2004 may prove to be the year of the shakedown for the RFID industry. Matrics, a leading developer of EPC systems, has consistently placed itself at the center of the controversy as the target of two lawsuits and a monumental buyout. The buyer, beleaguered giant Symbol, is in the midst of a corporate awakening that may spark widespread industry consolidation.
Symbol’s Accounting Mess
Less than two months before the announcement, eight of Symbol’s former top executives were charged with fraud in a 25 count indictment. The charges stemmed from an SEC investigation revealing numerous fraudulent accounting practices. Among the indicted was Symbol’s former CEO and executive vice president. The executives manipulated Symbol’s accounting records to meet Wall Street expectations, resulting in a $530 million overstatement on pre-tax earnings from 1998 to 2003. Ironically, this yielded a cumulative net impact of over $230 million on reported revenue, equal to the cash purchase price of Matrics.
“The scope and magnitude of the fraud at Symbol Technologies warrant the imposition of significant penalties — not just against individual wrongdoers, but also against the company responsible for having created and fostered the environment in which the wrongdoing took place,” said Stephen M. Cutler, Director of the SEC’s Division of Enforcement. And on June 3rd, without admitting or denying the allegations levied against it, Symbol agreed to pay a civil penalty of $37 million and nominal disgorgement of $1 distributed to injured investors.
But recent events point to a rosier future for the troubled company. With the SEC’s mandated appointment of an independent examiner to review accounting practices, the company’s 2004 second quarter profits are verifiably healthy. High sales, low taxes and improved operations margins led to quadrupling of profits over the same period in 2003.
Matrics’ Strong Start
Matrics was founded in 1999 by two former National Security Agency scientists. Dr. William Bandy and Michael Arneson had spent the last two decades developing wireless computing devices for the United States’ signal intelligence agency. Over the course of the next five years, their company grew to supply some of the industry’s highest profile projects. Drug wholesaler H.D. Smith uses Matric’s EPC Class 0 smart labels and readers to track controlled-substance pharmaceuticals in a first of its kind pilot program. The company also supplies hardware for the McCarran International and the Hong Kong International Airports’ luggage tracking system. Boeing uses Matrics systems in its Wichita, Kansas facility. The meteoric rise made Matrics the moving target in the RFID market. Claiming infringement on intellectual property, two separate lawsuits were filed against the company in the second half of 2004, accompanied by Matrics’ acquisition in June.
The buyout overshadowed the lawsuit between Intermec and Matrics that had dominated headlines the month prior. Intermec, a fierce rival and longtime supply chain innovator claimed Matrics products infringe on four patents acquired from IBM Research in 1997. The patents cited are fundamental to any passive RFID system, leaving the industry deeply apprehensive. Intermec justifies its actions as necessary to fuel innovation- without research incentives the technology may stagnate. The impact of Symbol’s purchase of Matrics remains unclear, but signals point to a licensing deal.
Less than a month after Symbol’s purchase, another company announced claims to technology in Matrics’ products. Nanopower Technologies, an EPCglobal member and developer of RFID integrated circuits cited violation of the Uniform Trade Secrets Act and breach of contract. The filed lawsuit claims Matrics not only violated an intellectual property license agreement but now markets products partly or fully developed by Nanopower.
Symbol’s acquisition may be the catalyst for an expected industry consolidation. Small to medium sized companies need big-company resources to move forward in what is becoming a multi-billion dollar RFID supply chain industry. While suppliers bask in industry hype, EPC products are making deliberate and steady progress towards commoditization. But today’s market volatility demands the flexibility to increase capacity while establishing long term strategies. Symbol has made its intentions clear and will watch as its competitors emerge.