10-Q 1 q22001.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 0-24172 Metrologic Instruments, Inc. (Exact name of registrant as specified in its charter) New Jersey 22-1866172 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 90 Coles Road, Blackwood, New Jersey 08012 (Address of principal executive offices) (Zip Code) (856) 228-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of August 14, 2001 there were 5,458,629 shares of Common Stock, $.01 par value per share, outstanding. METROLOGIC INSTRUMENTS, INC. INDEX Page No. Part I - Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Part II - Other Information Item 1. Legal Proceedings 15 Item 2. Changes in Securities 17 Item 3. Defaults upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 19 PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements Metrologic Instruments, Inc. Consolidated Balance Sheets (amounts in thousands except share data) June 30, December 31, Assets 2001 2000 -------- -------- (Unaudited) Current assets: Cash and cash equivalents $ 3,141 $ 2,332 Accounts receivable, net of allowance 24,776 26,593 Inventory 19,675 26,898 Deferred income taxes 1,025 1,356 Other current assets 1,874 4,025 -------- -------- Total current assets 50,491 61,204 Property, plant and equipment, net 13,874 10,459 Patents and trademarks, net of amortization 3,357 3,013 Holographic technology, net of amortization 542 600 Advance license fee, net of amortization 1,471 1,529 Goodwill, net of amortization 13,989 4,317 Other assets 1,066 701 -------- -------- Total assets $ 84,790 $ 81,823 ======== ======== Liabilities and shareholders' equity Current liabilities: Current portion of lines of credit $ - $ 174 Current portion of notes payable 6,730 2,531 Accounts payable 6,256 5,188 Accrued expenses 8,662 11,739 -------- -------- Total current liabilities 21,648 19,632 Lines of credit, net of current portion 11,140 17,689 Notes payable, net of current portion 23,594 7,645 Deferred income taxes 573 565 Other liabilities 553 529 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; 5,456,365 and 5,451,092 shares issued and outstanding in 2001 and 2000, respectively 55 54 Additional paid-in capital 17,597 17,562 Retained earnings 13,722 20,703 Accumulated other comprehensive loss (4,092) (2,556) -------- -------- Total shareholders' equity 27,282 35,763 -------- -------- Total liabilities and shareholders' equity $ 84,790 $ 81,823 ======== ======== See accompaying notes. Metrologic Instruments, Inc. Condensed Consolidated Statements of Operations (amounts in thousands except share and per share data) Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 (Unaudited) (Unaudited) Sales $28,057 $23,128 $57,841 $45,460 Cost of sales 18,288 13,903 47,015 27,118 ------- ------- ------- ------- Gross profit 9,769 9,225 10,826 18,342 Selling, general and administrative expenses 8,289 6,080 15,832 11,850 Research and development expenses 1,481 1,338 3,271 2,670 ------- ------- ------- ------- Operating (loss) income (1) 1,807 (8,277) 3,822 Other (expenses) income Interest income 16 74 96 145 Interest expense (1,021) (226) (2,202) (365) Foreign currency transaction (loss) gain (84) 205 (161) 218 Other, net (367) (101) (726) (168) ------- ------- ------- ------- Total other (expenses) (1,456) (48) (2,993) (170) ------- ------- ------- ------- (Loss) income before provision for income taxes (1,457) 1,759 (11,270) 3,652 Provision for income taxes (550) 561 (4,289) 1,242 ------- ------- ------- ------- Net (loss) income $ (907) $ 1,198 $(6,981) $ 2,410 ======= ======= ======= ======= Basic (loss) earnings per share Weighted average shares outstanding 5,456,365 5,436,104 5,455,022 5,428,212 Basic (loss) earnings per share $(0.17) $0.22 $ (1.28) $ 0.44 Diluted (loss) earnings per share Weighted average shares outstanding 5,456,365 5,436,104 5,455,022 5,428,212 Net effect of dilutive securities - 250,425 - 205,908 Total shares outstanding used in computing diluted earnings per share 5,456,365 5,686,529 5,455,022 5,634,120 Diluted (loss) earnings per share $(0.17) $0.21 $ (1.28) $ 0.43 See accompanying notes. Metrologic Instruments, Inc. Condensed Consolidated Statements of Cash Flows (amounts in thousands) Six Months Ended June 30, --------------------------- 2001 2000 -------- -------- (unaudited) Operating activities Net cash provided by (used in) operating activities $ 8,296 $(9,200) Investing activities Purchase of property, plant and equipment (481) (1,862) Patents and trademarks (467) (277) Other intangibles 697 - Cash paid for purchase of business, net of cash acquired (19,739) (1,282) ------- ------- Net cash used in investing activities (19,990) (3,421) Financing activities Proceeds from exercise of stock options and employee stock purchase plan 37 251 Proceeds from issuance of notes payable 20,557 2,498 Principal payments on notes payable (11,737) (425) Net proceeds from line of credit 4,451 10,153 Capital lease payments (55) (46) ------- ------- Net cash provided by financing activities 13,253 12,431 Effect of exchange rates on cash (750) (748) ------- ------- Net increase (decrease) in cash and cash equivalents 809 (938) Cash and cash equivalents at beginning of period 2,332 6,970 ------- ------- Cash and cash equivalents at end of period $ 3,141 $ 6,032 ======== ======= Supplemental Disclosure Cash paid for interest $ 1,737 $ 285 Cash paid for income taxes $ 112 $ 540 Tax benefit from stock options $ - $ 36 See accompanying notes. METROLOGIC INSTRUMENTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands) (Unaudited) 1. Business Metrologic Instruments, Inc. and its subsidiaries (the "Company") designs, manufactures and markets bar code scanning and high-speed automated data capture solutions using laser, holographic and vision-based technologies. Metrologic offers expertise in 1D and 2D bar code reading, optical character recognition, image lift, and parcel dimensioning and singulation detection for customers in retail, commercial, manufacturing, transportation and logistics, and postal and parcel delivery industries. In addition to its extensive line of bar code scanning and vision system equipment, the company also provides laser beam delivery and control systems to semi-conductor and fiber optic manufacturers, as well as a variety of highly sophisticated optical systems. Metrologic products are sold in more than 100 countries worldwide through Metrologic's sales, service and distribution offices located in North and South America, Europe and Asia. 2. Accounting Policies Reclassifications Results for the six months ended June 30, 2001 reflect certain reclassifications of amounts previously reported in the three months ended March 31, 2001 to conform to current period presentation. Interim Financial Information The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included. The results of the interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The Condensed Consolidated Financial Statements and these Notes should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 2000, including the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2000 contained therein. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Impact of Pending Adoption of Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $800 ($0.15 per share) per year, not- withstanding any further purchase price adjustments from the Company's purchase of AOA. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 3. Cost of Sales Cost of sales for the six months ended June 30, 2001 included $10,040 of special charges and other costs incurred in the Company's first quarter ended March 31, 2001 as follows: $4.5 million of costs associated with products that are not anticipated to be included in the prospective costs to manufacture similar products because of reductions in material costs and manufacturing efficiencies; $3.5 million of similar costs associated with a valuation charge taken on products included in inventory at March 31, 2001 due to the related cost reductions noted above; $1.0 million of costs associated with inventory deemed to be obsolete at March 31, 2001; and $1.0 million of costs associated with the expensing of floor stock inventory that had been previously capitalized by the Company. 4. Inventory Inventory consists of the following: June 30, 2001 December 31, 2000 ------------------ ------------------ Raw materials $ 8,247 $ 9,694 Work-in-process 4,460 6,380 Finished goods 6,968 10,824 ------ ------ 19,675 26,898 ------ ------ 5. Comprehensive (Loss) Income The Company's total comprehensive (loss) income were as follows: Six Months Ended June 30, 2001 2000 -------- -------- Net (loss) income $ (6,981) $ 2,410 Other comprehensive losses: Change in equity due to foreign currency translation adjustments (1,536) (1,568) ------ ------ Comprehensive (loss) income $ (8,517) $ 842 ------ ------ 6. 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 2001 or 2000. The Company manages its business on a geographic basis and has principal operations in the United States and Europe. Sales were attributed to geographic areas in the following table based on the location of the Company's customers. United States Operations European North Other Operations Total America Europe Export Total Europe Consolidated Three months ended June 30, 2001: Sales $12,911 $ 635 $ 4,079 $ 17,625 $10,432 $ 28,057 Income (loss) before provision for income taxes $ (1,469) $ 13 $ (1,456) Identifiable assets - - - $ 67,795 $16,995 $ 84,790 Three months ended June 30, 2000: Sales $12,486 $201 $ 1,918 $ 14,605 $ 8,523 $ 23,128 Income (loss) before provision for income taxes $ 1,607 $ 152 $ 1,759 Identifiable assets - - - $ 58,734 $14,142 $ 72,876 Six months ended June 30, 2001: Sales $28,918 $1,117 $ 7,637 $ 37,672 $20,169 $ 57,841 Loss before provision for income taxes - - $(10,627) $ (643) $(11,270) Six months ended June 30, 2000: Sales $24,129 $785 $ 3,992 $ 28,906 $16,554 $ 45,460 Income (loss) before provision for income taxes - - $ 3,847 $ (195) $ 3,652 7. Acquisition On January 8, 2001, the Company acquired all of the outstanding stock of Adaptive Optics Associates, Inc. ("AOA"), a developer and manufacturer of custom optical systems which include precision laser beam delivery, high speed imaging control and data processing, industrial inspections and scanning and dimensioning systems for the aerospace and defense industry. The acquisition was accounted for under the purchase method of accounting, and accordingly, the results of AOA's operations from January 8, 2001 are reflected in the income statement for the three and six months ended June 30, 2001. The excess purchase price over the fair value of net assets acquired was approximately $10,671 and is being amortized over a straight-line basis over 10 years. The following unaudited pro forma condensed results of operations combine the historical consolidated statements of operations for Metrologic and AOA for the three and six months ended June 30, 2001 and June 30, 2000 as if the acquisition was consummated on January 1, 2000. The unaudited pro forma financial statements do not purport to represent what Metrologic's financial position or results of operations would actually have been if the acquisition of AOA occurred at such date or at the beginning of the period indicated or to project Metrologic's financial position or results of operations at any future date or for any future period, nor do these pro forma combined financial statements give effect to any matters other than those described in the notes thereto. The final purchase price is subject to adjustment based upon a final determination of working capital. In addition, the allocation of the purchase price to these assets and liabilities of AOA is preliminary and the final allocations may differ from the amounts reflected herein. (amounts in thousands except share and per share data) Pro Forma Pro Forma Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- -------- --------- -------- Sales $ 28,057 $ 28,004 $ 58,300 $ 56,092 Operating (loss) income (1) 2,124 (8,593) 4,381 Net (loss) income (907) 921 (7,010) 1,812 (Loss) earnings per share Basic (0.17) 0.17 (1.29) 0.33 Diluted (0.17) 0.16 (1.29) 0.32 Weighted average number of shares outstanding Basic 5,456,365 5,436,104 5,455,022 5,428,212 Diluted 5,456,365 5,686,529 5,455,022 5,634,120 8. Credit Facility In connection with the acquisition of Adaptive Optics Associates, Inc. ("AOA") on January 8, 2001, the Company entered into a $45,000 credit facility ("Credit Facility") with its primary bank, as agent ("primary bank") for other bank parties. Under the terms of the Credit Facility, the Company secured a $20,000 term loan with maturities of $2,000 in 2001, $3,000 in 2002 and 2003, and $4,000 in 2004, 2005 and 2006, respectively. As of June 30, 2001, the balance outstanding was $19,000. Also under the Credit Facility, the Company secured a $25,000 revolving credit line, which expires in January 2006. Interest rates are based on Libor or Prime-Rate Options based on the discretion of the Company, plus spreads ranging from 1.00% to 3.75% as defined in the Credit Facility. Proceeds from the Credit Facility were applied towards the financing of the acquisition of AOA, paying down the existing term loans and line of credit, and providing working capital for the Company and its subsidiaries. As of June 30, 2001, the balance outstanding was $11,140. Also in connection with the acquisition of AOA, the Company entered into Subordinated Promissory Notes ("Subordinated Debt") aggregating $11,000 with United Technologies Optical Systems, Inc. ("UTOS"), the former parent of AOA, with maturities of $4,750 in 2002 and $6,250 in 2003. Interest rates are fixed at 10%. Under the Credit Facility, the Company is subject to affirmative and negative covenants. The Company did not meet certain covenant requirements as of June 30, 2001, however, the Company obtained a waiver and plans to convert the working capital revolving facility to an asset-based arrangement. The Company believes that an asset-based arrangement would provide more flexibility to finance the Company's working captial needs. The Company believes such an asset-based arrangement to be in place before the end of the third quarter 2001. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the Company's results of operations and liquidity and capital resources should be read in conjunction with the unaudited Condensed Consolidated Financial Statements of the Company and the related Notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and the Notes to Consolidated Financial Statements for the year ended December 31, 2000 appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The Condensed Consolidated Financial Statements for the three and six months ended June 30, 2001 and June 30, 2000 are unaudited. 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 100 foreign countries. Most of the Company's product sales in Western Europe, Asia 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 the three and six months ended June 30, 2001 and 2000, sales and gross profit were adversely affected by the continuing rise in the value of the U.S. dollar in relation to foreign currencies. Three Months Ended June 30, 2001 Compared with Three Months Ended June 30, 2000 (amounts in thousands except per share information) Sales increased 21.3% to $28,057 in the three months ended June 30, 2001 from $23,128 in the three months ended June 30, 2000, principally as a result of the addition of sales of AOA. Sales in the three months ended June 30, 2001 were affected by lower average unit selling prices on certain POS products compared to the corresponding period in 2000, which were mostly due to unfavorable foreign exchange fluctuations. The increase in the value of the U.S. dollar relative to the euro negatively affected the recorded U.S. dollar value of quarterly European operation sales by approximately 7.0% and quarterly consolidated sales were affected by the increased value of the U.S. dollar relative to other foreign currencies, namely the euro and Brazilian real by approximately 3.9% as compared to the corresponding period in 2000. In the first quarter of 2001, the Company instituted a price increase in Europe to mitigate the unfavorable foreign currency effect. International sales accounted for $15,146 (53.9% of total sales) in the three months ended June 30, 2001 and $13,016 (56.3% of total sales) in the three months ended June 30, 2000. No individual customer accounted for 5% or more of revenues in the three months ended June 30, 2001. Two customers accounted for 7.5% and 7.4%, respectively of total revenues in the three months ended June 30, 2000. Cost of sales increased to $18,288 in the three months ended June 30, 2001 from $13,903 in the three months ended June 30, 2000. The increase in cost of sales was due to the increased cost of sales associated with the acquisition of AOA. Further, cost of sales during the three months ended June 30, 2001 was negatively impacted by the increase in the value of the U.S. dollar relative to other foreign currencies as compared to the corresponding period in 2000. Selling, general and administrative ("SG&A") expenses increased 36.3% to $8,289 in the three months ended June 30, 2001 from $6,080 in the three months ended June 30, 2000 and increased as a percentage of sales to 29.5% from 26.3%. The increase in SG&A expenses was due primarily to the addition of AOA expenses, increased legal costs associated with defending the Company's patents and an increase to the allowance for uncollectible accounts. Research and development ("R&D") expenses increased 10.7% to $1,481 in the three months ended June 30, 2001 from $1,338 in the three months ended June 30, 2000, and decreased as a percentage of sales to 5.3% from 5.8%. The increase in R&D expenses is due primarily to the addition of AOA expenses. Operating (loss) income decreased 100% to $(1) in the three months ended June 30, 2001 from $1,807 in the three months ended June 30, 2000, and operating income as a percentage of sales decreased to 0% from 7.8%. Other income/expenses reflect net other expenses of $1,456 in the three months ended June 30, 2001 compared to net other expenses of $48 in the corresponding period in 2000. Net other expenses for the three months ended June 30, 2001 reflect higher interest and amortization expenses due to the acquisition of AOA and associated debt, and higher foreign currency transaction losses. Net loss was $907 in the three months ended June 30, 2001 compared with net income of $1,198 in the three months ended June 30, 2000. Net loss reflects a 38% effective income tax rate for the three months ended June 30, 2001 compared to 32% for the corresponding period in 2000. The increased effective income tax rate resulted from a higher effective state tax rate of AOA. The increase in the value of the U.S. dollar relative to other foreign currencies negatively affected diluted earnings per share by approximately $.11 as compared to the corresponding period in 2000. Six Months Ended June 30, 2001 Compared with Six Months Ended June 30, 2000 (amounts in thousands except per share information) Results for the six months ended June 30, 2001 reflect certain reclassifications of amounts previously reported in the three months ended March 31, 2001 to conform to current period presentation. Sales increased 27.2% to $57,841 in the six months ended June 30, 2001 from $45,460 in the six months ended June 30, 2000, principally as a result of the addition of sales of AOA. Sales in the six months ended June 30, 2001 were affected by lower average unit selling prices on certain POS products compared to the corresponding period in 2000, which were mostly due to unfavorable foreign exchange fluctuations. The increase in the value of the U.S. dollar relative to the euro negatively affected the recorded U.S. dollar value of year-to-date European operation sales by approximately 7.0% and year-to-date consolidated sales were affected by the increased value of the U.S. dollar relative to other foreign currencies, namely the euro and Brazilian real by approximately 3.3% as compared to the corresponding period in 2000. In the first quarter of 2001, the Company instituted a price increase in Europe to mitigate the unfavorable foreign currency effect. International sales accounted for $28,923 (50.0% of total sales) in the six months ended June 30, 2001 and $25,692 (56.5% of total sales) in the six months ended June 30, 2000. No individual customer accounted for 5% or more of the Company's total revenues in the six months ended June 30, 2001. Two customers accounted for 6.5% and 6.3%, respectively of total revenues in the six months ended June 30, 2000. Cost of sales increased to $47,015 in the six months ended June 30, 2001 from $27,118 in the six months ended June 30, 2000. In addition to the increased costs of sales associated with the acquisition of AOA, cost of sales for the six months ended June 30, 2001 included $10,040 of special charges and other costs that are not expected to reoccur in subsequent quarters as follows: $4.5 million of costs associated with products that are not anticipated to be included in the prospective costs to manufacture similar products because of reductions in material costs and manufacturing efficiencies; $3.5 million of similar costs associated with a valuation charge taken on products included in inventory at March 31, 2001 due to the related cost reductions noted above; $1.0 million of costs associated with inventory deemed to be obsolete at March 31, 2001; and $1.0 million of costs associated with the expensing of floor stock inventory that had been previously capitalized by the Company. Similar costs are not anticipated to be included in costs of sales for the remaining two quarters of 2001. Further, cost of sales as a percentage of sales during the three months ended June 30, 2001 was negatively impacted by the increase in the value of the U.S. dollar relative to other foreign currencies as compared to the corresponding period in 2000. SG&A expenses increased 33.6% to $15,832 in the six months ended June 30, 2001 from $11,850 in the six months ended June 30, 2000 and increased as a percentage of sales to 27.4% from 26.1%. The increase in SG&A expenses was due primarily to the addition of AOA expenses, increased legal costs associated with defending the Company's patents and an increase to the allowance for uncollectible accounts. Research and development ("R&D") expenses increased 22.5% to $3,271 in the six months ended June 30, 2001 from $2,670 in the six months ended June 30, 2000, and decreased as a percentage of sales to 5.7% from 5.9%. The increase in R&D expenses is due primarily to the addition of AOA expenses. Operating income, excluding special charges and other costs, decreased 53.9% to $1,763 in the six months ended June 30, 2001 from $3,822 in the six months ended June 30, 2000, and operating income as a percentage of sales decreased to 3% from 8.4%. Operating losses including special charges and other costs in the six months ended June 30, 2001 was $8,277. Other income/expenses reflect net other expenses of $2,993 in the six months ended June 30, 2001 compared to net other expenses of $170 in the corresponding period in 2000. Net other expenses for the six months ended June 30, 2001 reflect higher interest and amortization expenses due to the acquisition of AOA and associated debt, and higher foreign currency transaction losses. Net loss was $6,981 in the six months ended June 30, 2001 compared with net income of $2,410 in the six months ended June 30, 2000. Net income reflects a 38% effective income tax rate for the six months ended June 30, 2001 compared to 34% for the corresponding period in 2000. The increased effective income tax rate resulted from a higher effective state tax rate of AOA. The increase in the value of the U.S. dollar relative to other foreign currencies negatively affected diluted earnings per share by approximately $.21 as compared to the corresponding period in 2000. 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 periods will not be impacted by fluctuations in seasonal demand from European customers in its third quarter or from reduced production days in the Company's fourth quarter. Liquidity and Capital Resources (amounts in thousands) The Company's working capital decreased approximately 30.6% to $28,843 as of June 30, 2001 from $41,572 as of December 31, 2000, due primarily to the generation of cash from reducing accounts receivable and inventory levels and using those funds to pay down the Company's revolving credit facility classified in non-current liabilities. The Company's operating activities provided net cash of $8,296 compared with net cash used of $9,200 for the six months ended June 30, 2001 and 2000, respectively. Net cash provided in operating activities for the six months ended June 30, 2001 resulted primarily from reductions in accounts receivable plus non-cash charges, offset by decreases in accrued expenses. In connection with the acquisition of Adaptive Optics Associates, Inc. ("AOA") on January 8, 2001, the Company entered into a $45,000 credit facility ("Credit Facility") with its primary bank, as agent ("primary bank") for other bank parties. Under the terms of the Credit Facility, the Company secured a $20,000 term loan with maturities of $2,000 in 2001, $3,000 in 2002 and 2003, and $4,000 in 2004, 2005 and 2006, respectively. As of June 30, 2001, the balance outstanding was $19,000. Also under the Credit Facility, the Company secured a $25,000 revolving credit line, which expires in January 2006. Interest rates are based on Libor or Prime-Rate Options based on the discretion of the Company, plus spreads ranging from 1.00% to 3.75% as defined in the Credit Facility. Proceeds from the Credit Facility were applied towards the financing of the acquisition of AOA, paying down the existing term loans and line of credit, and providing working capital for the Company and its subsidiaries. As of June 30, 2001, the balance outstanding was $11,140. Also in connection with the acquisition of AOA, the Company entered into Subordinated Promissory Notes ("Subordinated Debt") aggregating $11,000 with United Technologies Optical Systems, Inc. ("UTOS"), the former parent of AOA, with maturities of $4,750 in 2002 and $6,250 in 2003. Interest rates are fixed at 10%. Under the Credit Facility, the Company is subject to affirmative and negative covenants. The Company did not meet certain covenant requirements as of June 30, 2001, however, the Company obtained a waiver and plans to convert the working capital revolving facility to an asset-based arrangement. The Company believes that an asset-based arrangement would provide more flexibility to finance the Company's working captial needs. The Company believes such an asset-based arrangement to be in place before the end of the third quarter 2001. Property, plant & equipment expenditures were $481 and $1,862 for the six months ended June 30, 2001 and 2000, respectively. The Company's current plans for future capital expenditures include: (i) investment in the Company's Suzhou, China facility; (ii) continued investment in manufacturing capacity expansion at the Blackwood, NJ headquarters; (iii) additional Company facilities; and (iv) enhancements to existing information systems, and additional information systems. The Company's liquidity has been, and may continue to be, adversely affected by changes in foreign currency exchange rates, particularly the value of the U.S. dollar relative to the euro, the Brazilian real, the Singapore dollar, the Japanese yen and the Chinese renminbi. In an effort to mitigate the financial implications of the volatility in the exchange rate between foreign currencies 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 through its primary bank for periods not exceeding six months, which partially hedge sales to the Company's subsidiaries and (ii) foreign currency based loans, which act as a partial hedge against outstanding intercompany receivables and the net assets of its foreign subsidiaries. Additionally, The Company's European subsidiary invoices and receives payment in certain other major currencies, including the British pound, which results in an additional mitigating measure that reduces the Company's exposure to the fluctuation between the euro and the U.S. dollar although it does not offer protection against fluctuations of that currency against the U.S. Dollar. The Company believes that its current cash and cash equivalent balances, along with cash generated from operations and availability under revolving credit facilities, will be adequate to fund the Company's operations through at least the next twelve months. Forward Looking Statements; Certain Cautionary Language Written and oral statements provided by the Company from time to time, including those in this report, 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 for sales on third party resellers, distributors and OEMs which subject 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; foreign currency exchange rate fluctuations between the U.S. Dollar and other major currencies including, but not limited to, the euro, Singapore Dollar, Brazilian Real, and British Pound affecting the Company's results of operations; 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 timing, introduction and market acceptance of Metrologic's new products including the iQ180; 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; 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; availability of patent protection for Metrologic's vision-based technologies, and other products; general economic conditions; disposition of legal issues; 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; Metrologic's ability to integrate AOA with other Metrologic subsidiaries, and realize anticipated impact on results of operations; 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; the economic slowdown of foreign nations other than those using may also adversely affect the Company's results of operations; ability to comply with future bank covenants; issues that have not been anticipated in the transition to the new European currency that may cause prolonged disruption of the Company's business; 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. 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 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk The information contained in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2000 is hereby incorporated herein by reference. PART II. OTHER INFORMATION Item 1 Legal Proceedings The Company is currently involved in matters of litigation arising from the normal course of business including matters described below. Management is of the opinion that such litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations. A. Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships On July 21, 1999 the Company and six other leading members of the Automatic Identification and Data Capture Industry (the "Auto ID companies") jointly initiated a litigation against the Lemelson Medical, Educational, & Research Foundation, Limited Partnership (the "Lemelson Partnership"). The suit, which is entitled Symbol Technologies, Inc. et. al. v. Lemelson Medical, Educational & Research Foundation, Limited Partnerships, was commenced in the U.S. District Court, District of Nevada in Reno, Nevada. In the litigation, the Auto ID companies seek, among other remedies, a declaration that certain patents, which have been asserted by the Lemelson Partnership against end users of bar code equipment, are invalid, unenforceable and not infringed. The other six Auto ID companies who are plaintiffs in the lawsuit are Accu-Sort Systems, Inc., Intermec Technologies Corporation, a wholly-owned subsidiary of UNOVA, Inc., PSC Inc., Symbol Technologies, Inc., Teklogix Corporation, a wholly-owned U.S. subsidiary of Teklogix International, Inc., and Zebra Technologies Corporation. Symbol Technologies, Inc. has agreed to bear approximately half of the legal and related expenses associated with the litigation, with the remaining portion being borne by the Company and the other Auto ID companies. Although no claim had been asserted by the Lemelson Partnership directly against the Company or, to our knowledge, any other Auto ID company, the Lemelson Partnership has contacted many of the Auto ID companies' customers demanding a one-time license fee for certain so-called "bar code" patents transferred to the Lemelson Partnership by the late Jerome H. Lemelson. The Company and the other Auto ID companies have received many requests from their customers asking that they undertake the defense of these claims using their knowledge of the technology at issue. Certain of these customers have requested indemnification against the Lemelson Partnership's claims from the Company and the other Auto ID companies, individually and/or collectively with other equipment suppliers. The Company, and to the Company's knowledge, the other Auto ID companies, believe that generally they have no obligation to indemnify their customers against these claims and that the patents being asserted by the Lemelson Partnership against Auto ID companies customers with respect to bar code equipment are invalid, unenforceable and not infringed. However, the Company and the other Auto ID companies believe that the Lemelson claims do concern the Auto ID industry at large and that it is appropriate for them to act jointly to protect their customers against what they believe to be baseless claims being asserted by the Lemelson Partnership. In response to the action commenced by the Company and the other plaintiffs, the Lemelson Partnership filed a motion to dismiss the lawsuit, or alternatively, to stay the proceedings pending the outcome of other litigation or transfer the case in its entirety to the U.S. District Court for Arizona where several infringement suits filed by the Lemelson Partnership are pending against other companies. The Lemelson Partnership has stated that the primary grounds for its motion to dismiss are the lack of a legally justifiable case or controversy between the parties because (1) the method claims asserted by the Lemelson Partnership apply only to the "use" of bar code equipment by the end-users and not the bar code equipment itself; and (2) the Lemelson Partnership has never asserted claims of infringement against the Auto ID companies. On March 15, 2000, Judge Pro of the U.S. District Court for the District of Nevada issued a ruling denying the Lemelson Foundation's motion (a) to dismiss the lawsuit for lack of a legally justifiable case or controversy and (b) transfer the case to the U.S. District Court for the District of Arizona. However the Court granted the Lemelson Partnership's motion to dismiss our claim that the patents are invalid due to laches in prosecution of the patents. The court also ordered the action consolidated with an action against the Lemelson Partnership brought by Cognex Corp. pending in the same court. On March 30, 2000, the Lemelson Partnership filed a motion (a) to appoint a permanent magistrate judge to the case and remove Magistrate Judge Atkins and (b) to transfer the case from the court in Reno, Nevada, where it is currently assigned to a court in Las Vegas, Nevada. The Auto ID Companies filed papers opposing both motions. On April 10, 2000, Judge Pro again ruled against the Lemelson Partnership on both motions. The case is now in the early states of discovery. April 12, 2000, the Lemelson Partnership filed its Answer to the Complaint in the Symbol et al. v. Lemelson Partnership case. In the Answer, the Lemelson Partnership included a counterclaim against the Company and the other plaintiffs seeking a dismissal of the case. Alternatively, the Lemelson Partnership's counterclaim seeks a declaration that the Company and the other plaintiffs have contributed to, or induced infringement of particular method claims of the patents-in-suit by the plaintiffs' customers. The Company believes there is no merit to the Lemelson Partnership's counterclaim. On May 10,2000, the Lemelson Partnership filed a second motion with the Court to stay the Auto ID action pending the resolution of United States Metals Refining Co. ("US Metals") v. Lemelson Medical, Education & Research Foundation, LP et al., an action in Nevada state court where in the plaintiff is challenging the Lemelson Partnership's ownership of the patents at issue in the Auto ID action. The Auto ID companies opposed the motion. Although the Court has not yet ruled on this motion, the Nevada state court dismissed the complaint of US Metals on July 5, 2000. On May 15, 2000, the Auto ID companies filed a motion seeking permission to file an interlocutory appeal of the Court's decision to strike the fourth count of the complaint (which alleged that the Lemelson Partnership's delays in obtaining its patents rendered them unenforceable for laches). The motion was granted by the Court on July 14, 2000. On September 1, 2000 the United States Court of Appeals for the Federal Circuit agreed to hear the appeal. The hearing on the appeal has not yet been scheduled. On July 24, 2000, the Auto ID companies filed a motion for partial summary judgment arguing that almost all of the claims of the Lemelson Partnership's patents are invalid for lack of written description. The Court heard argument on this motion on June 15, 2001. On July 12, 2001, the Court denied the Auto ID companies' motion for partial summary judgment concluding that there were triable issues of material fact and therefore summary judgment was not appropriate. The Court also denied the Lemelson Partnership's cross-motion for summary judgment on the same basis. On May 14, 2001, the Auto ID companies and Cognex Corp. filed a motion for partial Summary judgment arguing patent unenforceability due to inequitable conduct on the part of Lemelson of the Lemelson partnership in their dealings before the United States Patent and Trademark Office in obtaining the patents in suit. This motion is now pending. B. Metrologic v. PSC On October 13, 1999, the Company filed suit for patent infringement against PSC Inc. (PSC) in United States District Court for the District of New Jersey. The complaint asserts that at least seven of the Company's patents are infringed by a variety of point-of-sale bar code scanner products manufactured and sold by PSC. The patents cited in the complaint cover a broad range of bar code scanning technologies important to scanning in a retail environment including the configuration and structure of various optical components, scanner functionalities and shared decoding architecture. The complaint seeks monetary damages as well as a permanent injunction to prevent future sales of the infringing products. On December 22, 1999, PSC filed an answer to the complaint citing a variety of affirmative defenses to the allegations of infringement asserted by the Company in its complaint. PSC additionally asserted a counterclaim under the Lanham Act claiming that the Company made false and misleading statements in its October 13, 1999 press release regarding the patent infringement suit against PSC. The Company does not believe that this counterclaim has any merit and has made a claim with its insurance carrier to pay for the defense of this claim. The court ordered the case to mediation, and discovery was stayed pending the outcome of the mediation. The mediation was terminated by the parties with no result having been reached and the stay on discovery has been lifted by the court. The case is still in discovery. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on June 21, 2001. At such meeting, the following matters were voted upon by the shareholders, receiving the number of affirmative, negative and withheld votes, as well as abstentions and broker non-votes, set forth below each matter. (1) The vote of the common shareholders for the election of Richard Close, John H. Mathias and William Rulon-Miller as directors to serve a three-year term ending in 2004 were as follows: No. of Votes For Name ---------------- ----------------- 5,250,438 Richard Close 5,250,438 John H. Mathias 5,250,438 William Rulon-Miller (2) The vote of the common shareholders for the appointment of Ernst & Young as the independent auditors for the Company for the fiscal year ending December 31, 2001 was as follows: 5,274,053 For 580 Against 300 Abstain --------- --- --- The directors of the Company whose terms continue after the Annual Meeting of Shareholders referenced above are C. Harry Knowles, Janet H. Knowles, Stanton L. Meltzer, Thomas E. Mills IV, and Hsu Jau Nan. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: (b) Reports on Form 8-K. During the quarter ended June 30, 2001 the Registrant did not file any reports on Form 8-K: SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. METROLOGIC INSTRUMENTS, INC. Date: August 14, 2001 By:/s/ C. Harry Knowles ---------------- ----------------------- C. Harry Knowles Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: August 14, 2001 By:/s/Thomas E. Mills IV ---------------- -------------------------- Thomas E. Mills IV President, Chief Operating Officer and Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit No. Page No.