currency
translation
adjustment (467) (467)
Total comprehensive
income 2,513
Exercise of stock
options 1 1,055 1,056
Stock issued through
employee stock
purchase plan 94 94
Compensation expense
related to stock
awards 6 6
Tax benefit of stock
options 185 185
----------------------------------------------------------
Balances,
December 31, 1997 54 16,389 (2) 8,576 (116) 24,901
Comprehensive
income:
Net income 4,493 4,493
Other
comprehensive
income -
foreign currency
translation
adjustment 61 61
Total comprehensive
income 4,554
Exercise of stock
options 390 390
Stock issued through
employee stock
purchase plan 110 110
Compensation expense
related to stock
awards 2 2
Tax benefit of stock
options 44 44
----------------------------------------------------------
Balances,
December 31, 1998 $ 54 $ 16,933 $ - $13,069 $ (55)$30,001
See accompanying notes
Metrologic Instruments, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
Year ended December 31,
--------------------------------
Operating activities 1998 1997 1996
-------- -------- --------
Net income $ 4,493 $ 2,980 $ 2,975
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,044 843 885
Amortization 334 289 138
Compensation expense related to stock
awards and employee stock
purchase plan 2 6 38
Deferred income taxes 958 939 243
Gain on disposal of property (122) - -
Changes in operating assets and liabilities:
Accounts receivable (4,876) (1,995) (1,302)
Inventory (2,167) 779 (2,194)
Other current assets (443) (121) 88
Other assets 70 412 (46)
Accounts payable 1,296 252 306
Accrued expenses 887 (266) 673
Accrued legal settlement (942) (785) (1,184)
-------- -------- --------
Net cash provided by operating activities 534 3,333 620
Investing activities
Purchase of property, plant and equipment (3,104) (544) (1,427)
Patents and trademarks (584) (323) (208)
Advance license fee - (500) (1,000)
Purchase of Holoscan, Inc. and holographic
technology, net of cash acquired (194) (44) (560)
Other Intangibles (559) - -
Proceeds from sale of property 65 - -
-------- -------- --------
Net cash used in investing activities (4,376) (1,411) (3,195)
Financing activities
Proceeds from exercise of stock options and
employee stock purchase plan 411 1,150 240
Principal payments on notes payable (418) (332) (248)
Proceeds from issuance of notes payable 1,960 - 1,318
Net (payments) proceeds from line of credit - - (168)
Payments of amounts due to former officer - (84) (200)
Capital lease payments (142) (250) (151)
-------- -------- --------
Net cash provided by financing
activities 1,811 484 791
Effect of exchange rates on cash (381) 332 77
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents (2,412) 2,738 (1,707)
Cash and cash equivalents at beginning
of year 13,096 10,358 12,065
-------- -------- --------
Cash and cash equivalents at end of year $ 10,684 $ 13,096 $ 10,358
======== ======== ========
Supplemental Disclosure
Cash paid for interest $ 174 $ 169 $ 125
======== ======== ========
Cash paid for income taxes $ 1,260 $ 96 $ 2,706
======== ======== ========
Liability incurred for advance
license fee $ - $ - $ 1,000
======== ======== ========
Capital lease obligations incurred $ - $ 261 $ 233
======== ======== ========
Tax benefit from stock options $ 44 $ 185 $ -
======== ======== ========
See accompanying notes
Metrologic Instruments, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Dollars in Thousands)
1. Business
Metrologic Instruments, Inc. designs, manufactures and markets bar
code scanning equipment incorporating laser and holographic technology. The
Company's principal products are hand-held scanners, fixed projection scanners,
in-counter scanners and industrial scanners. These scanners rapidly,
accurately, and efficiently read and decode all widely used bar codes and
provide an efficient means for data capture and automated data entry into
computerized systems.
2. Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of Metrologic Instruments, Inc., and its domestic and foreign
subsidiaries. Significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles 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.
Revenue Recognition
Product sales revenue is recognized upon the transfer of title to
goods.
Cash and Cash Equivalents
The Company considers all highly-liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable and
accounts payable approximate fair value because of their short-term nature. The
carrying amount of long-term debt approximates its fair value because the
interest rate is reflective of rates that the Company could currently obtain on
debt with similar terms and conditions.
Inventory
Inventory is stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
determined on the straight-line method for building and improvements over
estimated useful lives of 31 to 39 years and on an accelerated method for
machinery and equipment over estimated useful lives of five to seven years.
Patents and Trademarks
Patents and trademarks reflect application and testing costs for
products with respect to which the Company has applied for or received patent
and trademark protection. Costs expended for successful patent and trademark
applications are being amortized on a straight-line basis over their useful
lives, which generally are 17 years.
Advance License Fee
The Company capitalized an advance license fee of $2,000 in December 1996
(Note 10). The advance license fee is being amortized on a straight-line basis
over the seventeen-year life of the cross-licensing agreement.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Income statement amounts have been translated using
the average exchange rate for the year. The gains and losses resulting from the
changes in exchange rates from year to year have been reported separately in
other comprehensive loss in the consolidated financial statements.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with
SFAS 128, "Earnings Per Share." Basic earnings per share is calculated by
dividing net income by the weighted average shares outstanding for the year and
diluted earnings per share is calculated by dividing net income by the weighted
average shares outstanding for the year plus the dilutive effect of stock
options.
Concentrations of Credit Risk
The Company has operations and affiliates in the United States,
Germany, Asia and South America. The Company performs ongoing credit
evaluations of its customers' financial condition, and except where risk
warrants, requires no collateral. The Company may require, however, letters of
credit or prepayment terms for those customers in lesser developed countries.
Short-term cash investments are placed with high credit quality
financial institutions or in short-term high quality debt securities. The
Company limits the amount of credit exposure in any one institution or single
investment.
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for stock options. Under APB 25, if the exercise
price of the Company's stock options equals the market price of the underlying
common stock on the date of grant, no compensation expense is recognized. Note
13 to these consolidated financial statements includes the required disclosures
and pro forma information provided for under SFAS 123, "Accounting for
Stock-Based Compensation."
Pronouncements Adopted in 1998
In December 1998, the Company adopted SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," which established new
standards for reporting information about operating segments, geographic areas,
and major customers. Interim reporting requirements under SFAS 131 becomes
effective for the Company's quarterly reporting beginning in 1999. Adoption of
SFAS 131 had no effect on the Company's consolidated results of operations,
financial position or cash flows. As required by SFAS 131, the Company has
modified certain disclosures on segment reporting and geographic areas.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." The Company
followed the SOP in accounting for the costs of computer software obtained for
internal use during 1998.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative financial
instruments. SFAS 133 requires recognition of derivatives in the balance
sheet, to be measured at fair value. Gains or losses resulting from changes in
the value of derivatives would be accounted for depending on the intended use
of the derivative and whether it qualifies for hedge accounting. SFAS 133
is effective for the Company's financial statements beginning in 2000. The
Company is currently reviewing the effects of adopting SFAS 133. However,
due to the Company's limited use of derivative financial instruments, adoption
of SFAS 133 is not expected to have a significant effect on the Company's
consolidated results of operations, financial position, or cash flows.
Reclassification
Certain prior year balances have been reclassified to conform with
current year presentation.
3. Inventory
Inventory consists of the following:
December 31,
1998 1997
Raw materials $3,280 $2,542
Work-in-process 2,614 1,590
Finished goods 1,006 552
------ ------
$6,900 $4,684
====== ======
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31,
1998 1997
Buildings and improvements $2,416 $2,345
Machinery and equipment 9,664 6,716
------ ------
12,080 9,061
Less accumulated depreciation 5,698 4,776
----- ------
6,382 4,285
Idle land and building, net of
depreciation - 340
------- -------
$ 6,382 $4,625
======= ======
Machinery and equipment included $487 and $1,020 under capital leases as of
December 31, 1998 and 1997, respectively. Accumulated depreciation on these
assets was $142 and $388 as of December 31, 1998 and 1997, respectively.
Idle land and building consisted of the Company's former office and factory in
Bellmawr, New Jersey, which were sold in 1998.
5. Accrued Expenses
Accrued expenses consist of the following:
December 31,
1998 1997
Accrued royalties $ 835 $1,075
Accrued compensation 1,506 913
Income taxes 757 -
Product warranty 853 850
Profit sharing 300 300
Accrued marketing and
sales promotions 1,175 71
Other 1,834 3,296
------- ------
$7,260 $6,505
======= ======
6. Notes Payable
Notes payable consist of the following:
December 31,
1998 1997
Term note (a) $ 880 $1,086
Fixed asset term note payable (b) 1,500 -
Fixed asset line of credit (b) 366 -
Note payable-shareholders (c) 335 446
Capital lease obligations (d) 432 497
Other 3 10
------ ------
3,516 2,039
Less: current maturities 908 543
------ ------
$2,608 $1,496
====== ======
The Company's primary debt facility consists of an Amended and Restated Loan &
Security Agreement dated November 1995 with its primary bank, as amended
(collectively, the "Bank Agreement").
(a) In December 1996, under the Bank Agreement, the Company executed a
term note for $1,300. In 1997, this term note was converted from a
U.S. dollar denominated loan to a German mark based loan (Note 7). The
term note, due January 2002, is payable in monthly installments of
approximately $22 and bears interest at a variable German Euro-Rate
(3.5% at December 31, 1998), as defined, plus 1.75%.
(b) During 1998, in connection with the Bank Agreement, the Company
entered into a U.S. dollar denominated line of credit and a German
mark denominated line of credit (Note 7) for the purpose of purchasing
fixed assets. Each line of credit has a maximum borrowing limit of
$1,500. Interest only is payable monthly at a rate equal to a variable
Euro-Rate, as defined, plus 1.5%. As of December 31, 1998, the Company
converted the German mark denominated line of credit to a term note
payable in 54 equal monthly installments. On December 31, 1999, the
U.S. dollar denominated line of credit will be converted into a term
note payable in 54 equal monthly installments.
(c) Notes payable - shareholders, due September 2001, is payable in annual
installments of $112 and bears interest at the prime rate (7.75% as of
December 31, 1998), as defined, plus 0.5%.
(d) The Company has entered into capitalized lease agreements for
equipment which are payable through 2002 at interest rates ranging
from 6% to 9.3%.
The minimum annual maturities of notes payable and capital lease obligations at
December 31, 1998 are approximately as follows:
1999 $ 908
2000 895
2001 910
2002 548
2003 255
--------
$ 3,516
7. Financial Instruments
The Company selectively enters into derivative financial instruments to offset
its exposure to foreign currency risks. These financial instruments include (i)
foreign currency forward exchange contracts with its primary bank for periods
not exceeding six months, which partially hedge sales to the Company's German
subsidiary, and (ii) German mark based loans to act as a partial hedge against
outstanding intercompany receivables and the net assets of its German
subsidiary, which are denominated in German marks. The Company's forward
exchange contracts do not subject the Company to risk from exchange rate
movements because gains and losses on such contracts offset losses and gains,
respectively, on the assets, liabilities, and intercompany transactions being
hedged. Forward exchange contracts are adjusted to market value and the
resulting gains and losses are reflected in income. At December 31, 1998, the
Company had no foreign currency forward exchange contracts outstanding.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and are disclosed in the
consolidated balance sheets. Significant components of the Company's deferred
tax assets and liabilities are as follows:
December 31,
1998 1997
----- -----
Deferred tax assets:
Reserves on current assets $ 384 $ 379
Inventory capitalization 143 121
Warranty reserve 167 141
Accrued legal settlement 275 564
Other accrued expenses 339 907
------ ------
$1,308 $2,112
====== ======
Deferred tax liability:
Advance license fee $ 705 $ 552
Deferred gain on involuntary
conversion 20 19
------ ------
$ 725 $ 571
====== ======
Significant components of the provision for income taxes are as follows:
Year ended December 31,
1998 1997 1996
---- ---- ----
Current:
Federal $1,209 $ 683 $1,432
Foreign (103) - (208)
State 148 51 336
------ ------ ------
Total current 1,254 734 1,560
Deferred:
Federal 742 727 232
State 216 212 11
------ ------ ------
Total deferred 958 939 243
------ ------ ------
Provision for income taxes $2,212 $1,673 $1,803
====== ====== ======
The effective income tax rate of 33.0%, 36.0% and 37.7% for the years ended
December 31, 1998, 1997, and 1996, respectively, differs from the federal
statutory rate of 34% because of the difference in treatment of certain expense
items for financial and income tax reporting purposes. A reconciliation between
the statutory provision and the provision for financial reporting purposes is
as follows:
December 31,
1998 1997 1996
---- ---- ----
Statutory federal tax provision $2,280 $1,582 $1,625
State income taxes, net of
federal income tax benefit 240 174 258
Foreign income taxes (98) - (54)
Other (210) (83) (26)
------ ------ ------
Provision for income taxes $2,212 $1,673 $1,803
====== ====== ======
9. Related Party Transactions
The Company's principal shareholder, Chairman, President, and CEO and his
spouse, the Company's Vice President, Administration, Secretary, Treasurer and
a director, own and lease to the Company certain real estate utilized in the
operation of the Company's business. Lease payments made to related parties
were approximately $762, $729, and $699 for the years ended December 31, 1998,
1997 and 1996, respectively. The lease for the real estate was renewed in 1999
and expires in March 2004. Future minimum lease payments required under the
lease are approximately $796 in 1999, $832 in 2000, $869 in 2001, $908 in 2002,
$949 in 2003, and $240 thereafter, excluding taxes and insurance.
The notes payable - shareholders referred to in Note 6 include a loan payable
to the principal shareholder, Chairman, President and CEO. In 1998, the fourth
installment of the seven-year notes was paid to the principal shareholder in
the amount of $143, which included $38 of interest.
The Company incurred expenses of $56, $75, and $62 for tax services rendered by
an accounting firm during the years ended December 31, 1998, 1997 and 1996,
respectively. A partner in this accounting firm is a shareholder and director
of the Company.
10. Commitments & Contingencies
Operating Leases
The Company has entered into operating lease agreements with unrelated
companies to lease office space for its foreign subsidiaries and vehicles.
Future minimum lease payments required under the lease agreements as of
December 31, 1998 are $372 in 1999, $205 in 2000, $158 in 2001, $103 in 2002,
and $32 in 2003. Rental expense for 1998, 1997 and 1996 was approximately $297,
$196, and $200, respectively.
Cross-Licensing Agreement and Settlement of Patent Litigation
In December 1996, the Company and Symbol Technologies, Inc. ("Symbol") executed
an extensive cross-license of patents (the "Symbol Agreement") for which the
Company and Symbol pay royalties to each other under certain circumstances
effective January 1, 1996. In connection with the Symbol Agreement, the Company
paid Symbol an advance license fee of $1 million in December 1996 and agreed to
pay another $1 million in quarterly installments of $125 over two years ending
in December 1998. In December 1997, the Company and Symbol amended the Symbol
Agreement to provide for the purchase of the Company's HoloTrak industrial
holographic scanners for resale by Symbol under Symbol's brand label. This
arrangement replaced a prior commitment of Symbol under the Symbol Agreement to
purchase the Company's products. Royalty expense under the Symbol Agreement
amounted to $2,826 and $1,513 in 1998 and 1997, respectively.
In December 1993, the Company entered into an agreement settling patent
litigation brought by Symbol which provided the Company future rights to use
certain technology. The agreement required the Company to pay annual amounts
for a 12-year period aggregating a minimum of $4,450 and a maximum of $7,500.
The Company accrued the $4,450 minimum obligation in 1993 to account for the
settlement of the patent litigation. In connection with the Symbol Agreement,
Symbol and the Company amended the December 1993 settlement to reduce the
maximum aggregate amount payable thereunder by the Company from $7,500 to
approximately $5,111. The result of the amended December 1993 settlement
amounted to a net reduction in expense for the year ended December 31, 1996 of
$287, which was recorded upon the signing of the Symbol Agreement in the fourth
quarter of 1996.
Legal Matters
The Company files domestic and foreign patent applications to protect its
technological position and new product development. From time to time, the
Company receives legal challenges to the validity of its patents or allegations
that its products infringe the patents of others.
Management is of the opinion that there are no legal claims against the Company
which would have a material adverse effect on the Company's consolidated
financial position or results of operations.
Credit Facility
The Bank Agreement (Note 6) expires annually on June 30, and includes financial
covenants with which the Company is in compliance. The Bank Agreement includes
an available unsecured line of credit of $7,500, which bears interest at a rate
selected by the Company from interest rate options offered under the Bank
Agreement. Interest rate options consist of (i) the bank's prime rate (7.75% at
December 31, 1998) minus 0.25%, or (ii) the bank's Euro-Rate (5.1% at December
31, 1998) plus 1.50%. As of December 31, 1998, no amounts were outstanding
under the line of credit.
The Company also has a 500 German mark unsecured revolving line of credit with
a German bank in the name of its German subsidiary, Metrologic Instruments
GmbH. As of December 31, 1998, no amounts were outstanding under this revolving
credit facility.
11. Retirement Plans
The Company maintains a noncontributory defined contribution cash or deferred
profit sharing plan covering substantially all employees. Contributions are
determined by the President and Chief Executive Officer and are equal to a
percentage of each participant's compensation. The Company's contributions were
$300, $300, and $302 in 1998, 1997 and 1996, respectively.
Additionally, the Company maintains an employee funded Deferred Compensation
Retirement 401(k) Plan, contributions to which are partially matched by the
Company. Contribution expenses were $62, $55, and $48 in 1998, 1997 and 1996,
respectively.
12. Geographical Information
The Company generates its revenue from the sale of laser bar code scanners
primarily to distributors, value-added resellers, original equipment
manufacturers and directly to end users, in locations throughout the world. No
individual customer accounted for 10% or more of revenues in 1998, 1997 or
1996.
The Company has operations in the United States and Germany. Sales were
attributed to geographic areas in the following table based on the location of
the Company's customers.
United States Operations German
North Other Operations Total
America Europe Export Total Europe Consolidated
Sales 1996 $17,445 $2,535 $ 6,060 $26,040 $20,931 $46,971
1997 19,684 855 7,336 27,875 25,620 53,495
1998 26,058 1,351 10,734 38,143 27,498 65,641
Income (loss)
before provision
for income taxes
1996 $ 5,236 $ (458) $ 4,778
1997 4,686 (33) 4,653
1998 6,872 (167) 6,705
Identifiable
assets 1996 29,046 - - $29,046 $ 6,946 $35,992
1997 31,091 - - 31,091 7,367 38,458
1998 37,455 - - 37,455 8,841 46,296
13. Incentive Plan
The Company's Board of Directors has granted incentive and non-qualified stock
options and restricted stock pursuant to the Company's Incentive Plan to
certain eligible employees and a board member. 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 Incentive Plan is 1,600,000. Shares canceled for any reason without
having been exercised shall again be available for issuance under the Incentive
Plan. An aggregate of 700,000 shares were available for grant under the
Incentive Plan at December 31, 1998. Options granted under the Incentive Plan
are exercisable 20% on the date of grant and 20% per year, thereafter. Each
option shall expire four to ten years after becoming exercisable.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying common stock
on the date of grant, no compensation expense is recognized.
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company had accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of SFAS 123. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively, risk-free interest rates of
6.2%, dividend yields of 0.0%; volatility factors of the expected market price
of the Company's common stock of 40%, 50% and 50%, and a weighted-average
expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
1998 1997 1996
---- ---- ----
Net income:
As reported $4,493 $2,980 $2,975
Pro forma 2,811 2,391 2,352
Net income per share:
Basic:
As reported $ 0.83 $ 0.56 $ 0.57
Pro forma 0.52 0.45 0.45
Diluted:
As reported $ 0.82 $ 0.55 $ 0.56
Pro forma 0.51 0.44 0.44
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until the ye